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Filed March 6, 2003

United States

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-K

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF

THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2002

Commission file number 1-11437

LOCKHEED MARTIN CORPORATION

(Exact name of registrant as specified in its charter)

6801 Rockledge Drive, Bethesda, Maryland 20817-1877 (301/897-6000)

(Address and telephone number of principal executive offices)

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, and (2) has been subject to such filing requirements for the past 90 days.

Yes [x] No [    ]

Indicate by check mark if the disclosure of delinquent filers pursuant to Item 405 or 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 [    ]

State the aggregate market value of the voting stock held by non-affiliates of the registrant. Approximately $25.5 billion as of June 30, 2002.

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). Yes [x] No [    ]

Indicate the number of shares outstanding of each of the registrant’s classes of common stock, as of the latest practicable date. Common Stock, $1 par value, 455,709,443 shares outstanding as of January 31, 2003.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of Lockheed Martin Corporation’s 2003 Definitive Proxy Statement are incorporated by reference in Part III of this
Form 10-K.

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PART I

ITEM 1.    BUSINESS

General

Lockheed Martin Corporation principally researches, designs, develops, manufactures, integrates and operates advanced technology systems, products and services. We serve customers in domestic and international defense, civil and commercial markets, with our principal customers being agencies of the U.S. Government. Lockheed Martin was formed in March 1995 by combining the businesses of Lockheed Corporation and Martin Marietta Corporation. We are a Maryland corporation.

In 2002, approximately 80% of our net sales were made to the U.S. Government, either as a prime contractor or as a subcontractor. Approximately 14% of our net sales in 2002 were made to foreign governments (including foreign military sales). Approximately 6% of our net sales in 2002 were made to commercial customers (mainly launch services, satellites and information technology services).

Our principal executive offices are located at 6801 Rockledge Drive, Bethesda, Maryland 20817. Our telephone number is (301) 897-6000. Our home page on the Internet is www.lockheedmartin.com. We make our 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, we incorporate by reference information from parts of other documents filed with the Securities and Exchange Commission (SEC). The SEC allows us to disclose important information by referring to it in this manner, and you should review this information.

We make our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and proxy statement for our annual shareholders’ meeting, as well as any amendments to those reports, available free of charge through our web site as soon as reasonably practicable after we electronically file such material with, or furnish it to, the SEC. You can learn more about us by reviewing our SEC filings on our web site. Our SEC reports can be accessed through the investor relations page of our web site, namely www.lockheedmartin.com/investor. The SEC also maintains a web site at www.sec.gov that contains reports, proxy statements and other information regarding SEC registrants, including Lockheed Martin.

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Business Segments

In the fourth quarter of 2002, we changed the manner in which we report the results of our business segments. We made this change in presentation to align the segment results with the measurement criteria our senior management uses in their evaluation of the performance of the business segments. We continue to operate in four principal business segments: Systems Integration, Space Systems, Aeronautics and Technology Services. We eliminated the prior “Corporate and Other” segment, and now report all of our other activities as part of Unallocated corporate income (expense), net, or as discontinued operations. For more information concerning our new segment presentation, see Note 16 - Information on Business Segments and Major Customers on page 110 of this Form 10-K. A brief description of each of our four business segments follows:

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information services for NASA; and research, development, engineering and science in support of nuclear weapons stewardship and naval reactor programs.

Unallocated corporate income (expense), net includes earnings and losses from our equity investments (primarily telecommunications), interest income, unusual items and corporate costs not allocated to the operating segments and other miscellaneous corporate activity.

Comparative segment revenues, profits and related financial information for 2002, 2001, and 2000 are provided in Note 16- Information on Business Segments and Major Customers on page 110 of this Form 10-K. All historical financial information has been reclassified to be consistent with the current segment presentation.

Systems Integration

Our Systems Integration segment has several lines of business that mainly are engaged in U.S. defense work. Systems Integration serves as a lead systems integrator. Systems Integration’s core businesses are:

In 2002, Systems Integration’s net sales represented 36% of our total net sales.

Naval Electronics & Surveillance Systems provides ship systems integration services, surface ship and submarine combat systems, sensors and missile launching systems. Missiles and Fire Control develops and produces air and theater missile defense systems, tactical battlefield missiles, electro-optical systems, fire control and sensor systems, and precision-guided weapons and munitions. Our C4I businesses provide information superiority systems, federal information management solutions (such as automated fingerprint identification systems), and modeling, simulation and training systems and services. C4I also encompasses Air Traffic Management, which develops and integrates advanced air traffic control systems. Our Systems Integration—Owego business integrates mission-specific combat suites and other systems for anti-submarine warfare, electronic warfare, and surveillance and reconnaissance applications. In addition, our Systems Integration—Owego business develops and integrates postal automation and material handling systems, and provides information technology solutions for government and commercial business customers.

Some of Systems Integration’s significant programs in 2002 included: the Aegis Combat System program; the Theater High Altitude Area Defense (THAAD) program; the Multiple Launch Rocket System (MLRS); the Longbow system; and the Patriot Advanced Capability (PAC-3) missile. These top five programs represent less than 25% of Systems Integration’s sales. The segment has a diverse portfolio of over 1,000 programs. Historically, this diversity has provided a stable backlog and reduced potential risks that can result from reductions in funding or changes in customer priorities.

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The Aegis Combat System program encompasses activities in the development, production, ship integration and test support for ships at sea. We manufacture major portions of the Aegis Combat System, with our primary customer being the U.S. Navy. We test and integrate weapon systems for the U.S. Navy’s Ticonderoga Class Cruiser and Arleigh Burke Class destroyer, along with the Kongo Class Destroyer for Japan, the F100 Class Frigate for Spain, the Nansen Class Frigate for Norway and the KDX Class Destroyer for Korea. Aegis development activities include the design and development of the Aegis Combat System, including major upgrades associated with expanded capabilities in areas such as sea-based missile defense.

The THAAD program is a transportable defensive missile system designed to engage targets both inside and outside the earth’s atmosphere. The THAAD system is comprised of the THAAD Battle Management/Command Control, Communications and Intelligence units, missiles, launchers and ground support equipment. The THAAD program currently is in the engineering, manufacturing and development phase.

The MLRS program is a fast-reaction, mass-firepower supplement to cannon artillery. MLRS has been in production since 1982. Customers include the U.S. Army, U.S. Marines and U.S. Army National Guard, as well as several foreign governments. Currently, a guided version of the rocket and a high-mobility launcher are completing development and are being transitioned to production.

Longbow is a missile and fire control radar system, which provides anti-armor targeting capabilities for existing AH-64 Apache heavy-attack helicopters. The program is managed through a limited liability company in which we own a 50% interest along with Northrop Grumman Corporation. Longbow is currently in the production phase under a multi-year contract with the U.S. Government. Longbow also has international production for the United Kingdom (U.K.), Israel and Japan.

The Patriot Advanced Capability missile is an advanced, state of the art defensive missile designed to intercept incoming airborne threats. In March 2002, we received the fourth low-rate initial production contract for the program. In December 2002, we received the first block production contract.

Systems Integration’s major business orders during 2002 included winning the Deepwater program with our joint venture partner Northrop Grumman Corporation to modernize U.S. Coast Guard cutters, aircraft, command and control, and logistics systems. We were awarded the Federal Aviation Administration’s ten-year En Route Automation Modernization program to improve the efficiency, capacity and safety of the nation’s air traffic automation system. We won a contract competition for the U.S. Postal Service’s Automated Package Processing System, which could generate revenues of more than $500 million over four years. We also won a contract for the Transportation Security Administration’s Strategic Airport Security Rollout, a $469 million effort to upgrade passenger security measures at the nation’s airports and to support conversion of passenger screening operations to federal control. We were awarded a U.S. Navy contract to develop a new prototype tactical radar designated the SPY-1E, which if fully funded and authorized could generate up to $420 million in revenues. We also won one of two U.S. Army contracts to develop and test the system architecture and technology that will be core to the service’s transformational Warfighter Information Network-Tactical system. Current DoD

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plans call for the Army to award a production contract for up to $7 billion to one of the two competing teams in 2005. The U.S. Air Force and U.S. Navy qualified our laser-guided bomb kits for production, resulting in an initial $80 million contract to produce kits that convert gravity bombs to “smart” precision-guided weapons. We were selected by the Pentagon’s Missile Defense Agency to lead a national team responsible for developing a battle management, command and control, and communications system to support the goal of fully integrating systems, sensors and weapons that currently operate independently.

The Republic of Korea selected our Aegis Combat System for its three new KDX-III destroyers, becoming the fifth nation to employ the versatile Aegis SPY-1 radar and the associated weapon system. The Republic of Korea also selected our TIGER Eyes^™ advanced sensor suite for deployment aboard its F-15K fighter jets, awarding us a $163 million contract for this system to give pilots all-weather, day-or-night targeting, navigation, terrain-following and infrared search and track capability, and placed a $30 million order for MLRS launchers, marking the first foreign military sale of the upgraded system. We also received the first international order for the Precision Attack Navigation and Targeting pod, the export equivalent to the U.S. Air Force’s Sniper XR (eXtended Range) Advanced Targeting Pod. Under a $27 million contract, pods will be integrated on the Royal Norwegian Air Force’s F-16 Mid-Life Upgrade aircraft. We established a teaming agreement with AgustaWestland, a Finmeccanica and GKN company, to jointly market, produce and support a medium-lift helicopter in the United States. Based on AgustaWestland’s versatile EH101 helicopter, the US101 will be offered for U.S. Air Force combat search and rescue, U.S. Coast Guard search and rescue, and U.S. Marine Corps executive transport requirements.

Systems Integration received follow-on orders in 2002 involving a number of established programs, including Aegis, PAC-3 Missiles, the MK 41 Vertical Launching Systems for the U.S. Navy and international customers, the AN/WLD-1 Remote Mine-hunting System for the U.S. Navy, and Wind Corrected Munitions Dispenser tail kits for the U.S. Air Force.

In 2002, we were selected by the Royal Mail to develop, operate and support an on-line postage service in the U.K. We also were selected to provide systems integration services in support of the London Metropolitan Police’s new command, control, communications and information system, intended to improve the delivery of police services throughout metropolitan London.

Major program milestones achieved during 2002 included demonstration of the Aegis Combat System’s integral role in sea-based missile defense. In a series of tests, the Aegis system and its SPY-1 radar successfully tracked ballistic missile targets and guided U.S. Navy missiles to intercept and destroy those targets. With the U.S. Air Force, we successfully conducted the first powered test flight of the Low-Cost Autonomous Attack System, a hybrid precision munition and unmanned air vehicle that can be deployed from U.S. Air Force fighters and bombers, and dispensed from U.S. Army tactical missiles. Milestone deliveries to the U.S. Army included the 5,000th Longbow Hellfire missile, the 300th Close Combat Tactical Trainer and the first Line-Of-Sight Anti-Tank weapon system fire unit, a lightweight system for early-entry forces. We delivered the first two High Mobility Artillery Rocket System launchers, a wheeled vehicle capable of firing a variety of rockets and missiles to provide high-volume, precision fire support for the U.S. Marine Corps. We also marked the 141st consecutive on-schedule, on-budget installation of our Common Automated Radar Terminal System for the Federal Aviation

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Administration. We delivered to the U.S. Navy—for transfer to the Spanish Navy—five SH-60B helicopters equipped with Light Airborne Multi-Purpose System MK III mission systems. We achieved the first flight milestone demonstrating the Total Weapon System for the MH-60R Program for the U.S. Navy. We delivered the new Combined Arms Tactical Trainer simulation system to the U.K. Army. We delivered the 44^th and final Merlin Helicopter, and we are expecting a capability sustainment program to follow. We commenced operational service at the new Swanwick Centre, used by the U.K.’s National Air Traffic Services to control air traffic over southern England and Wales. The U.K. Address Interpretation program processed peak mail volume of 27 million letters and flats daily while the nationwide deployment continued on schedule. We completed final acceptance testing of the Gulf of Suez Vessel Traffic Management System, an integral part of the Republic of Egypt’s total port management program.

Our strong program performance and production efficiency was recognized during 2002 with several awards. The THAAD and the Joint Air-to-Surface Standoff Missile (JASSM) programs received the David Packard Excellence In Acquisition Award, the DoD’s highest honor for innovative acquisition processes. Lockheed Martin’s Pike County Operations facility in Troy, Alabama, which currently produces the Javelin, JASSM, Hellfire and Longbow missiles and will produce the THAAD missile, won the 2002 Shingo Prize for excellence in manufacturing.

Systems Integration typically competes against two or three large aerospace and defense companies and numerous smaller competitors in each of our specific markets. Systems Integration’s broad portfolio of programs and capabilities requires this segment to compete in numerous market segments. Systems Integration’s specific business units often compete in these market segments by forming alliances or teaming agreements with other companies that often are Systems Integration’s competitors in different market segments. The principal factors of competition include technical and management capability, price, past performance and our ability to quickly demonstrate solutions to our customers’ requirements.

The segment is heavily dependent on both military and civilian agencies as customers. In 2002, U.S. Government customers accounted for approximately 81% of the segment’s total net sales.

Space Systems

Space Systems designs, develops, engineers and produces commercial and military space systems. Space Systems’ principal lines of business are:

A portion of the segment’s activities involves classified programs for the U.S. Government. At December 31, 2002, Space Systems’ net sales represented approximately 28% of our total net sales.

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Our Government Satellites business designs, develops, manufactures and integrates advanced technology satellite systems and defensive missile systems for the U.S. Government. We are responsible for various classified systems and services in support of vital national systems.

We are the prime contractor for Milstar, a military satellite communications system that provides the DoD, national command authorities and operational forces with reliable, secure, jam-proof communications between fixed-site, mobile and portable terminals. The Milstar system consists of the space segment (comprising four satellites to complete a ring constellation), the terminal segment (comprising communications terminals installed on ships, submarines, aircraft and vehicles) and the mission control segment. The final Milstar satellite is scheduled for launch in 2003.

We also are under contract to develop the DoD’s next generation of highly secure communications satellites known as the Advanced Extremely High Frequency system. As envisioned by the DoD, the fully operational system constellation will consist of four networked satellites. These satellites will provide improved secure data throughput capability and coverage flexibility to regional and global military operations and also will be compatible with the Milstar I and II system. We are providing the spacecraft bus and mission control segment for the system.

Our Government Satellites business is the prime contractor for the Global Positioning System IIR program, which includes 20 satellites that will improve navigation accuracy and provide longer autonomous satellite operation than current global positioning satellites.

We are the prime contractor for the Space-Based Infrared System (SBIRS) program. SBIRS is providing the nation with enhanced worldwide missile detection and tracking capabilities. The consolidated ground system is now operational and processes data from defense support program satellites and manages the satellite constellation. The ground system also provides the foundation to evolve mission capabilities as SBIRS High payloads and satellites are deployed. SBIRS High is envisioned to operate with a total of four satellites in geo-synchronous earth orbit and two sensors in highly-elliptical orbit to increase mission capabilities for missile warning, missile defense and technical intelligence. Our current contract includes two geo-synchronous orbit spacecraft and two highly-elliptical orbit payloads.

We produce exploration spacecraft, earth-orbiting satellites and sensors for earth observation and environmental monitoring. Spacecraft include the Hubble Space Telescope, Space Infrared Telescope Facility, Mars Odyssey, Genesis and Stardust.

We also are integrally involved with several missile defense programs. For the Ground-based Midcourse Defense program, our payload launch vehicle flew its tenth and final mission in 2002. The payload launch vehicle was used to launch kill vehicles during tests and supported five hit-to-kill intercepts in the program since 1999. The program is evolving toward operationally-realistic test conditions and will use our boost vehicle-plus in 2003. The boost vehicle-plus is expected to support the test-bed complex at Ft. Greely, Alaska in 2004.

We are one of three industry teammates developing the Airborne Laser Weapon system under direction from the U.S. Air Force and Missile Defense Agency. We are developing the beam control and fire control system that will accurately shape and fire a high-energy laser in a

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test, which has the goal of shooting down a boosting ballistic missile target in 2004. Last summer, the aircraft completed its first in a series of airworthiness flights with the distinctive new nose designed and developed at Lockheed Martin.

Our Commercial Satellite business designs, builds, markets and operates turnkey satellite systems for the space-based telecommunications market, and provides space-based solutions for other applications. Following an analysis of strategic options in response to ongoing overcapacity issues in the commercial satellite-manufacturing marketplace, we announced our plan to advance and extend an initiative, begun in July 2001, to consolidate and streamline management, engineering and manufacturing organizations within the Commercial Satellite business.

In 2002, our Commercial Satellite business successfully launched five satellites for customers worldwide, including EchoStar VII for EchoStar Communications Corporation, NStar-C for NTT DoCoMo, Inc., NSS-6 and NSS-7 satellites for New Skies Satellites, N.V., and most recently Nimiq 2 for Telesat. The successful launch of Nimiq 2 represented the 21^st consecutive successful launch of our A2100 spacecraft.

Our Commercial Satellite business also includes our 46% ownership interest in Space Imaging LLC. Space Imaging is a supplier of satellite images, satellite imaging access, and related products and services. In light of the uncertainties as to whether Space Imaging will be successful in obtaining the additional investment necessary to fund replacement satellites and repay its existing credit facilities, in the fourth quarter of 2002, we wrote off our investment in the joint venture and recorded a charge of $150 million related to our guarantee of borrowings under Space Imaging’s credit facility. See Management’s Discussion and Analysis on page 68 and Note 8—Investments in Equity Securities on page 93 of this Form 10-K for additional information.

Our Ground Systems business is a leader in technically advanced system engineering, information technology, sensor-processing and communications systems. This unit provides complex, innovative solutions for intelligence, surveillance and reconnaissance programs for diverse government, commercial and international customers. The majority of our Ground Systems business is classified.

In 2002, our Ground Systems business became the first company in the world to achieve the Software Engineering Institute’s highest possible rating for systems and software development and maintenance capability. In 2002, the Pennsylvania State Police selected our Ground Systems business as the systems integrator for the implementation of its Incident Information Management System. The system is designed to give Pennsylvania State Troopers improved access to crime-fighting information and is a critical element of that state’s homeland defense infrastructure.

We provide launch services to both government and commercial customers. We design, develop, manufacture and integrate expendable and reusable space launch systems for the DoD, NASA and commercial customers.

The Titan IV is the nation’s largest expendable launch vehicle. Titan IVs launch the nation’s largest, national security payloads. We are the prime contractor to the U.S. Air Force for the

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development, program management, production, payload, integration and launch operations for the Titan IV. Our contract calls for the launch of 39 vehicles. As of year-end 2002, we had launched 34 Titan IVs. We also produce the Titan II, a refurbished intercontinental ballistic missile that is used for launching spacecraft.

We developed the Atlas V in cooperation with the U.S. Air Force as part of the Evolved Expendable Launch Vehicle program, utilizing best practices from both the Atlas and Titan programs. Atlas V serves as both a commercial and government launch system. The successful maiden flight for the Atlas V occurred in August 2002.

We also manufacture the NASA Space Shuttle external tank at the NASA Michoud Assembly Facility in New Orleans, Louisiana. We operate the facility under a government-owned, contractor-operated contract with NASA. The tank is the only major non-reusable element of the Space Shuttle. One tank is used for each launch. Our existing contract for production of the external tanks runs through 2008.

Our Government Launch business also includes our 50% ownership interest in United Space Alliance, LLC (USA), a limited liability company that we jointly own with The Boeing Company. USA is responsible for the day-to-day operation and management of the Space Shuttle fleet for NASA. USA also performs the modification, testing and checkout operations required to prepare Space Shuttles for launch. We account for our ownership interest in USA using the equity method of accounting. As such, we record our proportionate share of USA’s profit or loss as part of the segment’s operating profit or loss, but do not record any portion of USA’s revenues as sales.

Our Commercial Launch business includes the Lockheed Martin-built Atlas family of launch vehicles and the Proton and Angara family of launch vehicles manufactured by our primary joint venture partner in Russia, Khrunichev State Research and Production Space Center. Launch services for the Atlas, Proton and Angara launch vehicles are marketed to customers world-wide through International Launch Services (ILS).

In 1992, we entered into a joint venture with two Russian government-owned space firms to form Lockheed-Khrunichev-Energia International, Inc. (LKEI). We own 51% of LKEI. LKEI has exclusive rights to market launches of commercial, non-Russian-origin space payloads on the Proton family of rockets from a launch site in Kazakhstan. Lockheed Martin and LKEI each own 50% of ILS. We consolidate the results of operations of LKEI and ILS into our financial statements. For additional information concerning LKEI and ILS, see “Management’s Discussion and Analysis—Commercial Space Business” on page 43 of this report.

We currently produce three configurations of the Atlas family of launch vehicles (the Atlas II, Atlas III and Atlas V). The Atlas family of launch vehicles has a record of 63 consecutive successful launches. Atlas V, the newest member of the Atlas family, offers improved performance and value to our customers. The Atlas V is powered by a Russian-manufactured engine system and can be configured with up to five solid rocket boosters. The flexible solid rocket booster configuration enables the Atlas to perform launch missions from low-Earth orbit to geo-synchronous orbit. The Atlas V utilizes a modular design and is more operationally

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efficient than prior systems. As a result, less time is required to process and prepare each vehicle for launch. This affords greater flexibility in meeting customer launch schedule and mission performance requirements.

Our Strategic Missiles business has been the sole supplier of strategic fleet ballistic missiles to the U.S. Navy since the program’s inception in 1955. The Trident II D5 is the latest generation of submarine launched ballistic missiles, following the highly successful Polaris, Poseidon, and Trident I C4 programs. The Trident II D5 began full production in 1988 and has achieved a mission-success track record of 100 consecutive successful test launches. The Trident II D5 succeeds the Trident I C4. However, both missiles are in active service today. The Trident II D5 is the only intercontinental ballistic missile in production in the United States.

We compete in the worldwide markets for satellites, ground systems products, launch services and strategic missiles. There are numerous competitors in these markets. The markets are segmented into two primary areas: Government and commercial sales.

The Government market for large-scale satellite systems, launch systems and strategic missiles is characterized by major competitions governed by DoD or NASA procurement regulations. While the evaluation criteria for selection varies from competition to competition, it is generally characterized by the customer’s best value determination, which includes several important elements, such as price, technical capability and past performance.

Future competitions for Government systems include DoD initiatives for transformation communications, global positioning, space-based radar, mobile communications, planetary exploration and science, Evolved Expendable Launch Vehicle procurements, missile defense boost vehicles and targets, the Space Launch Initiative for reusable technologies, the next generation space shuttle, and command, control, communication, computing, intelligence, surveillance, reconnaissance ground programs.

Based on current projected DoD, NASA and other government spending profiles and budget priorities, we believe we are well positioned to compete in the market for Government satellites, launch systems and ground systems. If the DoD, NASA and other government customers significantly alter future program plans, we would have to re-evaluate our current strategic thrusts and potentially re-program our resources to pursue other areas of emphasis by these customers.

The commercial market for geo-stationary telecommunications satellites and intermediate class launch vehicles that place these commercial satellites in orbit is characterized by overcapacity and slowing demand in the commercial satellite industry. This has created significant price and competitive pressures. For further discussion of competitive factors in the commercial satellite market, see Management’s Discussion & Analysis at page 42 of this report.

The segment is heavily dependent on both military and civilian agencies of the U.S. Government as customers. In 2002, U.S. Government customers accounted for 85% of the segment’s net sales.

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Aeronautics

Aeronautics’ major lines of business are combat aircraft, air mobility, and aeronautical research and development. Aeronautics designs, develops, integrates, produces and supports advanced military fighter and airlift aircraft, and related technologies. In 2002, Aeronautics’ net sales represented 24% of our total net sales.

Our Aeronautics segment is involved in numerous large defense programs including:

We are the team leader for the F/A-22 “Raptor”. The F/A-22, formerly identified as the F-22, is an air-dominance and strike fighter with improved capabilities over current U.S. Air Force aircraft, including enhanced maneuverable stealth, super-cruise speed and advanced integrated avionics that enable it to attack critical air and surface targets to gain and maintain air superiority against air-to-air and ground-to-air threats. The F-22 was re-designated by the U.S. Air Force as the F/A-22, with the “A” designating attack, because the F/A-22 is capable of performing both air-to-surface and air-to-air missions. The program continues to proceed through its engineering and manufacturing development phase, as it transitions into low rate production. In 2002, the F/A-22 program delivered the final three development aircraft and the first three production representative test vehicles. We received contract awards for Production Lot 2 (13 aircraft) and incremental funding for Production Lot 3 (20 aircraft). We also received Production Lot 4 advanced procurement authorization. The U.S. Air Force continues to operate under a “buy-to-budget” strategy and, as a result, buys the maximum number of aircraft possible within the production cap. The production cap, along with other factors (such as annual U.S. Government budget allocations and completion of engineering and manufacturing development), will determine the total program quantities. Our goal is to continue to work with the U.S. Air Force and our suppliers, through a variety of cost-efficiency initiatives, to maximize the number of F/A-22s that can be purchased for the budget allocated. The F/A-22 program remains a high priority for the DoD and U.S. Air Force, but we expect that the program will continue to receive a high level of attention from Congress and the Administration during 2003. In December 2002, Congress fully funded the Administration’s request for fiscal year 2003 funding for the F/A-22.

We are the prime contractor on the F-16 “Fighting Falcon” tactical fighter aircraft and continue to provide upgrades for the U.S. Air Force and our international customers. Since the program’s inception, over four thousand F-16s have been delivered worldwide. We delivered 21 F-16s in 2002. On December 27, 2002, Poland announced its intent to purchase 48 F-16 aircraft, subject to completion of definitive contract negotiations in 2003.

For the next generation F-35 “Joint Strike Fighter”, the U.S. Air Force, U.S. Navy, U.S. Marine Corps. and other countries are working together on a set of requirements that should allow for a near-common design for the three contemplated variants of the aircraft. Built on a single assembly line, our F-35’s multiple-variant design will include the conventional takeoff and landing variant, the carrier-based variant and the short takeoff, vertical landing variant. The F-35 is designed to be a superior multi-role aircraft offering improvements in stealth, weapon

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systems, survivability, maintenance and total ownership cost over most existing multi-role aircraft. The F-35 is planned to replace the F-16 and A-10 for the U.S. Air Force, the F/A-18 for the U.S. Navy, the AV-8B for the U.S. Marines, and the Harrier jet for the U.K. Royal Air Force and Navy. In 2002, seven countries (the Netherlands, Italy, Canada, Denmark, Norway, Turkey and Australia) joined the F-35 development program with the U.S. and U.K.

Aeronautics was awarded the System Development and Demonstration contract for the F-35 in the fourth quarter of 2001. Calendar year 2002 was the first full year of performance on the 10.5-year contract. During the system development and demonstration phase, the Lockheed Martin-led team will produce 22 aircraft (14 flying test aircraft and 8 ground test aircraft). Low-rate initial production is scheduled to begin in the 2005-2006 timeframe and continue through 2011, under subsequent contracts to be awarded. High rate production currently is planned to begin after low-rate initial production in the 2012 and beyond timeframe. Given the size of the F-35 program, we anticipate that there will be a number of studies related to the program and production quantities over time as part of the DoD’s normal budgeting process. Since we are the team leader for the system development and demonstration phase, we would expect to play a major role in future production contracts for the F-35. There is no guarantee, however, that future contracts for the F-35 beyond the system development and demonstration phase will be awarded.

The C-130J is an advanced technology tactical transport aircraft offering improved performance and reliability and reduced operating and support cost over prior C-130 models. The C-130 is designed primarily to support the military mission of tactical combat transport. It also is a multi-mission platform that has been purchased in support of electronic combat, weather reconnaissance, sea surveillance and as an aerial tanker. The “J” model incorporates state-of-the-art cockpit and avionics, a more powerful and efficient propulsion system and other innovations into a proven, mission-tested airframe. In 2002, we delivered eight C-130J aircraft, and were awarded a contract from the U.S. Air Force for five additional aircraft. In addition, Congress approved a multi-year procurement of C-130Js as part of the defense budget for fiscal year 2003. In 1999, we decided to cease booking profit on the C-130J program until such time as costs have stabilized, and orders have been obtained to ensure absorption of non-recurring costs and a build rate which substantiates that a profitable production rate can be attained.

We also are involved in C-5 aircraft modernization for the U.S. Air Force, which includes an avionics modernization and a reliability enhancement and re-engining program. We received full-contract authorization for the system development and demonstration phase of the C-5 reliability enhancement and re-engining program in March 2002. The initial C-5 airplane incorporating avionics modernization accomplished its first flight in December 2002.

In addition, we are involved in other programs, including the joint Japan/U.S. production of the F-2 fighter aircraft. We provide sustaining engineering, modifications and upgrades for existing aircraft, including the U-2 reconnaissance aircraft, earlier model
C-130s and the F-117. We also participate in the T-50 trainer aircraft program with Korea and the C-27J airlift aircraft program with Alenia Aeronautica of Italy. We also are involved in advanced development programs and advanced design and rapid prototype applications.

Aeronautics competes in the worldwide market for military aircraft. While there are many segments within this market, we have primarily focused our activities in two areas: combat

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aircraft and air mobility or transport aircraft. We are a major competitor in both segments throughout the world. Unlike the market for commercial aircraft, the military market is subject to a wide variety of U.S. Government controls (e.g., export restrictions, market access, technology transfer and contracting practices). While a variety of factors determine the results of different competitions, price is a major determinant, as well as past performance and customer confidence. Other critical factors are technical capabilities, political relationships, release of technology, prior purchase experience, financing, offset requirements and total cost of ownership. In many cases, especially in the international market, the military and political relationship with the U.S. and industrial cooperation programs are important factors in determining the outcome of competitions.

In the military aircraft market, we compete with both domestic and international companies. Some or all of these companies are competing, or preparing to compete, in the market for unmanned military aircraft. Our military aircraft programs also face potential competition from the application of derivatives of commercial aircraft to missions that require large aircraft and the application of unmanned vehicles to missions that are now served by tactical-bomber capabilities.

In the tactical fighter market, the F-16 remains a formidable competitor, especially on the basis of price. It competes less effectively where stealth is a major determinant, but otherwise the ability to update its capabilities with changes in sensor and weapon systems makes the F-16 a strong competitor.

The F-35 is envisioned to be a cornerstone of future defense capability and is planned to replace several existing multi-role fighters currently in production for the U.S. and its allied partners. Due to the number of governments that have signed up to participate in the system development and demonstration phase, we anticipate that a large international market could develop for the F-35.

We believe that the F/A-22 is well positioned to evolve and help satisfy the long-range weapon delivery needs of our customers while providing the air dominance and strike capabilities needed for conventional military operations. The program currently is in low-rate initial production, and is scheduled to enter full production in 2006.

The U.S. market has historically been the major driver for product design and development activities for military combat and transport aircraft. However, this has been modified somewhat over the years with international customers being willing to fund military aircraft research and development programs in cooperation with U.S. defense contractors. Examples of joint international development programs include our F-35 program currently with nine countries participating, our F-16 Block 60 program with the United Arab Emirates, our T-50 trainer aircraft program with Korea, our F-2 fighter program with Japan, and our C-27J airlift aircraft program with Alenia Aeronautica of Italy.

The transport aircraft market is being driven by the need to maintain or replace large numbers of aircraft for which maintenance costs have been increasing and by high development costs for new replacement aircraft. In most cases, the choice has been to modernize and update the available aircraft. In some mission segments, new commercial aircraft derivatives will make suitable replacement platforms and may be the final choice. In most other cases, existing platforms will perform the job more capably if suitably modernized. Many of these existing

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aircraft are heritage Lockheed Martin platforms (e.g., C-5, P-3, C-130E-H), which we believe affords Aeronautics a competitive advantage. Aeronautics remains focused on reducing the price of the C-130J to improve its competitive position.

Based on current projected DoD spending profiles and budget priorities, we believe we are well positioned strategically and operationally to compete in the market for combat and transport aircraft. If the DoD significantly alters future program plans, we would have to re-evaluate our current strategic thrusts and potentially re-program our resources to pursue a broad area of technical activities that could be newly important. We believe that our current products are competitive with potential unmanned systems. While we do not believe the unmanned technology is sufficiently robust for widespread replacement of manned vehicles for an extended period of time, we are pursuing plans to be competitive in this market segment in the future. If the U.S. Government decides to make larger investments in competing or new programs, there is always the potential that the availability of adequate funding for our programs could be adversely affected.

The segment is dependent on the U.S. military and international governments as customers. In 2002, U.S. Government customers accounted for more than 69% of the segment’s net sales.

Technology Services

Our Technology Services segment provides a wide array of information, management, engineering, scientific and logistics services to government agencies and commercial customers. Technology Services has six lines of business:

In 2002, Technology Services’ net sales represented 12% of our total net sales. We derive a portion of our sales from government-owned, contractor-operated contracts where we receive a fee for performing management services and are reimbursed for the cost of operations. In those instances, only our fee is recorded in net sales.

Our Government Information Technology business provides a full spectrum of IT support to federal, state, and local government agencies. Our information technology customers include the U.S. Social Security Administration, Patent and Trademark Office, DoD, Department of Energy (DoE), NASA, and the Departments of Justice and Health and Human Services. Specific types of information technology support include program management, complex systems development, complete life-cycle software support, information assurance and enterprise integration. Much of the work we perform is contracted through task order vehicles or a Government Services Administration schedule.

Our Commercial Information Technology business provides information technology services to select commercial customers, including Nike, Goodyear Tire & Rubber, and Cummins

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Corporation. We provide data center management, distributed system management, seat management, network services, help desk, applications development and maintenance, asset management and business consulting.

Our Military Aircraft and Logistics Centers provide aircraft maintenance, modification services, contractor logistics support, and engine maintenance, repair and overhaul services for government customers around the world. We provide depot-level and field maintenance of airframes and engines, major aircraft modifications, avionics upgrades, logistics and engineering support, customer site operations, and government facility privatization projects in the U.S. and overseas. We also manage international aircraft depots in Saudi Arabia and Argentina.

Our Defense Services business provides a wide range of professional and technical support services for the DoD, the Department of Homeland Security and the U.S. intelligence community. Services we perform include management of mission critical infrastructure and systems, and providing operation management, maintenance, logistics and engineering functions for military systems. These services include aircrew training, flight-simulator engineering support and assembly, and installation, integration, upgrade and repair services for a variety of computer, communications, command and control, radar, target, simulation and surveillance systems. These services also include facility support, supply chain management, spacecraft transportation, “clean-room” based satellite processing, launch pad activation, satellite early-orbit test and checkout, satellite mission operations, ground systems development and sustainment, and post-processing information analysis and related ground systems sustainment. In 2002, we trained over 54,000 airport-security passenger screeners for the Transportation Security Agency (now a part of the Department of Homeland Security), which exceeded the congressionally mandated requirement.

For NASA, we provide engineering, science and information services at nine centers across the country. Core competencies include mission operations, flight hardware and payload development and integration, propulsion testing, engineering and technical support for life sciences, information technology engineering design and support services, and software design, development and process control. NASA has decided to extend the current Science, Engineering, Analysis, and Test contract for one year (through 2004). NASA also decided not to exercise the five-year approximately $1.8 billion option for the Consolidated Space Operations contract, but will re-compete the work in multiple packages.

Our Energy business manages two large laboratory facilities in the U.S. and participates in the management of a large facility in the U.K. The Knolls Atomic Power Laboratory designs nuclear reactors for the U.S. Navy. It also supports the existing fleet of nuclear powered ships and trains the Navy personnel who operate those ships. Technology Services is in the third year of a ten-year, $3.8 billion government-owned, contractor-operated contract at Knolls. Sandia National Laboratories supports the stewardship of the U.S. nuclear weapons stockpile, developing sophisticated research and technology in the areas of engineering sciences, materials and processes, pulsed power, micro-electronics and photonics, and computational and information sciences. Sandia has developed a number of promising technologies that have potential applications in a multitude of industries and for homeland security. At the end of 2002, the DoE announced its intention to extend our Sandia contract for an additional five years. In the U.K., we own one-third of a joint venture that is performing the Atomic Weapons Establishment program.

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In addition to the Sandia contract extension and Transportation Security Administration contract to train passenger screeners, Technology Services received several new and follow-on awards in 2002. We received new awards from the Centers for Medicare and Medicaid Services for the Consolidated IT Infrastructure Contract and from the FBI for the Technology Refresh Program. The Defense Information Support Agency renewed our ENCORE contract to provide IT solutions to the DoD and other government agencies. The Defense Logistics Agency awarded us a ten-year contract to provide supply chain management services for proprietary parts for Lockheed Martin aircraft. The U.S. Army Space and Missile Command awarded a joint venture, in which we hold a 49% ownership interest, a contract to provide range and logistics services to the Kwajalein Missile Range. We account for our ownership interest in the venture using the equity method of accounting. As such, we record our proportionate share of the venture’s profit or loss as part of the segment’s operating profit or loss, but do not record any portion of venture’s revenues as sales. We also received a contract to provide mission services in support of U.S. facilities at a Royal Air Force installation in the U.K

As part of its continuing strategy of focusing on core markets, Technology Services took several portfolio-shaping actions in 2002. To strengthen our growing business in the military aircraft market, we established a limited partnership with GE Aircraft Engines through which some GE military engine lines will be overhauled and upgraded at Lockheed Martin’s Kelly Aviation Center in San Antonio, Texas. We own 85% of that limited partnership. We divested three non-core commercial IT businesses. We also entered into an agreement to divest our share of a commercial aircraft services joint venture in China. These divestiture transactions did not have a material impact on our consolidated results of operations or financial position in 2002.

Technology Services competes against both large aerospace and defense corporations and pure service companies in all our major markets. The competitive landscape is highly fragmented with no single company or small group of companies in dominant positions. The principal factors of competition include price, technical and management capability, past performance and, increasingly, the ability to develop and implement complex, integrated solutions to meet the challenges facing government customers across their entire enterprise.

The segment is heavily dependent on both military and civilian agencies as customers. In 2002, U.S. Government customers accounted for approximately 88% of the segment’s total net sales.

Patents

As of December 31, 2002, we owned approximately 1,969 U.S. patents and 987 foreign patents, and had approximately 1,222 U.S. patent applications and 713 foreign patent applications pending. In addition to owning a large portfolio of intellectual property, we also license intellectual property to, and from, third parties. The U.S. Government has licenses in our patents that are developed in performance of Government contracts, and it may use or authorize others to use the inventions covered by such patents for Government purposes. Un-patented research, development and engineering skills also make an important contribution to our business. We currently are defending several lawsuits that allege infringement of other companies’ patents.

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While our intellectual property rights in the aggregate are important to the operation of our business, we do not believe that any existing patent, license or other intellectual property right is of such importance that its loss or termination would have a material adverse effect on our business taken as a whole. We also do not believe that any of our pending intellectual property litigation, if decided adversely, would have a material effect on our business taken as a whole

Raw Materials and Seasonality

Aspects of our business require relatively scarce raw materials. We generally have not experienced difficulty in our ability to obtain raw materials and other supplies needed in our manufacturing processes. We seek to manage raw materials supply risk through long-term contracts and by maintaining a stock of key materials in inventory.

Aluminum and titanium are important raw materials used in certain of our Aeronautics and Space programs. Aluminum and titanium generally have been in good supply. Carbon fiber is an important ingredient in the composite material that is used on certain of our Aeronautics programs, such as the F/A-22 and F-35. Nicalon fiber also is a key material used on the F/A-22 aircraft. One type of carbon fiber and the nicalon fiber that we use are currently only available from single-source suppliers. Aluminum lithium, which we use in the producing the Space Schuttle’s external tank, also is currently only available from a single source. While we do not anticipate material problems regarding the supply of our raw materials, it is possible that the unavailability of key materials in the future could delay one or more of our programs, result in increased costs or reduce award fees.

No material portion of our business is considered to be seasonal, although in recent years our revenues in the last six months of the year have generally exceeded those in the first six months of the year. Various factors can affect the distribution of our revenue between accounting periods, including the timing of government awards, the availability of government funding, product deliveries and customer acceptance.

Government Contracts and Regulation

Our businesses are heavily regulated in most of our markets. We deal with numerous U.S. Government agencies and entities, including all of the branches of the U.S. military, NASA, the U.S. Postal Service, the Social Security Administration, the Patent and Trademark Office, and the Departments of Energy, Justice, Health and Human Services, Homeland Security and Transportation. Similar government authorities exist in our international markets.

The U.S. Government, and other governments, may terminate any of our government contracts and, in general, subcontracts, at their convenience as well as for default based on performance. If any of our government contracts were to be terminated for convenience, we generally would be entitled to receive payment for work completed and allowable termination or cancellation costs.

Upon termination for convenience of a fixed-price type contract, we normally are entitled to receive the purchase price for delivered items, reimbursement for allowable costs for work-in-process and an allowance for profit on the contract or adjustment for loss if completion of performance would have resulted in a loss. Upon termination for convenience of a cost

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reimbursement contract, we normally are entitled to reimbursement of allowable costs plus a portion of the fee. The amount of the fee recovered, if any, is related to the portion of the work accomplished prior to termination and is determined by negotiation.

U.S. Government contracts also are conditioned upon the continuing availability of Congressional appropriations. Long-term government contracts and related orders are subject to cancellation if appropriations for subsequent performance periods become unavailable. Congress usually appropriates funds on a fiscal-year basis even though contract performance may extend over many years. Consequently, at the outset of a program, the contract is usually partially funded, and Congress annually determines if additional funds are to be appropriated to the contract.

A portion of our business is classified by the government and cannot be specifically described. The operating results of these classified programs are included in our consolidated financial statements. The business risks associated with classified programs, as a general matter, do not differ materially from those of our other government programs and products.

Sales of our products and services internationally are subject to local government regulations and procurement policies and practices (including regulations relating to import-export control, investments, exchange controls and repatriation of earnings) as well as to varying currency, political and economic risks. Sales of military products are affected by defense budgets (both in the U.S. and abroad) and U.S. foreign policy. The policies of some international customers require offset programs (e.g., in-country purchases, manufacturing and financial support projects required as a condition to obtaining orders) or other arrangements. Offset programs generally extend over several years and may provide for penalties in the event we fail to perform in accordance with offset requirements. In international sales, we face substantial competition from domestic manufacturers and other foreign manufacturers (whose governments sometimes provide research and development assistance, marketing subsidies and other assistance for their commercial products).

We have investments in several satellite or telecommunications ventures, which are subject to regulation by the Federal Communications Commission (FCC) and other international telecommunications regulatory authorities. FCC and other regulatory decisions have had and are likely to continue to have an impact on the value of those investments. In 2000, Congress passed the Open-market Reorganization for the Betterment of International Telecommunications Act that, among other measures, establishes deadlines for completion of initial public offerings by Intelsat, Ltd. and Inmarsat Ventures, plc, as well as specific criteria for determining whether the privatizations of those entities are pro-competitive. If those criteria are not met, the FCC may limit access by U.S. users to the satellite capacity of the privatized entities for certain services. If this were to occur, the value of the Corporation’s investment in those entities could be adversely affected. In the fourth quarter of 2002, we recorded charges to write-down the book value of certain of our telecommunications equity investments. See “Management’s Discussion and Analysis” on page 46 of this report.

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Backlog

At December 31, 2002, our total negotiated backlog was $70.4 billion compared with $71.3 billion at the end of 2001. The total negotiated backlog of each of our segments at December 31, 2002, was as follows: Systems Integration—$17.7 billion; Space Systems—$12.6 billion; Aeronautics—$35.5 billion; and Technology Services—$4.6 billion. Of our total 2002 year-end backlog, approximately $47.3 billion, or 67%, is not expected to be filled within one year.

These amounts include both funded backlog (unfilled firm orders for our products for which funding has been both authorized and appropriated by the customer—Congress in the case of U.S. Government agencies) and unfunded backlog (firm orders for which funding has not been appropriated). Funded backlog was $36.1 billion at December 31, 2002.

Environmental Regulation

Our operations are subject to and affected by a variety of federal, state and local environmental protection laws and regulations. We are involved in environmental responses at some of our facilities and former facilities, and at third-party sites not owned by us where we have been designated a potentially responsible party by the U.S. Environmental Protection Agency (EPA) or by a state agency.

We manage various government-owned facilities on behalf of the government. At such facilities, environmental compliance and remediation costs have historically been the responsibility of the government and we relied (and continue to rely with respect to past practices) upon government funding to pay such costs. While the government remains responsible for capital and operating costs associated with environmental compliance, responsibility for fines and penalties associated with environmental noncompliance, in certain instances, is being shifted from the government to the contractor with fines and penalties no longer constituting allowable costs under the contracts pursuant to which such facilities are managed.

Most of the laws governing environmental matters include criminal provisions. If we were convicted of a violation of the federal Clean Air Act or the Clean Water Act, our facility or facilities involved in the violation would be listed on the EPA’s List of Violating Facilities. The listing would continue until the EPA concluded that the cause of the violation had been cured. Listed facilities cannot be used in performing any U.S. Government contract awarded to us during any period of listing by the EPA.

We have incurred and will likely continue to incur liabilities under various state and federal statutes for the cleanup of pollutants previously released into the environment. We are responding to three administrative orders issued by the California Regional Water Quality Control Board in connection with our former Lockheed Propulsion Company facilities in Redlands, California. In January 2002, the State of California reduced the provisional standard for perchlorate concentration in water from 18 parts per billion (ppb) to 4 ppb. Although this provisional standard does not create a legally enforceable requirement for us at this time, we have developed a preliminary remediation plan that would meet the provisional standard if it were to become final. See Management’s Discussion and Analysis—Environmental Matters at

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page 69 of this report. We also have been responding to soil and regional groundwater contamination in the San Fernando Valley associated with our former operations in Burbank and Glendale, California. In addition, we are involved in proceedings and potential proceedings relating to environmental matters at other facilities, including disposal of hazardous wastes and soil and water contamination. The extent of our financial exposure cannot in all cases be reasonably estimated at this time. Among the variables management must assess in evaluating costs associated with these cases and remediation sites generally are changing cost estimates, continually evolving governmental environmental standards and cost allowability issues. For information regarding these matters, including current estimates of the amounts that we believe are required for remediation or clean-up to the extent estimable, see “Environmental Matters” in Management’s Discussion and Analysis of Results of Operations and Financial Condition on page 69 through 71 and Note 15—Commitments and Contingencies on page 107 through page 110 of this Form 10-K.

Research and Development

We conduct research and development activities under customer funded contracts and with Independent Research and Development (IR&D) funds. IR&D efforts consist of projects involving basic research, applied research, development, and systems and other concept formulation studies. In 2002, we spent approximately $830 million on IR&D, product development and bid and proposal funds, a substantial portion of which was included in general and administrative costs allocable to U.S. Government contracts. We spent $875 million and $863 million on such activities in 2001 and 2000, respectively.

During 2002, we did not undertake the development of a new product or line of business requiring the investment of a material amount of our total assets, other than increasing investments in the development or improvement of launch vehicles.

See Research and development and similar costs in Note 1— Significant Accounting Policies of the Notes to Consolidated Financial Statements on page 82 of this Form 10-K.

Employees

At December 31, 2002, we had approximately 125,000 employees, the majority of whom were located in the U.S. We have a continuing need for numerous skilled and professional personnel to meet contract schedules and obtain new and ongoing orders for our products. Management considers employee relations generally to be good.

Approximately one-fifth of our employees are covered by over a hundred separate collective bargaining agreements with various unions. A number of our existing collective bargaining agreements expire in any given year. Historically, we have been successful at negotiating successor agreements without any material disruption of operating activities. This does not assure, however, that we will be successful in our efforts to negotiate renewals of our existing collective bargaining agreements when they become due. If we were unsuccessful in those efforts, there is the potential that we could incur unanticipated delays or expenses in the programs affected by any resulting work stoppages.

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Risk Factors and Forward-Looking Statements

An investment in our common stock involves risks and uncertainties. You should consider the following factors carefully, in addition to the other information contained in this report, before deciding to purchase shares of our common stock.

This report also contains statements which, to the extent they are not recitations of historical fact, constitute forward-looking statements within the meaning of the Securities Act of 1933 and the Securities Exchange Act of 1934. The words believe, estimate, anticipate, project, intend, expect, plan, outlook, scheduled, forecast and similar expressions are intended to identify forward-looking statements.

Statements and assumptions with respect to future revenues, income and cash flows, program performance, the outcome of litigation, environmental remediation cost estimates, and planned dispositions of assets are examples of forward-looking statements. Numerous factors, including potentially the risk factors described in this section, could affect our forward-looking statements and actual performance.

We derive approximately 80% of our revenue from sales to the U.S. Government. We expect that U.S. Government sales will be the primary source of our revenue for the foreseeable future. Our ability to successfully compete for and retain business is highly dependent on technical excellence, management proficiency, strategic alliances, cost-effective performance and the ability to recruit and retain key personnel. U.S. Government programs are subject to uncertain future funding levels, which can result in the extension or termination of programs. Our business is also highly sensitive to changes in national and international priorities and U.S. Government budgets. Events like Operation Enduring Freedom, the continued war on terrorism and nuclear proliferation in North Korea may positively or adversely affect funding for our programs or result in changes in U.S. Government programs or spending priorities.

The U.S. Government can typically terminate or modify any of its contracts with us either for its convenience or if we default by failing to perform under the terms of the applicable contract. A termination arising out of our default could expose us to liability and have a material adverse effect on our ability to re-compete for future contracts and orders.

In addition, our U.S. Government contracts typically span one or more base years and multiple option years. U.S. Government agencies generally have the right to not exercise these option periods and may not exercise an option period if the agency is not satisfied with our performance of the contract. If any of our contracts are terminated by the U.S. Government, our backlog would be reduced by the expected value of the remaining terms of such contracts and our financial condition and operating results could be materially adversely affected. In addition, on those contracts for which we are teamed with others and are not the prime contractor, the U.S. Government could terminate a prime contract under which we are a subcontractor, irrespective of the quality of our services as a subcontractor.

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In addition to unfavorable termination provisions, our U.S. Government contracts contain provisions that allow the U.S. Government to unilaterally suspend us from receiving new contracts pending resolution of alleged violations of procurement laws or regulations, reduce the value of existing contracts, issue modifications to a contract and control and potentially prohibit the export of our services and associated materials.

We must comply with and are affected by laws and regulations relating to the formation, administration and performance of U.S. Government contracts. These laws and regulations, among other things:

These laws and regulations affect how we do business with our customers, and in some instances, impose added costs on our business. A violation of specific laws and regulations could result in the imposition of fines and penalties or the termination of our contracts.

U.S. Government agencies such as the Defense Contract Audit Agency, or the DCAA, routinely audit and investigate government contractors. These agencies review a contractor’s performance under its contracts, cost structure and compliance with applicable laws, regulations and standards. The DCAA also reviews the adequacy of, and a contractor’s compliance with, its internal control systems and policies, including the contractor’s purchasing, property, estimating, compensation and management information systems. Any costs found to be improperly allocated to a specific contract will not be reimbursed, while such costs already reimbursed must be refunded. If an audit uncovers improper or illegal activities, we may be subject to civil and criminal penalties and administrative sanctions, including termination of contracts, forfeiture of profits, suspension of payments, fines and suspension or prohibition from doing business with the U.S. Government. In addition, we could suffer serious reputational harm if allegations of impropriety were made against us.

We are exposed to liabilities that are unique to the products and services we provide. A significant portion of our business relates to designing, developing and manufacturing advanced defense and technology systems and products. New technologies may be untested or unproven. Components of certain of the defense systems and products we develop are explosive

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and inherently dangerous. Failures of launch vehicles, spacecraft and satellites, missile systems, air-traffic control systems, train-control systems, homeland security applications, nuclear facilities, and aircraft have the potential to cause loss of life and extensive property damage. We may face liabilities related to the maintenance or servicing of aircraft or other platforms or for training services we supply in the course of our business. In addition, from time-to-time, we have employees deployed on-site at active military installations or locations. In some, but not all, circumstances, we may receive indemnification from the U.S. Government. While we maintain insurance for certain risks, the amount of our insurance coverage may not be adequate to cover all claims or liabilities, and we may be forced to bear substantial costs from an accident. It also is not possible to obtain insurance to protect against all operational risks and liabilities.

Substantial claims resulting from an accident in excess of Government indemnity and our insurance coverage could harm our financial condition and operating results. Moreover, any accident or incident for which we are liable, even if fully insured, could negatively affect our reputation among our customers and the public, thereby making it more difficult for us to compete effectively, and could significantly impact the cost and availability of adequate insurance in the future.

We have a continuing need for numerous skilled and professional personnel to meet contract schedules and obtain new and ongoing orders for our products. The demand for workers with specialized engineering and technical skills within the defense and aerospace industries is likely to remain high for the foreseeable future, while the pool of trained individuals with those skills has been declining. As a result, we will be competing with other companies with similar needs in hiring skilled employees, and we may incur increased labor, recruiting or training costs so as to have access to the required skills.

Under fixed-price contracts, we receive a fixed price irrespective of the actual costs we incur, and consequently, any costs in excess of the fixed price are absorbed by us. Under time and materials contracts, we are paid for labor at negotiated hourly billing rates and for certain expenses. Under cost reimbursement contracts, which are subject to a contract-ceiling amount, we are reimbursed for allowable costs and paid a fee, which may be fixed or performance based. However, if our costs exceed the contract ceiling or are not allowable under the provisions of the contract or applicable regulations, we may not be able to obtain reimbursement for all such costs. Under each type of contract, if we are unable to control costs we incur in performing under the contract, our financial condition and operating results could be materially adversely affected. Cost over-runs also may adversely affect our ability to sustain existing programs and obtain future contract awards.

At December 31, 2002, our backlog included both cost reimbursement and fixed-price contracts. Cost reimbursement contracts generally have lower profit margins than fixed-price contracts. Production contracts are mainly fixed-price contracts, and developmental contracts are generally cost reimbursement contracts. Our earnings and margins may vary materially depending on the types of long-term government contracts undertaken, the costs incurred in their performance, the achievement of other performance objectives and the stage of performance at which the right to receive fees, particularly under incentive and award fee contracts, is finally determined.

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Many of our contracts involve subcontracts with other companies upon which we rely to perform a portion of the services we must provide to our customers. There is a risk that we may have disputes with our subcontractors, including disputes regarding the quality and timeliness of work performed by the subcontractor, customer concerns about the subcontractor, our failure to extend existing task orders or issue new task orders under a subcontract or our hiring of personnel of a subcontractor. A failure by one or more of our subcontractors to satisfactorily provide on a timely basis the agreed-upon supplies or perform the agreed-upon services may materially and adversely impact our ability to perform our obligations as the prime contractor. Subcontractor performance deficiencies could result in a customer terminating our contract for default. A default termination could expose us to liability and have a material adverse effect on our ability to compete for future contracts and orders. In addition, a delay in our ability to obtain components and equipment parts from our suppliers may affect our ability to meet our customers’ needs and may have an adverse effect upon our profitability.

Contract and program accounting require judgment relative to assessing risks, estimating contract revenues and costs and making assumptions for schedule and technical issues. Due to the size and nature of many of our contracts, the estimation of total revenues and cost at completion is complicated and subject to many variables. Assumptions have to be made regarding the length of time to complete the contract because costs also include expected increases in wages and prices for materials. Incentives or penalties related to performance on contracts are considered in estimating sales and profit rates, and are recorded when there is sufficient information for us to assess anticipated performance. Estimates of award fees are also used in estimating sales and profit rates based on actual and anticipated awards.

Because of the significance of the judgments and estimation processes described above, it is likely that materially different amounts could be recorded if we used different assumptions or if the underlying circumstances were to change. Changes in underlying assumptions, circumstances or estimates may adversely affect future period financial performance. For additional information on accounting policies and internal controls we have in place for recognizing sales and profits, see our discussion under “Management’s Discussion and Analysis—Critical Accounting Policies—Contract Accounting/Revenue Recognition” on page 44 and Note 1 to the financial statements on page 81.

Our earnings may be positively or negatively impacted by the amount of income or expense we record for our employee benefit plans. This is particularly true with income or expense for our pension plans. An example of how changes in our assumptions related to employee benefit plans can affect our financial statements occurred in 2002. For a discussion regarding how our financial statements can be affected by pension plan accounting policies, see “Management’s

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Discussion and Analysis—Critical Accounting Policies—Post-Retirement Benefit Plans” on page 45 of this report.

We have investments in equity securities of several companies. We review these investments each quarter to evaluate our ability to recover our investments. We record an impairment charge if the fair value of the investment has declined below our carrying value, and that decline is viewed to be other than temporary. We estimate the fair values based market prices when available and other valuation methods (e.g., discounted cash flow analyses, sum-of-the-parts valuations and trading multiples). In estimating fair value, we are required to exercise judgment. Changes in our assumptions could affect the fair value. For a discussion of the factors we consider, see “Management’s Discussion and Analysis—Critical Accounting Policies—Impairment of Investments in Equity Securities” on page 46 of this report.

Many of our investments are concentrated in the satellite services and telecommunications industries. These industries continue to be adversely affected by the capital markets, excess satellite capacity and competition from other kinds of telecommunications services, including fiber optic cable and other wireless communication technologies. Realization of the value of our equity investments, or related equity earnings for a given period, may be affected by the ability of the companies to successfully execute their business plans, the availability of funding, industry considerations specific to each company’s business, general economic conditions and other factors.

Our international business (mainly foreign military sales to various governments in Europe, Asia and the Middle East) tends to have more risk than our domestic business due to the greater potential for changes in foreign economic and political environments. Our business is also highly sensitive to changes in foreign national priorities and government budgets. International transactions frequently involve increased financial and legal risks arising from stringent contractual terms and conditions and the widely differing legal systems and customs in foreign countries. Our contracts, however, generally are denominated in U.S. dollars.

In addition, general economic conditions and trends can and do affect our businesses. Our business may be adversely affected by the outcome of legal proceedings and other contingencies, which cannot be predicted with certainty. See Legal Proceedings on page 29 and Note 15—Commitments and Contingencies on page 107 through page 110 of this Form 10-K. For a discussion identifying additional risk factors and important factors that could cause actual results to vary materially from those anticipated in the forward-looking statements, see the discussion of Government Contracts and Regulation on page 19 through page 20, “Industry Considerations” in Management’s Discussion and Analysis on page 40 through page 44, Note 1—Significant Accounting Policies on page 79 through page 85, “Critical Accounting Policies” in Management’s Discussion and Analysis on page 44 through 48, and “Environmental Liabilities” on page 48 through 49 of this Form 10-K. Other factors, in addition to those described, may affect our forward-looking statements or actual results.

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Our actual financial results likely will be different from those projected due to the inherent nature of projections and may be better or worse than projected. Given these uncertainties, you should not rely on forward-looking statements. The forward-looking statements contained in this report speak only as of the date of this report. We expressly disclaim a duty to provide updates to forward-looking statements after the date of this report to reflect the occurrence of subsequent events, changed circumstances, changes in our expectations, or the estimates and assumptions associated with them. The forward-looking statements in this report are intended to be subject to the safe harbor protection provided by the federal securities laws.

ITEM 2.    PROPERTIES

At December 31, 2002, we operated in 362 locations (including, offices, manufacturing plants, warehouses, service centers, laboratories and other facilities) throughout the United States and internationally. Of these, we owned 49 locations aggregating approximately 33 million square feet and leased space at 313 locations aggregating approximately 21 million square feet. We also manage or occupy various government-owned facilities. The U.S. Government also furnishes equipment that we use in some of our businesses.

At December 31, 2002, our lines of business had major operations at the following locations:

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At December 31, 2002, a summary of our floor space by core operating unit consisted of:

At December 31, 2002, we owned various large tracts of land that are available for sale or development. The location and approximate size of these tracts include:

A portion of our activity is related to engineering and research and development, which is not susceptible to productive capacity analysis. In the area of manufacturing, most of the operations are of a job-order nature, rather than an assembly line process, and productive equipment has multiple uses for multiple products. Management believes that all of our major physical facilities are in good condition and are adequate for their intended use.

ITEM 3.    LEGAL PROCEEDINGS

We are parties or have property subject to litigation and other proceedings, including matters arising under provisions relating to the protection of the environment. Based on the information available to us as of the date of filing of this report, we do not believe that resolution of any of these matters will have a material adverse effect upon the Corporation.

From time-to-time, agencies of the U.S. Government investigate whether our operations are being conducted in accordance with applicable regulatory requirements. U.S. Government investigations of us, whether relating to Government contracts or conducted for other reasons, could result in administrative, civil or criminal liabilities, including repayments, fines or penalties being imposed upon us, or could lead to suspension or debarment from future U.S. Government contracting. U.S. Government investigations often take years to complete and many result in no adverse action against us. For the U.S. Government investigations noted below, it is too early for us to determine whether adverse decisions relating to these investigations could ultimately have a material adverse effect on our results of operations or financial condition.

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As previously reported, two consolidated class action complaints have been filed against the Corporation and certain of its officers and directors in the United States District Court for the Central District of California, In re Lockheed Martin Corp. Securities Litigation, and Kops et al. v. Lockheed Martin Corporation et al. The complaints allege that the defendants violated U.S. securities laws by allegedly employing devices, schemes and artifices to defraud; making untrue statements of material facts or omitting to state material facts necessary in order to make statements, in light of the circumstances under which they were made, not misleading; or engaging in acts, practices and a course of business that operated as a fraud or deceit upon class members in connection with their purchases of our common stock. According to the complaints, class members were damaged, because they paid artificially inflated prices for our stock. The plaintiffs are seeking damages and costs, as well as equitable, injunctive and other relief.

The Securities Litigation complaint alleges claims on behalf of a putative class of shareholders who purchased Lockheed Martin stock between August 13, 1998 and December 23, 1998. The defendants in that action include the Corporation, Vance D. Coffman, Marcus C. Bennett, Norman R. Augustine and three former officers of the Corporation. The Kops complaint alleges claims on behalf of a putative class of shareholders who purchased Lockheed Martin stock between January 28, 1999 and June 9, 1999. The defendants in that action include the Corporation, Vance D. Coffman, Marcus C. Bennett and two former officers of the Corporation.

The Corporation has filed motions to dismiss the complaints, as well the amended complaints filed by the plaintiffs, in both matters. Most recently, in the Securities Litigation proceeding, the district court granted our motion to dismiss the second amended complaint on July 22, 2002. The plaintiffs filed a third amended complaint on September 12, 2002, and we filed a motion to dismiss that complaint on October 28, 2002.

In the Kops proceeding, the district court on November 1, 2002 granted part and denied part of our motion to dismiss the second amended complaint. The court dismissed, with leave to amend, the allegation that we publicly announced false or misleading expectations about anticipated results in a variety of areas, including the sale of F-16 aircraft to a foreign government in 1999, expected deliveries of C-130J aircraft in 1999 and earnings projections. The court dismissed, without leave to amend, the allegations that we made false statements regarding the expected number of satellite launches in 1999. The court denied our motion regarding the allegations that we falsely claimed the sale of seven C-130J aircraft to the Air Force and improperly recognized revenue from that sale. Plaintiffs advised the court that they intend to stand on the second amended complaint and to proceed solely on the revenue recognition allegation. In addition, plaintiffs have without prejudice dismissed as defendants Mr. Bennett and a former officer of the Corporation.

As previously reported, since November 2000, the SEC has been investigating the adequacy of the Corporation’s disclosures regarding the regulatory approval of the proposed merger between the Corporation and Northrop Grumman, which was announced in 1997 and terminated in 1998. The Corporation is cooperating with the SEC’s investigation.

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As previously reported, in 1994, we were awarded a $180 million fixed-price contract by the DoE for the design, construction and limited test of remediation facilities, and the remediation of waste found in Pit 9, located on the Idaho National Engineering and Environmental Laboratory reservation. The DoE, through Lockheed Martin Idaho Technologies Company (LMITCO), its management contractor, terminated the Pit 9 contract for default. We filed a lawsuit against the DoE on the same day in the U.S. Court of Federal Claims in Washington, D.C., challenging the default termination and seeking to recover our costs, which are included in inventories. On June 1, 1998, LMITCO, at the DoE’s direction, filed suit against us in the U.S. District Court in Idaho, seeking, among other things, recovery of approximately $54 million previously paid to us by LMITCO under the Pit 9 contract. We filed counterclaims against LMITCO challenging the default termination and seeking to recover our costs. In October 2001, the court dismissed our complaint in the Court of Federal Claims against the DoE. On September 30, 2002, the U.S. Court of Appeals for the Federal Circuit affirmed the decision of the Court of Federal Claims. We continue to defend and to pursue our counterclaims in the DoE lawsuit in Idaho, which is set for trial in August 2003, while independently pursuing resolution of the matter through non-litigation means. For additional information regarding this matter, see Note 15—Commitments and Contingencies on page 110 of this Form 10-K.

As previously reported, in February 2000, we were served with a grand jury subpoena issued by the U.S. District Court for the Southern District of Texas in Houston seeking documents related to cost accounting issues in connection with NASA service and support contracts performed by Lockheed Engineering & Sciences Company and its successors, Lockheed Martin Engineering & Sciences Services and Lockheed Martin Space Operations. We are cooperating with the Government’s investigation.

As previously reported, since 1996, we have been defending two complaints filed against us in the United States District Court for the Middle District of Florida as qui tam actions under the Civil False Claims Act and unsealed in 1996. A qui tam action is a lawsuit filed by private plaintiff, or relator, in the name of the Government in which the relator is entitled to a portion of any recovery. On November 20, 2001, the Department of Justice Civil Division intervened in one of the lawsuits, alleging that the Corporation in 1994 defectively priced a proposal submitted to the Air Force for the foreign military sale of LANTIRN pods. The Department did not intervene in the second qui tam lawsuit. We are cooperating with the Government’s continuing investigation. We also continue to defend the lawsuits vigorously. Trial is set for September 2003.

The Department of Justice is investigating whether hazardous waste was properly stored and handled at the Paducah Gaseous Diffusion Plant in Paducah, Kentucky. Former employees of Martin Marietta Energy Systems and Lockheed Martin Energy Systems have testified before a Federal grand jury in Louisville, Kentucky. The grand jury has not issued a subpoena to the Corporation.

As previously reported, on June 17, 2002, we were served with a grand jury subpoena issued by the United States District Court for the Central District of California. The subpoena seeks documents relating to an international sales agent engaged by Loral Corporation in connection with the sale of synthetic aperture radars to the Government of Korea in 1996. We are cooperating with the investigation.

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In a lawsuit filed against us in the United States District Court for the Northern District of California, Space Systems/Loral alleges that our series 3000, 4000, 5000 and 7000 satellites, as well as our A2100 satellites infringe a patent relating to a method and apparatus to minimize attitude changes resulting from satellite thruster operations. We believe that our satellites do not infringe the patent and have moved for summary judgment. If necessary, we will vigorously defend the case at trial. Trial is set for April 28, 2003.

Since 1997, as previously reported, we have been in litigation with residents of Redlands in California regarding allegations of personal injury, property damage, and other tort claims on behalf of individuals and putative classes of individuals arising from our alleged contribution to regional groundwater contamination. On March 3, 2003, the California Supreme Court issued a final decision denying class certification. Trial preparations continue with respect to the 800 individual claimants in Redlands. We intend to continue to defend these claims vigorously.

We are subject to federal and state requirements for protection of the environment, including those for discharge of hazardous materials and remediation of contaminated sites. As a result, we are a party to or have our property subject to various other lawsuits or proceedings involving environmental protection matters. Due in part to their complexity and pervasiveness, such requirements have resulted in us being involved with related legal proceedings, claims and remediation obligations. The extent of our financial exposure cannot in all cases be reasonably estimated at this time. For information regarding these matters, including current estimates of the amounts that we believe are required for remediation or clean-up to the extent estimable, see “Environmental Matters” in Management’s Discussion and Analysis of Results of Operations and Financial Condition on page 69 through 71 and
Note 15—Commitments and Contingencies on page 107 through page 110 of this Form 10-K.

As previously reported, on May 2, 2002, the EPA issued a notice alleging that we had been out of compliance during portions of 2000 and 2001 with certain terms and conditions of the Burbank Operable Unit consent decrees concerning the operation of a groundwater pump-and-treat system we constructed. We agreed with the EPA to settle the matter for $260,000 and to review whether we should perform additional work to improve the existing pump-and-treat system.

Like many other industrial companies in recent years, we are a defendant in lawsuits alleging personal injury as a result of exposure to asbestos integrated into our premises and certain historical products. We have never mined or produced asbestos and no longer incorporate it in any currently manufactured products. We have been successful in having a substantial number of these claims dismissed without payment. The remaining resolved claims have settled for amounts that are not material individually or in the aggregate. A substantial majority of our asbestos-related claims have been covered by insurance or other forms of indemnity. Based on the information available to us as of the date of filing of this report, we do not believe that resolution of any or all of these matters will have a material adverse effect upon the Corporation.

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ITEM 4.    SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

No matters were submitted to a vote of security holders during the fourth quarter of 2002.

ITEM 4(a).    EXECUTIVE OFFICERS OF THE REGISTRANT

Our executive officers are listed below. There were no family relationships among any of our executive officers and directors. All officers serve at the pleasure of the Board of Directors.

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PART II

ITEM 5.    MARKET FOR THE REGISTRANT’S COMMON STOCK AND RELATED STOCKHOLDER MATTERS

At January 31, 2003, we had 45,425 holders of record of our Common Stock, $1 par value. Our Common Stock is traded on the New York Stock Exchange, Inc. under the symbol LMT. Information concerning stock prices and dividends paid during the past two years is as follows:

Common Stock — Dividends Paid and Market Prices

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ITEM 6.    SELECTED FINANCIAL DATA

Lockheed Martin Corporation

Consolidated Financial Data—Five Year Summary

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Notes to Five-Year Summary

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Lockheed Martin Corporation

December 31, 2002

Industry Considerations

Defense Business Considerations

In recent years, domestic and worldwide political and economic developments have had a significant impact on the markets for defense and advanced technology systems, products and services. Markets for defense and advanced technology systems during 2002 and in the foreseeable future will continue to be affected by the worldwide war against terrorism and threats created by the potential widespread availability of weapons of mass destruction. These realities have increased the need for greater attention to the security of our homeland and for better communication and interplay between law enforcement, civil government agencies and our military services. Our nation’s overall defense posture continues to move toward a more capabilities-based structure, which creates the ability for a more flexible response with greater force mobility, stronger space capabilities, better missile defense and improved information systems security.

The President’s budget for the U.S. Department of Defense (DoD) for fiscal year 2003 and beyond reflects the transformation of the country’s national defense posture and responds to increased needs for homeland security and defeating terrorism. This is evidenced by budget increases for operational readiness and personnel needs, as well as for both procurement and research and development. While there is no assurance that the increased DoD budget levels will be approved by Congress, the current defense budget outlook is one of modest growth. However, the level of growth and the amount of the budget that will ultimately be allocated to the investment accounts (i.e., procurement, research and development) is unknown.

Our broad mix of programs and capabilities gives us the ability to support the needs of the various agencies of the U.S. Government that require our products and services. Our product areas and programs include: missile defense; space intelligence; command, control, communications, computers, intelligence, surveillance and reconnaissance (C4ISR); air mobility aircraft; and air power projection/precision strike capability. In terms of size and long-term potential impact, two of our more important programs are the F/A-22 fighter aircraft program and the F-35 Joint Strike Fighter program. We are also represented in almost every aspect of land, sea, air and space-based missile defense, including the PAC-3 and THAAD programs. In the areas of space intelligence and information superiority, we have leadership positions on the Milstar, Advanced Extremely High Frequency (AEHF) and Space-Based Infrared System-High (SBIRS-H) programs, and in battle management command and control capabilities. In airlift, we have the

C-130J program and are under contract to upgrade the C-5 strategic airlift aircraft. Many of these programs are large and require funding over several budget cycles. There are risks associated with these and other large, highly visible programs that are subject to appropriation by Congress which, because of their size, could be expected to become potential targets for reductions or extensions of their funding to pay for other programs.

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In addition, the increase in emphasis on homeland security may increase demand for our capabilities in areas such as air traffic management, biohazard detection systems for postal equipment, information systems security and other technical systems solutions. Recent trends have indicated an increase in demand by federal and civil government agencies for upgrading and investing in new information technology systems. This is an area where we have continued to focus our resources.

In prior years, companies in our industry had reacted to historically shrinking defense budgets for procurement, research and development by combining to maintain critical mass and achieve cost savings. More recently, we have focused our efforts on cost savings and improving efficiency, as well as generating cash to repay debt incurred during the period of consolidation. Through our consolidation activities, we have been able to pass along savings to our customers, mainly the DoD.

Non-U.S. defense budgets have generally been declining over the past decade. As a result, consolidation has also been occurring in the European aerospace industry, resulting in fewer but larger and more capable competitors, potentially resulting in an environment where there could be less demand abroad for products from U.S. companies. This type of environment could reduce opportunities for European partnerships and sales potential for U.S. exports.

Other Business Considerations

As a government contractor, we are subject to U.S. Government oversight. The Government may ask about and investigate our business practices and audit our compliance with applicable rules and regulations. Depending on the results of those audits and investigations, the Government could make claims against us. Under Government procurement regulations and practices, an indictment of a government contractor could result in that contractor being fined and/or suspended from being able to bid on, or be awarded, new government contracts for a period of time. A conviction could result in debarment for a specific period of time. Similar government oversight exists in most other countries where we conduct business. Although we cannot predict the outcome of these types of investigations and inquiries with certainty, based on current facts, we do not believe that any of the claims, audits or investigations pending against us are likely to have a material adverse effect on our business or our results of operations, cash flows or financial position.

Changes in government procurement policies and practices over the past several years, such as increases in the progress payment rate and the use of performance-based payments, have had a positive effect on our financial position and cash flows. But we are still exposed to risks associated with U.S. Government contracting, including technological uncertainties and obsolescence, and having to depend on Congressional appropriation and allotment of funds each year. Many of our programs involve the development and application of state-of-the-art technologies aimed at achieving challenging goals. As a result, setbacks, delays, cost overruns and failures can occur.

In addition to our defense businesses, we also provide products and services to civil government customers, as well as commercial customers. Relative to civil government customers, in 2002, a joint venture in which we are participating was awarded the contract for Deepwater, a modernization program for the Coast Guard’s fleet and systems. Our role will be

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to provide systems integration and engineering; C4ISR; air assets; and integrated logistics support. In addition, we provide products and services to agencies such as the U.S. Postal Service, the Federal Aviation Administration, NASA and the Transportation Security Administration. Although our lines of business in civil government and commercial markets are not dependent on defense budgets, they share many of the same risks as our defense businesses, as well as other risks unique to their particular marketplaces. These risks may include development of competing products, technological feasibility and product obsolescence.

With respect to our work with NASA, we provide products and services for the Space Shuttle program mainly through our Space Systems and Technology Services business segments. In 2002, work for NASA accounted for approximately 6% of our consolidated net sales, of which approximately one-half was related to the Space Shuttle program. We also have a 50% equity interest in United Space Alliance, LLC, which provides ground processing and other operational services to the Space Shuttle program. We are working with the Columbia Accident Investigation Board and NASA in the investigation of the February 2003 accident involving the Space Shuttle Columbia. This tragic event did not impact our results of operations for 2002, and it is too early to determine whether the accident will affect our business operations for 2003 and beyond.

We have entered into various joint venture, teaming and other business arrangements to help support our portfolio of products and services in commercial space as well as other lines of business. For additional information about these ventures, see the discussion in the next section concerning our “Commercial Space Business,” the discussion on page 51 captioned “Write-Off and Restructuring of Investment in Astrolink,” and the discussion on page 68 relating to Space Imaging under the caption “Capital Structure and Resources.” These arrangements generally include a formal plan for funding the business which usually requires commitments from the partners, and may require the business to get financing from other sources as well. To the extent the business is unable to get financing from other sources, the business partners, ourselves included, would be required to look at alternatives for funding the business. Some of these business arrangements include foreign partners. The conduct of international business introduces other risks into our operations, including changing economic conditions, fluctuations in relative currency values, regulation by foreign countries and the potential for unanticipated cost increases resulting from the possible deterioration of political relations.

The nature of our international business also makes us subject to the export control regulations of the U.S. Department of State and the Department of Commerce. If these regulations are violated, it can result in monetary penalties and denial of export privileges. We are currently unaware of any violations of export control regulations which are reasonably likely to have a material adverse effect on our business or our results of operations, cash flows or financial position.

Commercial Space Business

The launch vehicle industry has continued to be affected by low demand for products and services due mainly to low demand for satellites as a result of excess capacity in the telecommunications industry. Concerns over uncertainty in the economy have made it difficult for many ventures, especially telecommunications and other high-technology companies, to obtain funding from capital markets. Reduced demand and increased competition have also

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caused pricing pressures in the launch vehicle market. This comes at a time when we have been making significant investments in the Evolved Expendable Launch Vehicle (Atlas V) program, our next generation launch vehicle. This program has required investment of funds for research and development, start-up and other nonrecurring costs, and launch facilities. Some of these expenditures have been funded under an agreement with the U.S. Government. We had our first Atlas V launch in August 2002, successfully delivering a Eutelsat satellite into orbit. Orders to-date for the Atlas V launch vehicle have been lower than expected and at lower prices.

Similar to the launch vehicle market, the commercial satellite market is experiencing pricing pressures due to excess capacity and lower demand. Satellite demand also has been impacted by the business difficulties encountered by some companies in the commercial satellite services industry which have resulted in reduced access to capital and a reduction in the total market size in the near term. We expect to continue to reduce costs in our commercial satellite manufacturing business while keeping our focus on providing a reliable product.

In 1992, we entered into a joint venture with two Russian government-owned space firms to form Lockheed-Khrunichev-Energia International, Inc. (LKEI). We own 51% of LKEI. LKEI has exclusive rights to market launches of commercial, non-Russian-origin space payloads on the Proton family of rockets from a launch site in Kazakhstan. In 1995, another joint venture was formed, International Launch Services (ILS), with Lockheed Martin and LKEI each holding a 50% ownership. ILS was formed to market commercial Atlas and Proton launch services around the world. We consolidate the results of operations of LKEI and ILS into our financial statements. Contracts for launch services usually require substantial advances from the customer before the launch. At the end of 2002, $412 million of advances received from customers for Proton launch services not yet provided was included as a liability on our balance sheet in the caption “Customer advances and amounts in excess of costs incurred.”

A sizable percentage of the advances we receive from customers for Proton launch services are sent to Khrunichev State Research and Production Space Center (Khrunichev), the manufacturer of the launch vehicle and provider of the related launch services in Russia. If a contracted launch service is not provided, a sizeable percentage of the related advance would have to be refunded to the customer. In addition, we have sent advances to Khrunichev for launches we purchased which have not yet been assigned to customers. The advances sent to Khrunichev are included on our balance sheet in inventories. In the fourth quarter of 2002, we entered into an agreement with Khrunichev to eliminate the requirement to provide launch services for our prior advances that were not associated with specific customer launch orders in exchange for an arrangement to reduce future launch payments from us to Khrunichev, contingent on the receipt of new orders as well as a minimum number of actual launches each year. Due to the continuing overcapacity in the launch vehicle market, we do not expect to recover amounts previously advanced for an extended period of time. In addition, we assessed the likelihood of customer terminations-for-convenience for launches currently under contract. A contract termination would require Khrunichev to refund a portion of the advances we have made to them and would require us to refund a portion of the advances received from the customer. As a result of these factors, we reduced the carrying value of our advances to Khrunichev and recognized a charge, net of state income tax benefits, of $173 million in the fourth quarter of 2002. The charge reduced net earnings by $112 million ($0.25 per share). At year-end 2002, $391 million of payments to Khrunichev were included in inventories. Our ability to realize the remaining amounts may be affected by Khrunichev’s ability to provide the

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launch services and the political environment in Russia. Through the end of 2002, launch services through LKEI and ILS have been provided according to contract terms.

The Corporation has entered into an agreement with RD AMROSS, a joint venture of the Pratt & Whitney division of United Technologies Corporation and the Russian firm NPO Energomash, for the development and purchase, subject to certain conditions, of RD-180 booster engines for use in the Corporation’s Atlas launch vehicles. Terms of the agreement call for payments to be made to RD AMROSS upon the achievement of certain milestones in the development and manufacturing processes. Approximately $61 million of payments made under this agreement for engines not yet delivered were included in the Corporation’s inventories at December 31, 2002.

Critical Accounting Policies

Contract Accounting / Revenue Recognition

A large part of our business is derived from long-term development and production contracts which we account for consistent with the American Institute of Certified Public Accountants’ (AICPA) audit and accounting guide, “Audits of Federal Government Contractors,” and the AICPA’s Statement of Position No. 81-1, “Accounting for Performance of Construction-Type and Certain Production-Type Contracts.” We consider the nature of these contracts and the types of products and services provided when we determine the proper accounting for a particular contract. Generally, we record long-term fixed-price contracts on a percentage of completion basis using units-of-delivery as the basis to measure progress toward completing the contract and recognizing revenue. For certain other long-term fixed-price contracts which, along with other factors, require us to deliver minimal quantities over a longer period of time or to perform a substantial level of development effort in comparison to the total value of the contract, revenues are recorded when we achieve performance milestones or using the cost-to-cost method of accounting. Under the cost-to-cost method of accounting, we recognize revenue based on the ratio of costs incurred to our estimate of total costs at completion. We record sales under cost-reimbursement-type contracts as we incur the costs. As a general rule, we recognize sales and profits earlier in a production cycle when we use the cost-to-cost and milestone methods of percentage of completion accounting versus when we use the units-of-delivery method. We have accounting policies in place to address these and other complex issues in accounting for long-term contracts. For other information on accounting policies we have in place for recognizing sales and profits, see our discussion under “Sales and earnings” in Note 1 to the financial statements.

Contract accounting requires judgment relative to assessing risks, estimating contract revenues and costs, and making assumptions for schedule and technical issues. Due to the size and nature of many of our contracts, the estimation of total revenues and cost at completion is complicated and subject to many variables. Contract costs include material, labor and subcontracting costs, as well as an allocation of indirect costs. Assumptions have to be made regarding the length of time to complete the contract because costs also include expected increases in wages and prices for materials. For contract change orders, claims or similar items, we apply judgment in estimating the amounts and assessing the potential for realization. These amounts are only included in contract value when they can be reliably estimated and realization is considered probable. Incentives or penalties related to performance on contracts are

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considered in estimating sales and profit rates, and are recorded when there is sufficient information for us to assess anticipated performance. Estimates of award fees are also a significant factor in estimating sales and profit rates based on actual and anticipated awards.

Products and services provided under long-term development and production contracts make up a large portion of our business, and therefore the amounts we record in our financial statements using contract accounting methods and cost accounting standards are material. We follow U.S. Government procurement and accounting standards in assessing the allowability and the allocability of costs to contracts. Because of the significance of the judgments and estimation processes, it is likely that materially different amounts could be recorded if we used different assumptions or if the underlying circumstances were to change. We closely monitor compliance with and the consistent application of our critical accounting policies related to contract accounting. Business segment personnel perform reviews of the status of contracts through periodic contract status and performance reviews. When adjustments in estimated contract revenues or costs are required, any changes from prior estimates are generally included in earnings in the current period. Also, regular and recurring evaluations of contract cost, scheduling and technical matters are performed by management personnel who are independent from the business segment performing work under the contract. Costs incurred and allocated to contracts with the U.S. Government are scrutinized for compliance with regulatory standards by our personnel, and are subject to audit by the Defense Contract Audit Agency.

Post-Retirement Benefit Plans

Most employees are covered by defined benefit pension plans, and we provide health care and life insurance benefits to eligible retirees. Our earnings may be positively or negatively impacted by the amount of income or expense we record for our employee benefit plans. This is particularly true with income or expense for qualified defined benefit plans (pension plans) because those calculations are sensitive to changes in several key economic assumptions and workforce demographics.

We account for our pension plans using Statement of Financial Accounting Standards (FAS) No. 87, “Employers’ Accounting for Pensions” (FAS 87). Those rules require that the amounts we record, including the income or expense for the plans, be computed using actuarial valuations. These valuations include many assumptions, including assumptions we make relating to financial market and other economic conditions. Changes in key economic indicators can result in changes in the assumptions we use. The key year-end assumptions used to estimate pension income or expense for the following fiscal year are the discount rate, the expected long-term rate of return on plan assets and the rate of increase in future compensation levels.

We use judgment in selecting these assumptions each year because we have to consider not only current market conditions, but also make judgments about future market trends, changes in interest rates and equity market performance. We also have to consider factors like the timing and amounts of expected contributions to the plans and benefit payments to plan participants.

An actual example of how changes in these assumptions can affect our financial statements occurred in 2002. Based on our review of market trends, actual returns on plan assets, and other factors, we lowered the expected long-term rate of return on plan assets for our year-end 2002 actuarial calculations to 8.5%, versus 9.5% for 2001. This rate is applied to a calculated value of

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plan assets which results in an amount that is included in pension income or expense in the following year. We also lowered the discount rate assumption to 6.75% at year-end 2002, versus 7.25% used for 2001. These changes, together with other factors such as the effects of the actual return on plan assets, result in our projecting a substantial amount of pension expense for 2003, compared to recording pension income in 2002.

Also, at the end of 2002, we recorded an adjustment in the stockholders’ equity section of our balance sheet to reflect a minimum pension liability for most of our pension plans. This adjustment is calculated on a plan-by-plan basis, and is determined by comparing the accumulated benefit obligation (ABO) for the plan to the fair value of that plan’s assets. The amount by which the ABO exceeds the fair value of the plan assets, after adjusting for previously recorded accrued or prepaid pension cost for the plan, must be recorded as a minimum pension liability, with a corresponding increase in an intangible asset, if appropriate, and a reduction to stockholders’ equity, consistent with FAS 87. The noncash after-tax adjustment related to our recording of a minimum pension liability in 2002 did not impact earnings, but reduced our stockholders’ equity by $1.5 billion. This adjustment is computed at each year-end and could potentially reverse in the future if financial markets improve and interest rates increase, or could potentially increase if financial market performance and interest rates continue to decline.

The total funding requirement for our pension plans under U.S. Government Cost Accounting Standards (CAS) in 2002 was $87 million. CAS is a major factor in determining our funding requirements and governs the extent to which our pension costs are allocable to and recoverable under contracts with the U.S. Government. For 2003, we expect our funding requirements under CAS to increase substantially. This amount is recovered over time through the pricing of our products and services on U.S. Government contracts, and therefore is recognized in our net sales. Also in 2003, funding in addition to the amount calculated under CAS will likely be required under Internal Revenue Code rules. Any additional amounts computed under those rules are considered to be prepayments under the CAS rules, and therefore are recorded on our balance sheet and recovered in future periods.

Impairment of Investments in Equity Securities

We have investments in equity securities of several companies, some of which are publicly traded entities. We review these investments each quarter to evaluate our ability to recover our investments. We record an impairment charge if the fair value of the investment has declined below our carrying value, and that decline is viewed to be other than temporary.

For publicly traded companies, the fair value of the equity securities is determined by multiplying the number of shares we own by the stock price, as well as by computing estimates of the fair values based on a variety of valuation methods (e.g., discounted cash flow analyses, sum-of-the-parts valuations and trading multiples). For those companies that are not publicly traded, we prepare discounted cash flow analyses to compute an estimate of the fair value of the investment. Since we generally do not have access to internal projections of those companies, we prepare projections based on information that is publicly available. We use judgment in computing the fair value based on our evaluation of the investee and establishing an appropriate discount rate and terminal value to apply in the calculations. In selecting these and other assumptions, we consider the investee’s ability to execute their business plan successfully,

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including their ability to obtain required funding, general market conditions, and industry considerations specific to their business. It is likely that we could compute a materially different fair value for an investment if different assumptions were used or if circumstances were to change.

Many of our investments are concentrated in the satellite services and telecommunications industries, including Intelsat, Ltd. (Intelsat), Inmarsat Ventures plc (Inmarsat) and New Skies Satellites, N.V. (New Skies). These industries continue to be affected by the capital markets, excess satellite capacity and competition from other kinds of telecommunications services, including fiber optic cable and other wireless communication technologies. This has been evidenced by recent bankruptcy filings by some telecommunications companies. Intelsat, Inmarsat and New Skies are also subject to regulation by the Federal Communications Commission (FCC). FCC decisions and policies have had, and may continue to have, a significant impact on these companies. In 2000, Congress passed the Open-Market Reorganization for the Betterment of International Telecommunications Act (the ORBIT Act) that, among other things, established deadlines for Intelsat and Inmarsat to complete their initial public offerings. Under the ORBIT Act, Intelsat and Inmarsat were required to complete their initial public offerings by December 31, 2002. However, Inmarsat has received an extension from the FCC until June 30, 2003. In October 2002, legislation was enacted which extends the deadline for Intelsat to complete its initial public offering to December 31, 2003, or June 30, 2004 if approved by the FCC. Unless there are changes in the current trends and market conditions in the telecommunications industry, as well as in the capital markets, Intelsat and Inmarsat may have difficulty in completing their initial public offerings by the ORBIT Act deadlines. If those deadlines are not met or extended by further amendments to the legislation, the FCC may limit access by U.S. users to the satellite capacity of the privatized entities for some services. If this were to occur, the value of our investments could be adversely affected.

In the fourth quarter 2002, as part of the ongoing evaluation of our ability to recover our investments, we calculated an estimate of the current fair values of our investments in Intelsat and Inmarsat. For our investment in New Skies, we calculated the current fair value based on the publicly traded stock price and, for analysis purposes, also calculated an estimate of the fair value using discounted cash flow analyses. In each case, the fair value of our investment was less than our carrying amount. We then made an assessment as to whether the decline in the value of these investments was other than temporary. We reviewed investment analyst reports to the extent they were available. We also assessed future business prospects for the companies and reviewed information regarding market and industry trends for their businesses.

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Based on our evaluation, including the factors discussed above, we determined that the decline in values of these investments was other than temporary, and recorded impairment charges related to these investments in the fourth quarter of 2002. The impact of the unusual charges on operating profit (earnings from continuing operations before interest and taxes), net earnings and diluted earnings per share was as follows:

Environmental Liabilities

We record financial statement accruals for environmental matters in the period that it becomes probable that a liability has been incurred and the amounts can be reasonably estimated (see the discussion under “Environmental matters” in Note 1 to the financial statements). Judgment is required when we develop assumptions and estimate costs expected to be incurred for environmental remediation activities due to, along with other factors, difficulties in assessing the extent of environmental remediation to be performed, complex environmental regulations and remediation technologies, and agreements between potentially responsible parties (PRPs) to share in the cost of remediation as discussed below.

We enter into agreements (e.g., administrative orders, consent decrees) which document the extent of our obligation. These agreements usually cover several years which makes estimating the costs more judgmental due, for example, to changing remediation technologies. To determine total costs at clean-up sites, we have to assess the appropriate technology to be used to accomplish the remediation, as well as continually evolving regulatory environmental standards. We consider these factors in our estimates of the timing and amount of any future costs that may be required for remedial actions. Given the level of judgment and estimation which has to occur as described above, it is likely that materially different amounts could be recorded if different assumptions were used or if circumstances were to change (e.g., a change in environmental standards).

Under agreements reached with the U.S. Government in 1990 and 2000, some of the amounts we spend for groundwater treatment and soil remediation are allocated to our operations as general and administrative costs. Under existing government regulations, these and other environmental expenditures relating to our U.S. Government businesses, after deducting any recoveries from insurance or other PRPs, are allowable in establishing prices of our products and services. As a result, a substantial amount of the expenditures we incur are being included in our sales and cost of sales according to U.S. Government agreement or regulation.

At the end of 2002 and 2001, the total amount of liabilities recorded on our balance sheet for environmental matters was $445 million and $300 million, respectively. We have recorded an asset for the portion of environmental costs that are probable of future recovery in pricing of our

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products and services for U.S. Government businesses. The amount that is expected to be allocated to our commercial businesses has been expensed through cost of sales. The amounts we record do not reflect the fact that we may recover some of the environmental costs we have incurred through insurance or from other PRPs, which we are pursuing as required by agreement and U.S. Government regulation. Any recoveries we receive would reduce the allocated amounts included in our future U.S. Government sales and cost of sales.

Exit From the Global Telecommunications Services Business

In December 2001, we announced that we would exit our global telecommunications services business as a result of continuing overcapacity in the telecommunications industry and weakening business and economic conditions in Latin America. We also decided in the fourth quarter of 2001 not to provide further funding to Astrolink International, LLC (Astrolink) and, mainly due to Astrolink’s inability to obtain additional funding from other sources, wrote off our investment in Astrolink. We recorded unusual charges, net of state income tax benefits, of approximately $2.0 billion in the fourth quarter of 2001 related to these actions. The charges reduced net earnings by about $1.7 billion ($3.98 per diluted share).

The global telecommunications services businesses included the operations of COMSAT Corporation. We completed our merger with COMSAT Corporation in August 2000. The operations of COMSAT were included in the results of our operations since August 1, 2000. The total purchase price for COMSAT was approximately $2.6 billion. The COMSAT transaction was accounted for using the purchase method of accounting, where the purchase price was allocated to assets acquired and liabilities assumed based on their fair values. These allocations included adjustments totaling approximately $2.1 billion to record investments in equity securities (i.e., Intelsat, Inmarsat and New Skies) at fair value, and goodwill.

The global telecommunications businesses that we retained included the Systems & Technology line of business and the COMSAT General telecommunications business unit, which were realigned with the Space Systems segment, and Enterprise Solutions-U.S., which was realigned with the Technology Services segment. The equity investments retained, including Intelsat, Inmarsat and New Skies, ACeS International, Ltd. (ACeS), Americom Asia-Pacific, LLC and Astrolink, had a combined carrying value of about $900 million at December 31, 2002.

The following discussion describes the components of the $2.0 billion in charges based on their classification in our financial statements.

Discontinued Operations

The $2.0 billion in charges in 2001 included an amount, net of state income tax benefits, of approximately $1.4 billion related to global telecommunications services businesses held for sale and exit costs for the elimination of the administrative function supporting the global telecommunications businesses and investments. These charges, which reduced net earnings for the year by $1.3 billion ($3.09 per diluted share) were included in discontinued operations in our statement of operations. The status of the businesses held for sale is as follows:

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material impact on our consolidated results of operations or financial position. We also reached an agreement to sell Lockheed Martin Intersputnik (LMI) in the third quarter of 2002. This transaction is expected to close in 2003, subject to regulatory approvals and the satisfaction of other conditions, including a requirement that we move the LMI satellite to another orbital slot. The transaction is not expected to have a material impact on our results of operations or financial position.

Of the $1.4 billion of charges included in discontinued operations, about $1.2 billion related to impairment of goodwill. The goodwill was recorded when we acquired COMSAT as discussed above. Approximately $170 million of the $1.4 billion related to impairment of some of the long-lived assets employed by foreign businesses held for sale, mainly COMSAT International. The rest of the charge related to costs associated with elimination of administrative functions, including severance and facilities.

Effective January 1, 2001, we adopted FAS 144, “Accounting for the Impairment or Disposal of Long-Lived Assets.” Since the operating businesses we identified for divestiture met the requirements of FAS 144 to be classified as discontinued operations, their results of operations, as well as the impairment and other charges related to the decision to exit the businesses, are classified as discontinued operations for all periods presented, and have been excluded from business segment information. Also, the assets and liabilities of these businesses have been shown separately in the balance sheet as being held for sale. Depreciation and amortization expense were not recorded for these businesses after the date they were classified as held for sale consistent with FAS 144. LMI is recorded at estimated fair value less cost to sell at December 31, 2002. Changes in the estimated fair value of LMI will be recorded in the future if appropriate.

We also completed the sale of Lockheed Martin IMS Corporation (IMS), a wholly-owned subsidiary, for $825 million in cash in August 2001. This transaction resulted in a gain, net of state income taxes, of $476 million and increased net earnings by $309 million ($0.71 per diluted share). The results of IMS’s operations for all periods presented, as well as the gain on the sale, are classified as discontinued operations in accordance with FAS 144. Net sales recorded in 2001 up to the effective date of the divestiture totaled approximately $355 million, excluding intercompany sales. The transaction generated net cash proceeds of approximately $560 million after related transaction costs and federal and state income tax payments.

Other Charges Related to Global Telecommunications

The charges recorded in the fourth quarter of 2001 also included unusual charges, net of state income tax benefits, of approximately $132 million related to commitments to and impairment in the values of investments in satellite joint ventures, primarily ACeS and Americom Asia-Pacific. We had previously recorded unusual charges related to other than temporary declines in the values of these investments as follows: in the first quarter of 2001, a charge, net of state income tax benefits, of $100 million was recorded related to Americom Asia-Pacific; and in the fourth

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quarter of 2000, a charge, net of state income tax benefits, of $117 million was recorded related to ACeS (see Note 8 to the financial statements for more discussion of these charges).

In addition, as part of the $2.0 billion in charges recorded in the fourth quarter 2001, about $43 million related to severance, facilities costs and impairment of certain fixed assets associated with the business units we retained. These unusual charges reduced net earnings for 2001 by $117 million ($0.27 per diluted share).

Write-off and Restructuring of Investment in Astrolink

Through 2001, we had invested $400 million in Astrolink, a joint venture that planned to develop a broad-band satellite system. In the fourth quarter of 2001, in light of market conditions affecting the telecommunications industry and the difficulty Astrolink was having raising external capital, we decided not to make an additional equity investment in Astrolink and wrote off our 31% equity interest. As a result, we recorded an unusual charge of $367 million, net of state income tax benefits, in other income and expenses to reflect the other than temporary decline in the value of our Astrolink investment. We also recorded charges of approximately $20 million, net of state income tax benefits, in cost of sales for certain other costs related to Astrolink. On a combined basis, these charges reduced net earnings for 2001 by approximately $267 million ($0.62 per diluted share).

After several months of negotiation, in January 2003, we finalized an agreement with Astrolink’s other members to restructure Astrolink. As part of the transaction, Liberty Satellite & Technology, a subsidiary of Liberty Media Corporation, may acquire substantially all of Astrolink’s assets and pursue a business plan to build a one- or two-satellite system. The transaction is subject to regulatory approval, financing and other closing conditions. Upon closing of the asset transfer, we would continue to provide launch services and be a satellite vendor, but would retain only a limited indirect equity interest in the restructured business. The restructuring also entails the settlement of existing claims related to termination of Astrolink’s major procurement contracts. As part of that settlement, if Liberty Satellite & Technology does not elect to proceed with the new system, we would acquire the remaining assets of Astrolink, including work in process under our procurement contracts with Astrolink. Certain other of the members also would retain their work in process. Under either scenario, the restructuring is not expected to have a material effect on our financial position, results of operations or cash flows.

Other Divestiture Activities

In January 2001, we completed the divestiture of two business units in the environmental management line of business. The impact of these divestitures was not material to our 2001 results of operations, cash flows or financial position due to the effects of unusual impairment losses recorded in prior years related to these business units. Those losses were included in other income and expenses as part of other portfolio shaping activities in the respective years.

In November 2000, we sold our Aerospace Electronics Systems (AES) businesses for $1.67 billion in cash (the AES Transaction). We recorded an unusual loss, including state income taxes, of $598 million related to this transaction which is included in other income and expenses. The loss reduced net earnings for 2000 by $878 million ($2.18 per diluted share). Although the AES Transaction resulted in a pretax loss for book purposes, it resulted in a gain for tax purposes

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primarily because goodwill related to the AES businesses was not included in the tax basis of the net assets of AES. Therefore, we were required to make state and federal income tax payments associated with the divestiture. The AES Transaction generated net cash proceeds of approximately $1.2 billion after related transaction costs and federal and state income tax payments. Net sales included in the year 2000 related to the AES businesses totaled approximately $655 million, excluding intercompany sales.

In September 2000, we sold Lockheed Martin Control Systems (Control Systems) for $510 million in cash. This transaction resulted in the recognition of an unusual gain, net of state income taxes, of $302 million which is reflected in other income and expenses. The gain increased net earnings for the year ended December 31, 2000 by $180 million ($0.45 per diluted share). This transaction generated net cash proceeds of $350 million after related transaction costs and federal and state income tax payments. Net sales for the first nine months of 2000 related to Control Systems totaled approximately $215 million, excluding intercompany sales.

In September 2000, we sold approximately one-third of our interest in Inmarsat for $164 million. The investment in Inmarsat was acquired as part of the merger with COMSAT. As a result of the transaction, our interest in Inmarsat was reduced from approximately 22% to 14%. The sale of shares in Inmarsat did not impact our results of operations. The transaction generated net cash proceeds of about $115 million after transaction costs and federal and state income tax payments.

On an ongoing basis, we will continue to explore the sale of various non-core businesses, passive equity investments and surplus real estate. If we were to decide to sell any such holdings or real estate, the resulting gains, if any, would be recorded when the transactions are consummated and losses, if any, would be recorded when they are probable and estimable. We also continue to review our businesses on an ongoing basis to identify ways to improve organizational effectiveness and performance, and to focus on our core business strategy.

Results of Operations

Since our operating cycle is long-term and involves many types of development and production contracts with varying production delivery schedules, the results of operations of a particular year, or year-to-year comparisons of recorded sales and profits, may not be indicative of future operating results. The following discussions of comparative results among periods should be viewed in this context.

Effective January 1, 2002, we adopted FAS 142, “Goodwill and Other Intangible Assets,” as discussed more fully in Note 1 of the notes to the financial statements. We completed the initial step of the goodwill impairment test required by the new rules and concluded that no adjustment to the balance of goodwill at the date we adopted the standard was required. We also reassessed the estimated remaining useful lives of other intangible assets as part of our adoption of the Statement. As a result of that review, we extended the estimated remaining useful life of the intangible asset related to our F-16 fighter aircraft program from six to ten years, effective January 1, 2002. The most important factors considered in making this determination included the existing backlog for F-16 deliveries which extends production beyond the life we originally anticipated, and our outlook for potential new orders for the F-16 during the next ten years. Relative to new orders, we expect that the F-16 will continue to be the dominant fighter aircraft

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available for many countries in the international market until the F-35 Joint Strike Fighter is available. As a result of the adoption, amortization expense for goodwill and certain other intangibles for 2002 was lower compared to 2001 by $274 million, and was lower compared to 2000 by $297 million.

Continuing Operations

For 2002, net sales were $26.6 billion, an 11% increase over 2001 sales. Sales for 2001 were $24.0 billion, a decrease of 2% compared to 2000. Sales increased in all segments during 2002 as compared to 2001. Sales growth in our Aeronautics and Technology Services segments during 2001 were more than offset by decreases in the remaining business segments as compared to 2000. Adjusting for acquisitions and divestitures, sales would have remained comparable when comparing 2001 to 2000. The U.S. Government is our largest customer, accounting for about 80% of our sales for 2002 compared to 78% in 2001 and 72% in 2000.

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Our results of operations for 2002, 2001 and 2000 included the effects of various unusual items. The impact of these items on operating profit (earnings from continuing operations before interest and taxes), net earnings (loss) and amounts per diluted share is as follows:

Effects of unusual items:

Our operating profit for 2002 was $1.2 billion, an increase of 39% compared to 2001. Our operating profit for 2001 was $833 million, a decrease of 25% compared to 2000. These amounts included the impacts of unusual items which reduced operating profit for 2002, 2001

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and 2000 by $1,112 million, $973 million and $685 million, respectively. The results for 2001 and 2000 included amortization expense of $274 million and $297 million, respectively, for goodwill and certain other intangibles that was not included in 2002 due to the adoption of FAS 142. Adjusting for the effects of the unusual items and the adoption of FAS 142 for each year, operating profit for 2002 would have been $2.3 billion, a 9% increase over the operating profit of $2.1 billion in 2001. The operating profit for 2001 would have remained comparable to operating profit of $2.1 billion in 2000.

Operating profit in 2002 increased in all four business segments when compared to 2001. When comparing 2001 to 2000, increases in the Aeronautics, Space Systems and Technology Services segments were offset by a decrease in operating profit in Systems Integration.

Interest expense for 2002 was $581 million, $119 million lower than the comparable amount in 2001 mainly due to reductions in our debt portfolio and the benefit from interest rate swap agreements. Interest expense for 2001 was $700 million, $219 million lower than the amount for 2000 mainly as a result of reductions in our debt portfolio.

Our effective tax rate was 7.7% for 2002, 67.7% for 2001 and 355.7% for 2000. The rate for each year was affected by the tax impact from unusual items. Included in the unusual items for 2002 was a $90 million tax benefit related to the settlement of a research and development tax credit claim. In addition, for years prior to 2002, the rates were increased by non-deductible goodwill that was being amortized for financial accounting purposes. For 2000, the tax rate was further increased by write-offs of non-deductible goodwill for businesses divested in that year. Adjusting for the impact of unusual items and the adoption of FAS 142, our effective tax rates would have been 31% for 2002, 32.6% for 2001 and 36.2% for 2000. For 2002 and 2001 these adjusted effective tax rates were lower than the 35% statutory rate primarily due to the lower tax rates on extraterritorial income. For 2000, the adjusted rate was higher than the statutory rate due to adjustments for revisions to prior year estimates.

For 2002, we reported earnings from continuing operations of $533 million ($1.18 per diluted share) compared to $43 million ($0.10 per diluted share) for 2001. In 2000, we reported a loss from continuing operations of $477 million ($1.19 per diluted share). These amounts included the after-tax effects of unusual items which reduced earnings for 2002, 2001 and 2000 by $632 million, $651 million and $951 million, respectively. The results for 2001 and 2000 included after-tax amortization expense of $236 million and $268 million, respectively, for goodwill and certain other intangibles that was not included in 2002 due to the adoption of FAS 142. Adjusting for the unusual items and the adoption of FAS 142, earnings from continuing operations would have been $1.2 billion in 2002, $930 million in 2001, and $742 million in 2000.

Discontinued Operations

We reported losses from discontinued operations of $33 million ($0.07 per diluted share) in 2002, $1.1 billion ($2.52 per diluted share) in 2001, and $42 million ($0.10 per diluted share) in 2000.

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The businesses included in discontinued operations reported operating losses of $33 million ($0.07 per diluted share) in 2002, $62 million ($0.14 per diluted share) in 2001, and $42 million ($0.10 per diluted share) in 2000.

Discontinued operations for 2002 includes losses incurred for wind-down activities related to the global telecommunications services businesses, offset by the reversal of a reserve associated with the sale of IMS. When recording the sale of IMS in 2001, we established transaction-related reserves to address various indemnity provisions in the sale agreement. The risks associated with certain of these indemnity provisions have been resolved and $39 million, net of taxes, was reversed through discontinued operations in 2002.

Included in the 2001 loss from discontinued operations was an unusual after-tax charge of $1.3 billion ($3.09 per diluted share) related to our decision to exit the global telecommunications services business. The 2001 results also include an unusual after-tax gain of $309 million ($0.71 per diluted share) from the third quarter 2001 sale of Lockheed Martin IMS Corporation.

Net Earnings (Loss)

We reported net earnings of $500 million ($1.11 per diluted share) in 2002, compared to net losses of $1 billion ($2.42 per diluted share) in 2001 and $519 million ($1.29 per diluted share) in 2000. These amounts included the after-tax effects of unusual items which reduced earnings for 2002, 2001 and 2000 by $632 million, $1,678 million and $951 million, respectively. The results for 2001 and 2000 included after-tax amortization expense of $236 million and $268 million, respectively, for goodwill and certain other intangibles that was not included in 2002 due to the adoption of FAS 142.

Discussion of Business Segments

We changed the way we report the results of our business segments in the fourth quarter of 2002. The change in presentation is being made to align the way segment operating results are reported to senior management for their evaluation of segment operating performance. We continue to operate in four principal business segments: Systems Integration, Space Systems, Aeronautics and Technology Services. The changes include the following:

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For more information on the changes in our segment presentation and the reasons for the changes, see Note 16 to the financial statements. The following tables of financial information and the discussions of the results of operations of our business segments have been adjusted to reflect the new presentation of segment operating results and correspond to segment information presented in Note 16.

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This table shows net sales and operating profit of the business segments and reconciles to the consolidated total.