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FORM 10-K

For Annual and Transition Reports

Commission file number 1-14279

ORBITAL SCIENCES CORPORATION

Registrant’s telephone number, including area code:

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

Securities registered pursuant to Section 12(g) of the Act: None

     Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes  x     No  o

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

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

     The aggregate market value of the voting common equity held by non-affiliates of the registrant based on the closing sales price of the registrant’s Common Stock as reported on The New York Stock Exchange on March 5, 2003 was approximately $262,885,715. The registrant has no non-voting common equity.

     As of March 5, 2003, 45,707,136 shares of the registrant’s Common Stock were outstanding.

     Portions of the registrant’s definitive proxy statement to be filed on or about March 21, 2003 are incorporated by reference in Part III of this report.

TABLE OF CONTENTS

Pegasus is a registered trademark and service mark of Orbital Sciences Corporation; Taurus is a registered trademark of Orbital Sciences Corporation; Orbital is a trademark of Orbital Sciences Corporation; and OrbView and ORBIMAGE are registered service marks of Orbital Imaging Corporation.

PART I

Item 1. Business

Background

   We design, develop, manufacture and operate small space systems for U.S. government agencies and for global commercial and scientific customers. We define small space systems to include the following major product lines:

	•	Suborbital rockets that are used as target and boost vehicles for missile defense systems;
	•	Small-class launch vehicles that place satellites weighing up to 3,000 lbs. into low-Earth orbit;
	•	Geosynchronous Earth orbit, or GEO, communications satellites weighing up to 5,000 lbs.; and
	•	Low-Earth orbit, or LEO, satellites weighing up to 5,000 lbs. which are used for communications, remote sensing, scientific and military missions.

   Orbital was incorporated in Delaware in 1987 to consolidate the assets, liabilities and operations of two entities established in 1982 and 1983, Space Systems Corporation and Orbital Research Partners, L.P., respectively.

   Since inception, it has been our general strategy to develop and expand a core integrated business of space systems technologies and products focused on the design and manufacturing of lightweight rockets, small satellites and other space systems intended to capitalize on increasing commercial and governmental uses of space. In 2002, we successfully performed 12 space missions, made substantial progress in continuing to implement operational efficiencies and successfully completed critical financing efforts. As a result of our expertise in designing, developing, manufacturing and operating a broad range of small space systems, we believe we are well positioned to capitalize on the growing demand for small space systems in missile defense, military and intelligence operations, and commercial communications programs, and to take advantage of continuing government-sponsored initiatives for space-based scientific research and planetary exploration.

Description of Orbital’s Products and Services

   Our products and services are grouped into three reportable segments that are described more fully below: launch vehicles and advanced programs, satellites and related space systems and electronic systems. Our business is not seasonal. Customers that accounted for 10% or more of our consolidated revenues in 2002 were The Boeing Company, the U.S. Department of Defense (“DoD”) and PanAmSat Corporation.

   Launch Vehicles and Advanced Programs. We developed and produce the Pegasus, Taurus and Minotaur space launch vehicles that place small satellites into low-Earth orbit. Our Pegasus launch vehicle is launched from our L-1011 carrier aircraft to deploy relatively lightweight satellites into low-Earth orbit. The Taurus launch vehicle is a ground-launched derivative of the Pegasus vehicle that can carry heavier payloads to orbit. The ground-launched Minotaur launch vehicle combines Minuteman II rocket motors with our Pegasus technology to launch payloads into low-Earth orbit. Since 1990, the Pegasus, Taurus and Minotaur rockets have performed a total of 40 launches,

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   We also design and produce suborbital launch vehicles that place payloads into a variety of high-altitude trajectories, but unlike space launch vehicles, do not place payloads into orbit around the Earth. Our suborbital launch products include suborbital vehicles and their principal subsystems, as well as payloads carried by such vehicles. Various branches of the U.S. military and the U.S. Missile Defense Agency (“MDA”) typically use our suborbital launch vehicles as targets for defense-related applications such as ballistic missile interceptor and related experiments. In March 2002, we received a contract from Boeing to develop and build a ground-launched interceptor boost vehicle for the Missile Defense Agency’s Ground-based Midcourse Defense System program pursuant to which our boost vehicle, a modified version of our Pegasus rocket, would be used as a major operational element in the U.S. national missile defense system were such a system to be deployed. Since 1982, we have performed 118 suborbital missions, including nine successful missions in 2002 and one successful mission so far in 2003.

   Our launch technology has also been the basis for several other advanced space and suborbital programs, including supporting efforts to develop technologies that could be applied to reusable launch vehicles, space maneuvering vehicles, hypersonic aircraft and missiles and missile defense systems. For example, since the late 1990s, we have been developing the Hyper-X hypersonic research launcher for the National Aeronautics and Space Administration (“NASA”) and designing advanced space launchers for NASA and the U.S. Air Force. In January 2003, we were selected by the U.S. Air Force to combine surplus government Peacekeeper ballistic missile equipment with Pegasus and Taurus launch vehicle technology to conduct space and suborbital launch missions over the next 10 years. In a follow-on to an existing contract, the U.S. Air Force also selected us to continue to provide similar services using surplus Minuteman rocket motors.

   Customers that accounted for 10% or more of our launch vehicles and advanced programs segment revenues in 2002 were Boeing, DoD and NASA.

   Satellites and Related Space Systems. We design and manufacture spacecraft, including LEO and GEO satellites and planetary (or “deep space”) spacecraft for communications, remote sensing, scientific and military missions. Since 1982, we have built and delivered 86 satellites for various commercial and governmental customers for a wide range of communications, broadcasting, remote imaging, scientific and military missions. In 2002, our next-generation small GEO satellite platform was launched and successfully completed on-orbit checkout.

   We design and manufacture various other space systems, including satellite command and data handling, attitude control and structural subsystems for a variety of government and commercial customers. In addition, we provide a broad range of spacecraft design and engineering services, including specialized space-related analytical, engineering and production services for U.S. government agencies, such as NASA, the Jet Propulsion Laboratory, the DoD, the Naval Research Laboratory and the U.S. Department of Energy. Since 1982, we have supplied such systems and services on 24 space missions, including the Hubble Space Telescope servicing mission performed by NASA in March 2002.

   Customers that accounted for 10% or more of our satellites and related space systems segment revenues in 2002 were PanAmSat and the Broadcasting Satellite System Corporation, a Japanese company.

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   Electronic Systems. Our transportation management systems division develops and produces fleet management systems that are used primarily by metropolitan mass transit operators in the United States. We combine global positioning satellite vehicle tracking technology with terrestrial wireless communications to help transit agencies manage public bus and light rail systems. Major customers for our transportation management systems include the metropolitan mass transit authorities in Chicago, Houston, Denver, Philadelphia, Phoenix, Baltimore, Washington, DC, Atlanta, Los Angeles, Santa Clara, Oakland, San Mateo (California) and Las Vegas, a number of smaller state and municipal transit systems, and private vehicle fleet operators.

Competition

   We believe that competition for sales of our products and services is based on performance, other technical features, reliability, price, scheduling and customization, and we believe that we compete favorably on the basis of these factors.

   There is currently no primary domestic competition for the Pegasus and Taurus launch vehicles. Competition for Pegasus and Taurus could come from various Russian and other international launch vehicles. Our primary competitors in the suborbital launch vehicle product line are Lockheed Martin, L-3 Communications and Space Vector Corporation. Our primary competition for the missile defense interceptor boost vehicle that we are building under our contract with Boeing comes from Lockheed Martin.

   Our GEO communications satellite products primarily compete with products produced by Boeing, Lockheed Martin, Alenia Aerospazio and Alcatel. Competition for our LEO satellites and interplanetary spacecraft primarily comes from Ball Aerospace and Technology Corporation, Spectrum Astro, Inc., Northrop Grumman, and EADS/ Astrium. The primary competition in our satellite systems technical services line of business is Swales Aerospace. Our primary competitor in electronic systems is Siemens Corporation.

   Many of our competitors are larger and have substantially greater resources than we do. Furthermore, it is possible that other domestic or foreign companies or governments, some with greater experience in the space industry and many with greater financial resources than we possess, will seek to provide products or services that compete with our products or services. Any such foreign competitor could benefit from subsidies from or other protective measures by its home country.

Research and Development

   We invest in product-related research and development to conceive and develop new products and to enhance existing products. Our research and development expenses totaled approximately $4.7 million, $7.7 million and $10.1 million for the years ended December 31, 2002, 2001 and 2000, respectively.

Patents and Trademarks

   We rely, in part, on patents, trade secrets and know-how to develop and maintain our competitive position and technological advantage, particularly with respect to our launch vehicle and satellite products. We hold and have applications pending for various U.S. and foreign patents relating to the

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Components, Raw Materials and Carrier Aircraft

   We purchase a significant percentage of our product components, structural assemblies and certain key satellite components and instruments from third parties. We also occasionally obtain from the U.S. government parts and equipment that are used in the production of our products or in the provision of our services. Generally, we have not experienced material difficulty in obtaining product components or necessary parts and equipment and we believe that alternatives to our existing sources of supply are available, although increased costs and possible delays could be incurred in securing alternative sources of supply. We have a sole source supplier for motors used on all our launch vehicles. While alternative sources would be available, the inability of such supplier to provide us with motors could result in significant delays, expenses and loss of revenues. Our ability to launch our Pegasus vehicle depends on the availability of an aircraft with the capability of carrying and launching such space launch vehicle. We own a modified Lockheed L-1011 carrier aircraft that is used for the Pegasus vehicle. In the event that our L-1011 carrier aircraft were to be unavailable, we would experience significant delays, expenses and loss of revenues as a result of having to acquire and modify a new carrier aircraft.

U.S. Government Contracts

   During 2002, 2001 and 2000, approximately 58%, 55% and 45%, respectively, of our total annual revenues were derived from contracts with the U.S. government and its agencies or from subcontracts with the U.S. government’s prime contractors. Most of our U.S. government contracts are funded incrementally on a year-to-year basis.

   Our major contracts with the U.S. government primarily fall into two categories: cost-reimbursable contracts and fixed-price contracts. Approximately 49% and 51% of revenues from U. S. government contracts in 2002 were derived from cost-reimbursable contracts and fixed-price contracts, respectively. Under a cost-reimbursable contract, we recover our actual allowable costs incurred and receive a fee consisting of a base amount that is fixed at the inception of the contract and/or an award amount that is based on the U.S. government’s evaluation of our performance in terms of the criteria stated in the contract. Our fixed-price contracts include firm fixed-price and fixed-price incentive fee contracts. Under firm fixed-price contracts, work performed and products shipped are paid for at a fixed price without adjustment for actual costs incurred in connection with the contract. Therefore, we bear the risk of loss due to increased cost, although some of this risk may be passed on to subcontractors. Under fixed-price government contracts, we may receive progress payments, generally in an amount equal to between 80% and 95% of monthly costs and profits, or we may receive milestone payments upon the occurrence of certain program achievements, with final payments occurring at project completion. Fixed-price incentive fee contracts provide for sharing by us and the customer of unexpected costs incurred or savings realized within specified limits, and may provide for adjustments in price depending on actual contract performance other than costs. Costs in excess of the negotiated maximum (ceiling) price and the risk of loss by reason of such excess costs are borne by us, although some of this risk may be passed on to subcontractors.

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   All our U.S. government contracts and, in general, our subcontracts with the U.S. government’s prime contractors provide that such contracts may be terminated for convenience by the U.S. government or the prime contractor, respectively. Furthermore, any of these contracts may become subject to a government-issued stop work order under which we would be required to suspend production. In the event of a termination for convenience, contractors should be entitled to receive the purchase price for delivered items, reimbursement for allowable costs for work in process and an allowance for reasonable profit thereon or adjustment for loss if completion of performance would have resulted in a loss. For a fuller description of risks relating to the U.S. government contract industry, see “Risks Related to Our Business and Our Industry — We derive a significant portion of our revenues from U.S. government contracts, which are dependent on continued political support and funding and are subject to termination by the U.S. government at any time for any reason. In addition, payments under U.S. government contracts are subject to potential adjustment upon audit.”

Regulation

   Our ability to pursue our business activities is regulated by various agencies and departments of the U.S. government and, in certain circumstances, the governments of other countries. Commercial space launches require licenses from the U.S. Department of Transportation (“DoT”) and operation of our L-1011 aircraft requires licenses from certain agencies of the DoT, including the Federal Aviation Administration. We also require licenses from the U.S. Department of State with respect to work we do for foreign customers or with foreign subcontractors.

Backlog

   Our firm backlog was approximately $820 million at December 31, 2002 and approximately $580 million at December 31, 2001. Approximately $450 million of the 2002 year-end firm backlog is expected to be recognized as revenue during 2003. Firm backlog consists of aggregate contract values for firm product orders, excluding the portion previously included in revenues, and including government contract orders not yet funded and our estimate of potential award fees. Total backlog was approximately $2.46 billion at December 31, 2002. Total backlog includes firm backlog in addition to unexercised options, indefinite-quantity contracts and undefinitized orders and contract award selections. Backlog at December 31, 2002 does not give effect to new orders received or any terminations or cancellations since that date.

   A significant portion of our total firm contract backlog was attributable to contracts with the U.S. government and its agencies or from subcontracts with prime contractors of the U.S. government. Most of our government contracts are funded incrementally on a year-to-year basis. Changes in government policies, priorities or funding levels through agency or program budget reductions by the U.S. Congress or executive agencies could materially adversely affect our financial condition and results of operations. Furthermore, contracts with the U.S. government may be terminated or suspended by the U.S. government at any time, with or without cause. Such contract suspensions or terminations could result in unreimbursable expenses or charges or otherwise adversely affect our business.

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Employees

   As of March 1, 2003, Orbital had approximately 2,000 permanent employees. None of our employees is subject to collective bargaining agreements. We believe our employee relations are good.

Discontinued Operations and Financial Information

   In 2001, we sold our sensor systems division and our respective interests in Magellan Corporation, Navigation Solutions LLC and MacDonald, Dettwiler and Associates Ltd. (“MacDonald, Dettwiler”). In 2000, we sold our Fairchild Defense electronics business unit. The gains and losses on the sales of these businesses, as well as the results of their operations, have been presented in our consolidated financial statements as “discontinued operations.”

ORBIMAGE

   In 1992, we formed Orbital Imaging Corporation (“ORBIMAGE”) to provide satellite-based remote sensing services. Under a fixed price procurement agreement with ORBIMAGE, we are continuing to construct the OrbView-3 satellite and the related launch vehicle and ground segment. The OrbView-3 satellite is scheduled to be launched in the second quarter of 2003.

   On April 5, 2002, ORBIMAGE filed a voluntary petition of reorganization under Chapter 11 of the U.S. Federal Bankruptcy Code in the Eastern District of Virginia. ORBIMAGE has indicated that it expects to file a plan of reorganization in May 2003. We believe that our ownership interest in ORBIMAGE, currently consisting of 99% of the common stock and 50.6% of the total equity, will be cancelled upon ORBIMAGE’s reorganization or liquidation.

   As described in Item 3 below, outstanding litigation between ORBIMAGE, its Official Committee of Unsecured Creditors, and Orbital and two of its officers/directors has been conditionally settled.

* * *

   Financial information about our products and services, domestic and foreign operations and export sales is included in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the notes to our consolidated financial statements, and is incorporated herein by reference.

Special Note Regarding Forward-Looking Statements

   The Private Securities Litigation Reform Act of 1995 provides a safe harbor, in certain circumstances, for certain forward-looking statements made by us or on our behalf. All statements other than those of historical facts included in this Form 10-K, including those related to our financial outlook, liquidity, goals, business strategy, projected plans and objectives of management for future operating results, are forward-looking statements. These “forward-looking statements” involve unknown risks and uncertainties that may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. The forward-looking statements are and will be based on

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   The following are some of the factors that could cause actual results to differ materially from information contained in our forward-looking statements:

	•	our ability to satisfy future capital and operating requirements;
	•	whether the U.S. government terminates or suspends our contracts;
	•	whether we are able to realize our backlog of orders, including backlog we consider firm backlog;
	•	whether there is continued U.S. government support and funding for key space and defense programs;
	•	whether our innovative products experience failures or malfunctions;
	•	our ability to timely fund and implement innovative and novel technologies involving complex systems in a cost-effective manner in the face of rapidly changing technology;
	•	the establishment and expansion of commercial markets and customer acceptance of our products;
	•	the effects that competition may have on our ability to win new contracts;
	•	the potential effect on our business if foreign countries were to increase subsidies to our foreign competitors or impose other protectionist measures; and
	•	the other risks and uncertainties as are described below and as may be detailed from time to time in our public filings with the Securities and Exchange Commission.

   Although we believe the expectations reflected in these forward-looking statements are based on reasonable assumptions, there is a risk that these expectations will not be attained and that any deviations will be material. We disclaim any obligation or undertaking to disseminate any updates or revisions to any forward-looking statement contained in this Form 10-K to reflect any changes in its expectations or any change in events, conditions or circumstances on which any statement is based.

Risks Related to Our Business and Our Industry

OUR FINANCIAL CONDITION AND THE RESTRICTIVE COVENANTS CONTAINED IN OUR CREDIT FACILITY AND THE INDENTURE GOVERNING OUR SECOND PRIORITY SECURED NOTES MAY LIMIT OUR ABILITY TO BORROW ADDITIONAL FUNDS REQUIRED TO FUND OUR FUTURE OPERATIONS.

   Our accumulated deficit was $444.8 million as of December 31, 2002, largely due to significant losses from continuing operations that we incurred in 2001 and 2000. In addition, our earnings were insufficient to cover our fixed charges for the years ending December 31, 2001 and 2000. Although we expect that our available cash, cash generated from operations, and remaining borrowing capacity under our $35 million credit facility will be sufficient to fund our projected operating and capital expenditure requirements and our debt obligations in the foreseeable future, there can be no

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	•	incur additional debt, particularly unsubordinated debt;
	•	pay dividends, redeem or repurchase our stock or make other distributions;
	•	acquire assets or businesses or make investments in other entities;
	•	enter into transactions with affiliates;
	•	merge or consolidate with other entities;
	•	sell or otherwise dispose of assets or use the proceeds from any asset sale or other disposition; and
	•	create liens on our assets.

TERMINATION OF OUR BACKLOG OF ORDERS COULD NEGATIVELY IMPACT OUR REVENUES.

   At December 31, 2002, we had firm backlog of approximately $820 million and total backlog of approximately $2.46 billion. Approximately $450 million of the 2002 year-end firm backlog is expected to be recognized as revenue during 2003. Firm backlog consists of aggregate contract values for product orders, excluding the portion previously included in revenues, and including government contract orders not yet funded and our estimate of potential award fees. Total backlog includes firm backlog in addition to unexercised options, indefinite-quantity contracts and undefinitized orders and contract award selections, which award selections may not result in definitized contracts or orders. Backlog at December 31, 2002 does not give effect to new orders received or any terminations or cancellations since that date. Approximately 70% of our firm contract backlog at December 31, 2002 was derived from contracts with the U.S. government and its agencies or from subcontracts with the U.S. government’s prime contractors. All of our direct and indirect contracts with the U.S. government or its prime contractors may be terminated or suspended at any time, with or without cause, for the convenience of the government. From time to time, certain of our commercial contracts have also given the customer the right to unilaterally terminate the contracts. For these reasons, we cannot assure you that our backlog will ultimately result in revenues.

WE DERIVE A SIGNIFICANT PORTION OF OUR REVENUES FROM U.S. GOVERNMENT CONTRACTS, WHICH ARE DEPENDENT ON CONTINUED POLITICAL SUPPORT AND FUNDING AND ARE SUBJECT TO TERMINATION BY THE U.S. GOVERNMENT AT ANY TIME FOR ANY REASON. IN ADDITION, PAYMENTS UNDER U.S. GOVERNMENT CONTRACTS ARE SUBJECT TO POTENTIAL ADJUSTMENT UPON AUDIT.

   For the year ended December 31, 2002, approximately 58% of our total revenues, and at December 31, 2002, approximately 70% of our firm contract backlog, were derived from contracts with the U.S. government and its agencies or were derived from subcontracts with the U.S.

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   The accuracy and appropriateness of our direct and indirect costs and expenses under our contracts with the U.S. government are subject to extensive regulation and audit by the Defense Contract Audit Agency (“DCAA”), or by other agencies of the U.S. government. These agencies have the right to challenge our cost estimates or allocations with respect to certain contracts. A substantial portion of payments to us under U.S. government contracts are provisional payments that are subject to potential adjustment and reimbursement upon audit by such agencies, and from time to time we have in the past made and may in the future be required to make adjustments and reimbursements in connection with these audits. Responding to governmental audits, inquiries or investigations may involve significant expense and divert management attention. Also, an adverse finding in any such audit, inquiry or investigation could involve fines, injunctions or other sanctions.

OUR RESTRICTED BORROWING CAPACITY AND FINANCIAL CONDITION MAY IMPAIR OUR ABILITY TO WIN NEW BUSINESS AND/OR TO RETAIN EXISTING BUSINESS AND THEREFORE COULD REDUCE OUR REVENUES AND BACKLOG.

   Our electronic systems contracts typically require us to post performance bonds or letters of credit pending completion of work. In addition, international contracts often contain similar requirements. Due to limitations on our borrowing capacity as a result of the restrictive covenants contained in our existing debt and our financial condition generally, we may not be able to issue performance bonds or letters of credit, which may prevent us from winning contracts in the future.

   Our contract with Boeing permits Boeing to cancel our contract if Boeing determines that our financial condition warrants such action and requires us to provide Boeing with equipment, intellectual property, facilities and other resources so as to ensure a smooth transition to a different subcontractor. The Boeing contract is a material contract and its termination could harm our liquidity and would likely impair the value of our outstanding securities.

WE MAY NOT RECEIVE FULL PAYMENT FOR OUR SATELLITES IN THE EVENT OF A FAILURE, AND WE COULD INCUR PENALTIES IF OUR SATELLITES ARE NOT DELIVERED ON SCHEDULE.

   Some of our satellite contracts provide for performance-based payments to be made to us after the satellite is on-orbit. Additionally, some contracts also require us to refund a percentage of payments made prior to launch if performance-based incentives are not achieved. While we intend to procure insurance to indemnify us for incentive payments that are not made in the event of a launch or on-orbit failure, insurance may not be available on economical terms, if at all. In addition, some of our satellite contracts require us to pay penalties in the event that satellites are not delivered on a timely basis. Our failure to receive our incentive payments, or a requirement that we refund amounts previously received or pay delay penalties, would adversely affect revenue recognition, profitability and our liquidity.

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OUR FIXED-PRICE AND COST-REIMBURSABLE CONTRACTS COULD SUBJECT US TO LOSSES AND IMPAIR OUR LIQUIDITY IF WE EXPERIENCE COST OVERRUNS IN THE FUTURE AS WE HAVE IN THE PAST.

   We provide our products and services primarily through fixed-price and cost-reimbursable contracts. Cost overruns may result in losses and, if the magnitude of an overrun or overruns is significant, could impair our liquidity position:

	•	Under fixed-price contracts, our customers pay us for work performed and products shipped without adjustment for the costs we incur in the process. Therefore, we generally bear all of the risk of losses as a result of increased costs on these contracts, although some of this risk may be passed on to subcontractors. Some of our fixed-price contracts provide for sharing of unexpected costs incurred or savings realized within specified limits and may provide for adjustments in price depending on actual contract performance other than costs. We bear the entire risk of cost overruns in excess of the negotiated maximum amount of unexpected costs to be shared. We have experienced significant cost overruns on several of our commercial satellite programs. Any similar overruns in the future could materially impair our liquidity and operations.
	•	Under cost-reimbursable contracts, we are reimbursed for allowable incurred costs plus a fee, which may be fixed or variable. There is no guarantee as to the amount of fee we will be awarded under a cost-reimbursable contract with a variable fee. The price on a cost-reimbursable contract is based on allowable cost incurred, but generally is subject to contract funding limitations. U.S. government regulations require that we notify our customer of any cost overruns or underruns on a cost-plus-fee contract. If we incur costs in excess of the funding limitation specified in the contract, we may not be able to recover those cost overruns.

OUR SUCCESS DEPENDS ON OUR ABILITY TO PENETRATE AND RETAIN MARKETS FOR OUR EXISTING PRODUCTS AND TO CONTINUE TO CONCEIVE, DESIGN, MANUFACTURE AND MARKET NEW PRODUCTS ON A COST-EFFECTIVE AND TIMELY BASIS.

   We anticipate that we will continue to incur expenses to design and develop new products. There can be no assurance that we will be able to achieve the technological advances necessary to remain competitive and profitable, that new products will be developed and manufactured on schedule or on a cost-effective basis or that our existing products will not become technologically obsolete. Our failure to predict accurately the needs of our customers and prospective customers, and to develop products or product enhancements that address those needs, may result in the loss of current customers or the inability to secure new customers. The development of new or enhanced products is a complex and uncertain process that requires the accurate anticipation of technological and market trends. We may experience design, manufacturing, marketing and other difficulties that could delay or prevent the development, introduction or acceptance of new products and enhancements.

THERE CAN BE NO ASSURANCE THAT OUR PRODUCTS WILL BE SUCCESSFULLY LAUNCHED OR OPERATED OR THAT THEY WILL BE DEVELOPED OR WILL PERFORM AS INTENDED.

   Most of the products we develop and manufacture are technologically advanced and sometimes include novel systems that must function under highly demanding operating conditions and are subject to significant technological change and innovation. We have in the past experienced product

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WE OPERATE IN A REGULATED INDUSTRY, AND OUR INABILITY TO SECURE OR MAINTAIN THE LICENSES OR APPROVALS NECESSARY TO OPERATE OUR BUSINESS COULD HAVE A MATERIAL ADVERSE EFFECT ON OUR FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

   Our ability to pursue our business activities is regulated by various agencies and departments of the U.S. government and, in certain circumstances, the governments of other countries. Commercial space launches require licenses from the DoT, and operation of our L-1011 aircraft requires licenses from certain agencies of the DoT, including the Federal Aviation Administration. There can be no assurance that we will be successful in our future efforts to secure and maintain necessary licenses or regulatory approvals. Exports of our products, services and technical information frequently require licenses from the U.S. Department of State. We have a number of international customers and subcontractors. Our inability to secure or maintain any necessary licenses or approvals or significant delays in obtaining such licenses or approvals could negatively impact our ability to compete successfully in international markets.

THE MAJORITY OF OUR CONTRACTS ARE LONG-TERM CONTRACTS, AND OUR REVENUE RECOGNITION AND PROFITABILITY UNDER SUCH CONTRACTS MAY BE ADVERSELY AFFECTED TO THE EXTENT THAT ACTUAL COSTS EXCEED ESTIMATES OR THAT THERE ARE DELAYS IN COMPLETING SUCH CONTRACTS.

   The majority of our contracts are long-term contracts. We generally recognize revenues on long-term contracts using the percentage-of-completion method of accounting, whereby revenue, and therefore profit, is recognized based on actual costs incurred in relation to total estimated costs to complete the contract. Revenue recognition and our profitability, if any, from a particular contract may be adversely affected to the extent that original cost estimates, estimated costs to complete or incentive or award fee estimates are revised, delivery schedules are delayed or progress under a contract is otherwise impeded.

IF OUR SUBCONTRACTORS FAIL TO PERFORM AS EXPECTED, OUR REPUTATION MAY BE DAMAGED, WE MAY EXPERIENCE DELAYS AND LOSE CUSTOMERS AND OUR REVENUES, PROFITABILITY AND CASH FLOW MAY DECLINE.

   We purchase a significant percentage of our product components, structural assemblies and some key satellite components and instruments from third parties. We also occasionally obtain from the U.S. government parts and equipment used in the production of our products or the provision of our services. In addition, we have a sole source for the motors we use on our Pegasus and Taurus launch vehicles, and the interceptor boost vehicles that we are developing for the U.S. Missile Defense Agency under our contract with Boeing. If our subcontractors fail to perform as expected or encounter financial difficulties, we may have difficulty replacing them in a timely or cost effective manner. As a result, we may experience performance delays that could damage our customer relationships and cause our revenues, profitability and cash flow to decline. In addition, negative

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OUR INTERNATIONAL BUSINESS IS SUBJECT TO RISKS. POLITICAL AND ECONOMIC INSTABILITY IN FOREIGN MARKETS MAY HAVE A MATERIAL ADVERSE EFFECT ON OUR OPERATING RESULTS.

   For the fiscal years ended December 31, 2002, 2001 and 2000, direct sales to non-U.S. customers comprised approximately 12%, 9% and 15%, respectively, of our consolidated revenue. Further, at December 31, 2002, approximately 19% of our firm backlog was derived from non-U.S. customers. International contracts are subject to numerous risks, including:

	•	political and economic instability in foreign markets;
	•	restrictive trade policies of the U.S. government and foreign governments;
	•	inconsistent product regulation by foreign agencies or governments;
	•	imposition of product tariffs and burdens;
	•	costs of complying with a wide variety of international and U.S. export laws and regulatory requirements, particularly those relating to complying with the U.S. Foreign Corrupt Practices Act; and
	•	foreign currency and standby letter of credit exposure.

WE FACE SIGNIFICANT COMPETITION IN EACH OF OUR LINES OF BUSINESS, AND MANY OF OUR COMPETITORS POSSESS SIGNIFICANTLY MORE RESOURCES THAN WE DO.

   Many of our competitors are larger and have substantially greater resources than we do. Furthermore, it is possible that other domestic or foreign companies or governments, some with greater experience in the space industry and many with greater financial resources than we possess, could seek to produce products or services that compete with our products or services, including new launch vehicles using new technology which could render our launch vehicles less competitively viable. Some of our foreign competitors currently benefit from, and others may benefit in the future from, subsidies from or other protective measures by their home countries.

THE LOSS OF EXECUTIVE OFFICERS COULD ADVERSELY AFFECT OUR OPERATIONS.

   Our inability to retain our executive officers and other key employees in the future could have an adverse effect on our operations.

THE ANTICIPATED BENEFITS OF FUTURE ACQUISITIONS MAY NOT BE REALIZED.

   From time to time we may evaluate potential acquisitions that we believe would enhance our business. Were we to complete any acquisition transaction, the anticipated benefits may not be fully realized if we are unable to successfully integrate the acquired operations, technologies and personnel into our organization.

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OUR RESTATED CERTIFICATE OF INCORPORATION, OUR BYLAWS, OUR STOCKHOLDER RIGHTS PLAN AND DELAWARE LAW CONTAIN ANTI-TAKEOVER PROVISIONS THAT MAY ADVERSELY AFFECT THE RIGHTS OF OUR STOCKHOLDERS.

   Our board of directors has the authority to issue up to 10 million shares of our preferred stock, $0.01 par value per share, and to determine the price, rights, preferences, and privileges of those shares without any further vote or action by the stockholders. The rights of the holders of our common stock will be subject to, and may be adversely affected by, the rights of the holders of any preferred stock that may be issued in the future. The issuance of preferred stock, while providing desirable flexibility in connection with possible acquisitions and other corporate purposes, could have the effect of making it more difficult for a third party to acquire a majority of our outstanding voting stock.

   In addition to our ability to issue preferred stock without stockholder approval, our charter documents contain other provisions which could have an anti-takeover effect, including:

	•	our charter provides for a staggered board of directors as a result of which only one of the three classes of directors is elected each year;
	•	any merger, acquisition or other business combination that is not approved by our board of directors must be approved by 66 2/3% of voting stockholders;
	•	stockholders cannot act by written consent;
	•	stockholders holding less than 10% of our outstanding voting stock cannot call a special meeting of stockholders; and
	•	stockholders must give advance notice to nominate directors or submit proposals for consideration at stockholder meetings.

   In 1998, we adopted a stockholder rights plan which provides, among other things, that when specified events occur, our stockholders will be entitled to purchase from us a number of shares of common stock equal in value to two times the purchase price, initially equal to $210.00 per share, subject to adjustment upon the occurrence of specified events. Therefore, for example, if our shares of common stock had a current market value of $5.00 and the purchase price was $210.00, a stockholder would be entitled to purchase 84 shares of common stock for $210.00. The stock purchase rights are triggered by the earlier to occur of (1) ten days following the date of a public announcement that a person or group acting in concert has acquired, or obtained the right to acquire, beneficial ownership of 15% or more of our outstanding shares of common stock without the prior consent of our board of directors or (2) ten business days after the commencement of or announcement of an intention to make a tender offer or exchange offer, the consummation of which would result in the acquiring person becoming the beneficial owner of 15% or more of our outstanding shares of common stock. The stock purchase rights would cause substantial dilution to a person or group that attempts to acquire us on terms not approved by our board of directors.

   In addition, we are subject to the anti-takeover provisions of Section 203 of the Delaware General Corporation Law, which restricts the ability of current stockholders holding more than 15% of our voting shares to acquire us without the approval of 66 2/3% of the other stockholders. These provisions could discourage potential acquisition proposals and could delay or prevent a change in control transaction. They could also have the effect of discouraging others from making tender offers for our

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WE MAY NOT HAVE THE ABILITY TO RAISE THE FUNDS NECESSARY TO FINANCE THE REPURCHASE OFFER REQUIRED BY THE INDENTURE GOVERNING OUR SECOND PRIORITY SECURED NOTES, WHICH MAY PREVENT US FROM ENTERING INTO OR CONSUMMATING A CHANGE OF CONTROL TRANSACTION OTHERWISE IN THE BEST INTERESTS OF OUR STOCKHOLDERS.

   In the event of a change of control, under the terms of the indenture governing the terms of our $135 million aggregate principal amount of second priority secured notes due 2006 we are required to offer to repurchase the notes at a premium. If a change of control were to occur, there can be no assurance that we would have sufficient financial resources, or would be able to arrange financing, to pay the purchase price for all notes tendered by holders thereof. In addition, our repurchase of the notes as a result of a change of control may be prohibited or limited by, or constitute an event of default under, the terms of the credit facility or the terms of other agreements which we may enter into from time to time. Because our failure to repurchase the notes would constitute an event of default under the indenture, we may not be able to consummate a change of control transaction, even if the transaction may be in the best interests of our stockholders.

Item 2. Properties

   We lease approximately one million square feet of office, engineering and manufacturing space in various locations in the United States, as summarized in the table below:

   We also own a 125,000 square foot state-of-the-art satellite manufacturing facility that houses our satellite manufacturing, assembly and testing activities in Dulles, Virginia. This facility has been pledged as collateral to our primary lenders.

   We believe that our existing facilities are adequate for our requirements for the foreseeable future.

Item 3. Legal Proceedings

   On July 24, 2002, ORBIMAGE filed a complaint in the U.S. Bankruptcy Court for the Eastern District of Virginia against Orbital alleging, among other things, breach of the satellite system procurement agreement between the two parties, conversion of property, breach of fiduciary duty, fraud and misrepresentation, and civil conspiracy in connection with various transactions among Orbital, ORBIMAGE and our former subsidiary, MacDonald, Dettwiler. The complaint also named two officer/directors of Orbital as defendants in connection with certain of the claims. ORBIMAGE sought $30 million in damages allegedly arising out of the restructuring of the RadarSat-2 data

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   In February 2003, the Bankruptcy Court approved a settlement agreement among ORBIMAGE, Orbital, the Official Committee of Unsecured Creditors of ORBIMAGE, and the two officer/ directors of Orbital named as defendants (the “Settlement Agreement”). The effectiveness of the agreement remains subject to the receipt into escrow of conditional releases from 75% of ORBIMAGE’s bondholders, which Orbital expects to receive in March 2003. The Settlement Agreement provides for mutual releases of all claims, including those claims made by ORBIMAGE in the above-described litigation, to take effect upon launch (whether or not successful) of the OrbView-3 satellite by Orbital and payment by Orbital of $2.5 million to ORBIMAGE. In addition to releases from ORBIMAGE, under the Settlement Agreement and subject to the same conditions described above, Orbital will obtain releases from at least 85% of ORBIMAGE’s Series A Preferred Stockholders and at least 75% of the holders of ORBIMAGE’s senior notes.

   As part of the settlement, if OrbView-3 is not launched by April 30, 2003, and subject to various exceptions for force majeure and commercial reasonableness, Orbital will pay ORBIMAGE launch delay penalties of $16,429 per day. If checkout of OrbView-3 has not occurred within 90 days of launch or July 31, 2003, and subject to various exceptions for force majeure, commercial reasonableness, delays caused by ORBIMAGE or impossibility due to on-orbit failure, Orbital will pay ORBIMAGE checkout delay penalties of $16,429 per day. Delay penalties are capped at $16,429 per day and $5 million in the aggregate. Further detail regarding the settlement terms are more fully described in our Current Report on Form 8-K filed with the SEC on January 21, 2003.

   In August 2002, we received an invoice from our former subsidiary, MacDonald, Dettwiler seeking payment of $5 million alleged to be due and owing under an agreement among Orbital, ORBIMAGE and MacDonald, Dettwiler. In September 2002, we filed a complaint in the United States District Court for the Eastern District of Virginia against MacDonald, Dettwiler seeking a declaratory judgment that we were not obligated to make any payments to MacDonald, Dettwiler. In January, 2003, MacDonald, Dettwiler withdrew its invoice and we dismissed the court action, in each instant without prejudice.

   We are party to certain other litigation or proceedings arising in the ordinary course of business. In the opinion of management, the probability is remote that the outcome of any such litigation or proceedings would have a material adverse effect on our results of operations or financial condition.

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Item 4. Submission of Matters to a Vote of Security Holders

   There was no matter submitted to a vote of our security holders during the fourth quarter of 2002.

Item 4A. Executive Officers of the Registrant

   The following table sets forth the name, age and position of each of the executive officers of Orbital as of March 1, 2003. All executive officers are elected annually and serve at the discretion of the Board of Directors.

   David W. Thompson is a co-founder of Orbital and has been Chairman of the Board and Chief Executive Officer of Orbital since 1982. From 1982 until October 1999, he also served as our President. Prior to founding Orbital, Mr. Thompson was employed by Hughes Electronics Corporation as special assistant to the President of its Missile Systems Group and by NASA at the Marshall Space Flight Center as a project manager and engineer, and also worked on the Space Shuttle’s autopilot design at the Charles Stark Draper Laboratory. Mr. Thompson is a Fellow of the American Institute of Aeronautics and Astronautics, the American Astronautical Society and the Royal Aeronautical Society and was recently elected to the U.S. National Academy of Engineering.

   James R. Thompson (who is not related to David W. Thompson), has been Vice Chairman, President and Chief Operating Officer since April 2002, and has been President and Chief Operating Officer since October 1999. He has been a director of the Company since 1992. He has been Acting General Manager of our Electronic Systems Group since 2001. From 1993 until October 1999, Mr. Thompson served as Executive Vice President and General Manager/ Launch Systems Group. Mr. Thompson was Executive Vice President and Chief Technical Officer of Orbital from 1991 to 1993. He was Deputy Administrator of NASA from 1989 to 1991. From 1986 until 1989, Mr. Thompson was Director of NASA’s Marshall Space Flight Center. Mr. Thompson was Deputy Director for Technical Operations at Princeton University’s Plasma Physics Laboratory from 1983 through 1986. Before that, he had a 20-year career with NASA at the Marshall Space Flight Center. He is a director of SPACEHAB Incorporated.

   Garrett E. Pierce has been Vice Chairman and Chief Financial Officer since April 2002, and was Executive Vice President and Chief Financial Officer since August 2000. He has been a director of the Company since August 2000. From 1996 until August 2000, he was Executive Vice President

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   Ronald J. Grabe has been Executive Vice President and General Manager/ Launch Systems Group since 1999. From 1996 to 1999, he was Senior Vice President and Assistant General Manager of the Launch Systems Group, and Senior Vice President of the Launch Systems Group since 1995. From 1994 to 1995, Mr. Grabe served as Vice President for Business Development in the Launch Systems Group. From 1980 to 1993, Mr. Grabe was a NASA astronaut during which time he flew four Space Shuttle missions and was lead astronaut for development of the International Space Station.

   John M. Danko has been Executive Vice President and General Manager/ Space Systems Group since January 2003. He served as Senior Vice President and Acting General Manager/ Space Systems Group from January 2002 until January 2003. From 1998 until the end of 2001, he served as Deputy General Manager/ Space Systems Group. He previously was in charge of our Technical Services Division, a position he had held since 1989 at one of our predecessor companies. Mr. Danko held various positions with OAO Corporation from 1975 until 1989, including general manager of the aerospace division when it was formed in 1980.

   Antonio L. Elias has been Executive Vice President and General Manager/ Advanced Programs Group since October 2001, and was Senior Vice President and General Manager/ Advanced Programs Group since August 1997. From January 1996 until August 1997, Dr. Elias served as Senior Vice President and Chief Technical Officer of Orbital. From May 1993 through December 1995 he was Senior Vice President for Advanced Projects and was Senior Vice President/ Space Systems Division from 1990 to April 1993. He was Vice President/ Engineering of Orbital from 1989 to 1990 and was Chief Engineer from 1986 to 1989. From 1980 to 1986, Dr. Elias was an Assistant Professor of Aeronautics and Astronautics at Massachusetts Institute of Technology. He was elected to the National Academy of Engineering in 2001.

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PART II

Item 5. Market for Registrant’s Common Equity and Related Stockholder Matters

   On March 5, 2003, there were 1,639 Orbital stockholders of record.

   Our common stock trades on the New York Stock Exchange (“NYSE”) under the symbol ORB. The range of high and low sales prices of Orbital common stock, as reported on the NYSE, was as follows:

   We have never paid any cash dividends on our common stock, nor do we anticipate paying cash dividends on our common stock at any time in the foreseeable future. Moreover, we are prohibited from paying cash dividends under our credit facility.

   The transfer agent for our common stock and the warrant agent for our common stock warrants that are listed on the New York Stock Exchange is:

	EquiServe Trust Company, N.A.
	P.O. Box 43010
	Providence, RI 02940
	Telephone: (781) 575-3170
	www.equiserve.com

Recent Sales of Unregistered Securities; Use of Proceeds from Registered Securities

   In August 2002, we issued 10,000 shares of our common stock to Keybank National Association pursuant to its exercise of warrants dated January 15, 2000. The warrants were issued pursuant to our then primary credit facility. The company received $100 in proceeds from the warrant exercise. The shares were issued pursuant to Section 4(2) of the Securities Act based upon representations made by the purchaser as to its investment intent and sophistication in purchasing the shares. The shares were not sold by any form of general solicitation.

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Item 6. Selected Financial Data

Selected Consolidated Financial Data

   The selected consolidated financial data of the company for the years ended December 31, 2002, 2001, 2000, 1999 and 1998 have been derived from the company’s audited consolidated financial statements. This information should be read in conjunction with the 2002, 2001 and 2000 consolidated financial statements and the related notes thereto appearing elsewhere in this Annual Report on Form 10-K. Certain reclassifications have been made to the prior period financial statements to conform to the presentation used in the December 31, 2002 consolidated financial statements.

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Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Overview

   With the exception of historical information, the matters discussed below under the headings “Consolidated Results of Operations for the Years Ended December 31, 2002, 2001 and 2000,” “Liquidity and Capital Resources” and elsewhere in this Annual Report include forward-looking statements that involve risks and uncertainties, many of which are beyond our control. Readers should be cautioned that a number of important factors, including those identified above in “Item 1 — Special Note Regarding Forward-Looking Statements” and “Risks Related to Our Business and Our Industry” may affect actual results and may cause actual results to differ materially from those anticipated or expected in any forward-looking statement.

   We develop and manufacture small space systems for commercial, civil government and military customers. Our primary products are spacecraft and launch vehicles, including low-orbit, geosynchronous and planetary spacecraft for communications, remote sensing, scientific and military missions; ground-and air-launched rockets that deliver satellites into orbit; and suborbital rockets that are used as interceptor boost and target vehicles. We also offer space-related technical services to government agencies and develop and build satellite-based transportation management systems for public transit agencies and private vehicle fleet operators.

Critical Accounting Policies and Significant Estimates

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

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

	•	Our revenue is derived primarily from long-term contracts. Revenues on cost-reimbursable contracts are recognized to the extent of costs incurred plus a proportionate amount of fee earned. Revenues on long-term fixed-price contracts are generally recognized using the percentage-of-completion method of accounting. Such revenues are recorded based on the percentage that costs incurred to date bear to the most recent estimates of total costs to complete each contract. Estimating future costs and, therefore, revenues and profits, is a process requiring a high degree of management judgment, including management’s assumptions regarding future operations of the company as well as general economic conditions. In the event of a change in total estimated contract cost or profit, the cumulative effect of such change is recorded in the period the change in estimate occurs. Frequently, the period of performance of a contract extends over a long period of time and, as such, revenue recognition and our profitability from a particular contract may be adversely affected to the extent that estimated cost to complete or incentive or award fee estimates are revised, delivery schedules are delayed,

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

Certain contracts include incentive provisions for increased or decreased revenue and profit based on actual performance against established targets. Incentive and award fees are included in estimated contract revenue at the time the amounts can be reasonably determined and are reasonably assured based on historical experience and other objective criteria. Should we fail to perform satisfactorily under such contracts, previously recognized revenues could be reversed and/or future period revenues could be reduced.

	•	Inventory is stated at the lower of cost or estimated market value. Estimated market value is determined based on assumptions about future demand and market conditions. If actual market conditions are less favorable than those previously projected by management, inventory write-downs may be required.
	•	We self-construct some of our ground and airborne support equipment and special test equipment utilized in the manufacture, production and delivery of some of our products. We capitalize direct costs incurred in constructing such equipment and certain allocated indirect costs. Recovery of these capitalized costs is subject to the continuation of certain of our long-term contracts and could be adversely impacted by technological changes and innovation.
	•	We record a liability in connection with various warranty obligations. Our warranty obligations are affected by product failure rates and material usage and service delivery costs incurred in correcting a product failure. Should actual product failure rates, material usage or service delivery costs differ from our estimates, revisions to the estimated warranty liability would be required, resulting in additional income statement charges.
	•	We record a valuation allowance to reduce our deferred tax assets to the amount that is more likely than not to be realized. In the event we were to determine that we would be able to realize our deferred tax assets in the future in excess of our net recorded amount, an adjustment to the deferred tax valuation allowance would increase income in the period such determination is made.
	•	We use the equity method of accounting for affiliates that we have the ability to significantly influence but not control. In accordance with the equity method of accounting, we record our allocated share of the affiliate’s income or losses. We continue to recognize equity losses of an affiliate even if such losses exceed our book value of such affiliate, to the extent we are otherwise committed to provide additional funding to such affiliate.

Consolidated Results of Operations for the Years Ended December 31, 2002, 2001 and 2000

   Revenues – Our consolidated revenues were $551.6 million, $415.2 million and $379.5 million in 2002, 2001 and 2000, respectively. Consolidated revenues increased in 2002 primarily as a result of revenue growth in our launch vehicle and satellite segments, discussed more fully in “Segment Results” below. Consolidated revenues increased in 2001 primarily as a result of new launch vehicle contracts and new and existing electronic systems contracts. Consolidated revenues in 2000 included $12.1 million from sales to our unconsolidated affiliates, ORBCOMM Global, L.P.

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   Gross Profit – Our consolidated gross profit was $91.4 million (16.6% of revenues), $27.8 million (6.7% of revenues) and $35,000 in 2002, 2001 and 2000, respectively. Gross profit is affected by a number of factors, including the mix of contract types and costs incurred thereon in relation to revenues recognized. Such costs include the costs of personnel, materials, subcontracts and overhead. Gross profit in 2002 improved significantly compared to gross profit in 2001 as a result of increased revenues, the absence in 2002 of certain charges recorded in 2001 and a reduction in contract losses in 2002 in our satellite manufacturing business. Gross profit in 2001 was adversely affected by a $20.7 million charge in the fourth quarter of 2001 to write down inventory related to the OrbView-3 satellite and to accrue for the expected remaining costs to complete this contract and by $4.0 million of other contract-related charges. Gross profit in 2001 was also adversely impacted by cost overruns and contract losses related to certain other satellite construction contracts, although these losses were not as large as similar contract losses in 2000. These charges and contract losses in 2001 were partially offset by a $13.0 million favorable revenue and gross profit adjustment as a result of a contract settlement reached with the National Aeronautics and Space Administration (“NASA”) that is discussed below. Gross profit in 2000 was adversely affected by significant cost overruns and contract losses related to a few major satellite contracts, including the company’s procurement contract with ORBIMAGE. Costs related to the termination of an electronic systems contract also contributed to the lower gross profit in 2000.

   As discussed more fully in Note 3 to our consolidated financial statements, we had a contract with NASA to construct and test several X-34 reusable rocketplanes. NASA terminated this contract for convenience in March 2001, prior to the issuance of the 2000 financial statements. As a result of the contract termination, in the fourth quarter of 2000 we recorded an asset impairment charge of $15.9 million to write down assets unique to this contract, and we recorded a $3.4 million provision for potentially uncollectible receivables. In August 2001, we received a $10.0 million provisional settlement payment from NASA, and we reversed the $3.4 million provision for uncollectible receivables in the second quarter of 2001. In January 2002, NASA and Orbital settled and closed out the contract for an additional payment of $13.0 million to us. Accordingly, we recorded a favorable revenue and net income adjustment of $13.0 million ($0.34 per common and diluted share) in the fourth quarter of 2001.

   Research and Development Expenses – Research and development expenses represent our self-funded product research and development activities and exclude direct customer-funded development activities. Research and development expenses were $4.7 million (0.9% of revenues), $7.7 million (1.9% of revenues) and $10.1 million (2.7% of revenues) in 2002, 2001 and 2000, respectively. Research and development expenses in 2002 decreased compared to 2001 primarily due to completion of development activity on two advanced programs and lower expenditures on certain satellite programs, offset partially by increased development activity on a modified Taurus launch vehicle. Research and development expenses in 2001 and 2000 related primarily to the development of improved launch vehicles and satellites.

   Selling, General and Administrative Expenses – Selling, general and administrative expenses were $57.7 million (10.5% of revenues), $61.6 million (14.8% of revenues) and $68.5 million (18.1% of revenues) in 2002, 2001 and 2000, respectively. Selling, general and administrative expenses include the costs of marketing, advertising, promotional and other selling expenses, as well as the costs of

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   Amortization of Goodwill – In accordance with Statement of Financial Accounting Standards (“SFAS”) No. 142, which was effective for us beginning in 2002, goodwill and other intangible assets with indefinite lives are no longer amortized, but are reviewed at least annually for impairment. Accordingly, the amortization of goodwill was discontinued as of January 1, 2002. Goodwill amortization expense was $6.0 million and $5.7 million for 2001 and 2000, respectively.

   Provision for Doubtful ORBCOMM Accounts – As more fully discussed in our consolidated financial statements, we recorded a $53.7 million charge to write down ORBCOMM receivables to their estimated realizable value in 2000.

   Asset Impairment Charges – In 2000, we recorded a $15.9 million asset impairment charge related to the termination of the X-34 program as discussed above.

   Litigation-Related Settlements – In the third and fourth quarters of 2001, we agreed to settle several disputes that were the subject of arbitration proceedings. The company recorded charges totaling $5.4 million in 2001 for these litigation-related settlements. In 2000, an $11.5 million charge was recorded in connection with the July 2000 settlement of a class-action lawsuit against the company.

   Interest Expense – Interest expense, before deducting capitalized interest, was $17.5 million, $21.7 million and $25.8 million for 2002, 2001 and 2000, respectively. No interest was capitalized in 2002 or 2001; however, $1.8 million was capitalized in 2000. Interest expense included $3.1 million and $3.5 million of amortization of debt issuance costs in 2002 and 2001, respectively. Interest expense in 2002 also included $1.4 million of amortization of debt discount related to our $135 million notes issued in August 2002. Excluding amortization of debt issuance costs and debt discount, interest expense decreased $5.2 million in 2002 as compared to 2001 primarily due to one-time fees incurred in 2001 related to our prior credit facilities and due to lower average borrowings in 2002, partially offset by the impact of higher interest rates on our borrowings in 2002 as compared to 2001.

   Interest expense in 2001 decreased compared to 2000 as a result of lower borrowings in 2001, partially offset by the one-time fees incurred in 2001 related to our prior credit facilities.

   Other Income, Net – Other income, net, was $2.4 million, $5.5 million and $5.1 million for 2002, 2001 and 2000, respectively. Interest earnings on cash equivalents, short-term investments and realized gains and losses on investments included in other income was $1.0 million, $1.4 million, and $3.2 million for 2002, 2001, and 2000, respectively. Interest income decreased in 2002 as compared to 2001, and in 2001 as compared to 2000, as a result of smaller average investments and lower

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   Allocated Share of Losses of Affiliates – We did not record any income or loss from unconsolidated affiliates in 2002. The allocated share of losses of unconsolidated affiliates in 2001 and 2000 was as follows (in thousands):

(1)	We accounted for our limited partnership interest in ORBCOMM using the equity method of accounting through the second quarter of 2000. As a result of ORBCOMM’s Chapter 11 filing in September 2000, we wrote off our $56.9 million investment in ORBCOMM in 2000 and, accordingly, we ceased recognizing equity losses for ORBCOMM. ORBCOMM’s liquidating plan of reorganization became effective in the fourth quarter of 2001. In connection with confirmation of the reorganization plan, we contributed approximately 1.7 million shares of our common stock to the ORBCOMM estate and recorded a $6.5 million charge for the fair value of such shares.
(2)	As more fully described in Note 5 to the consolidated financial statements, through June 30, 2001 we recognized 100% of ORBIMAGE’s losses, including preferred stock dividends, in allocated share of losses of affiliates in the statements of operations. No such losses were recognized in 2002 or in the second half of 2001.

   Provision for Income Taxes – In 2002 we recorded a provision for income taxes of $265,000 related to state income taxes. We did not record a provision for U.S. federal income taxes in 2002 because we utilized prior net operating losses to offset all current U.S. federal taxable income. We did not record an income tax benefit in 2001 or 2000 related to the losses for those periods because such benefit could not be reasonably assured from future operating results. In 2000, we recorded a $9.9 million income tax provision to provide a full valuation allowance for our deferred tax assets. Valuation allowances are used to reduce net deferred tax assets to the amount considered more likely than not to be realized.

   Income (Loss) from Continuing Operations – Our consolidated income (loss) from continuing operations was $13.7 million, ($95.6 million), and ($313.5 million) for 2002, 2001 and 2000, respectively. Results from continuing operations in 2002 reflected a $109.3 million improvement relative to 2001. This improvement was primarily due to improved operating results and lower interest expense in 2002, in addition to the absence of allocated share of losses of an affiliate, which totaled $26.5 million in 2001. The decrease in losses from continuing operations from 2000 to 2001 is primarily attributable to ORBCOMM-related charges described above which were recorded in 2000.

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   Discontinued Operations – During 2001 and 2000, we sold various equity investments, divisions and subsidiaries. In 2001, we sold Magellan Corporation (“Magellan”), our interest in Navigation Solutions LLC (“NavSol”), our sensors systems division (“Sensors”), and our entire remaining interest in MacDonald, Dettwiler and Associates Ltd. (“MDA”). In 2000, we sold our Fairchild Defense electronics business unit (“Fairchild”), and MDA completed an initial public offering of common stock. These transactions resulted in net gains of $0.9 million, $114.7 million and $39.7 million in 2002, 2001 and 2000, respectively, reported in discontinued operations. The losses from operations related to these businesses, also reported in discontinued operations, were $0.2 million and $4.4 million in 2001 and 2000, respectively.

   Cumulative Effect of Change in Accounting – In connection with our adoption of SFAS No. 142, “Goodwill and Other Intangible Assets, “ we recorded a $13.8 million impairment loss in our electronic systems segment to write off the remaining net book value of goodwill in this segment. The impairment loss was determined based on a comparison of the fair value of our electronic systems reporting unit to its carrying value, including goodwill. The fair value of our electronic systems reporting unit, and the resulting implied fair value of goodwill, were estimated after consideration of letters of interest in respect of purchase offers received by us in early 2002 during our attempts to sell the electronic systems business. The impairment loss was recorded as a January 1, 2002 cumulative effect of a change in accounting.

   Net Income (Loss) – Our net income for 2002 was $0.8 million, or $0.02 per share, as compared to $19.0 million, or $0.49 per share, for 2001. The decrease in net income was attributable to the $109.3 million increase in income from continuing operations as discussed above offset by the impact of certain significant factors in both 2001 and 2002. Net income for 2002 included $13.7 million income from continuing operations in addition to $0.9 million of income related to previously discontinued operations, offset by the $13.8 million goodwill impairment charge discussed above. Net income for 2001 included a $95.6 million loss from continuing operations and $114.6 million of income from discontinued operations. Our net loss for 2000 was $278.2 million, which reflected a loss of $313.5 million from continuing operations and income from discontinued operations of $35.3 million.

Segment Results

   Our products and services are grouped into three reportable segments: (i) launch vehicles and advanced programs, (ii) satellites and related space systems and (iii) electronic systems. All other activities of the company, as well as consolidating eliminations and adjustments, are reported in corporate and other. The following tables summarize revenues and income (loss) from operations from our reportable business segments and corporate and other (in thousands):

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   Launch Vehicles and Advanced Programs – Revenues in this segment increased in 2002 as compared to 2001 due primarily to growth in revenues on our missile defense boost vehicle program under a multi-year contract with The Boeing Company. This contract generated $119.4 million and $18.5 million of revenues in 2002 and 2001, respectively. Additionally, continuing progress on several suborbital programs and a new Taurus launch vehicle contract for an international customer contributed to the increase in launch vehicle revenues, offset partially by a reduction in Pegasus launch vehicle revenues. These increases were partially offset by a reduction in advanced programs revenues in 2002 due primarily to a $13.0 million favorable revenue and income adjustment recorded in 2001 related to the X-34 program, discussed above in “Consolidated Results of Operations for the Years Ended December 31, 2002, 2001 and 2000.”

   Revenues in this segment increased in 2001 as compared to 2000 due to a $23.8 million increase in revenues from launch vehicles that was partly offset by a $1.5 million decrease in revenues from advanced programs. The increase in launch vehicle revenues was largely attributable to increased suborbital business, including $18.5 million in revenue attributable to the missile defense boost vehicle program mentioned above and an increase in revenues on the Supersonic Sea Skimming Target (SSST) development program for the U.S. Navy, which contributed $17.6 million in revenue in 2001, or $15.1 million more than in the prior year. Offsetting these 2001 increases in launch vehicle revenues was the absence of revenue on the ORBIMAGE and ORBCOMM contracts in 2001, which totaled $7.0 million in 2000, and a slowdown in our Minotaur space launch program with the U.S. Air Force. Revenues from advanced programs decreased in 2001 as compared to 2000 primarily as a result of the termination for convenience of the X-34 program in March 2001.

   Operating income for launch vehicles and advanced programs increased in 2002 as compared to 2001 primarily attributable to the operating profit contributed by the missile defense boost vehicle program, in addition to increases in operating income in 2002 on several other programs and the absence of $4.0 million in other contract-related charges recorded in 2001. These increases were offset in part by reductions in our Pegasus space launch services activity and by cost growth on our SSST program. Further, operating income for advanced programs decreased in 2002 as compared to 2001 primarily due to the X-34 adjustments recorded in 2001 discussed above, partially offset by lower research and development expenses in 2002 and the absence of a litigation settlement charge recorded in 2001. Additionally, the absence of goodwill amortization in 2002, which was $1.5 million in 2001, contributed to an improvement in operating income.

   Operating income from launch vehicles and advanced programs increased in 2001 as compared to 2000 primarily due to the X-34 adjustments recorded in 2000 and 2001 discussed above. Launch vehicle operating income was higher in 2001 as compared to 2000 primarily due to profits on

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   Satellites and Related Space Systems – Revenues from satellites and related space systems increased in 2002 as compared to 2001 due to increases in all of our major satellite and related space systems product lines. The largest increase was from our geosynchronous communications satellite product line with revenues increasing from $118.5 million in 2001 to $135.2 million in 2002. The increase was primarily attributable to production work on three new satellite orders received in late 2001, offset by lower revenues in 2002 from the N-STARc contract that was completed in the third quarter of 2002 as well as lower revenues from two BSAT satellites that were completed in 2001. In our science and technology satellite product line, revenues increased $1.6 million primarily due to production work on a new scientific satellite contract received in early 2002, offset partially by a decrease in revenue due to completion of a scientific satellite for NASA. Our technical services product line and other revenues increased by $6.3 million, primarily due to work performed in 2002 on a U.S. government research contract.

   Revenues from satellites and related space systems decreased in 2001 as compared to 2000, in spite of the significant increase in revenues attributable to our geosynchronous communications satellite product line, which increased from $90.0 million in 2000 to $118.5 million in 2001. Revenues from our other product lines decreased by $40.3 million from 2000 to 2001 due in part to the completion of the construction phase in 2000 of a scientific satellite for NASA, the absence in 2001 of ORBCOMM and ORBIMAGE procurement contract revenues, which totaled $10.5 million in 2000, and an approximately $8.0 million decrease in revenues from our technical services business.

   The operating results in our satellites and related space systems segment improved from an operating loss of $47.9 million in 2001 to an operating profit of $5.8 million in 2002. This improvement was due to a number of factors. First, operating results improved due to a reduction in losses and non-recurring development and production costs in our geosynchronous satellite product line, primarily associated with the N-STARc and BSAT geosynchronous satellite programs. The launch failure of the BSAT-2b satellite in 2001 contributed to the operating loss in the geosynchronous satellite product line in 2001. We received insurance proceeds in connection with the launch failure; however, these proceeds were recorded in 2001 in Other Income, Net, as discussed above in “Other Income, Net” under “Consolidated Results of Operations for the Years Ended December 31, 2002, 2001, and 2000.” Second, our science and technology satellite product line experienced significant improvement primarily driven by the absence in 2002 of a loss recorded in connection with the launch failure of the OrbView-4/ QuikTOMS mission in 2001 and a significant reduction in charges related to the OrbView-3 program. In the fourth quarter of 2002 we recorded a $2.5 million charge for the expected remaining costs to complete the OrbView-3 satellite, and in the fourth quarter of 2001 we recorded a $20.7 million charge to write down inventory and accrue for the expected remaining costs to complete this satellite. Third, our technical services product line improved in 2002 as compared to 2001 largely due to the sale of satellite inventory that had previously been fully reserved. Finally, beginning in 2002, goodwill amortization was no longer recorded, resulting in an operating profit improvement of $3.2 million.

   The operating loss from satellites and related space systems increased in 2001 as compared to 2000 primarily as a result of the previously mentioned $20.7 million charge in the fourth quarter of 2001 related to OrbView-3. Excluding the 2001 OrbView-3 charge, the operating loss from satellites and related space systems decreased by $16.3 million in 2001 as compared to 2000 largely due to the completion of certain satellite contracts for which we had experienced significant cost overruns in

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   Electronic Systems – Revenue from electronic systems in 2002 was approximately the same as revenue from this segment in 2001. Revenue earned in 2002 on new contracts awarded in late 2001 and early 2002 was offset by decreased revenue in 2002 from various existing contracts.

   Revenues from electronic systems increased in 2001 as compared to 2000 primarily as a result of new contracts won in 2001.

   Operating income from electronic systems decreased $1.3 million in 2002 as compared to 2001 primarily as a result of charges totaling $2.2 million in 2002 to write down excess inventory offset in part by the absence in 2002 of goodwill amortization, which was $1.3 million in 2001.

   Operating income from electronic systems increased in 2001 as compared to 2000 due primarily to a decrease in product development costs in 2001 and contract termination costs incurred in 2000.

   Corporate and Other – Revenue adjustments in corporate and other in all three years include the elimination of intercompany revenues, and in 2000 include adjustments to properly report revenues on certain contracts that are performed by more than one business unit. Such eliminations and adjustments were approximately the same in 2002 as compared to 2001. The reduction in such eliminations and adjustments in 2001 as compared to 2000 was primarily attributable to a reduction of intercompany revenues and the absence in 2001 of consolidation adjustments related to the ORBIMAGE, ORBCOMM and X-34 contracts.

   Corporate and other expenses include corporate general and administrative activities that are not allocated to the operating segments, as well as consolidating adjustments for intercompany contracts. Corporate and other expenses in 2001 included a $4.3 million provision for potentially unrecoverable amounts related to the OrbView-4 satellite construction program and a $4.9 million provision for unoccupied office space and facility sublease losses. Corporate and other expenses in 2000 included a $2.7 million write-off related to ORBIMAGE administrative services accounts receivable, a $4.9 million write-off of other assets and a $3.5 million provision for unoccupied office space and facility sublease losses. Corporate and other expenses for 2000 also included consolidating entries related to the ORBCOMM and ORBIMAGE contracts. Additionally, corporate and other expenses for 2001 and 2000 included corporate general and administrative expenses attributed to discontinued operations.

Liquidity and Capital Resources

   Cash Flows from Operating Activities – We reported a $28.8 million net use of cash from continuing operations in 2002, as compared to a $73.0 million net use of cash from continuing operations in 2001 and a $1.2 million net increase in cash provided by continuing operations in 2000. The $28.8 million net use of cash in continuing operations in 2002 was primarily attributable to cash used to fund our operations together with a reduction in accounts payable, largely attributable to the payment of a $48.8 million vendor financing obligation. The $73.0 million of cash used in continuing operations in 2001 was primarily attributable to our operating loss and a $39.5 million increase in receivables. In 2000, cash used to fund our operating loss was offset largely by a reduction of receivables and an increase in payables and accrued expenses.

   Cash Flows from Investing Activities – Our investing activities used $15.3 million in 2002 for capital expenditures. Our investing activities provided $237.0 million and $42.7 million of cash during 2001 and 2000, respectively, primarily due to the sales of assets and subsidiary equity in those two years. In 2001, we sold our entire remaining interest in MDA, our interests in Magellan and

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   Cash Flows from Financing Activities – Our financing activities provided approximately $24.4 million in 2002, consisting of $145.5 million in net proceeds from issuances of long-term debt and warrants and $7.6 million from issuances of common stock, less $128.7 million in principal payments on long-term debt. The net proceeds from issuances of long-term debt and warrants reflect $123.1 million in net proceeds from our sale of new notes and warrants in August 2002 and $22.4 million in net proceeds from a term loan, discussed below. Principal payments in 2002 on long-term debt consisted primarily of the prepayment of a $25.0 million term loan and our $100.0 million 5% subordinated convertible notes, which were due in 2002, and $3.7 million of principal payments on capital leases and other debt. We received $7.6 million in 2002 from the issuance of shares of common stock under our employee stock purchase plan and the exercise of stock options and warrants.

   Our financing activities used $137.9 million and $86.6 million of cash in 2001 and 2000, respectively. During 2001, we repaid our prior primary credit facility using cash proceeds from the sales of businesses as required under the terms of that credit facility. At December 31, 2001, no borrowings were outstanding under that facility, which was formally terminated in January 2002. The primary use of cash for financing activities during 2000 was for repayments of our then primary credit facility and the repayment of an advance from a joint venture partner.

   On March 1, 2002, we entered into a three-year credit facility with Foothill Capital Corporation (“Foothill”) as arranger and agent. The facility provided for total borrowings of up to $60.0 million, including (i) a $25.0 million term loan (the “Term Loan”) and (ii) a $35.0 million revolver (the “Revolver”), of which up to $30.0 million could be available for borrowing based on our billed and unbilled receivables. The Term Loan had an interest rate equal to the prime rate publicly announced from time to time by Wells Fargo Bank, National Association (the “Prime Rate”) plus 6%, but not less than 11%. Borrowings under the Revolver accrue interest at a rate equal to the Prime Rate plus 2.25%, but not less than 7%. Upon closing the facility, we borrowed the entire $25.0 million available under the Term Loan, which provided $22.4 million in net proceeds after deducting transaction fees and expenses. We prepaid the entire Term Loan in August 2002 using proceeds from our August 2002 $135.0 million financing discussed below. As of December 31, 2002, there were no borrowings under the Revolver, although approximately $21.3 million of the amount available for borrowing was reserved under letters of credit, foreign exchange forward contracts or other arrangements. Accordingly, $13.7 million of the Revolver was available for borrowing as of December 31, 2002. The borrowings under the facility are collateralized by all of our assets.

   On August 22, 2002, we raised gross proceeds of $135.0 million through the sale of 135,000 units, each consisting of $1,000 aggregate principal amount of our 12% second priority secured notes due 2006 (the “Notes”) and one warrant to purchase up to 122.23 shares of our common stock at an exercise price of $3.86 per share. We used the $123.1 million net proceeds from the offering, together with available cash, to prepay the $25.0 million Term Loan and to repay our $100.0 million 5% subordinated convertible notes due 2002. Interest on the Notes is payable semi-annually each February 15 and August 15. The Notes are subordinated in right of payment to our existing and future senior indebtedness, including indebtedness under our $35.0 million Revolver described above.

   Both the Revolver and the indenture governing the Notes (the “Indenture”) contain covenants limiting our ability to, among other things, incur more debt, redeem or repurchase Orbital stock,

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   Orbital’s 100% owned subsidiary, Orbital International, Inc., has fully and unconditionally guaranteed the Notes. Orbital International, Inc. had no independent assets or operations during the three years ended December 31, 2002. No other subsidiary of Orbital has guaranteed the Notes.

   Available Cash and Future Funding – At December 31, 2002, we had $43.4 million of unrestricted cash and cash equivalents. Management believes that available cash, cash expected to be generated from operations and borrowing capacity under the Revolver will be sufficient to fund our operating and capital expenditure requirements in the foreseeable future. However, there can be no assurance that this will be the case. Our ability to borrow additional funds is limited by the terms of our outstanding debt. Additionally, significant unforeseen events such as termination of major orders, or late delivery or failure of launch vehicle or satellite products could adversely affect our liquidity and results of operations.

   Debt and Lease Maturities – The following summarizes Orbital’s obligations associated with debt and leases at December 31, 2002, and the effect such obligations are expected to have on our liquidity and cash flow in future periods (in millions):

	(1)	Assumes our second priority secured notes are paid at full par value in 2006.

   Letters of Credit and Performance Bonds – Occasionally, certain contracts require us to post performance bonds or letters of credit supporting our performance and refund obligations under the contracts. We had $24.9 million of standby letters of credit outstanding at December 31, 2002, of which $10.2 million was collateralized by our restricted cash and cash equivalents and $14.7 million was issued under the Revolver. If circumstances were to prevail in the future whereby we were unable to issue performance bonds or letters of credit in accordance with our contractual requirements, the customer might be entitled to withhold future payments or terminate its contract with us and this could result in charges or other adverse effects on our financial condition.

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New Accounting Pronouncements

   In April 2002, SFAS No. 145, “Rescission of FASB Statements 4, 44 and 64, Amendment of FASB Statement No. 13 and Technical Corrections” was issued. Under SFAS No. 145, gains and losses related to the extinguishment of debt should no longer be segregated on the income statement as extraordinary items. Instead, such gains and losses should be included as a component of income from continuing operations. The provisions of SFAS No. 145 are effective for fiscal years beginning after May 15, 2002, with early adoption encouraged. We adopted SFAS No. 145 effective July 1, 2002. There was no material impact on our financial statements as a result of the adoption.

   In November 2002, FASB Interpretation No. 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others, an Interpretation of FASB Statements No. 5, 57 and 107 and Rescission of FASB Interpretation No. 34,” (“FIN 45”) was issued. FIN 45 clarifies the requirements of SFAS No. 5, “Accounting for Contingencies,” relating to guarantors’ accounting for, and disclosure of, the issuance of certain types of guarantees. The disclosure provisions of FIN 45 are applicable to interim or annual periods that end after December 15, 2002, and as such have been incorporated into our December 31, 2002 financial statements. The provisions for initial recognition and measurement under FIN 45 are effective on a prospective basis for guarantees that are issued or modified after December 31, 2002. Management believes that the initial recognition and measurement provisions under FIN 45 will not have a material impact on our financial statements.

   In December 2002, SFAS No. 148, “Accounting for Stock-Based Compensation — Transition and Disclosure, an amendment of FASB Statement No. 123,” was issued. SFAS No. 148 amended SFAS No. 123 to provide alternative methods of transition for a voluntary change to the fair value-based method of accounting for stock-based employee compensation. In addition, SFAS No. 148 amends the disclosure requirements of SFAS No. 123 related to disclosures about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. The disclosure provisions of SFAS No. 148 are applicable to interim or annual periods that end after December 15, 2002, and as such have been incorporated into our December 31, 2002 financial statements.

Item 7A. Quantitative and Qualitative Disclosures About Market Risk

   We do not have significant exposure to interest rate changes, commodity price changes, foreign currency fluctuation or similar market risks, although we do enter into forward exchange contracts to hedge against specific foreign currency fluctuations on specific receivables denominated in Japanese Yen. Accordingly, we are subject to off-balance sheet market risk for the possibility that future changes in market prices may make the forward exchange contracts less valuable. At December 31, 2002, we had foreign currency forward exchange contracts that expire in 2003 to sell a total of 570.5 million Japanese Yen for $4.7 million. The market value of these contracts was $4.5 million as of December 31, 2002.

   The fair market value of our $135.0 million 12% second priority secured notes due 2006 was estimated at approximately $118.8 million at December 31, 2002, based on market trading activity.

   The company has a deferred compensation plan for senior managers and executive officers, with a total liability balance of $4.2 million at December 31, 2002. This liability is subject to fluctuation based upon the market value of underlying securities.

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Item 8. Financial Statements and Supplementary Data

INDEX TO FINANCIAL STATEMENTS

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REPORT OF INDEPENDENT ACCOUNTANTS

To the Board of Directors and
           Stockholders of Orbital Sciences Corporation:

   In our opinion, based on our audits and the report of other auditors, the accompanying consolidated balance sheets and the related consolidated statements of operations, of stockholders’ equity and of cash flows present fairly, in all material respects, the financial position of Orbital Sciences Corporation and its subsidiaries at December 31, 2002 and 2001, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2002 in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the company’s management; our responsibility is to express an opinion on these financial statements based on our audits. We did not audit the financial statements of ORBCOMM Global, L.P., an equity affiliate, which statements reflect total revenues of $7,797,000, and net losses of $543,227,000 for the year ended December 31, 2000. Those statements were audited by other auditors who have ceased operations and whose report thereon has been furnished to us, and our opinion expressed herein, insofar as it relates to the amounts included for ORBCOMM Global, L.P., for the year ended December 31, 2000, is based solely on the report of the other auditors. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States of America, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits and the report of other auditors provide a reasonable basis for our opinion.

   As discussed in Note 1 to the consolidated financial statements, in 2002 the company changed its method of accounting for goodwill to conform to Statement of Financial Accounting Standards No. 142, “Goodwill and Other Intangible Assets.”

/s/ PricewaterhouseCoopers LLP

McLean, Virginia

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THE FOLLOWING REPORT IS A COPY OF A REPORT PREVIOUSLY ISSUED BY ARTHUR ANDERSEN LLP (“ANDERSEN”). THIS REPORT HAS NOT BEEN REISSUED BY ANDERSEN AND ANDERSEN DID NOT CONSENT TO THE INCORPORATION BY REFERENCE OF THIS REPORT (AS INCLUDED IN THIS FORM 10-K) INTO ANY OF THE COMPANY’S REGISTRATION STATEMENTS.

Report of Independent Public Accountants

To ORBCOMM Global, L.P.:

   We have audited the accompanying consolidated balance sheets of ORBCOMM Global, L.P. (the “Company”) as of December 31, 2000 and 1999, and the related consolidated statements of operations and comprehensive loss, partners’ capital (deficit), and cash flows for the years then ended. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

   We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

   In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of ORBCOMM Global, L.P. as of December 31, 2000 and 1999, and the results of its operations and its cash flows for the years then ended in conformity with accounting principles generally accepted in the United States.

   The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the financial statements, the Company has suffered recurring losses from operations, has a net capital deficiency and in February 2001, the Company filed a motion pursuant to the United States Bankruptcy Code to permit the sale of substantially all of its assets or alternatively the orderly liquidation of the Company. Management’s plans in regard to these matters are also described in Note 1. These factors raise substantial doubt about the Company’s ability to continue as a going concern. The accompanying consolidated financial statements do not include any adjustments relating to the amount and classification of liabilities that might result from the outcome of this uncertainty.

/s/ Arthur Andersen LLP

Vienna, VA

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ORBITAL SCIENCES CORPORATION

CONSOLIDATED STATEMENTS OF OPERATIONS

See accompanying notes to consolidated financial statements.

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ORBITAL SCIENCES CORPORATION

CONSOLIDATED BALANCE SHEETS