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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

For the fiscal year ended December 31, 2002

NORTHROP GRUMMAN CORPORATION

(Exact name of registrant as specified in its charter)

1840 Century Park East, Los Angeles, California 90067

www.northropgrumman.com

(Address of principal executive offices and internet site)

(310) 553-6262

(Registrant’s telephone number, including area code)

Securities registered pursuant to section 12(b) of the Act:

Securities Registered pursuant to Section 12(g) of the Act:

None

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Indicate by check mark whether the Registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2).

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.    ¨

As of March 7, 2003, 182,889,368 shares of Common Stock were outstanding, and the aggregate market value of the Common Stock (based upon the closing price of the stock on the New York Stock Exchange) of the Registrant held by nonaffiliates was approximately $15,085 million.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Proxy Statement for the 2003 Annual Meeting of Stockholders.    Part III

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PART I

Item 1.    Business

Originally formed in California in 1939, Northrop Corporation was reincorporated in Delaware in 1985. In 1994 the company purchased the outstanding common stock of Grumman Corporation and, effective May 18, 1994, Northrop Corporation was renamed Northrop Grumman Corporation (the company). On April 2, 2001, NNG, Inc., a newly formed Delaware holding company, exchanged its common shares for all of the outstanding Northrop Grumman Corporation common shares on a one-for-one basis, through a merger in which Northrop Grumman Corporation became a subsidiary of NNG, Inc. In connection with this merger, NNG, Inc. changed its name to Northrop Grumman Corporation and the former Northrop Grumman Corporation changed its name to Northrop Grumman Systems Corporation (Northrop Systems).

In April 2001, the company purchased approximately 97 percent of the common stock and approximately 59 percent of the preferred stock of Litton Industries, Inc. (Litton). The company issued 13,000,000 shares of its common stock and 3,500,000 shares of its preferred stock and paid cash for the balance of the Litton shares. In May and June 2001, the company acquired all of the remaining shares of Litton common and preferred stock for cash.

In November 2001, pursuant to a tender offer that expired on November 29, 2001, the company purchased approximately 80.7 percent of the outstanding shares of Newport News Shipbuilding Inc. (Newport News). For the year ended December 31, 2001, the company accounted for the remaining 19.3 percent of Newport News common shares as minority interest. On January 18, 2002, the company acquired the remaining 19.3 percent of Newport News shares not purchased in the tender offer.

On December 11, 2002, the company issued 69.4 million shares in exchange for all outstanding shares of TRW Inc. The company completed the sale of TRW’s Automotive business (Auto) to The Blackstone Group on February 28, 2003. The company received approximately $4.7 billion, comprised of $3.9 billion in cash and debt retained by Auto, a $600 million payment-in-kind note and a 19.6 percent investment in the new enterprise. Cash proceeds from the sale, along with cash received from completion of the TRW acquisition will be used primarily to pay down debt. In connection with the acquisition of TRW, the company entered into a formal stipulation and consent decree (Final Judgment) with the United States Department of Justice that was filed in the U. S. District Court for the District of Columbia on December 11, 2002. Key provisions of the consent decree are intended to assure that the merger will not impede fair and open competition related to certain electronic satellite payloads. The consent decree does not require the divestiture of any businesses and will permit the company to operate its businesses and those of TRW as planned. The retained portions of TRW represent the new Mission Systems and Space Technology sectors discussed more fully herein. Additional information describing the aforementioned mergers and acquisitions is contained in the “Acquisitions” footnote to the Consolidated Financial Statements in Part II, Item 8.

The company operates in seven business sectors: Electronic Systems, Newport News, Ship Systems, Information Technology, Integrated Systems, Mission Systems and Space Technology. For financial reporting purposes the Electronic Systems, Information Technology, Integrated Systems, Mission Systems and Space Technology sectors are each reportable segments. In accordance with the provisions of Statement of Financial Accounting Standards (SFAS) No. 131 – Disclosures about Segments of an Enterprise and Related Information, Newport News and Ship Systems results are aggregated and reported as the Ships segment.

In 2002, the company decided to sell the majority of the businesses comprising its Component Technologies operating sector, and also sold two of the businesses in its Electronic Systems sector, Ruggedized Displays and Electron Devices. These businesses, Auto and the aerostructures business sold in 2000 are reported as discontinued operations. Additional information is contained in the “Dispositions and Discontinued Operations” footnote to the Consolidated Financial Statements in Part II, Item 8.

Electronic Systems is a leading designer, developer and manufacturer of a wide variety of advanced defense electronics and systems. Electronic Systems provides airborne radar systems, secondary surveillance systems, inertial navigation systems and sensors, electronic warfare systems, precision weapons, air traffic control systems, air

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defense systems communications systems, space systems, marine systems, oceanic and naval systems, integrated avionics systems and automation and information systems. Headquartered in Baltimore, Maryland the sector includes the Aerospace Electronic Systems, C4ISR&N, Defensive Electronic Systems, Navigation Systems, and Space Systems divisions. Operations not included in these divisions are reported as “Other”. Key products include fire control radars for the F-16 fighter aircraft, the F-22 air dominance fighter, the F-35 joint strike fighter, and the Longbow Apache helicopter; the AWACS airborne early warning radar; Joint STARS air-to-ground surveillance radar sensor; Longbow Hellfire missile; tactical military radars, countrywide air defense systems, airborne electronic countermeasures systems, sophisticated undersea warfare systems and naval propulsion and power generation systems. Electronic Systems has 51 locations worldwide, 19 international offices and approximately 22,000 employees.

Newport News’ primary business is the design, construction, repair, maintenance, overhaul, life-cycle support and refueling of nuclear-powered aircraft carriers and the design, life-cycle support and construction of nuclear-powered submarines for the U.S. Navy. Newport News is the nation’s sole designer, builder and refueler of nuclear-powered aircraft carriers and only one of two companies capable of designing and building nuclear-powered submarines. Major programs are the Nimitz-class nuclear powered aircraft carriers and the Virginia-class submarine program. The sector also provides after-market services for a wide array of naval and commercial vessels. Headquartered in Newport News, Virginia, the sector has approximately 18,000 employees.

Ship Systems is one of the nation’s leading full service systems providers for the design, engineering, construction, and life cycle support of major surface ships for the U.S. Navy, U.S. Coast Guard and international navies, and for commercial vessels of all types. Major programs for the U.S. Navy include the WASP LHD 1 Class and San Antonio LPD 17 Class amphibious assault ships, the Arleigh Burke DDG 51 and next generation DD(X) destroyers. The company is also a partner in the Coast Guard’s Deepwater modernization program and produces double-hulled crude oil tankers. Headquartered in Pascagoula, Mississippi, with primary operations in Pascagoula, Mississippi; New Orleans, Louisiana; Gulfport, Mississippi; and Tallulah, Louisiana, as well as in fleet support offices in the U.S. and Japan. Ship Systems has more than 16,000 employees.

The Information Technology segment consists of four lines of business: Government Information Technology, Enterprise Information Technology, Technology Services, and Commercial Information Technology. Government Information Technology covers a wide range of large-scale systems integration, solutions and services programs. This work is performed for government customers at the DOD, federal, state and local levels, and covers command, control, communications, computers, intelligence, surveillance and reconnaissance (C⁴ISR), training and simulation; science and technology; and information systems markets. Enterprise Information Technology provides enterprise-wide infrastructure, training and simulation, mission support, and science and technology solutions and services to the defense and civil marketplace, including the delivery and integration of commercially available computers, networks, hardware, software, and peripherals. Technology Services include base and range support, training and simulation, information systems, and state and local information technology services. Commercial Information Technology provides complete IT outsourcing services directed at the commercial market. In addition, this sector provides information technology services to commercial customers and to all Northrop Grumman’s sectors. Headquartered in Herndon, Virginia, the sector employs more than 23,000 professionals located in 500 sites worldwide.

Integrated Systems is a leader in the design, development and production of airborne early warning, electronic warfare and surveillance and battlefield management systems. Integrated Systems includes the Air Combat, Airborne Early Warning & Electronic Warfare Systems, and Airborne Ground Surveillance & Battle Management Systems divisions. Integrated Systems is the prime contractor for the Joint STARS advanced airborne targeting and battle management system, Global Hawk and the B-2 Spirit stealth bomber. The sector has principal roles in the F/A-18 Hornet strike fighter and F-35 joint strike fighter programs. Integrated Systems is upgrading the EA-6B Prowler electronic countermeasures aircraft and produces the E-2C Hawkeye early warning aircraft. Headquartered in El Segundo, California, the sector has approximately 12,000 employees.

Mission Systems, headquartered in Reston, Virginia, is a leading global system integrator of complex, mission-enabling systems for government, military and business clients. The organization’s technology leadership spans four business areas: Command, Control and Intelligence Systems, Federal and Civil Information Systems,

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Missile Systems, and Technical Services. Products and services are focused on the fields of command and control; strategic missiles; missile and air defense; airborne reconnaissance; unmanned aerial vehicles; intelligence management and processing; electro-magnetic and infrared analysis and decision support systems. Mission Systems has 15,000 employees in more than 300 locations around the world.

Space Technology develops a broad range of systems at the leading edge of space, defense and electronics technology. The sector creates products for U.S. government and commercial customers that contribute significantly to the nation’s security and leadership in science and technology. Its business areas focus on the design and manufacture of spacecraft systems and subsystems; electronic systems, including communication systems for space and defense; commercial telecommunications products; digital broadband space payloads; space science instruments; advanced avionics systems; high energy laser systems; and spacecraft products, including solar arrays and reflectors. Headquartered in Redondo Beach, California, Space Technology has approximately 9,000 employees in more than 25 locations around the world.

The company’s principal executive offices are located at 1840 Century Park East, Los Angeles, California 90067. The company’s telephone number is (310) 553-6262. The company’s home page on the Internet is www.northropgrumman.com. The company makes web site content available for information purposes only. It should not be relied upon for investment purposes, nor is it incorporated by reference into this Form 10-K.

Throughout this Form 10-K, the company incorporates by reference information from parts of other documents filed with the Securities and Exchange Commission (SEC). The SEC allows the company to disclose important information by referring to it in this manner, and you should review this information.

The company’s annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and proxy statement for the company annual shareholders’ meeting, as well as any amendments to those reports, are available free of charge through the company web site as soon as reasonably practicable after electronic filing of such material with the SEC. You can learn more about the company by reviewing the company SEC filings on the company web site. The company SEC reports can be accessed through the investor relations page of the company web site. The SEC also maintains a web site at www.sec.gov that contains reports, proxy statements and other information regarding SEC registrants, including Northrop Grumman.

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The major locations, general status of the company’s interest in the property, and identity of the industry segments that use the property described are indicated in the following table.

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Following each described property are numbers indicating the reporting segments utilizing the property:

(1) Electronic Systems

(2) Ships

(3) Information Technology

(4) Integrated Systems

(5) Mission Systems

(6) Space Technology

(7) General Corporate Asset

Following each described property are letters indicating the types of facilities located at each location:

(a) office

(b) manufacturing

(c) warehouse

(d) research and testing

(e) other

Government-owned facilities used or administered by the company consist of approximately 2 million square feet at various locations across the United States.

The company believes its properties are well-maintained and in good operating condition and that the productive capacity of the company’s properties is adequate to meet current contractual requirements for the foreseeable future.

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Item 3.    Legal Proceedings

Various claims and legal proceedings arise in the ordinary course of business and are pending against the company and its properties. Based upon the information available, the company does not believe that the resolution of any of these proceedings will have a material adverse affect upon its operations or financial condition.

Departments and agencies of the U.S. Government have the authority to investigate various transactions and operations of the company and the results of such investigations may lead to administrative, civil or criminal proceedings, the ultimate outcome of which could be fines, penalties, repayments, compensatory or treble damages. U.S. Government regulations provide that certain findings against a contractor may lead to suspension or debarment from future U.S. Government contracts or the loss of export privileges for a company or an operating division or subdivision. Suspension or debarment could have a material adverse effect on the company because of its reliance on government contracts. Based on available information, the company does not believe, but can give no assurance, that any matter resulting from a U.S. Government investigation would have a material adverse effect on its results of operations or financial condition. Matters described below include cases in which the U.S. Government is a party. The company is unable to predict whether or not adverse decisions in these matters would have a material adverse effect on the company’s financial condition.

As previously reported, in October 1999 in U.S. ex rel. Jordan v. Northrop Grumman Corporation, the company was served with a fifth amended complaint. The action was filed by the government in the United States District Court of the Central District of California in May 1995. The complaint alleges that the company violated the civil False Claims Act by knowingly supplying BQM-74C aerial target drones that contained various defective components between 1988 and 1998. The government seeks to recover damages up to approximately $210 million plus penalties under theories of fraud, payment by mistake, unjust enrichment, breach of warranty and breach of contract. Damages awarded pursuant to the False Claims Act may be trebled by the court. The company denies the allegations and intends to vigorously defend this matter. Trial is set for April 1, 2003.

As previously reported, in August 1992 in U.S. ex rel. Rex Robinson v. Northrop Grumman Corporation, in the United States District Court for the Northern District of Illinois unsealed a complaint brought by four individuals in the name of the United States of America. The action was filed on August 10, 1989, seeking damages under the qui tam provision of the civil False Claims Act. On July 28, 1992, the government declined to intervene in this action. Plaintiffs seek damages of approximately $113 million, plus penalties. Damages under the False Claims Act can be trebled. In 2001, the Civil Division of the U.S. Attorney’s Office filed a motion to intervene in the action, which motion was granted on October 12, 2001. The company denies the allegations and intends to vigorously defend the action.

During 1996, in U.S. ex rel. Bagley v. TRW Inc., the U.S. Department of Justice (DOJ) advised TRW Inc. (TRW) that it had been named as a defendant in lawsuits brought by a former employee originally filed under seal in 1994 and 1995 in the United States District Court for the Central District of California under the qui tam provisions of the civil False Claims Act. The DOJ subsequently advised that it would intervene in the litigation. In a consolidated complaint filed jointly by the former employee and the DOJ, it is alleged that TRW misclassified various costs and improperly charged those costs to certain of its federal contracts, that the United States has incurred substantial damages, and that TRW is liable for approximately $56 million in single damages, subject to trebling, plus penalties, post-judgment interest, costs (including attorneys’ fees) and “all other proper relief.” All substantive allegations against TRW have been denied in its answer to the consolidated complaint. The company denies the allegations and intends to vigorously defend this matter. Trial is scheduled for November 2003.

On February 3, 2003, the Department of Justice filed a civil False Claims Act case against Newport News Shipbuilding, Inc. in the United States District Court for the Eastern District of Virginia in U.S. v. Newport News Shipbuilding, Inc. The government seeks single damages in an amount in excess of $72 million, plus penalties, costs and interest. Damages may be trebled under the False Claims Act. The complaint alleges that the company improperly charged certain independent research and development costs to its government contracts with respect to the years 1994 through 1999. The company denies the allegations and intends to vigorously defend the matter.

The putative class action lawsuits filed against TRW relating to the company’s then-proposed offer to acquire TRW, reported in TRW’s Form 10-Q for the quarter ended March 31, 2002, have been dismissed with

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prejudice. The putative class action lawsuit filed against TRW on behalf of a proposed class of TRW shareholders in the United States District Court for the Northern District of Ohio was dismissed on October 3, 2002. The two putative class action lawsuits filed against TRW on behalf of a proposed class of TRW shareholders in Common Pleas Court, Cuyahoga County, Ohio, were dismissed on December 2, 2002.

In July and August 1998, three shareholder derivative lawsuits, respectively encaptioned Zabielski v. Kent Kresa, et al., Harbor Finance Partners v. Kent Kresa, et al., and Clarren v. Kent Kresa, et al., were filed in the Superior Court of California for the County of Los Angeles. These lawsuits each contain similar allegations that the directors of the company and certain of its officers breached their fiduciary duties in connection with the shareholder vote approving the proposed acquisition of the company by Lockheed Martin Corporation, and that certain defendants engaged in stock trades in violation of federal and state securities laws. The lawsuits are purportedly brought on the company’s behalf and do not seek relief against the company. On January 31, 2001, the State Court dismissed these actions with prejudice and plaintiffs subsequently filed a timely appeal. Oral argument took place on February 18, 2003, and the matter stands submitted. The defendants deny the allegations made in these actions and intend to vigorously defend the actions.

Environmental Matters

On December 18, 2000, the Mississippi Department of Environmental Quality (MDEQ) delivered to the Ingalls subsidiary of Litton, a notice of violation alleging use of non-compliant coatings, opacity violations and VOC emissions violations. The MDEQ subsequently requested that Ingalls, now named Northrop Grumman Ship Systems, Inc., perform an air permit compliance review. In the course of negotiations with respect to the review and required corrective actions the MDEQ has advised the company that it will seek penalties in excess of $100,000 in connection with these matters.

On March 13, 2002, Lucas Western Inc. received written notice from the New York State Department of Environmental Conservation (DEC) that certain alleged violations of the Environmental Conservation Law of New York State by the Utica facility operated by Lucas Western had been referred for enforcement action. The alleged violations include discharge of pollutants to waters of the State without a permit and the discharge of material to the waters of the State in contravention of established water quality standards. The DEC is seeking payment of a penalty as well as a compliance plan for the elimination of such alleged discharges, including confirmatory sampling and sampling of any sediments and soil excavated during removal of the discharge. Lucas Western Inc. became an indirect wholly-owned subsidiary of the company upon the acquisition of TRW Inc. in the fourth quarter of 2002. The company believes the ultimate resolution of this matter will not have a material effect on the company’s financial condition or results of operations.

Other Matters

The Company continues to cooperate with the previously disclosed SEC investigation pertaining to alleged failures to update disclosures in the joint proxy statement and prospectus issued by Northrop Grumman and Lockheed Martin Corporation on January 22, 1998 in connection with a meeting of Northrop Grumman’s shareholders to approve the then-proposed (but subsequently abandoned) merger of the two companies.

Like many other industrial companies in recent years, and as a result of acquisition activities, the company is a defendant in lawsuits alleging personal injury as a result of exposure to asbestos integrated into its premises and certain historical products. The company no longer incorporates asbestos in any currently manufactured products. Many of these claims have been dismissed with no payment and the remaining resolved claims have involved amounts that were not material either singly or in the aggregate. Based on the information available to the company as of the date of filing of this report, the company does not believe that disposition of any or all of these matters would have a material adverse effect upon it.

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Executive Officers of the Registrant

The following individuals were the elected officers of the company as of March 7, 2003:

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PART II

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Selected Financial Data

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BUSINESS CONDITIONS

Northrop Grumman provides technologically advanced, innovative products, services, and solutions in defense and commercial electronics, information technology, systems integration, space technology, mission systems, and nuclear and non-nuclear shipbuilding and systems. As a prime contractor, principal subcontractor, partner, or preferred supplier, Northrop Grumman participates in many high-priority defense and commercial technology programs in the United States and abroad. While Northrop Grumman is subject to the usual vagaries of the marketplace, it is also affected by the unique characteristics of the defense industry and by certain elements peculiar to its own business mix. Lockheed Martin Corporation, The Boeing Company and Raytheon Company are among the largest companies in the defense industry at this time. Northrop Grumman, the second largest defense contractor, competes against these and other companies for a number of programs, both large and small. Intense competition and long operating cycles are both key characteristics of Northrop Grumman’s business and the defense industry. It is common in this industry for work on major programs to be shared among a number of companies. A company competing to be a prime contractor may, upon ultimate award of the contract, turn out to be a subcontractor. It is not uncommon to compete with customers and, simultaneously on other contracts, to be either a supplier to or a customer of such competitor. The nature of major defense programs, conducted under binding contracts, allows companies that perform well to benefit from a level of program continuity unknown in many industries. Northrop Grumman conducts most of its business with the U.S. Government, principally the Department of Defense (DOD). The company also conducts business with foreign governments and makes domestic and international commercial sales.

The defense requirements of the United States and NATO countries have shifted to being able to respond to one or more regional conflicts, terrorist acts, homeland security, and proactive threat identification. Such engagements may require unilateral or cooperative initiatives, ranging from passive surveillance to active engagement, deterrence, policing or peacekeeping. In addition, the DOD’s strategy continues to be affected by the general public’s concern for placing military or civilian personnel at risk. As a result of these trends, both the United States and NATO countries are increasingly relying on sophisticated weapon systems that provide long-range surveillance and intelligence, battle management and precision strike capabilities combined with the ability to rapidly deploy complete defensive platforms around the world. Accordingly, defense procurement spending is expected to be weighted towards the development and procurement of advanced electronics and software that enhance the capabilities of individual weapons systems and provide for the real-time integration of individual surveillance, information management, strike and battle management platforms.

United States defense contractors have benefited from the upward trend in overall defense spending over recent years. Defense spending in NATO countries has stabilized, while they continue to increase their focus upon the development and procurement of advanced electronics and information systems capabilities. Although the ultimate size of future defense budgets remains uncertain, current indications are that the defense budget will increase over the next five years. U.S. Government programs in which Northrop Grumman either participates, or strives to participate, must compete with other programs for consideration during our nation’s budget formulation and appropriation processes. Budget decisions made in this environment will have long-term consequences for the size and structure of Northrop Grumman and the entire defense industry. While the ultimate distribution of the budget remains uncertain, the company believes that its technologies and programs will be viewed favorably in the upcoming strategic review and budget process.

Northrop Grumman has historically concentrated its efforts in high technology areas such as stealth, airborne surveillance, battle management, precision weapons, systems integration, defense electronics and information technology. Through its acquisitions of Litton Industries, Inc. (Litton), Newport News Shipbuilding Inc. (Newport News) and TRW Inc. (TRW) the company now has a significant presence in space technology; command, control & intelligence; federal and civil information systems; missile systems; and the manufacture of a broad range of ships including aircraft carriers and submarines. The company believes that its programs are a high priority for national defense, but there remains the possibility that one or more of them may be reduced, extended or terminated.

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In the event of termination for the government’s convenience, contractors are normally protected by provisions covering reimbursement for costs incurred subsequent to termination. The company received a termination for convenience notice on the Tri-Service Standoff Attack Missile (TSSAM) program in February 1995. In December 1996 the company filed a lawsuit against the U.S. Government in the U.S. Court of Federal Claims seeking the recovery of approximately $750 million for uncompensated performance costs, investments and a reasonable profit on the program. In prior years the company had charged to operations in excess of $600 million related to this program. Northrop Grumman is unable to predict whether it will realize some or all of its claims, none of which are recorded on its balance sheet, from the U.S. Government on the TSSAM contract.

Prime contracts with various agencies of the U.S. Government and subcontracts with other prime contractors are subject to numerous procurement regulations, including the False Claims Act and The International Traffic in Arms Regulation promulgated under the Arms Export Control Act, with noncompliance found by any one agency possibly resulting in fines, penalties, debarment or suspension from receiving additional contracts with all U. S. Government agencies. Given the company’s dependence on U.S. Government business, suspension or debarment could have a material adverse effect on the company’s future.

The company does not make use of business arrangements or other business activities that involve so-called off-balance sheet, variable interest or special purpose entities.

An individual company’s success in the competitive defense industry depends upon its ability to develop and market its products, as well as its ability to provide the people, facilities, equipment and financial capacity needed to deliver those products with maximum efficiency. It is necessary to maintain, as the company has, sources for raw materials, fabricated parts, electronic components and major subassemblies. In this manufacturing and systems integration environment, effective oversight of subcontractors and suppliers is as vital to success as managing internal operations. Northrop Grumman’s operating policies are designed to achieve these objectives. The company also believes that it maintains good relations with its employees, approximately 19 percent of whom are covered by 37 collective bargaining agreements. The company currently expects to complete negotiation of 11 collective bargaining agreements in 2003. Two of these agreements covering over 6,000 employees in the Ships segment are in current negotiations which are expected to be completed during the first quarter of 2003. It is not expected that these negotiations will either individually or collectively cause a material adverse effect on the operations of the company.

The company provides certain product warranties that require repair or replacement of non-conforming items for a specified period of time. Most of the company’s product warranties are provided under government contracts and are generally recoverable from the customer.

Critical Accounting Policies

The company’s established policies are outlined in the footnotes to the Consolidated Financial Statements (contained in Part II, Item 8 of this Form 10-K) entitled “Summary of Significant Accounting Policies”. As part of its oversight responsibilities, management evaluates the propriety of its accounting methods as new events occur. Management believes that its policies are applied in a manner which provides the reader of the company’s financial statements a current, accurate and complete presentation of information in accordance with U.S. Generally Accepted Accounting Principles. Principal accounting practices that require the use of assumptions and judgments are outlined below:

Revenue Recognition

As a defense contractor engaging in long-term contracts, the company extensively utilizes the cost-to-cost type and the units-of-delivery type of percentage-of-completion method of accounting. Application of this accounting method requires the use of estimates of costs to be incurred for the design, manufacture and delivery of aircraft carriers, submarines, aircraft and subassemblies, radars, intricate components and systems for space communications as well as the engineering, development and integration of software systems and other highly technical products. Such costs are typically incurred over a period of several years and estimation of these costs requires the use of judgment. The cost estimation process is based upon the professional knowledge and experience of the company’s engineers, program managers and financial professionals. Factors that are considered in estimating the work to be

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completed and ultimate contract recovery include the availability and productivity of labor, the nature and complexity of the work to be performed, the effect of change orders, the availability of materials, the effect of any delays in performance, availability and timing of funding from the customer, and the recoverability of any claims included in the estimates to complete. A significant change in an estimate on one or more programs could have a material effect on the company’s results of operations. Contract cost estimates are updated at least annually and more frequently in certain circumstances. Sales under cost-reimbursement contracts are recorded as costs are incurred. Certain contracts contain profit incentives based upon performance relative to predetermined targets that may occur during or subsequent to delivery of the product. Incentives which can be reasonably estimated are recorded over the performance period of the contract. Incentives which cannot be reasonably estimated are recorded when awarded. Certain contracts contain provisions for the redetermination of price based upon future economic conditions. Contract change orders and claims are included in sales when they can be reasonably estimated and realization is probable.

Purchase Accounting and Goodwill

The company applies the purchase method of accounting to its acquisitions. Under this method, the purchase price is allocated to the underlying tangible and intangible assets acquired and liabilities assumed based upon their respective fair market values, with the excess recorded as goodwill. Such fair market value assessments require judgments and estimates which can be affected by contract performance and other factors over time that may cause final amounts to differ from original estimates. The company evaluates the recovery of recorded goodwill amounts annually, or when evidence of potential impairment exists. The evaluation requires judgment associated with factors used to test recoverability.

Litigation, Commitments and Contingencies

The company is subject to a range of claims, lawsuits, environmental matters and administrative proceedings that arise in the ordinary course of business. Estimating liabilities and costs associated with these matters requires judgment and assessment based upon professional knowledge and experience of management and its legal counsel. In accordance with SFAS No. 5 – Accounting for Contingencies, amounts are recorded as charges to earnings when management has determined that it is probable that a liability has been incurred and the amount of the loss can be reasonably estimated. The ultimate resolution of any such exposure to the company may vary from earlier estimates as further facts and circumstances become known.

Retirement Benefits

Assumptions used in determining projected benefit obligations and the fair values of plan assets for the company’s pension plans and other post-retirement benefits plans are regularly evaluated by management in consultation with outside actuaries who are relied upon as experts. In the event that the company determines that changes are warranted in the assumptions used, such as the discount rate, expected long term rate of return, or health care cost, future pension and post-retirement benefit expenses could increase or decrease.

With respect to the previously described critical accounting policies, management believes that the application of judgments and assessments has been consistently applied and has produced financial information which fairly depicts the results of operations for the years presented.

Acquisitions and Divestures

The current composition of Northrop Grumman Corporation is the result of a series of strategic acquisitions, mergers and divestures. In 1998 and 1999, the company acquired several businesses that strategically fit within its operating sectors. Inter-National Research Institute Inc. (INRI) was acquired in 1998 and was integrated into the Information Technology sector. In 1999, Ryan Aeronautical, an operating unit of Alleghany Teledyne Incorporated, the Information Systems Division of California Microwave, Inc., and Data Procurement Corporation (DPC), were acquired and integrated into Integrated Systems, Electronic Systems and Information Technology, respectively.

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In 2000, the company acquired Navia Aviation AS, Comptek Research, Inc., Federal Data Corporation, and Sterling Software, Inc., (known as Sterling’s Federal Systems Group). Navia was integrated into Electronic Systems. The Comptek units were integrated within the Integrated Systems, Electronic Systems and Information Technology sectors. Federal Data and Sterling were both integrated into Information Technology.

On July 24, 2000, the company completed the sale of its commercial aerostructures (Aerostructures) business to The Carlyle Group. Aerostructures was principally a major producer of commercial aircraft subassemblies, the majority of which were sold to The Boeing Company.

In 2001, the company purchased Litton Industries, Inc. (Litton), Electronics and Information Systems Group of Aerojet-General Corporation (EIS) and 80.7 percent of Newport News. On January 18, 2002, the company completed the acquisition of the remaining shares of Newport News and now owns 100 percent of Newport News. Newport News is the nation’s sole designer, builder and refueler of nuclear-powered aircraft carriers and one of only two domestic companies capable of designing and building nuclear-powered submarines. To complete the acquisition, the company issued an additional 3.2 million shares of its common stock and paid cash for the balance of the Newport News shares. In total, the company issued 16.6 million shares of its common stock for the acquisition of Newport News. These shares were valued at $95.22 per share for purchase accounting purposes. In accordance with generally accepted accounting principles, this value was determined based on the average closing stock price of the company’s common stock from December 3, 2001, through December 7, 2001. Following the completion of the acquisition, the company eliminated the 19.3 percent minority interest from its financial statements.

The Litton, Newport News and EIS acquisitions were accounted for using the purchase method of accounting. Under the purchase method of accounting, the purchase price is allocated to the underlying tangible and intangible assets acquired and liabilities assumed based on their respective fair market values, with the excess recorded as goodwill. As of December 31, 2002, the company has completed the fair market value and accounting conformance evaluation process for these acquisitions and all related adjustments have been reflected in these financial statements. The Litton business units operating results are included from the acquisition date in the company’s segment data as follows: Litton’s advanced electronics business is included in Electronic Systems; Litton’s information systems business is included in Information Technology; Litton’s ship business is included in Ships. Litton’s electronic components and materials business, Component Technologies, is classified as discontinued operations. EIS was integrated into Electronic Systems and Newport News is included in the Ships segment.

In 2001, the company accrued $119 million in restructuring costs related to the acquisition of Litton. These costs included $29 million to exit a business, $31 million to close down redundant facilities and $59 million to terminate and relocate employees. Of the total amount accrued, $5 million was expensed directly to the income statement and $114 million was accounted for as purchase accounting adjustments to the opening balance sheet of Litton. For the period from April 2, 2001 to December 31, 2001 the company utilized $25 million of the balance sheet accrual. In 2002, the company accrued an additional $13 million of costs to close down redundant facilities in relation to this acquisition. During 2002, the company utilized $57 million of the balance sheet accrual. In addition, $1 million was reversed to the income statement as it is no longer required. At December 31, 2002, $49 million of accrued restructure costs remained, including $25 million in other current liabilities, $20 million in other long-term liabilities and $4 million in liabilities of businesses held for sale.

In December 2002, the company purchased 100 percent of the common stock of TRW Inc. (TRW). The company issued approximately 69.4 million shares of its common stock at an exchange ratio of .5357 for each TRW share, with cash paid in lieu of any fractional share of the company’s stock which otherwise would be issued to the TRW shareholders. These shares were valued at $107.31 per share for purchase accounting purposes. In accordance with generally accepted accounting principles, this value was determined based on the average closing stock price of the company’s common stock from October 15, 2002, through October 21, 2002. In connection with the acquisition of TRW, the company entered into a formal stipulation and consent decree (Final Judgment) with the United States Department of Justice that was filed in the U.S. District Court for the District of Columbia on December 11, 2002. Key provisions of the consent decree are intended to assure that the merger will not impede fair and open competition related to certain electronic satellite payloads. The consent decree does not

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require the divestiture of any businesses and will permit the company to operate its business and those of TRW as planned. TRW’s defense business units will be operated as two separate sectors, Mission Systems and Space Technology. TRW’s automotive business (Auto) was sold in February, 2003.

The acquisition of TRW, which is valued at approximately $12.5 billion, including the assumption of TRW’s debt of $4.8 billion, is accounted for using the purchase method of accounting. The company is in the early stages of determining the fair market value of assets acquired and liabilities assumed. These financial statements reflect preliminary estimates of the fair market value for only purchased intangibles, retiree benefits assets and liabilities and debt as well as preliminary estimates of adjustments necessary to conform TRW to the company’s accounting policies. Auto is included in the total TRW valuation and is valued and recorded at its estimated sale price, which represents its fair market value. The final determination of the fair market value of assets acquired and liabilities assumed and final allocation of the purchase price may differ significantly from the amounts included in these financial statements. Adjustments to the purchase price allocations are expected to be finalized by the fourth quarter of 2003, and will be reflected in future filings. There can be no assurance that such adjustments will not be material.

Discontinued Operations

The company completed the sale of Auto to The Blackstone Group on February 28, 2003. The company received approximately $4.7 billion, comprised of $3.9 billion in cash and debt retained by Auto, a $600 million payment-in-kind note and a 19.6 percent investment in the new enterprise. Cash proceeds from the sale will be used primarily to reduce debt.

In October 2002, Northrop Grumman completed the sale of two Electronic Systems sector businesses, Electron Devices and Ruggedized Displays for $135 million. During the third quarter of 2002, the company concluded that the Component Technologies businesses did not fit with the company’s long-term plan and decided to sell the businesses. The company completed the sale of the Component Technologies VEAM business units in the first quarter of 2003 and expects to complete the sale of the remaining businesses by September 30, 2003. Therefore, in accordance with SFAS No. 144 – Accounting for the Impairment or Disposal of Long-Lived Assets, the results of operations of these businesses are reported as discontinued operations, net of applicable income taxes, for all periods presented. In addition, the assets and liabilities of these businesses and of Auto have been classified as held for sale.

BUSINESS SEGMENTS

The company is aligned into seven business sectors: Electronic Systems, Newport News, Ship Systems, Information Technology, Integrated Systems, Mission Systems and Space Technology. For financial reporting purposes each business sector is a reportable segment with the exception of Newport News and Ship Systems which are aggregated and reported as the Ships segment in accordance with the provisions of SFAS No. 131 – Disclosures about Segments of an Enterprise and Related Information. Segment reporting for Mission Systems and Space Technology, acquired from TRW on December 11, 2002, will commence in the first quarter of 2003 as 2002 results for these new segments were not material to the company. The preliminary valuations of TRW assets and liabilities are included in the Consolidated Statement of Financial Position as of December 31, 2002.

Electronic Systems

The Electronic Systems segment comprises five product lines: Aerospace Electronic Systems; Command, Control, Communications, Computers, Intelligence, Surveillance, Reconnaissance, and Naval (C⁴ISR&N) Systems; Defensive Electronic Systems; Navigation Systems; and Space Systems; plus three smaller lines referred to collectively as “Other”. The segment’s expertise is in the ability to conceive, design, produce, integrate, and support high performance sensors, intelligence and processing systems that operate in diverse and challenging environments, from undersea to outerspace.

Aerospace Electronic Systems products include ground-based and airborne Radio Frequency (RF) and Electro-Optical/Infrared (EO/IR) sensors, and integrated sensor suites which meet military surveillance, precision-strike and threat-warning needs. These products are categorized into three types of systems: combat avionics

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systems, land combat systems, and airborne surveillance systems. Combat avionics systems include radar and electro-optic avionics systems that meet the needs of targeting and strike missions for armed forces worldwide, such as: the AN/APG-66/68 airborne fire control radar series installed onboard F-16 fighters; the next-generation air-superiority radar for the U.S. Air Force’s F-22 aircraft; and the fire control radar and other key avionics systems for the new F-35 Joint Strike Fighter. Land combat systems include the Longbow APG-78 fire control radar and the Longbow Hellfire missile for the U.S. Army’s AH 64D Apache attack helicopter and the British WAH-64 Westland Apache. Land combat systems also include the Brilliant Anti-Tank (BAT) anti-armor submunition that uses passive acoustic, infrared and millimeter wave sensors to find, attack and destroy moving tanks and other armored vehicles. Airborne surveillance systems include: the Airborne Warning and Control System (AWACS) radar, which is integrated on Boeing 707 and 767 aircraft; the Multirole Electronically Scanned Array (MESA), and airborne surveillance systems being developed for installation on Boeing 737 aircraft for the Royal Australian Air Force; the Multi-Platform Radar Technology Insertion Program (MP-RTIP), which will significantly improve the performance of Joint Surveillance Target Attack Radar System (Joint STARS), while creating new air-to-ground surveillance missions and opportunities; and the E-2C Radar Modernization Program.

C⁴ISR&N Systems encompass products in the areas of: airspace management systems; command, control, communications, computers, intelligence, surveillance, reconnaissance and targeting (C⁴ISRT) networked systems; advanced naval platforms; oceanic and naval systems; and marine systems. Airspace management systems include air defense and air traffic control radar systems, and associated systems used by domestic and international customers. C⁴ISRT networked systems include ground-based intelligence, surveillance and reconnaissance processing systems used by the DOD such as the U.S. Army’s Tactical Exploitation System, the U.S. Navy’s next-generation Naval Fires Network, and the U.S. Air Force’s Intelligence, Surveillance, and Reconnaissance Manager. Advanced naval platforms include shipboard mission systems integration and management for domestic and international navies and mission systems for the U.S. Navy LHD-8. Oceanic and naval systems products include the Advanced Sea and Land (SEAL) Delivery System mini-submarine, the SPQ-9B shipboard radar, advanced mine hunting sensors and processors, and submarine subsystems. Marine systems include: power generation machinery, advanced propulsion systems, and missile launchers used for naval applications; and integrated bridge systems, navigation systems, and radars for both commercial and naval ships. Communications products provide reliable solutions for commercial and defense applications including co-site and spread spectrum systems communication, navigation and surveillance systems, specialized satellite communications ground terminals, an array of communications gateways and message processing systems, and fully integrated voice communications systems for air traffic control and command, control and communications applications.

Defensive Electronic Systems provides electronic warfare and targeting products in several product lines: RF countermeasures, EO/IR countermeasures, targeting systems, automatic test equipment, simulation products, and laser systems. RF countermeasures products include radar warning receivers, electronic warfare suite controllers, self-protection jammers, electronic support measures, special receivers, and integrated electronic warfare systems. These products protect fixed-wing and rotary-wing aircraft, as well as surface ships, submarines and satellites RF threats. EO/IR countermeasures products include the NEMESIS Directional Infrared Countermeasures (DIRCM) system, which protects fixed-wing and rotary-wing aircraft from shoulder-launched, infrared-guided threats. Targeting systems products include the Litening II targeting pod, which provides 24-hour adverse-weather strike capabilities. Defensive Electronic Systems also provides: automatic test equipment to evaluate and assess the health of defense electronics and electro-optic systems quickly and efficiently; simulation and evaluation equipment to assess the performance of defense electronic systems; and laser systems for military applications, including laser rangefinders, laser target locators and laser target designators.

Navigation Systems products cover military aircraft electronic systems, military land and sea electronic systems, and commercial systems. Military aircraft electronic systems are sold globally to customers in fixed-wing and rotary-wing aircraft markets. Products and services include navigation systems, flight certified computers and cockpit displays, identification friend or foe systems, and complete systems integration. Three key programs in this category are U.S. Marine Corps attack and utility helicopter upgrades, Blackhawk helicopter modernization, and Euro Fighter aircraft upgrades. Military land and sea electronic systems are provided to customers in four categories: missiles, vehicles, ships, and sub-surface (submarines and acoustical devices). Products include battlefield

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situational awareness systems, interrogators/transponders, secondary surveillance radars, and all-optical fiber-optic acoustics systems for surveillance. Commercial systems are sold in the commercial air transport and space products markets. Products include inertial navigation and reference systems, altitude and heading/reference systems, and global positioning systems.

Space Systems products include visible, infrared, and RF payloads and the associated ground processing for spaceborne remote sensing applications, which cover environmental monitoring, missile warning, and surveillance. Space Systems provides payloads for the Defense Meteorological Satellite Program (DMSP), the National Polar-Orbital Operational and Environmental Satellite Systems (NPOESS), the Defense Support Program (DSP), Space-Based Infrared Surveillance (SBIRS) High, as well as other classified programs. For SBIRS High, mission level systems engineering and integration are also provided. In addition, Space Systems provides ground systems in support of national and tactical missile warning and defense systems, including DSP, SBIRS High, and the Space Tracking Surveillance System (STSS), formerly SBIRS Low.

Other product lines include government systems, logistics services, and systems development and technology. Government systems provides products in two areas: homeland security and automation and information (such as material handling and sorting for postal services). Logistics services provides a wide range of logistics support for a variety of customers. Systems development and technology provides the technology base for current and future Electronic Systems products.

Ships

The Ships segment combines two operating sectors, Newport News and Ship Systems and includes the following products and services: Aircraft Carriers, Surface Combatants, Amphibious and Auxiliary, Submarines, Commercial and International, and Services and Other.

Newport News is currently constructing the Ronald Reagan, the ninth Nimitz-class aircraft carrier, with delivery scheduled for 2003, and the George H.W. Bush, the tenth Nimitz-class carrier, which is scheduled for delivery in 2008. CVN (21), the next generation of nuclear aircraft carrier is currently in the design phase with a construction contract anticipated in 2007. CVN (21) will provide significant new technologies that will result in manning reductions, improved war fighting capability, and a new nuclear propulsion plant design. The sector also provides ongoing maintenance for the U.S. Navy’s vessels through overhaul, refueling and repair work. The company possesses unique expertise in servicing nuclear naval systems, and is the only private shipyard presently capable of refueling nuclear-powered aircraft carriers. Such aircraft carrier maintenance work is generally assigned by the U.S. Navy based on the type of work, location and cost. The company is currently overhauling and refueling carrier Dwight D. Eisenhower which began in 2001. Each Nimitz-class aircraft carrier will be refueled once in its 50-year life. The sector estimates that the remaining Nimitz-class aircraft carriers could be refueled over the next 30 to 40 years, although no assurances can be given as to the number of Nimitz-class carriers that will be refueled or that the sector will receive these awards.

Ship Systems builds Surface Combatants, which includes the design and construction of the Arleigh Burke DDG 51 Class Aegis guided missile destroyers, design of DD(X), the Navy’s future transformational surface combatant class, and the Coast Guard’s Deepwater Modernization Program. The latter two programs were awarded in 2002. Ship Systems is one of two prime contractors designing and building DDG 51 Class destroyers, which provide primary anti-aircraft and anti-ship missile protection for the U.S. Navy fleet. Seven Arleigh Burke Class Destroyers are currently under construction with an additional four ships in backlog. The DD(X) program is a $2.9 billion development contract to develop and test eleven Engineering Development Models (EDMs) including an Integrated Electric Propulsion System (IPS), an all composite low signature deckhouse with embedded radar and communication apertures, a new stealthy hull form, and a new Peripheral Vertical missile Launching System (PVLS). The contract further provides for incorporating these advanced technologies into the design of the next generation destroyer, DD(X). These technologies are also to be incorporated into the next generation Cruiser, CG(X), the Littoral Combat Ship (LCS) and many ships already in the fleet as well as other future new ship classes. Construction of the first DD(X) is currently scheduled to begin in 2006. Ship Systems and Lockheed Martin are joint venture partners for the Coast Guard’s Deepwater Modernization Program. Ship

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Systems has design and production responsibility for all surface ship assets including three new classes of cutters. The program is currently a 20-year program with the surface ship content representing $8.1 billion.

Ship Systems is also responsible for Amphibious and Auxiliary programs, which include the design and construction of amphibious assault ships for the U.S. Navy, including the WASP LHD 1 Class, the San Antonio LPD 17 Class ships and the Bob Hope Fast Sealift Auxiliary. Ship Systems is the sole provider for the LHD class of large-deck, 40,500-ton multipurpose amphibious assault ships, which serve as the centerpiece of an Amphibious Ready Group. Currently the LHD 8 is in the final stages of design and is a significant upgrade from the preceding seven sister ships. The design and production of the LHD 8 is a $1.4 billion program with delivery scheduled for 2007. Ship Systems is also the sole provider of the LPD17 class of ships, which function as amphibious transports. Four LPD Class ships are currently under contract with a value of $3 billion. Ship Systems also builds Sealift ships for the Military Sealift Command. These very large ships are used for prepositioning U.S. military vehicles and equipment overseas. One Sealift ship was delivered in 2002, bringing the total to date to six on this seven-ship contract. The seventh ship will be delivered in 2003.

Newport News is one of two builders of U.S. Navy nuclear-powered submarines. In February 1997, the sector and Electric Boat Corporation (Electric Boat), a wholly-owned subsidiary of General Dynamics Corporation, reached an agreement to cooperatively build the first four new nuclear attack submarines of the Virginia-class. With Electric Boat serving as the prime contractor and lead designer, each company will construct certain portions of each submarine, with final assembly, testing, outfitting, and delivery alternating between the two yards. The contract for the first flight of Virginia-class submarines was awarded to the Newport News/Electric Boat team in 1998. The period of performance on this contract spans 10 years as submarines in this class typically have a 6 to 7 year build cycle. The current schedule calls for the delivery of the Virginia by Electric Boat in 2004 followed over the balance of the contract by the Texas (Newport News), the Hawaii (Electric Boat), and the NorthCarolina (Newport News). Electric Boat and Newport News are currently in negotiation with the U.S. Navy for the second flight of 5 Virginia-class submarines with options for an additional two. The second flight of Virginia-class submarines will also be co-produced with Electric Boat. Management estimates that the Virginia-class program could total up to 30 submarines, although no assurances can be given as to the number of submarines that ultimately will be built by the sector.

Ship Systems is under contract to produce five Polar Tankers, included in Commercial and International; two ships have been delivered. These tankers will transport one million barrels of crude oil from Alaska to west coast refineries and are fully compliant with the Oil Pollution Act of 1990. The remaining three ships are expected to be delivered in 2003, 2004, and 2005. In 2002, Ship Systems delivered two overhauled frigates to Venezuela with warranty the only remaining contractual obligation. Ship Systems is under contract with the Israeli Government to perform feasibility studies to increase the size and capabilities of the SA’AR 5 Class corvettes. Ship Systems designed and built three ships of this class in the early 1990’s.

Included in Services and Other are short-duration government and commercial ship repair contracts. The company has ship repair facilities in the U.S. Navy’s largest homeports of Norfolk, VA and San Diego, CA.

Information Technology

The Information Technology segment consists of four lines of business: Government Information Technology, Enterprise Information Technology, Technology Services, and Commercial Information Technology.

Government Information Technology covers a wide range of large-scale systems integration, solutions and services programs. This work is performed for government customers at the DOD, federal, state and local levels, and covers command, control, communications, computers, intelligence, surveillance and reconnaissance (C⁴ISR); training and simulation; science and technology; and information systems markets. Government Information Technology has the lead for the company’s Homeland Security efforts. Homeland Security solutions include information security systems, such as detection and vulnerability assessments; communications systems such as C⁴ISR, mobile/wireless networks, cyber-warfare, local area networks, and air traffic control systems; intelligence and analysis systems, protecting our customers’ networks from cyber attacks; training systems, such as modeling and simulation; and response and recovery systems, such as computer aided dispatch/911 emergency response systems. In the C⁴ISR market, Information Technology supports the development, testing and fielding of

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command and control systems for its primary customers, principally the DOD. Specialty areas include systems integration, mission critical software and support, systems engineering, tactical data links, information security, independent validation and verification, geographic information systems, orbital analysis, and national intelligence systems and services. In the training and simulation market, the segment is a prime developer and operator of modeling, simulation and analysis systems, computer-driven war-gaming and training, flight simulations, knowledge management systems and mission readiness exercises. These services are provided to the U.S. Navy, Air Force, Army, Special Operations Command, NASA, and the Missile Defense Agency. In the science and technology market, work includes analysis of weapons of mass destruction effects, high-energy laser technology development and neural network applications. This technical and scientific support is provided to the U.S. Air Force Research Labs and the Defense Threat Reduction Agency. The information systems market is large and diverse. As a full service provider, the sector offers a complete range of services such as large-scale systems integrations, enterprise-wide infrastructure solutions, high performance computing, electronic commerce, large-scale database design, systems modernization and integration, disaster recovery and planning, enterprise resource planning, data center management, seat management, health solutions, air traffic controls, cyber warfare/information security systems, financial systems, logistics systems, and complete network-centric warfare operations. Customers include state and local governments, federal agencies such as the General Services Administration, Federal Aviation Administration, Department of Health and Human Services, the Department of Justice, the Department of State, and all branches of the DOD. The Software Engineering Institute’s Capability Maturity Model-Integration (CMMI) system engineering/software engineering level 5 rating, the highest engineering rating, has been achieved within this line of business.

Enterprise Information Technology provides enterprise-wide infrastructure and internet solutions and services to the defense and civil marketplace, including the delivery and integration of commercially available computers, networks, hardware, software and peripherals. Customers include the Veterans Administration, Department of State, Department of Justice, Department of Treasury, all branches of the DOD, NASA, and state and local government agencies.

Technology Services include base and range support, training and simulation, information systems, and state and local information technology services. Contracts include support of systems, logistics support, facilities management services, flight systems and simulation services, mission integration and planning support, operation and support of simulation enhanced training programs, systems integration, information security, data center management, and systems engineering and networking. In 2002, the company’s state and local group also entered the worldwide electronic election services market, to license and manufacture electronic voting systems. Primary customers of Technology Services include the U.S. Army, U.S. Air Force, NASA, and state and local government agencies.

Commercial Information Technology provides complete IT outsourcing services directed to the commercial market. This work includes desktop and server management, hardware and software maintenance, help desk support, systems administration, network design, systems modernization and integration, and facility management services. Customers include information technology outsourcing providers, original equipment manufacturers, integrators and resellers.

Integrated Systems

Air Combat Systems (ACS), Airborne Early Warning and Electronics Warfare (AEW/EW) systems and Airborne Ground Surveillance and Battle Management (AGS/BM) systems are the three product lines within the Integrated Systems segment.

Included in ACS are: F/A-18 and F-35 subcontract work, the Global Hawk and Fire Scout Unmanned Aerial Vehicles (UAVs), the Navy Unmanned Combat Aerial Vehicle (UCAV-N), the Multi-Platform Radar Technology Insertion Program (MP-RTIP), B-2 bomber post-production contracts, a family of aerial targets, support of out-of-production F-5/T-38 aircraft, and advanced systems and technology solutions. Integrated Systems is the principal subcontractor to The Boeing Company on the F/A-18 program. The F/A-18 is designed to execute a variety of air-to-air and air-to-surface missions. Principally deployed by the U.S. Navy on aircraft carriers, it also has been purchased by several other nations as a land-based combat aircraft. Northrop Grumman is

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responsible for approximately 40 percent of the aircraft, including the full integration of the center and aft fuselage and vertical tail sections and associated subsystems. Current business includes production of the F/A-18E/F Super Hornet model and support of prior models of the aircraft still in service.

On the F-35, Integrated Systems is teamed with Lockheed Martin Corporation and BAE Systems. The F-35 is a multi-mission, multi-service weapon system, which is being developed as an affordable fighter/attack platform with variants to be optimized for the U.S. Air Force, U.S. Marine Corps, U.S. Navy, U.K. Royal Navy and U.K. Royal Air Force, while maintaining a very high percentage of platform commonality. The F-35 is currently in the System Development and Demonstration (SDD) phase of the program. Plans call for more than 3,000 aircraft over the life of the program, with an initial 22 aircraft to be produced in the $19 billion SDD phase, although no assurances can be given regarding the ultimate number of aircraft to be produced. The Integrated Systems sector is responsible for the detailed design and integration of the center fuselage and weapon bay, a large part of systems engineering, mission system software, ground and flight test support, signature/low observables development, and support of modeling and simulation activities. The total program is valued at approximately $200 billion and is intended to be a cornerstone of future defense capability for the United States, the United Kingdom and their allied partners. The F-35 is designed to replace the A-10, the AV-8 Harrier, the F-16 and the F/A-18.

The company is a leader in the unmanned systems market. Global Hawk is a high altitude endurance UAV being developed for the U.S. Air Force to perform various intelligence, surveillance and reconnaissance (ISR) missions from high altitudes for long periods of time. The program is completing a successful advanced concept technology demonstration phase and has now entered the SDD phase, which is being conducted concurrently with a Low Rate Initial Production (LRIP) program. Fire Scout is a UAV being developed for the U.S. Navy to perform tactical ISR missions in a naval environment, taking off and landing vertically. The program is currently in LRIP, with production plans still to be determined. UCAV-N is being developed for the U.S. Navy to be a highly survivable UAV capable of both ISR and combat missions. This program is in the early stages of development.

Integrated Systems is the prime systems integration contractor for the MP-RTIP. The objective of the program is to upgrade current aircraft and unmanned vehicles with an advanced technology radar subsystem, which includes higher resolution and greater accuracy. The product of the MP-RTIP development program is a Ground Moving Target Indicator (GMTI) capability, in the form of an Active Electronically Scanned Array (AESA) radar, that can be integrated onto multiple U.S. platforms and is suitable for use by NATO. ACS is the prime contractor for the B-2 bomber. While production deliveries of the B-2 bomber have been completed, the company continues to perform upgrades and support activity. Advanced systems include future strike aircraft concepts and performing systems engineering studies as part of NASA’s Space Launch Initiative.

AEW/EW products include the E-2C (Hawkeye) Airborne Early Warning and the EA-6B (Prowler) Electronic Warfare aircraft. The E-2C has been in active service with the U.S. Navy since 1973 and is employed by the air forces of five other nations. AEW/EW is currently performing a multi-year contract to produce 22 E-2C aircraft for the U. S. Navy, one aircraft for France, and two aircraft for Taiwan. The E-2C is kept current through technological upgrades of its mission systems, the latest of which is the Hawkeye 2000 configuration. The company is developing the next generation capability which includes mission computer and sensor enhancements called the Advanced Hawkeye under a Pre-System Development and Demonstration contract with the U.S. Navy. The EA-6B is the armed services’ only offensive tactical radar jamming aircraft. The company is currently developing the next generation mission system for this aircraft under the ICAP (Increased Capability) III contract.

The major product included in AGS/BM is the E-8 Joint STARS. AGS/BM is the prime contractor on Joint STARS, which detects, locates, classifies, tracks and targets potentially hostile ground movement in all weather conditions. It is designed to operate around the clock in constant communication through secure data links with Air Force command posts, Army mobile ground stations, or centers for military analysis far from the point of conflict. Current business includes production, Total Systems Support Responsibility (TSSR), and upgrades to the weapons systems in service. Internationally, AGS/BM is actively involved in the development of a NATO Alliance Ground Surveillance system to provide a Joint STARS-like capability to that organization.

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Mission Systems

The Mission Systems segment is a leading global system integrator of complex, mission-enabling systems. The segment consists of four lines of business: Command, Control and Intelligence Systems; Federal and Civil Information Systems; Missile Systems; and Technical and Management Services.

Command, Control and Intelligence Systems provides command, control, communications, computers, and intelligence support to the U.S. Department of Defense, principally the intelligence community and the U.S. Air Force, Army, Navy and Marine Corps. Offerings in the intelligence market include signals intelligence and exploitation systems; system engineering and integration; operations, maintenance and engineering; and enterprise engineering. The space control, information operations and Air Force command and control (C²) markets include enterprise and system engineering; ground segment C²; information analysis, planning and decision aids; Computer Network Operations (CNO); systems with embedded information assurance; data collection; modeling and product generation; system simulation and integration and test; spacecraft C² systems; payload control and terminal software; and C² infrastructure products. In the integrated command, control, communications and computers (C⁴) market, the focus is on legacy C⁴ systems, object force C⁴, air defense artillery C², and network operations. In the logistics automation market, work includes Army and tactical global combat service support; legacy standard Army management information systems; Army knowledge on-line; and linkage to fielded C⁴ systems. In the platform integration and UAV market, the segment supports the Hunter corps and division tactical UAV system; light and heavy joint service nuclear, biological and chemical reconnaissance systems; and tactical operation centers.

Federal and Civil Information Systems provides information technology services to domestic and foreign government customers at the federal, state and/or local levels. In the federal network integration market, the focus is on converged enterprise networks and network design, planning, engineering, integration and support. In the federal security market, segment offerings include an integrated product to link legacy, commercial off-the-shelf, and emerging technologies into a network-centric standards-based platform; a tactical physical security solution supporting deployed forces; comprehensive assessment of security threats, vulnerabilities, risks, and business impacts for physical and cyber assets; a technology-oriented suite of integrated security solutions for physical and cyber security; and a complete set of business continuity and disaster recovery solutions. For the federal enterprise information technology market, the segment provides enterprise-wide architecture; systems integration; storage area network consolidation; financial asset tracking; secure document technology; knowledge management; and collaborative systems including advanced video teleconferencing. In the state and local information technology market, the segment focuses on public health data systems; labor unemployment insurance systems; child welfare and support enforcement systems; and operations and maintenance. Work in the public safety market includes prime integration for civilian command centers for public safety, transportation and airport security; statewide wireless communications systems; automated and criminal identification systems; integrated justice information systems; and C² and mobile data integration.

Missile Systems supports the Integrated Missile Defense system and the Intercontinental Ballistic Missile (ICBM) Program. The Integrated Missile Defense system market includes shooters, sensors, battle management C², communications, modeling and simulation, and test and evaluation. For this market, the segment provides wargames, modeling and simulation; system test and integration; targets and countermeasures, missile system engineering, and trainers to the Missile Defense Agency, Boeing and Lockheed Martin. As prime contractor for the ICBM Program Office, the segment offers ICBM domain knowledge; program management; systems engineering and integration; and sustainment and modernization services.

Technical and Management Services primarily supports the U.S. Departments of Defense, Labor and Justice. In the information technology market, the segment offers full life cycle design and information systems integration and operations. In the systems engineering and analytic services market, the focus is on electromagnetic and infrared analysis; decision support with modeling tools; systems effectiveness evaluation; engineering prototypes and integration; and simulation modeling for training resource allocation. For the training and combat support market, the segment provides full-scale exercise design, execution and analysis; multi-media training design and delivery; and operational support of warfighting and peacekeeping (e.g., linguists and subject matter experts). In the operations and maintenance market, offerings include base operating services; equipment maintenance; logistics

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and administrative support and freight forwarding services; biometrics; and biological agent detection. Work in the military training market includes maneuver and logistics training; force-on-force exercise development and control; force modernization and integration; and new equipment training and fielding. In the job corps market, the segment provides educational and vocational training; residential living; placement and transition services; logistics services; and web-based general education development training.

Space Technology

The Space Technology sector develops a broad range of systems at the leading edge of space, defense and electronics technology. The sector creates products primarily for the U.S. government that contribute significantly to the nation’s security and leadership in science and technology. This business primarily consists of the following major business areas: Civil Space; Missile Defense; Satellite Communications (SatCom); Intelligence, Surveillance & Reconnaissance (ISR); and Radio Systems.

The Civil Space business area produces spacecraft, instruments and services for some of our nation’s most challenging space science missions, earth observation systems and weather satellite systems. A variety of products and services are provided, including mission and systems engineering services, spacecraft and instrument systems, mission operations and propulsion systems. Customers include NASA, National Oceanic and Atmospheric Administration (NOAA), and the DOD. Major programs include the recently awarded James Webb Space Telescope (JWST), National Polar-orbiting Operational Environmental Satellite System (NPOESS), Earth Observation System (EOS) and the legacy space telescope program Chandra, currently in operation.

Missile Defense produces space-based systems that detect, track and destroy missiles and help to counter today’s widely proliferating ballistic threats. Key capabilities and products include system integration, spacecraft, directed energy and kinetic energy weapons, and tactical lasers. The newly formed Missile Defense Agency (MDA) is the primary customer. Major programs include the Space Tracking Surveillance System (STSS formerly SBIRS-Low), Airborne Laser (ABL), and Mobile Tactical High Energy Laser (MTHEL).

The SatCom business area demonstrates the sector’s leadership in complex satellite communication systems and broadband payloads. Key customers are satellite prime contractors in support of the DOD and other government agencies. Major programs include Advanced Extremely High Frequency (AEHF) payload, and communication payload for the legacy Milstar program, currently in operation.

In the ISR business area the sector’s capabilities give the nation’s monitoring systems a global reach and enhance national security. Addressing requirements in space-based intelligence, surveillance and reconnaissance systems, the sector provides mission and systems engineering, satellite systems and mission operations. Customers are predominantly restricted, as are the major programs. Also part of this business area, Defense Support Program (DSP) has been monitoring ballistic missile launches for the Air Force for decades.

In the Radio Systems business area the sector has been pioneering software-defined radio technology and applying the results to advanced integrated Communications, Navigation and Identification (CNI) systems, radios, and avionics integration software. The sector’s avionics system represents the “eyes and ears” of the F-35 Joint Strike Fighter, F/A-22 Raptor jet fighter and Comanche attack/reconnaissance helicopter. Customers for these programs include Air Force, Army, Navy and prime government contractors.

In addition, the sector maintains a Technology business area that consists primarily of government funded Research and Development (R&D) contracts in support of the five business areas described above. Technology also includes several small technology-based product areas that sell advanced electronics, mechanical devices, and laser products to both government and commercial customers.

SEGMENT FINANCIAL DATA

In the following table of segment and major customer data, revenue from the United States Government includes revenue from contracts on which Northrop Grumman is the prime contractor as well as those on which the company is a subcontractor and the ultimate customer is the U.S. Government. The company’s discontinued operations are excluded from all of the data elements in this table, except for assets by segment. Northrop Grumman’s income statements do not include TRW’s post-acquisition results because they were not material. Only the TRW backlog acquired and assets at December 31, 2002, are included in the following table.

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The company, effective December 31, 2002, revised the way it measures the profitability of its operating segments to better reflect its operating results. Pension and other retiree benefit expenses are now included in the sectors’ cost of sales to the extent that these costs are currently recognized under government Cost Accounting Standards (CAS). In order to reconcile from segment operating margin to total company operating margin, these amounts are reported under the caption “Reversal of CAS pension expense included above.” Total GAAP pension income or expense continues to be reported separately as a reconciling item under the caption “Pension income or expense.” The reconciling item captioned “Unallocated expenses” includes unallocated corporate expenses, state tax provisions, and other retiree benefit expenses. Segment results for all periods presented have been conformed to the new method of measuring profitability.

Foreign sales amounted to approximately $1.3 billion, $1.3 billion and $600 million for the years ended December 31, 2002, 2001 and 2000, respectively. All of the company’s segments engage in international business, for which the company maintains a large number of sales representatives and consultants who are not employees of the company. Foreign sales by their very nature are subject to greater variability in risk than the company’s domestic sales, particularly to the U.S. government. International sales and services subject the company to numerous stringent U.S. and foreign laws and regulations, including, without limitation, regulations relating to import-export control, repatriation of earnings, exchange controls, the Foreign Corrupt Practices Act and the anti-boycott provisions of the U.S. Export Administration Act. Failure by the company or its sales representatives or consultants to comply with these laws and regulations could result in administrative, civil or criminal liabilities and could in the extreme case result in suspension of the company’s export privileges, which could have material adverse consequences.

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NORTHROP GRUMMAN CORPORATION

RESULTS OF OPERATIONS BY SEGMENT AND MAJOR CUSTOMER

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MEASURES OF VOLUME

Certain prior year amounts in the tables titled “Contract Acquisitions”, “Net Sales” and “Backlog” have been reclassified to conform to current year reporting.

Contract Acquisitions

Contract acquisitions tend to fluctuate from year to year and are determined by the size and timing of new and add-on orders. The existing funded order backlog as of the purchase date of businesses acquired is reported as contract acquisitions. The variability resulting from multiyear orders and funding, as well as acquiring businesses, are reflected in the following table.

Contract Acquisitions