ORBITAL SCIENCES CORP /DE/ - 10-K Annual Report

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 þ 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. þ

Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2). Yes þ 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 June 30, 2003 was approximately $338,500,000. The registrant has no non-voting common equity.

As of February 20, 2004, 48,032,064 shares of the registrant’s Common Stock were outstanding.

Portions of the registrant’s definitive proxy statement to be filed on or about March 15, 2004 are incorporated by reference in Part III of this report.

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.

We design, develop, manufacture and operate small space and rocket systems for the U.S. Department of Defense (“DoD”) and other U.S. government agencies and for global commercial and scientific customers. We define small space and rocket systems to include the following major product lines:


	•	Suborbital rockets that are used as target and interceptor vehicles for missile defense systems;

	•	Small-class launch vehicles that place satellites weighing up to 4,000 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.

It has been our general strategy to develop and expand a core integrated business of space systems technologies and products, focusing on the design and manufacturing of affordable lightweight rockets, small satellites and other space systems in order to establish and expand positions in niche markets that have not typically been emphasized by our larger competitors. As a result of our capabilities and experience in designing, developing, manufacturing and operating a broad range of small space and rocket systems, we believe we are well positioned to capitalize on the demand for small space-technology systems in missile defense, spaced-based military and intelligence operations, and commercial satellite communications programs, and to take advantage of continuing government-sponsored initiatives for space-based scientific research and lunar and planetary exploration initiatives.

Our executive offices are located at 21839 Atlantic Boulevard, Dulles, Virginia 20166 and our telephone number is (703) 406-5000.

We maintain an Internet web site at www.orbital.com. In addition to news and other information about our company, we make available on or through the Investor Information section of our web site our annual report on Form 10-K, our quarterly reports on Form 10-Q, our current reports on Form 8-K and all amendments to these reports as soon as reasonably practicable after we electronically file this material with, or furnish it to, the Securities and Exchange Commission.

At the Investor Information section of our web site, we have a Corporate Governance page that includes, among other things, copies of our Code of Business Conduct and Ethics, our Corporate Governance Guidelines and the charters for each standing committee of the Board of Directors, including the Audit and Finance Committee, the Corporate Governance and Nominating Committee

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 transportation management systems. Our business is not seasonal. Customers that accounted for 10% or more of our consolidated revenues in 2003 were The Boeing Company (“Boeing”), DoD and the National Aeronautics and Space Administration (“NASA”).

Launch Vehicles and Advanced Programs. We 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 rockets and their principal subsystems, as well as payloads carried by such vehicles. Pursuant to a contract with Boeing, we are the primary supplier of operational and test interceptor boosters for the Missile Defense Agency’s (“MDA”) Ground-based Midcourse Defense (“GMD”) program, for which our boost vehicle, a modified version of our Pegasus rocket, is being used as a major operational element in the U.S. national missile defense system that is scheduled to begin initial deployments in 2004.

Various branches and agencies of the U.S. military, including the MDA, also use our suborbital launch vehicles as targets for defense-related applications such as ballistic missile interceptor testing and related experiments. These rockets are programmed to simulate incoming enemy missiles, offering an affordable and reliable means to test advanced missile defense systems. Our family of targets extends from long-range target launch vehicles, which will be the primary targets for testing the MDA’s GMD system, to medium-and short-range target vehicles designed to simulate threats to U.S. and allied military forces deployed in overseas theaters.

Since 1982, we have performed a total of 123 suborbital launch missions, including four successful missions in 2003 and one successful mission so far in 2004.

We developed and produce the Pegasus, Taurus and Minotaur space launch vehicles. Under a contract with the U.S. Air Force, we are also developing an advanced Minotaur launch vehicle that combines surplus government Peacekeeper ballistic missile equipment with our Pegasus and Taurus launch vehicle technology. Our space launch vehicles launch 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 ballistic missile rocket motors with our Pegasus technology. Since 1990, the Pegasus, Taurus and Minotaur rockets have performed a total of 45 launches. We carried out four Pegasus missions in 2003, all of which were successful. We did not conduct any Taurus or Minotaur missions in 2003.

Our launch vehicle 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, we are developing and building the Hyper-X hypersonic research

Our advanced programs include the development and manufacture of advanced space and flight systems for various U.S. government programs.

Customers that accounted for 10% or more of our launch vehicles and advanced programs segment revenues in 2003 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, military and technology demonstration missions. Since 1982, we have built and delivered 92 satellites for various commercial and governmental customers for a wide range of communications, broadcasting, remote imaging, scientific and national security applications. In 2003, five of our satellites were successfully deployed, including three LEO satellites and two GEO satellites.

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 space-related technical services, including specialized space-related analytical, engineering and production services for U.S. government agencies such as NASA, the Jet Propulsion Laboratory, the Naval Research Laboratory and the U.S. Department of Energy. Since 1982, we have supplied such systems and services on 24 major space missions and over 100 smaller missions.

Customers that accounted for 10% or more of our satellites and related space systems segment revenues in 2003 were NASA, PT Telekomunikasi Indonesia Tbk, the Broadcasting Satellite System Corporation, PanAmSat Corporation and the government of Taiwan’s National Space Program Office.

Transportation Management 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 public works systems. Major customers for our transportation management systems include the metropolitan mass transit authorities in Los Angeles, Philadelphia, Phoenix, Washington, D.C., and a number of other state and municipal transit systems and private vehicle fleet operators. We do not consider this product line to be core to our business.

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

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 and defense 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.

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 $7.8 million, $4.7 million and $7.7 million for the years ended December 31, 2003, 2002 and 2001, respectively. In addition, significant portions of our new product development and enhancement programs are funded under customer contracts.

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 U.S. and foreign patents relating to the Pegasus vehicle, certain of our satellites and other systems and products. The majority of our U.S. patents relating to the Pegasus vehicle expire between 2007 and 2016, and most of our U.S. patents relating to our satellites expire beginning in 2013.

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 to launch 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.

During 2003, 2002 and 2001, approximately 67%, 58% and 55%, 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 85% and 15% of revenues from U.S. government contracts in 2003 were derived from cost-reimbursable contracts and fixed-price contracts, respectively. Under a cost-reimbursable contract, we recover our actual allowable costs incurred, allocable overhead costs and 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 customer’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. 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.

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 generally are 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 more detailed 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.”

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

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. Our classified programs require that we and certain employees maintain appropriate security clearances. We also require licenses from the U.S. Department of State with respect to work we do for foreign customers or with foreign subcontractors.

Our firm backlog was approximately $995 million at December 31, 2003 and approximately $820 million at December 31, 2002. We expect to convert approximately $600 million of the 2003 year-end firm backlog into revenues during 2004.

Our firm backlog as of December 31, 2003 included approximately $755 million of contracts with the U.S. government and its agencies or from subcontracts with prime contractors of the U.S. government, including about $320 million in connection with our contract with Boeing to provide interceptor boosters for MDA’s GMD program. Most of our government contracts are funded incrementally on a year-to-year basis. Firm backlog from government contracts at December 31, 2003 included total funded orders of approximately $157 million and orders not yet funded of $598 million. 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.

Total backlog was approximately $2.68 billion at December 31, 2003. Total backlog includes firm backlog in addition to unexercised options, indefinite-quantity contracts and undefinitized orders and contract award selections. Backlog at December 31, 2003 does not give effect to new orders received or any terminations or cancellations since that date.

As of February 1, 2004, Orbital had approximately 2,160 permanent employees. None of our employees is subject to collective bargaining agreements. We believe our employee relations are good.

In 2001, we sold our sensor systems division and our respective interests in Magellan Corporation, Navigation Solutions LLC and MacDonald, Dettwiler and Associates Ltd. 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.”

In 1992, we formed Orbital Imaging Corporation (“ORBIMAGE”) to provide satellite-based remote imaging services. 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 successfully reorganized and emerged from Chapter 11 on December 31, 2003, resulting in the cancellation of our entire equity position in the company as of that date.

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.

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 within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. These forward-looking statements are subject to numerous assumptions, risks and uncertainties, including the risks set forth below, and are based on our current expectations and projections about future events. Our actual results, performance or achievements could be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. 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

Investors should carefully consider, among other factors, the risks listed below.

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.

A significant portion of our revenues and firm backlog is derived from U.S. government contracts. Most of our U.S. government contracts are funded incrementally on a year-to-year basis and are subject to uncertain future funding levels. Furthermore, our direct and indirect contracts with the U.S. government may be terminated or suspended by the U.S. government or its prime contractors at any time, with or without cause. There can be no assurance that government contracts will not be terminated or suspended in the future, or that contract suspensions or terminations will not result in unreimbursable expenses or charges or other adverse effects on our financial condition.

The Bush Administration’s defense budgets for the next several years contemplate significant spending on missile defense systems and other space-related programs. If President Bush is not reelected in November 2004, a new administration may have different priorities regarding defense and space spending. A decline in U.S. government support and funding for key missile defense and space programs could materially adversely affect our financial condition and results of operations.

We are also subject to laws and regulations regulating the formation, administration and performance of, and accounting for, U.S. government contracts. With respect to such contracts, any failure to comply with applicable laws could result in contract termination, price or fee reductions or suspension or debarment from contracting with the U.S. government.

OUR U.S. GOVERNMENT CONTRACTS ARE SUBJECT TO AUDITS THAT COULD RESULT IN A MATERIAL ADVERSE EFFECT ON OUR FINANCIAL CONDITION AND RESULTS OF OPERATIONS IF A MATERIAL ADJUSTMENT IS REQUIRED.

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, or by other agencies of the U.S. government. These agencies have the right to audit our cost estimates and/or allowable cost allocations with respect to certain contracts. From time to time we have in the past made and may in the future be required to make adjustments and reimbursements as a result of 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.

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. Our contract with Boeing to provide interceptor boosters for MDA’s GMD program is material, and

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.

WE MAY NOT RECEIVE FULL PAYMENT FOR OUR SATELLITES OR LAUNCH SERVICES IN THE EVENT OF A FAILURE, AND WE COULD INCUR PENALTIES IF OUR SATELLITES ARE NOT DELIVERED OR OUR ROCKETS ARE NOT LAUNCHED 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. Launch contracts may also have payments contingent upon a successful launch. While we generally intend to procure insurance to compensate 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 and launch contracts require us to pay penalties in the event that satellites are not delivered, or the launch does not occur, on a timely basis. Our failure to receive incentive payments, or a requirement that we refund amounts previously received or pay delay penalties, could adversely affect revenue recognition, profitability and our liquidity.

OUR FIXED-PRICE AND COST-REIMBURSABLE CONTRACTS COULD SUBJECT US TO LOSSES AND IMPAIR OUR LIQUIDITY IF WE EXPERIENCE COST OVERRUNS.

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. Any significant 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 costs incurred, but generally is subject to contract funding limitations. If we incur costs in excess of the funding limitation specified in the contract, this would be at our own risk and 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 DEVELOPED OR MANUFACTURED OR THAT THEY 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 failures, cost overruns in developing and manufacturing our products, delays in delivery and other operational problems. We may experience some product and service failures, schedule delays and other problems in connection with our launch vehicles, satellites, transportation management systems and other products in the future. Some of our satellite and launch services contracts impose penalties on us for delays, which could be significant. In addition to any costs resulting from product warranties or required remedial action, product failures or significant delays may result in increased costs or loss of revenues due to postponement or cancellation of subsequently scheduled operations or product deliveries and claims against performance bonds. Negative publicity from product failures may also impair our ability to win new contracts.

SEVERAL YEARS OF LOW DEMAND AND OVERCAPACITY IN THE COMMERCIAL SATELLITE MARKET MAY RESULT IN SLOW GROWTH IN DEMAND FOR OUR SMALL GEO SATELLITES.

The commercial satellite market has experienced pricing pressures due to excess capacity in the telecommunications industry and weakened demand over the past several years. Satellite demand also has been impacted by the business difficulties encountered by some companies in the commercial satellite services industry, which have resulted in reduced revenues and/or access to capital and a reduction in the total market size in the near term. While the market appears to be making a recovery, we may continue to experience slow growth in the demand for our small GEO satellites.

IF OUR KEY SUPPLIERS 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 and producing for the MDA 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 result in additional program costs, a customer terminating our contract for default, or damage to our customer relationships, causing our revenues, profitability and cash flow to decline. In addition, negative publicity from any failure of one of our products as a result of a failure by a key supplier could damage our reputation and prevent us from winning new contracts.

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 years ended December 31, 2003, 2002 and 2001, direct sales to non-U.S. customers comprised approximately 19%, 12% and 9%, respectively, of our consolidated revenues. Further, as of December 31, 2003, approximately 18% 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;

	•	inability to obtain required U.S. export licenses; and

	•	foreign currency and standby letter of credit exposure.

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. Our classified programs require that we and certain employees maintain appropriate security clearances. 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, and could result in an event of default under certain of our international contracts.

OUR LIMITED ABILITY TO OBTAIN LETTERS OF CREDIT AND PERFORMANCE BONDS AND OUR FINANCIAL CONDITION MAY IMPAIR OUR ABILITY TO WIN NEW BUSINESS AND/OR RETAIN EXISTING BUSINESS AND THEREFORE COULD REDUCE OUR REVENUES AND BACKLOG.

Our international contracts often require us to post letters of credit pending completion of work. Many of our transportation management systems contracts also require us to post performance bonds or letters of credit pending completion of work. Due to limitations on our borrowing capacity as a result of the restrictive covenants contained in our 9% senior notes and our senior credit facility, as well as decreased capacity in the surety bond market, we may not be able to issue letters of credit or secure performance bonds, which may prevent us from winning contracts in the future.

From time to time, certain of our commercial contracts permit the customer to terminate the contract if our financial condition were to deteriorate. Additionally, U.S. government contracting rules provide that a contracting officer may assess our financial viability. 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 have an adverse impact on our liquidity and operations.

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.

Our revolving credit facility and the indenture governing our 9% senior notes contain certain financial and operating covenants, including, among other things, certain coverage ratios, as well as limitations on our ability to incur debt, make dividend payments, sell all or substantially all of our assets and engage in mergers and consolidations and certain acquisitions. These covenants may restrict our ability to pursue certain business initiatives or certain acquisition transactions. In addition, failure to meet any of the financial covenants in our credit facility could cause an event of default under and/or accelerate some or all of our indebtedness, which would have a material adverse effect on us.

THE LOSS OF EXECUTIVE OFFICERS AND OUR INABILITY TO RETAIN OTHER KEY PERSONNEL COULD ADVERSELY AFFECT OUR OPERATIONS.

Our inability to retain our executive officers and other key employees, including personnel with security clearances required for classified work and highly skilled engineers, could have an adverse effect on our operations.

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.

We are subject to various federal, state and local environmental laws and regulations relating to the operation of our business, including those governing pollution, the handling, storage and disposal of hazardous substances, and the ownership and operation of real property. Such laws may result in significant liabilities and costs. We do not believe that compliance with or liability under environmental laws and regulations has had a material impact on our operations to date, but there can be no assurance that such laws and regulations will not have a material adverse effect on us in the future.

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 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 is intended to deter coercive or unfair takeover tactics. Under the rights plan, a preferred share purchase right, which is attached to each share of our common stock, generally will be triggered upon the acquisition, or actions that would result in the acquisition, of 15% or more of our common stock by any person or group. If triggered, these rights would entitle our stockholders (other than the acquirer) to purchase, for the exercise price, shares of Orbital’s common stock having a market value of two times the exercise price. The exercise price, which is subject to certain adjustments, is $210 per right. 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 common stock. As a result, these provisions may prevent our stock price from increasing substantially in response to actual or rumored takeover attempts. These provisions may also prevent changes in our management.

WE MAY NOT HAVE THE ABILITY TO RAISE THE FUNDS NECESSARY TO FINANCE THE REPURCHASE OFFER REQUIRED BY THE INDENTURE GOVERNING OUR SENIOR 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 our 9% senior notes due 2011, 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 our 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.

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 space systems manufacturing facility that primarily 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.

We are party to certain 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.

There was no matter submitted to a vote of our security holders during the fourth quarter of 2003.

The following table sets forth the name, age and position of each of the executive officers of Orbital as of February 25, 2004. 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

James R. Thompson (who is not related to David W. Thompson), has been Vice Chairman, President and Chief Operating Officer since April 2002, and was President and Chief Operating Officer since October 1999. He has been a director of the Company since 1992. He was Acting General Manager of our Transportation Management Systems Group from 2001 until August 2003. 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 and Chief Financial Officer of Sensormatic Electronics Corp., a supplier of electronic security systems, where he was also named Chief Administrative Officer in July 1998. From 1994 to 1996, Mr. Pierce was the Executive Vice President and Chief Financial Officer of California Microwave, Inc., a supplier of microwave, radio frequency and satellite systems and products for communications and wireless networks. From 1980 to 1993, Mr. Pierce was with Materials Research Corporation, a provider of thin film equipment and high purity materials to the semiconductor, telecommunications and media storage industries, where he progressed from Chief Financial Officer to President and Chief Executive Officer. Materials Research Corporation was acquired by Sony Corporation as a wholly owned subsidiary in 1989. From 1972 to 1980, Mr. Pierce held various management positions with The Signal Companies.

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

W. Jean Floyd has been Senior Vice President and General Manager/Transportation Management Systems Group since September 2003. From 1996 until September 2003, Mr. Floyd held a variety of senior management positions at Orbital, including Senior Vice President of Technical Operations from October 2000 to September 2003, and Deputy General Manager for our Launch Systems Group from July 1996 to October 2000. He joined Orbital in 1990 as a launch controller for the Pegasus program. From 1988 until 1990, he was a consultant providing technical services to the U.S. military. Between 1986 and 1988, Mr. Floyd worked for Tecolote Research, Inc., a defense support contractor, in support of several Air Force programs. From 1981 to 1986, Mr. Floyd was a Captain in the U.S. Air Force and served as a launch controller and program manager for the Titan space launch vehicle program.

Leo Millstein has been Senior Vice President, General Counsel and Corporate Secretary since August 2003. From 2002 until 2003, Mr. Millstein worked as a consultant on software and telecommunications matters. From 2000 to 2002, Mr. Millstein was Vice President, General Counsel and Corporate Secretary of MERANT plc, a software company listed on the London Stock Exchange and NASDAQ. From 1989 to 2000, Mr. Millstein held a variety of senior management and legal positions at the International Telecommunications Satellite Organization (INTELSAT), including Director of Corporate Restructuring from 1999 to 2000, Deputy General Counsel from 1995 to 1999, and Assistant General Counsel from 1989 to 1995. From 1984 to 1989, he was a partner of Dyer, Ellis, Joseph & Mills, a Washington, D.C. based law firm. From 1974 to 1984, Mr. Millstein held various legal positions with the Communications Satellite Corporation (COMSAT).

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 and our indenture governing our 9% senior notes contains restrictions on our ability to pay cash dividends. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Liquidity and Capital Resources.”

The transfer agent for our common stock and the warrant agent for our common stock warrants that are listed on the NYSE is:


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

The selected consolidated financial data of the company for the years ended December 31, 2003, 2002, 2001, 2000 and 1999 have been derived from our audited consolidated financial statements. This information should be read in conjunction with the 2003, 2002 and 2001 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, 2003 consolidated financial statements.


(1)	Operating income included $3.9 million in net settlement expenses.

(2)	Revenue, gross profit and operating income included a $13.0 million favorable adjustment as a result of a contract settlement and a $3.4 million reversal of a provision for uncollectible receivables in connection with a contract that was terminated in March 2001. Operating income was negatively impacted by $5.4 million of litigation-related settlement expenses.

(3)	Operating income was negatively impacted by the following: (i) a $53.7 million provision to write down ORBCOMM-related receivables and inventory; (ii) a $15.9 million asset impairment charge and a $3.4 million provision for uncollectible receivables related to a contract ultimately terminated in March 2001; and (iii) an $11.5 million charge in connection with the settlement of a class action lawsuit against the company.

(4)	Operating income was negatively impacted by a $15.2 million asset impairment charge.

(5)	Basic income (loss) per share is calculated using the weighted-average number of common shares outstanding during the periods. Diluted income (loss) per share is calculated using the weighted-average number of common shares and dilutive equivalent shares outstanding during the periods, including the dilutive effect of warrants, options and, for periods in which they were outstanding, the assumed conversion of our convertible subordinated notes.

With the exception of historical information, the matters discussed below under the headings “Consolidated Results of Operations for the Years Ended December 31, 2003, 2002 and 2001,” “Segment Results,” “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 and rocket systems for commercial, military and civil government customers. Our primary products are satellites and launch vehicles, including low-orbit, geosynchronous and planetary spacecraft for communications, remote sensing, scientific and defense missions; ground- and air-launched rockets that deliver satellites into orbit; and missile defense systems that are used as interceptor 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.

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 our future operations 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 or progress under a contract is otherwise impeded. Accordingly, our recorded revenues and gross profits from period to period can fluctuate significantly. In the event cost estimates indicate a loss on a contract, the


		total amount of such loss, excluding general and administrative expense, is recorded in the period in which the loss is first estimated.

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 our performance under such contracts differ from previous assumptions, current period revenues would be adjusted.


	•	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 innovations.

	•	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.

	•	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, a reduction in the deferred tax valuation allowance would be recorded as a tax benefit. In making such a determination, we would consider a number of factors including historical financial results and forecasted taxable income over future years. A reduction in the deferred tax valuation allowance would increase income in the period such determination is made, and in subsequent periods we would record tax provisions based upon pretax income.

Consolidated Results of Operations for the Years Ended December 31, 2003, 2002 and 2001

Revenues – Our consolidated revenues were $581.5 million, $551.6 million and $415.2 million in 2003, 2002 and 2001, respectively. Consolidated revenues increased in 2003 due to increased revenues in our launch vehicles and advanced programs segment, partially offset by lower revenues in our satellites and related space systems and our transportation management systems (formerly know as electronic systems) segments, as discussed more fully in “Segment Results” below. Consolidated revenues increased in 2002 primarily as a result of revenue growth in our launch vehicles and advanced programs and our satellites and related space systems segments.

Gross Profit – Our consolidated gross profit was $104.2 million (17.9% of revenues), $91.4 million (16.6% of revenues) and $27.8 million (6.7% of revenues) in 2003, 2002 and 2001, 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 2003 compared to 2002 increased by $16.4 million in our launch vehicles and advanced programs segment and by $5.7 million in our satellites and related space systems segment,

partially offset by a $9.3 million decrease in gross profit in our transportation management systems segment. The increase in gross profit in our launch vehicles and advanced systems segment was largely attributable to increased revenues and profit in our Orbital Boost Vehicle (OBV) missile defense interceptor program and in our space launch vehicle product line. The increase in gross profit in our satellites and related space systems segment was largely attributable to increased gross profit from our geosynchronous satellite product line. The decrease in gross profit in our transportation management systems segment was largely attributable to significant increases in the first half of 2003 in the estimated costs to complete a number of contracts. Under percentage-of-completion accounting for long-term fixed-price contracts, the increased estimates of future costs reduce current revenues and profit recognition because higher future costs mean less progress has been achieved currently toward completion of the contracts. The lower level of progress toward completion of the contracts results in a smaller portion of the total revenues and profits on contracts that are earned and recorded currently.

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 we were constructing for our former affiliate, Orbital Imaging Corporation (“ORBIMAGE”), 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. 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”) on a contract that was terminated for convenience in March 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 $7.8 million (1.3% of revenues), $4.7 million (0.9% of revenues) and $7.7 million (1.9% of revenues) in 2003, 2002 and 2001, respectively. Research and development expenses increased in 2003 compared to 2002 primarily as a result of enhancements to our Star-2 satellite and development activity on a modified Taurus space launch vehicle. 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 development programs, offset partially by increased development activity on the above-mentioned modified Taurus space launch vehicle.

Selling, General and Administrative Expenses – Selling, general and administrative expenses were $57.0 million (9.8% of revenues), $57.7 million (10.5% of revenues) and $61.6 million (14.8% of revenues) in 2003, 2002 and 2001, respectively. Selling, general and administrative expenses include the costs of marketing, advertising, promotional and other selling expenses, as well as the costs of our finance, legal, administrative and general management functions.

The slight decrease in selling, general and administrative expenses from 2002 to 2003 was largely due to lower general and administrative expenses in our satellite manufacturing business, offset partially by higher general support costs in connection with our OBV missile defense interceptor program and increased bid and proposal activity on advanced programs. In addition, in 2003 we settled an action we had brought against certain of our insurers seeking reimbursement for defense and settlement costs we had incurred prior to 2002 defending a breach of contract lawsuit. Proceeds

The decrease in selling, general and administrative expenses from 2001 to 2002 was primarily attributable to certain charges in 2001 that included a $4.9 million provision for unoccupied office space and facility sublease losses and a $4.3 million provision for estimated unrecoverable amounts related to the OrbView-4 satellite construction program, offset partly by the 2001 reversal of a $3.4 million provision initially recorded in 2000 for receivables on a contract that was terminated for convenience by NASA in March 2001.

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 for 2001.

Settlement Expense – In 2003, we recorded expenses of $4.8 million in connection with a settlement agreement with ORBIMAGE relating to certain litigation with them. Also during 2003, as discussed above within the caption “Selling, General and Administrative Expenses,” we recorded a $0.9 million reduction of settlement expense in connection with the settlement of an action we had brought against certain of our insurers seeking reimbursement for defense and settlement costs we had incurred prior to 2002 defending a breach of contract lawsuit.

In 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.

Interest Expense – Interest expense was $18.7 million, $17.5 million and $21.7 million for 2003, 2002 and 2001, respectively. No interest has been capitalized since 2000. Interest expense included $1.8 million, $3.1 million and $3.5 million of amortization of debt issuance costs in 2003, 2002 and 2001, respectively. Interest expense in 2003 and 2002 also included $2.2 million and $1.4 million, respectively, of amortization of debt discount related to our $135 million notes that were issued in August 2002 and were repurchased or redeemed in full in the third quarter of 2003.

Excluding amortization of debt issuance costs and debt discount, interest expense increased $1.7 million in 2003 as compared to 2002 primarily because during the first eight months of 2002 we incurred lower interest on our 5% convertible notes that were refinanced with higher rate debt in August 2002. Similarly 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.

Other Income, Net – Other income, net, was $1.3 million, $2.4 million and $5.5 million for 2003, 2002 and 2001, respectively. Interest income and realized gains and losses on investments included in other income totaled $0.7 million, $1.0 million and $1.4 million for 2003, 2002 and 2001, respectively. Other income in 2001 included $3.7 million of insurance proceeds that we received related to the BSAT-2b satellite launch failure in July 2001.

Allocated Share of Losses of Affiliates – We did not record any income or loss from unconsolidated affiliates in 2003 or 2002. The allocated share of losses of unconsolidated affiliates in 2001 was as follows (in thousands):


(1)	As more fully described in Note 5 to the consolidated financial statements, through June 30, 2001, we recognized 100% of the losses of our former affiliate, ORBIMAGE, including preferred stock dividends, in allocated share of losses of affiliates in our statements of operations. No such losses were recognized in 2003, 2002 or in the second half of 2001.

(2)	We accounted for our limited partnership interest in our former affiliate, ORBCOMM Global, L.P. (“ORBCOMM”), using the equity method of accounting through 2000. As a result of ORBCOMM’s Chapter 11 filing in 2000, we wrote off our investment in ORBCOMM in 2000 and 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.

Gain on Reversal of Allocated Losses of Affiliate – In 2003, we recorded a $40.6 million gain in connection with the reversal of our previously recorded liability related to the allocated losses of ORBIMAGE. This gain was recorded as a result of the cancellation of our ownership interest upon the consummation of ORBIMAGE’s Chapter 11 plan of reorganization in December 2003, as further discussed in Note 5 to the accompanying consolidated financial statements.

Debt Extinguishment Expense – We recorded $38.8 million in debt extinguishment expenses during the third quarter of 2003 associated with our debt refinancing in July 2003, as further described in “Liquidity and Capital Resources.” The debt extinguishment expenses consisted of $20.7 million in accelerated amortization of debt discount on our 12% notes issued in August 2002, $10.1 million in accelerated amortization of debt issuance costs and $8.0 million in prepayment premiums and other expenses.

Benefit (Provision) for Income Taxes – In 2003, we recorded a $265,000 tax benefit related to the refund of 2002 state taxes. In 2002, we recorded a $265,000 provision for income taxes in connection with the initial estimated state income tax liability. We did not record a provision for U.S. federal income taxes in 2003 or 2002 because we utilized prior net operating losses to offset all U.S. federal taxable income. We did not record an income tax benefit in 2001 related to the loss from continuing operations for that period because such benefit could not be reasonably assured from future operating results.

For the years ended December 31, 2003 and 2002, we concluded that a full deferred tax valuation allowance is required for the net deferred tax assets, based on our assessment that the realization of those assets does not meet the “more likely than not” criterion under SFAS No. 109, “Accounting for Income Taxes.” However, it is possible that the “more likely than not” criterion could be met in 2004 or a future period, which could result in the reversal of a significant portion or all of the valuation allowance, which, at that time, would be recorded as a tax benefit in the consolidated statement of operations.

Income (Loss) from Continuing Operations before Cumulative Effect of Change in Accounting – Our consolidated income (loss) from continuing operations before cumulative effect of change in accounting was $20.2 million, $13.7 million and ($95.6 million) for 2003, 2002 and 2001, respectively. The increase in income from continuing operations before cumulative effect of change in accounting in 2003 as compared to 2002 was primarily due to increased operating income in 2003. The $109.3 million improvement in 2002 relative to 2001 was primarily due to improved operating results and lower interest expense in 2002, in addition to the absence in 2002 of allocated share of losses of an affiliate, which totaled $26.5 million in 2001.

Discontinued Operations – During 2001, we sold our interests in several businesses, as described in Note 2 to our 2003 consolidated financial statements. These transactions and certain prior disposal activity resulted in net gains of $0.9 million and $114.7 million in 2002 and 2001, respectively, reported in discontinued operations.

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 2002 in our transportation management 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 transportation management systems reporting unit to its carrying value, including goodwill. The fair value of our transportation management 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 transportation management systems business. The impairment loss was recorded as a January 1, 2002 cumulative effect of a change in accounting.

Net Income – Our net income for 2003 was $20.2 million, or $0.35 per diluted share, as compared to $0.8 million, or $0.02 per share, for 2002 and $19 million, or $0.49 per share, for 2001. The increase in net income from 2002 to 2003 was primarily related to increased operating income and the absence in 2003 of the $13.8 million goodwill impairment charge for 2002 discussed above.

The decrease in net income from 2001 to 2002 was attributable to the $109.3 million increase in income from continuing operations which was more than offset by the impact of the $13.8 million goodwill impairment charge and the decreased income from discontinued operations.

Our products and services are grouped into three reportable segments: (i) launch vehicles and advanced programs, (ii) satellites and related space systems and (iii) transportation management systems (formerly known as electronic systems). Consolidating eliminations and transactions not attributable to or allocated to any segment are reported in Corporate and Other. The following tables

Launch Vehicles and Advanced Programs – Revenues increased by 29% in 2003 as compared to 2002 in large part as a result of increased revenues in our OBV missile defense interceptor program. We are developing and manufacturing interceptor boost vehicles for the U.S. Missile Defense Agency’s Ground-based Midcourse Defense system under a contract with The Boeing Company. During the first quarter of 2003, we successfully launched the first prototype of the OBV interceptor. During the third quarter of 2003, we successfully launched the second OBV interceptor. The OBV program accounted for $161.1 million in revenues, or almost 50% of total segment revenues in 2003, as compared to $119.4 million in revenues in 2002. Our space launch vehicle product line also contributed to the year-over-year increase in revenues, largely due to increased Pegasus launch vehicle activity and work on a contract begun in 2003 to build three Minotaur space launch vehicles for the U.S. Department of Defense. We completed four successful Pegasus launches during 2003 compared to one Pegasus launch in 2002. Higher revenues from our advanced programs in 2003 likewise contributed to increased segment revenues. These revenue increases were offset partially by decreased revenues in our suborbital target vehicle product line, which had fewer launches in 2003 than in 2002.

Revenues in this segment increased in 2002 as compared to 2001 due primarily to growth in revenues on our OBV missile defense interceptor program. 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 in 2002. 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 a contract that was terminated for convenience by NASA in March 2001.

Operating income increased by approximately 39% in 2003 as compared to 2002 primarily due to the increased profits from the OBV missile defense interceptor program, our advanced programs and our space launch vehicle product line. Operating income from the OBV missile defense interceptor program accounted for approximately half of the total operating profit in this segment in 2003. The increase in our advanced programs was largely attributable to a favorable contract close-out. The increase in operating income in our space launch vehicle product line for 2003 versus 2002 was largely attributable to increased operating income from Pegasus launch vehicle programs, partially offset by a decrease in operating income from a Taurus program. The Taurus program experienced significant cost increases and a schedule delay in the fourth quarter of 2003. The operating margin in this segment (as a percentage of revenues) was 9.8% in 2003, compared to 9.2% in 2002.

Operating income for launch vehicles and advanced programs increased in 2002 by $4.3 million, or 22%, as compared to 2001 primarily attributable to the operating income contributed by the OBV missile defense interceptor 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 in 2002 were offset in part by reductions in our Pegasus space launch services activity and by cost growth on the Supersonic Sea Skimming Target (SSST) development program for the U.S. Navy. Further, operating income for advanced programs decreased in 2002 as compared to 2001 primarily due to the adjustment recorded in 2001 related to a contract that was terminated for convenience by NASA in March 2001, as 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 greater operating income in 2001. The operating margin (as a percentage of revenue) was 9.2% in 2002, compared to 13.2% in 2001.

Satellites and Related Space Systems – Revenues from satellites and related space systems decreased by approximately 6% during 2003 compared to 2002 primarily due to a decline in revenues from our geosynchronous (GEO) communications satellite product line and our technical services business, offset partially by increased revenues from our science, technology and military satellite product line. Our GEO communications satellite product line revenues were $103.1 million in 2003 as compared to $135.2 million in 2002. This decrease in the product line’s revenues was primarily attributable to lower revenues on our PanAmSat contract, which was approximately 80% complete as of year-end 2002, and the absence in 2003 of revenues from the N-STARc satellite that was completed in mid-2002. This decline was offset partially by increased revenue on our TELKOM satellite contract order received in the second half of 2002. The increase in our science, technology and military satellite product line revenues was largely attributable to work on two new scientific satellite contracts begun during 2002.

Revenues from satellites and related space systems increased in 2002 as compared to 2001 from $207.7 million to $232.4 million due to increases in all of our major satellite and related space systems product lines. The largest increase was from our GEO 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, technology and military satellite product line, revenues increased $1.6 million in 2002 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.

Operating income increased from $5.8 million to $14.6 million, or 153%, in 2003 as compared to 2002 largely as a result of improved operating results in the GEO communications satellite product line attributable primarily to increased profits from our BSAT-2c and TELKOM satellite contracts, together with the absence in 2003 of a loss from the N-STARc satellite that was launched in mid-2002. Also contributing to the increase in operating income in this segment was higher operating income in our science, technology and military satellite product line, primarily attributable to income from two new scientific satellite contracts begun during 2002. In addition, operating income for 2003 included three transactions that largely offset each other. First, we recorded charges totaling $4.5 million for increases in the costs to complete the OrbView-3 satellite contract. Second, during 2003 we received a $2.0 million fee associated with the cancellation of a commercial GEO satellite contract. The contract was executed in early 2002, and the customer cancelled the contract in March 2003 as a result of changes to the customer’s strategy and plans prior to the commencement of any work on this satellite. Third, we recorded the impact of the $1.8 million proceeds received in connection with the litigation settlement further discussed in “Settlement Expense” under “Consolidated Results of Operations for the Years Ended December 31, 2003, 2002 and 2001” above. The litigation settlement resulted in an approximately $1.2 million improvement in operating income in 2003, after considering the impact of the settlement on contract profits on a percentage-of-completion basis. The operating margin in this segment (as a percentage of revenues) improved to 6.7% in 2003 as compared to 2.5% for 2002.

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 communications satellite product line, primarily associated with the N-STARc and BSAT GEO satellite programs. The launch failure of the BSAT-2b satellite in 2001 contributed to the operating loss in the communications 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, 2003, 2002, and 2001.” Second, our science, technology and military 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.

Transportation Management Systems – Revenues in our transportation management systems segment decreased from $65.6 million to $36.6 million, or approximately 44%, in 2003 as compared to 2002 primarily due to a reduction in activity on several contracts that were nearing completion at the end of 2003, offset partially by increased revenue on one current contract. Also contributing to the revenue decrease in 2003 were inventory-related charges totaling $1.4 million and unfavorable adjustments totaling $5.0 million in the second quarter of 2003 to the percentage of completion of several contracts as a result of increases in the estimated total costs to complete the contracts. The growth in the estimated costs to complete the contracts was largely due to increased anticipated costs associated with development, testing and deployment of software.

Revenues from our transportation management systems segment in 2002 were approximately the same as revenues from this segment in 2001. Revenues earned in 2002 on new contracts awarded in late 2001 and early 2002 were offset by decreased revenues in 2002 from various existing contracts.

Our transportation management systems segment reported a $7.6 million loss in 2003 compared to operating income of $0.2 million in 2002. The operating loss in 2003 was primarily due to the 2003 unfavorable contract and inventory adjustments described above.

Operating income from our transportation management systems segment 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.

Corporate and Other – Corporate and other revenues are comprised solely of the elimination of intercompany revenues. Corporate and other expenses include corporate general and administrative activities that are not attributable to or 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. Additionally, corporate and other expenses for 2001 included corporate general and administrative expenses attributed to discontinued operations.

Cash Flow from Operating Activities – Cash flow from continuing operations in 2003 was $46.5 million, as compared to a negative $29.8 million in 2002 and a negative $73.0 million in 2001. The net cash flow provided by operating activities in 2003 was primarily attributable to cash generated from operations and a $23.8 million increase in accounts payable and accrued liabilities, offset partially by a $14.3 million increase in receivables and an $11.8 million reduction in deferred revenues. In addition, cash flow from continuing operations in 2003 included a $38.8 million add-back to, and a $40.6 million subtraction from, net income from continuing operations associated with the previously discussed debt extinguishment expenses and reversal of allocated losses of affiliate, respectively.

In 2002, the $29.8 million net use of cash for continuing operations 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.

Cash Flow from Investing Activities – In 2003, we spent $9.6 million for capital expenditures and we increased restricted cash by $9.0 million for letters of credit issued by a financial institution on our behalf. These uses of cash were partially offset by a $3.0 million cash receipt from an escrow account related to the sale of a previously divested business.

In 2002, we used $15.3 million for capital expenditures and we received $1.0 million from an escrow account related to the sale of the previously divested business.

In 2001, we received net proceeds of $244.9 million from the sales of discontinued businesses and we used $11.4 million for capital expenditures.

Cash Flow from Financing Activities – In 2003, we used $147.0 million to pay long-term debt obligations and we received $129.0 million net proceeds from issuances of long-term debt, primarily

In 2002, we received $145.5 million in net proceeds from issuances of long-term debt and warrants and $7.6 million from issuances of common stock and we expended $128.7 million in principal payments on long-term debt. The net proceeds from issuances of long-term debt and warrants included $123.1 million in net proceeds from our sale of notes and warrants in August 2002 and $22.4 million in net proceeds from a term loan. Principal payments 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. The cash received from the issuances of shares of common stock was attributable to issuances under our employee stock purchase plan and the exercise of stock options and warrants.

In 2001, we used $137.9 million for our financing activities. During 2001, we repaid a prior primary credit facility using cash proceeds from the sales of businesses as required under the terms of that credit facility.

On July 10, 2003, we closed two financing transactions. In the first transaction, we issued $135.0 million of 9% unsecured Senior Notes due 2011 with interest payable semi-annually each January 15 and July 15, starting in 2004. During the third quarter of 2003, we used the net proceeds from this offering, together with available cash on hand, to repurchase or redeem all of our $135.0 million 12% Second Priority Secured Notes due 2006.

In the second transaction, we replaced our previous $35.0 million revolving line of credit with a new four-year, $50.0 million revolving credit facility (the “Revolver”) with Bank of America serving as the lead arranger in a syndicated line of credit. The Revolver bears interest at rates ranging from 2.25% to 3.0% over LIBOR (for LIBOR loans) or from 0.75% to 1.5% over a base rate related to the prime rate (for base rate loans), varying according to our ratio of total debt to earnings before interest, taxes, depreciation and amortization. The Revolver is collateralized by substantially all of our assets. The Revolver also permits us to reserve up to $40.0 million of the facility for letters of credit, foreign exchange contracts or other arrangements. As of December 31, 2003, there were no borrowings under the Revolver, although $6.0 million of standby letters of credit were issued under the Revolver. As of December 31, 2003, $44.0 million of the Revolver was available for borrowing.

In connection with these two financing transactions, we recorded $38.8 million of debt extinguishment expenses in 2003, which was comprised of accelerated amortization of unamortized debt discount of $20.7 million on our 12% notes, accelerated amortization of debt issuance costs of $10.1 million and $8.0 million in prepayment premiums and other expenses.

The new senior notes and the Revolver contain covenants limiting our ability to, among other things, incur more debt, redeem or repurchase Orbital stock, enter into transactions with affiliates, merge or consolidate with others and dispose of assets or create liens on assets. The Revolver contains an absolute prohibition and the new senior notes contain restrictions on the payment of cash dividends. In addition, the Revolver contains financial covenants with respect to leverage, secured leverage, minimum cash balance, fixed charge coverage and consolidated net worth.

Available Cash and Future Funding – At December 31, 2003, we had $60.9 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.

The following summarizes Orbital’s contractual obligations at December 31, 2003, both on- and off-balance sheet, and the effect such obligations are expected to have on our liquidity and cash flow in future periods (in millions):


(1)	Our obligations under operating leases consist of minimum rental commitments under non-cancelable operating leases primarily for office space and equipment.

(2)	Purchase obligations consist of open purchase orders that we had issued to acquire materials, parts or services in future periods.

Occasionally, certain contracts require us to post performance bonds or letters of credit supporting our performance and refund obligations under the contracts. We had $24.7 million of standby letters of credit outstanding at December 31, 2003, of which $18.7 million was collateralized by our restricted cash and cash equivalents and $6.0 million was issued under the Revolver.

At December 31, 2003, we had total receivables of approximately $5.1 million denominated in Japanese yen and $2.3 million denominated in Singapore dollars. We are subject to market risk to the extent that future fluctuations in foreign currency exchange rates impact these receivables.

From time to time, we enter into forward exchange contracts to hedge against foreign currency fluctuations on receivables denominated in foreign currency. At December 31, 2003, we had no foreign currency forward exchange contracts.

The fair market value of our $135.0 million of 9% unsecured Senior Notes due 2011 was estimated at approximately $145.1 million at December 31, 2003, based on market trading activity.

During the third quarter of 2003, we entered into an eight-year interest rate swap agreement with a financial institution on a notional amount of $50.0 million, whereby we receive fixed-rate interest of 9% in exchange for variable interest payments. The interest rate is reset quarterly and is equal to the 3-month LIBOR rate plus 4.28%. The total variable interest rate was 5.43% at December 31, 2003. This arrangement has been designated an effective fair value hedge of $50.0 million of our 9% Senior Notes due 2011. As of December 31, 2003, the fair value of the interest rate swap was $1.8 million, which was recorded in other non-current assets with an equal fair value adjustment recorded on the $50.0 million of 9% Senior Notes.

We have an unfunded deferred compensation plan for senior managers and executive officers, with a total liability balance of $4.4 million at December 31, 2003. This liability is subject to fluctuation based upon the market value of certain investment securities selected by participants to measure the market fluctuations and to measure our liability to each participant.

In our opinion, 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, 2003 and 2002, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2003 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 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 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.”

Orbital Sciences Corporation (together with its subsidiaries, “Orbital” or the “company”), a Delaware corporation, develops and manufactures small space and rocket systems for commercial, military and civil government customers. The company’s primary products are satellites and launch vehicles, including low-orbit, geosynchronous and planetary spacecraft for communications, remote sensing, scientific and defense missions; ground- and air-launched rockets that deliver satellites into orbit; and missile defense systems that are used as interceptor and target vehicles. Orbital also offers space-related technical services to government agencies and develops and builds satellite-based transportation management systems for public transit agencies and private vehicle fleet operators.

The consolidated financial statements include the accounts of Orbital and its wholly owned subsidiaries. As of December 31, 2003, the company had no partially owned subsidiaries. All significant intercompany balances and transactions have been eliminated.

The preparation of consolidated financial statements in conformity with generally accepted accounting principles in the United States requires management to make estimates and assumptions, including estimates of future contract costs and earnings. Such estimates and assumptions affect the reported amounts of assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and earnings during the current reporting period. Management periodically assesses and evaluates the adequacy and/or deficiency of estimated liabilities recorded for various reserves, liabilities, contract risks and uncertainties. Actual results could differ from these estimates.

Certain reclassifications have been made to the 2002 and 2001 financial statements to conform to the 2003 financial statement presentation. All financial amounts are stated in U.S. dollars unless otherwise indicated.

Orbital’s 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 Orbital 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 the company’s 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 or progress under a contract is otherwise impeded. Accordingly, the company’s recorded revenues and gross profits from period to period can fluctuate significantly. In the event cost estimates indicate a loss on a contract, the total amount of such loss, excluding general and administrative expenses, 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 upon historical experience and other objective criteria. Should Orbital’s performance under such contracts differ from previous assumptions, current period revenues would be adjusted.

Orbital’s comprehensive income (loss) is presented in the consolidated statements of stockholders’ equity. Comprehensive income in the years ended December 31, 2003 and 2002 was equal to net income. Accumulated other comprehensive income as of December 31, 2003 and 2002 was $0. Other comprehensive income (loss) in 2001 consisted primarily of foreign currency translation adjustments and unrealized gains and losses on available-for-sale securities.

Orbital occasionally uses forward contracts and interest rate swaps to manage certain foreign currency and interest rate exposures, respectively. Derivative instruments, such as forward contracts and interest rate swaps, are viewed as risk management tools by Orbital and are not used for trading or speculative purposes. Derivatives used for hedging purposes must be designated and effective as a hedge of the identified risk exposure at the inception of the contract. Accordingly, changes in fair value of the derivative contract must be highly correlated with changes in the fair value of the underlying hedged item at inception of the hedge and over the life of the hedge contract. All derivative instruments are recorded on the balance sheet at fair value. The ineffective portion of all hedges, if any, is recognized currently in earnings.

Expenditures for company-sponsored research and development projects are expensed as incurred. Customer-sponsored research and development projects performed under contracts are accounted for as contract costs as the work is performed.

Property, plant and equipment are stated at cost. Major improvements are capitalized while expenditures for maintenance, repairs and minor improvements are charged to expense. When assets are retired or otherwise disposed of, the assets and related accumulated depreciation and amortization are eliminated from the accounts and any resulting gain or loss is reflected in

Orbital’s policy is to evaluate its long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. When an evaluation indicates that the future undiscounted cash flows are not sufficient to recover the carrying value of the assets, an impairment loss is recognized and the asset is adjusted to its estimated fair value. Given the inherent technical and commercial risks within the aerospace industry, combined with the special purpose use of certain of the company’s assets, future impairment charges could be required if the company were to change its current expectation that it will recover the carrying amount of its long-lived assets from future operations.

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

The company has a Stock Option and Incentive Plan, which is described more fully in Note 10. Statement of Financial Accounting Standards (“SFAS”) No. 123, “Accounting for Stock-Based Compensation,” as amended by SFAS No. 148, “Accounting for Stock-Based Compensation — Transition and Disclosure, an amendment of FASB Statement No. 123,” requires companies to (i) recognize as expense the fair value of stock-based awards, or (ii) continue to apply the provisions of Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees” and related interpretations (“APB 25”), and provide pro forma net income and earnings per share disclosures for employee stock option grants as if the fair-value-based method defined in SFAS No. 123 had been applied. The company continues to apply the provisions of APB 25 and provide the pro forma disclosures in accordance with the provisions of SFAS Nos. 123 and 148. Under APB 25, the company has not recorded any stock-based employee compensation cost

The company uses the Black-Scholes option-pricing model to determine the pro forma impact under SFAS Nos. 123 and 148 on the company’s net income and earnings per share. The model utilizes certain information, such as the interest rate on a risk-free security maturing generally at the same time as the option being valued, and requires certain assumptions, such as the expected amount of time an option will be outstanding until it is exercised or it expires, to calculate the fair value of stock options granted. This information and the assumptions used for 2003, 2002 and 2001 are summarized as follows:

The following table illustrates the effect on net income and earnings per share if the company had applied the fair value recognition provisions of SFAS No. 123 to its stock option plan (in thousands, except per share amounts):

Net income and basic and diluted net income per share in 2001 include compensation expense related to stock option plans of discontinued operations. Pro forma net income (loss) reflects only options granted through 2003 and, therefore, may not be representative of the effects for future periods.

Basic earnings per share are calculated using the weighted-average number of common shares outstanding during the periods. Diluted earnings per share include the weighted-average effect of all dilutive securities outstanding during the periods. Diluted per share loss is the same as basic per share loss when there is a loss from continuing operations.

The following table presents the shares used in computing basic and diluted earnings per share for the years ended December 30, 2003 and 2002 (in thousands):

In 2003, diluted weighted-average shares outstanding excluded the effect of 2.3 million stock options that were anti-dilutive. In 2002, diluted weighted-average shares outstanding excluded the effect of 3.4 million stock options and 16.5 million warrants that were anti-dilutive. If the company had reported income from continuing operations in 2001, diluted average shares would have been approximately 42.0 million.

Cash and cash equivalents consist of cash and short-term, highly liquid investments with maturities of 90 days or less. Restricted cash and short-term investments consist of compensating cash balances for contractual obligations and investments in securities that do not meet the definition of cash equivalents.

Orbital classifies investments in debt and equity securities as either available-for-sale or trading securities and, accordingly, reports such investments at fair value. The company did not have any such securities as of December 31, 2003 or 2002. Any temporary difference between the fair value and the underlying cost of the available-for-sale securities is excluded from current period earnings and is reported as a component of accumulated other comprehensive income (loss) in stockholders’ equity. Temporary differences between the fair value and the underlying cost of trading securities are included in net investment income.

Inventories are stated at the lower of cost or net realizable value. Cost is determined on a first-in, first-out (“FIFO”) or specific identification basis. Given the specialized nature of certain inventory items, recoverability could be impaired should future demand for the company’s products decline.

The company self-constructs some of its ground and airborne support and special test equipment utilized in the manufacture, production and delivery of some of its products. Orbital capitalizes direct costs incurred in constructing such equipment and certain allocated indirect costs. Capitalized costs generally include direct software coding costs and certain allocated indirect costs.

Goodwill represents costs in excess of fair values assigned to the underlying net assets of acquired companies. The company adopted SFAS No. 142, “Goodwill and Other Intangible Assets,” effective January 1, 2002. In accordance with SFAS No. 142, goodwill amortization was discontinued as of January 1, 2002 and instead is tested at least annually for impairment using an estimation of the fair value of the reporting unit that the goodwill is attributable to. Prior to January 1, 2002, the company amortized goodwill on a straight-line basis over its estimated useful life, generally 10 to 40 years.

In connection with the adoption of SFAS No. 142 in 2002, the company completed its assessment of goodwill impairment and as a result recorded a $13.8 million impairment loss in its transportation management systems segment (formerly known as electronic systems) 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 the company’s transportation management systems reporting unit to its carrying value, including goodwill. The fair value of the company’s transportation management 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 the company in early 2002 during its attempts to sell the transportation management systems business. The impairment loss was recorded as a January 1, 2002 cumulative effect of a change in accounting.

The following table adjusts the reported loss from continuing operations for the year ended December 31, 2001 and the related basic and diluted per share amounts to exclude goodwill amortization (in thousands, except per share amounts):

Excluding goodwill amortization, 2001 net income would have been $25.0 million ($0.65 per share).

The company occasionally receives cash advances and payments from customers in excess of revenues recognized on certain contracts. These advances and payments are reported as deferred revenues on the balance sheet.

In September 2001, the company sold its Pomona, California-based sensors systems division (“Sensors”) to the Hamilton Sundstrand unit of United Technologies Corporation. The proceeds from the sale were approximately $19.0 million before transaction fees and expenses and resulted in a $7.1 million gain on the sale.

In the second and third quarters of 2001, Orbital’s wholly owned subsidiary, Orbital Holdings Corporation, sold its remaining interest in MacDonald, Dettwiler and Associates Ltd. (“MDA”). The company received gross proceeds of $169.2 million before transaction fees and expenses, and recorded a $111.3 million gain in 2001.

On July 13, 2001, subsidiaries of Thales, S.A. acquired the company’s majority owned subsidiary, Magellan Corporation (“Magellan”), and purchased the company’s 60% ownership interest in Navigation Solutions LLC (“NavSol”) for $70 million. At closing, after allocating $4.5 million of the proceeds to Magellan’s minority stockholders, Orbital received gross proceeds of $65.5 million before transaction fees and expenses. As a result of the company adopting a formal plan to sell its interest in Magellan and NavSol, the company recorded a $33.1 million accrual in the fourth quarter of 2000 for the estimated loss on disposal of Magellan and NavSol, including a provision of $4.5 million for the estimated losses from operations during the 2001 phase-out period. Magellan’s and NavSol’s actual losses for the phase-out period exceeded the original estimates by $3.2 million, resulting in an additional loss from discontinued operations in 2001. The fees and expenses associated with closing the sale of Magellan and NavSol exceeded the original estimates, resulting in an additional $4.2 million loss on the sale of these businesses recorded in 2001.

During the years ended December 31, 2002 and 2001, the company recorded $0.9 million and $0.5 million, respectively, of income for post-closing adjustments related to operations discontinued in prior years.

The following summarizes the operating results of discontinued operations (in thousands):

During 2003 and 2001, the company recorded the following special gains and charges in income (loss) from operations:

As described more fully in Note 5, during 2003 the company recorded $4.8 million in settlement expenses related to a settlement of litigation with its former affiliate, Orbital Imaging Corporation (“ORBIMAGE”). Also in 2003, the company settled an action it had brought against certain of its insurers seeking reimbursement for defense and settlement costs the company had incurred several years earlier defending a breach of contract lawsuit. Proceeds to Orbital under the settlement were $1.8 million, of which $0.9 million was recorded as a reduction of settlement expense and $0.9 million was recorded as a reduction of previously recorded general and administrative expenses.

In 2001, the company 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 2001, the company recorded a favorable revenue and net income adjustment of $13.0 million ($0.34 per common and diluted share) in connection with the settlement and close out of a contract with NASA that had been terminated in March 2001. Also in 2001, the company reversed a previously recorded $3.4 million provision for uncollectible receivables related to the same contract.

Orbital recorded a provision totaling $4.9 million in 2001 for unoccupied office space and facility sublease losses. This provision was recorded in selling, general and administrative expenses.

In 2001, the company issued warrants in connection with the settlement of a class action lawsuit. Under the settlement agreement, the warrants were determined to have a fair value of $11.5 million (see Note 10).

Orbital products and services are grouped into three reportable segments: (i) launch vehicles and advanced programs, (ii) satellites and related space systems, and (iii) transportation management systems (formerly known as electronic systems). Reportable segments are generally organized based upon product lines. All other activities of the company, as well as consolidating eliminations and adjustments, are reported in corporate and other. Corporate office general and administrative expenses that have not been attributed to a particular segment are reported in corporate and other. The company’s investments in, as well as its share of the income or loss of unconsolidated affiliates, are also included in corporate and other.

Intersegment sales are generally negotiated and accounted for under terms and conditions that are similar to other commercial and government contracts. There were no significant sales or transfers between segments. Substantially all of the company’s assets and operations are located within the United States.

The following table presents operating information and identifiable assets by reportable segment (in thousands):


	(1)	In 2003 and 2001, the company recorded net settlement expenses of $3.9 million and $5.4 million, respectively, (see Note 3) that impacted operating income as follows (in thousands):

Approximately 67%, 58% and 55% of the company’s revenues in 2003, 2002 and 2001, respectively, were generated under contracts with the U.S. government and its agencies or under subcontracts with the U.S. government’s prime contractors. Customers that accounted for 10% or more of consolidated revenue in 2003 were The Boeing Company, U.S. Department of Defense and NASA.

The company did not record any income or loss from unconsolidated affiliates in 2003 or 2002. The allocated share of losses of affiliates in 2001 was as follows (in thousands):

Equity Investment Accounting — In December 2003, the company’s former affiliate, Orbital Imaging Corporation (“ORBIMAGE”), consummated a plan of reorganization under Chapter 11 of the U.S. Federal Bankruptcy Code that resulted in the cancellation of Orbital’s equity ownership

Through June 30, 2001, the company recognized 100% of ORBIMAGE’s losses, including preferred stock dividends, in accordance with Accounting Principles Board No. 18 (“APB 18”), as the company was otherwise committed to provide additional funding to ORBIMAGE. The company ceased recognizing ORBIMAGE losses as of July 1, 2001, as the company determined at that time that it would not provide any future funding to ORBIMAGE beyond what was then contemplated. As of June 30, 2001 and through December 31, 2003, the recognized losses exceeded the company’s investment in ORBIMAGE by $40.6 million and such amount has been reported as “allocated losses of affiliate in excess of cost of investment” on Orbital’s consolidated balance sheet. In connection with the December 2003 cancellation of Orbital’s ownership interest in ORBIMAGE, the company recorded a $40.6 million gain in December 2003 to reverse the company’s previously recorded liability related to the allocated losses of ORBIMAGE. ORBIMAGE’s 2003 financial results had no effect on and bear no correlation to Orbital’s financial results in 2003. Therefore, ORBIMAGE’s 2003 financial statements have not been filed in Orbital’s 2003 Annual Report on Form 10-K since such financial statements are not material.

Settlement Agreement — In February 2003, a settlement agreement was approved among ORBIMAGE, Orbital, the Official Committee of Unsecured Creditors of ORBIMAGE, and two officers/directors of Orbital named as defendants in a previous complaint filed by ORBIMAGE (the “Settlement Agreement”). The Settlement Agreement provided for mutual releases of all claims to take effect upon launch of the OrbView-3 satellite by Orbital and payment by Orbital of $2.5 million to ORBIMAGE. The Settlement Agreement also provided that were ORBIMAGE to reorganize under a plan of reorganization that satisfied certain conditions, Orbital would be entitled to receive, in consideration for the $2.5 million settlement payment, $2.5 million in notes from ORBIMAGE’s successor company.

Upon the successful launch of the OrbView-3 satellite in the second quarter of 2003, Orbital paid $2.5 million to ORBIMAGE, litigation claims were dismissed and the mutual release provisions of the Settlement Agreement took effect. Since there was no assurance that Orbital would recover any of this amount in ORBIMAGE’s liquidation or reorganization, Orbital recorded the $2.5 million payment as a settlement expense in the second quarter of 2003. In addition, as part of the settlement, Orbital paid $2.3 million of delay penalties during 2003, recorded as settlement charges, in connection with the launch and check-out of the OrbView-3 satellite. No further delay penalties are owed.

On December 31, 2003, ORBIMAGE’s plan of reorganization became effective and Orbital received $2.5 million of ORBIMAGE’s Senior Subordinated Notes due 2008. In January 2004, the company sold the notes to a third party financial institution for $2.5 million. Orbital will record the sale of the notes as an increase to operating income in the first quarter of 2004. Orbital does not have any equity investment in ORBIMAGE’s successor company.

Procurement Agreement — Under a fixed-price procurement agreement between Orbital and ORBIMAGE, Orbital produced and launched ORBIMAGE’s satellites. Since 2000, Orbital has not recorded any revenues in connection with this procurement agreement since there had been no assurance that Orbital would realize the amounts due from ORBIMAGE. In 2001, Orbital recorded

In September 2001, Orbital’s Taurus rocket, which was carrying the OrbView-4 satellite for ORBIMAGE, did not achieve the mission’s intended orbit and the satellite was lost. The company recorded a $4.3 million provision in selling, general and administrative expenses in the third quarter of 2001 to fully reserve the remaining receivables from ORBIMAGE pertaining to the OrbView-4 satellite since there was no assurance that the company would be able to recover this amount. In addition, in 2001, Orbital paid $5.0 million to ORBIMAGE in satisfaction of launch delay penalties and recorded this charge as a contract cost.

Orbital accounted for its limited partnership interest in former affiliate ORBCOMM Global, L.P. (“ORBCOMM”) using the equity method of accounting through 2000. As a result of ORBCOMM’s Chapter 11 filing in 2000, Orbital wrote off its investment in ORBCOMM in 2000 and ceased recognizing equity losses for ORBCOMM. On December 31, 2001, ORBCOMM’s liquidating plan of reorganization became effective. Pursuant to the liquidating plan, in the fourth quarter of 2001, the company contributed approximately 1.7 million shares of its common stock to the ORBCOMM estate and, as a consequence, recorded a $6.5 million charge for the fair value of such shares. This charge was reported in “allocated share of losses of affiliates” on the accompanying consolidated statement of operations.

At December 31, 2003, the company had $19.3 million of cash and cash equivalents restricted primarily to collateralize outstanding letters of credit. At December 31, 2002, the company had $10.3 million of cash and cash equivalents restricted primarily to collateralize outstanding letters of credit and foreign exchange hedging contracts.

Substantially all of the company’s inventory consisted of component parts and raw materials.

Approximately 86% of unbilled recoverable costs and accrued profit and retainages at December 31, 2003 are due within one year and will be billed on the basis of contract terms and delivery schedules. At December 31, 2003 and 2002, $27.8 million and $4.6 million, respectively, were receivable from non-U.S. customers.

The accuracy and appropriateness of Orbital’s direct and indirect costs and expenses under its government contracts, and, therefore, its receivables recorded pursuant to such contracts, are subject to extensive regulation and audit by the Defense Contract Audit Agency or by other appropriate governmental agencies. These agencies have the right to challenge Orbital’s direct and indirect costs charged to any such contract. Additionally, portions of the payments to the company under government contracts are provisional payments that are subject to potential adjustment upon audit by such agencies.

Depreciation expense for the years ended December 31, 2003, 2002, and 2001 amounted to $16.0 million, $15.1 million and $22.7 million, respectively.

The company occasionally assumes warranty obligations in connection with certain contracts. The company records a liability for estimated warranty claims based upon historical data and customer information. During 2003 and 2002, activity in the warranty liability consisted of the following (in thousands):

The following table sets forth long-term obligations, excluding capital lease obligations (see Note 8) (in thousands):

On July 10, 2003, the company closed two financing transactions. In the first transaction, Orbital issued $135.0 million of 9% unsecured Senior Notes due 2011 with interest payable semi-annually each January 15 and July 15, starting in 2004. During the third quarter of 2003, the company used the net proceeds from this offering, together with available cash on hand, to repurchase or redeem all of the company’s $135.0 million 12% Second Priority Secured Notes due 2006. The fair value of the 9% senior notes at December 31, 2003 was estimated at approximately $145.1 million, based on market trading activity.

In the second transaction, the company replaced its previous $35.0 million revolving line of credit with a new four-year, $50.0 million revolving credit facility (the “Revolver”) with Bank of America serving as the lead arranger in a syndicated line of credit. The Revolver bears interest at rates ranging from 2.25% to 3.0% over LIBOR (for LIBOR loans) or from 0.75% to 1.5% over a base rate related to the prime rate (for base rate loans), varying according to the company’s ratio of total debt to earnings before interest, taxes, depreciation and amortization. The Revolver is collateralized by substantially all of our assets. The Revolver also permits the company to reserve up to $40.0 million of the facility for letters of credit, foreign exchange contracts or other arrangements. As of December 31, 2003, there were no borrowings under the Revolver, although $6.0 million of standby letters of credit were issued under the Revolver. As of December 31, 2003, $44.0 million of the Revolver was available for borrowing.

In connection with these two financing transactions, the company recorded $38.8 million of debt extinguishment expenses in 2003, which was comprised of accelerated amortization of unamortized debt discount of $20.7 million on our 12% notes, accelerated amortization of debt issuance costs of $10.1 million, and $8.0 million in prepayment premiums and other expenses.

The new senior notes and the Revolver contain covenants limiting the company’s ability to, among other things, incur more debt, redeem or repurchase Orbital stock, enter into transactions with affiliates, merge or consolidate with others and dispose of assets or create liens on assets. The Revolver contains an absolute prohibition and the new senior notes contain restrictions on the payment of cash dividends. In addition, the Revolver contains financial covenants with respect to leverage, secured leverage, minimum cash balance, fixed charge coverage and consolidated net worth. As of December 31, 2003, the company was in compliance with all of these covenants.

During the third quarter of 2003, the company entered into an eight-year interest rate swap agreement with a financial institution on a notional amount of $50.0 million, whereby the company receives fixed-rate interest of 9% in exchange for variable interest payments. The interest rate is reset quarterly and is equal to the 3-month LIBOR rate plus 4.28%. The total variable interest rate was 5.43% at December 31, 2003. This arrangement has been designated an effective fair value hedge of $50.0 million of the company’s 9% Senior Notes due 2011. As of December 31, 2003, the fair value of the interest rate swap was $1.8 million, which was recorded in other non-current assets with an equal fair value adjustment recorded on $50.0 million of the senior notes.

On March 1, 2002, Orbital 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 “Foothill Revolver”). 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 Foothill Revolver accrued interest at a rate equal to the Prime Rate plus 2.25%, but not less than 7%. Upon closing the facility, the company borrowed the entire $25.0 million available under the Term Loan, which provided $22.4 million in net proceeds to the company after deducting transaction fees and expenses. The entire Term Loan was prepaid from the proceeds of the company’s August 2002 $135.0 million financing transaction, discussed below. As of December 31, 2002, there were no borrowings under the Foothill Revolver. The Foothill credit facility was terminated in the third quarter of 2003 in connection with the 2003 financing transactions discussed above.

On August 22, 2002, Orbital raised gross proceeds of $135.0 million through the sale of 135,000 units, each consisting of $1,000 aggregate principal amount of 12% second priority secured notes due 2006 (the “Notes”) and one warrant to purchase up to 122.23 shares of Orbital’s common stock at an exercise price of $3.86 per share. Orbital used the $123.1 million net proceeds from the offering, together with available cash, to prepay the $25.0 million Term Loan discussed above and to repay its $100.0 million 5% subordinated convertible notes due October 1, 2002. Interest on the Notes was payable semi-annually each February 15 and August 15. During 2003, the Notes were prepaid in full from the proceeds of the 9% senior notes that were issued in July 2003, as discussed above.

The issuance of the 135,000 warrants was recorded based on their relative fair value at the date of issuance, determined using the Black-Scholes option-pricing model. The issuance was recorded as an increase to stockholders’ equity and debt discount in the amount of $24.4 million at the issuance date.

Aggregate minimum rental commitments under non-cancelable operating and capital leases (primarily for office space and equipment) at December 31, 2003 were as follows (in thousands):

Rent expense for 2003, 2002 and 2001 was approximately $14.4 million, $16.1 million and $13.3 million, respectively. The recorded amounts of capital lease obligations approximate their fair values.

The company is party to certain litigation or other legal proceedings arising in the ordinary course of business. In the opinion of management, the outcome of such legal matters will not have a material adverse effect on the company’s results of operations or financial condition.

Most of the company’s 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 the company’s financial condition or 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 the company’s financial condition and/or results of operations.

Occasionally, certain contracts require the company to post performance bonds or letters of credit supporting Orbital’s performance and refund obligations under the contracts. Orbital had $24.7 million of standby letters of credit outstanding at December 31, 2003, of which $18.7 million was collateralized by restricted cash and cash equivalents and $6.0 million was issued under the Revolver. At December 31, 2002, Orbital had $24.9 million of standby letters of credit outstanding, of which

The benefit for income taxes in 2003 was solely attributable to the refund of state income taxes paid in 2002. The provision for income taxes in 2002 consisted solely of the accrual of initially estimated state income taxes. There was no current or deferred income tax provision or benefit for 2001. The income tax provisions from continuing operations were different from those computed using the statutory U.S. Federal income tax rate as set forth below:

The tax effects of significant temporary differences were as follows (in thousands):

At December 31, 2003, the company had U.S. federal net operating loss carryforwards (portions of which expire beginning in 2004 through 2023) of approximately $538.4 million, and U.S. research and experimental tax credit carryforwards of approximately $2.8 million (portions of which expire

beginning in 2004 through 2008). Such net operating loss carryforwards and tax credits are subject to certain limitations and other restrictions. For the years ended December 31, 2003 and 2002, Orbital concluded that a full deferred tax valuation allowance is required for the net deferred tax assets, based on the company’s assessment that the realization of those assets does not meet the “more likely than not” criterion under SFAS No. 109, “Accounting for Income Taxes.” However, it is possible that the “more likely than not” criterion could be met in 2004 or a future period, which could result in the reversal of a significant portion or all of the valuation allowance, which, at that time, would be recorded as a tax benefit in the consolidated statement of operations.

In August 2002, the company issued 135,000 warrants to purchase approximately 16.5 million shares of the company’s common stock, as part of a sale of units consisting of notes and warrants (see Note 7). Each warrant is exercisable for up to 122.23 shares of Orbital’s common stock at an exercise price of $3.86 per share, for a period of four years from the date of their issuance. The issuance of the 135,000 warrants was recorded based on their relative fair value at the date of issuance, determined using the Black-Scholes option-pricing model. As of December 31, 2003, 8,478 of these warrants had been exercised.

In August 2001, the company issued warrants in connection with the settlement of a class action lawsuit (see Note 3). The settlement agreement specified that the company would issue warrants exercisable for three years at a price equal to 90% of the company’s average closing stock price for the 10-day period beginning 12 days prior to a settlement hearing in August 2001, resulting in an exercise price of $4.82 per warrant. The settlement agreement further specified that the Black-Scholes option-pricing model should be used to calculate the fair value per warrant and that the resulting number of warrants to be issued should have a fair value in the aggregate equal to $11.5 million. Accordingly, the company determined the value per warrant to be approximately $2.48 based on the Black-Scholes model and issued a total of 4,631,121 warrants. As of December 31, 2003, 112,382 of these warrants had been exercised.

In January 2000, the company issued 100,000 warrants to the banks that were party to the company’s then primary credit facility. Each warrant is exercisable for one share of the company’s common stock at an exercise price of $0.01 per share, for a period of five years from the date of their issuance. As of December 31, 2003, 51,500 of these warrants had been exercised.

In October 1998, the company adopted a stockholder rights plan in which preferred stock purchase rights were granted as a dividend at the rate of one right for each share of common stock to stockholders of record on November 13, 1998. The plan is designed to deter coercive or unfair takeover tactics. The rights become exercisable only if a person or group in the future becomes the beneficial owner of 15% or more of Orbital’s common stock, or announces a tender or exchange offer that would result in its ownership of 15% or more of the company’s common stock. The rights are generally redeemable by Orbital’s Board of Directors at a redemption price of $0.005 per right and expire on October 31, 2008.

In 1999, the company adopted an Employee Stock Purchase Plan (“ESPP”) for employees of the company. The ESPP has quarterly offering periods and allows employees to purchase shares of stock at the lesser of 85% of the fair market value of shares at the beginning or the end of the offering period. During the three years ended December 31, 2003, employees purchased approximately 3.0 million shares of Orbital’s common stock under the ESPP.

In both 2003 and 2002, the company issued 200,000 restricted shares of common stock to officers of the company. In connection with the issuances, in 2003 and 2002 the company recorded $1.4 million and $1.1 million, respectively, of deferred compensation in stockholders’ equity that is being amortized as compensation expense over the restriction period.

As of December 31, 2003, the company’s 1997 Stock Option and Incentive Plan, as amended (the “1997 Plan”), provided for awards of up to 10.6 million incentive or non-qualified stock options and shares of restricted stock to employees, directors, consultants and advisors of the company and its subsidiaries. Under the terms of the 1997 Plan, options may not be issued at less than 100% of the fair market value of the company’s common stock on the date of grant. Options under the 1997 Plan vest at a rate set forth by the Board of Directors in each individual option agreement, generally in one-third increments over a three-year period following the date of grant. Options expire no more than ten years following the grant date. The 1997 Plan provides for automatic grants of non-qualified stock options to nonemployee directors of the company. The company also has options outstanding that were issued pursuant to two predecessor plans to the 1997 Plan.

In the fourth quarter of 2002, the company offered a stock option exchange program to certain employees, pursuant to which 1,185,513 options previously granted under the 1997 Plan, each with an exercise price greater than $12.25 per common share, were cancelled. The company granted 870,928 new options in 2003 under the 1997 Plan, more than six months after the cancellation of the prior options.

The following two tables summarize information regarding the company’s stock options for the last three years:

At December 31, 2003, the company had a defined contribution plan (the “Plan”) generally covering all full-time employees. Company contributions to the Plan are made based on certain plan provisions and at the discretion of the Board of Directors, and were $6.8 million, $4.9 million and $6.1 million during 2003, 2002 and 2001, respectively. The company’s 2003 contributions consisted of $1.2 million in cash and approximately 0.8 million shares of Orbital common stock, which employees are permitted to exchange into other investment alternatives. The company’s 2002 contributions consisted of approximately 1.1 million shares of Orbital common stock.

The company has a deferred compensation plan for senior managers and executive officers. At December 31, 2003 and 2002, liabilities related to this plan totaling $4.4 million and $4.2 million, respectively, were included in accrued expenses.

The following is a summary of selected quarterly financial data for the previous two years (in thousands, except share data). Certain reclassifications have been made to prior quarter financial


(1)	During 2003, operating income included net settlement expenses related to the company’s settlement with ORBIMAGE in the amounts of $1.0 million in the first quarter, $3.5 million in the second quarter and $0.3 million in the fourth quarter. In the third quarter of 2003, the company recorded a $0.9 million reduction of settlement expense related to certain insurance proceeds (see Note 3).


	In the third quarter of 2003, net loss included a $38.8 million debt extinguishment charge. In the fourth quarter of 2003, net income included a $40.6 million gain on reversal of allocated losses of affiliate.


(2)	In the first quarter of 2002, the company recorded a $13.8 million ($0.30 per diluted share) cumulative effect of change in accounting in connection with the adoption of SFAS No. 142.

An evaluation was performed under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities and Exchange Act of 1934, as amended) as of the end of the period covered by this report. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that these disclosure controls and procedures were effective. There has been no change in our internal control over financial reporting during our most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

Information concerning directors and officers is included under the caption “Executive Officers of the Registrant” in Part I above and under the caption “Election of Directors — Directors to be Elected at the 2004 Annual Meeting, — Directors Whose Terms Expire in 2005 and — Directors Whose Terms Expire in 2006,” “Information Concerning the Board and Its Committees” and “Section 16(a) Beneficial Ownership Reporting Compliance” of our definitive Proxy Statement to be filed pursuant to Regulation 14A on or about March 15, 2004 and is incorporated herein by reference.

We have adopted a Code of Business Conduct and Ethics that applies to all of our directors, officers and employees. In compliance with the applicable rules of the SEC, special ethics obligations of our Chief Executive Officer, Chief Financial Officer, Controller and other employees who perform financial or accounting functions are set forth in Section 10 of the Code of Business Conduct and Ethics, entitled Special Ethics Obligations of Employees with Financial Reporting Obligations. The Code is available at the Investor Information/Corporate Governance section of our web site at www.orbital.com. Printed copies are available free of charge and may be requested by contacting our Investor Relations Department either by mail at our corporate headquarters, by telephone at (703) 406-5543 or by e-mail at investor.relations@orbital.com.

We intend to satisfy the disclosure requirements under the 1934 Securities Exchange Act, as amended, regarding an amendment to, or a waiver from, our Code of Business Conduct and Ethics by posting such information on our web site at www.orbital.com.

The information required by this Item is included under the captions “Summary Compensation Table,” “Option Grants in Last Fiscal Year,” “Aggregated Option Exercises During 2003 and December 31, 2003 Option Values,” “Indemnification Agreements,” “Executive Employment Agreements” and “Information Concerning the Board and Its Committees” of our definitive Proxy

The following table sets forth certain information regarding our equity compensation plans as of December 31, 2003.

The information required by this Item also is included under the caption “Ownership of Common Stock” of our definitive Proxy Statement to be filed pursuant to Regulation 14A on or about March 15, 2004 and is incorporated herein by reference.

If applicable, the information required by this Item will be included under the caption “Related Transactions” of our definitive Proxy Statement to be filed pursuant to Regulation 14A on or about March 15, 2004 and is incorporated herein by reference.

The information required by this Item is included under the caption “Fees of Independent Auditors” of our definitive Proxy Statement to be filed pursuant to Regulation 14A on or about March 15, 2004 and is incorporated herein by reference.


	1.	Financial Statements. The following financial statements, together with the reports of independent auditors are filed as a part of this report:


	A. Report of Independent Auditors

	B. Consolidated Statements of Operations

	C. Consolidated Balance Sheets

	D. Consolidated Statements of Stockholders’ Equity

	E. Consolidated Statements of Cash Flows

	F. Notes to Consolidated Financial Statements

2. Financial Statements of 50% Owned Subsidiaries and Financial Statement Schedules.


	The following additional financial data are transmitted with this report and should be read in conjunction with the consolidated financial statements contained herein. Schedules other than those listed below have been omitted because they are inapplicable or are not required.


	Report of Independent Auditors on Financial Statement Schedule

	Schedule II — Valuation and Qualifying Accounts

	Financial Statements of Orbital Imaging Corporation as of December 31, 2002 and for the year then ended (unaudited)

	Financial Statements of Orbital Imaging Corporation as of December 31, 2001 and 2000 and for each of the three years in the period ended December 31, 2001, together with report of independent accountants

3. Exhibits. A complete listing of exhibits required is given in the Exhibit Index that precedes the exhibits filed with this report.

On October 16, 2003, the company filed a Current Report on Form 8-K, dated October 16, 2003, disclosing under Item 12 that it announced its consolidated financial results for the third quarter ended September 30, 2003.

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the date indicated.



/s/ Robert M. Hanisee Robert M. Hanisee		Director

/s/ Robert J. Hermann Robert J. Hermann		Director

/s/ Janice I. Obuchowski Janice I. Obuchowski		Director

/s/ Frank L. Salizzoni Frank L. Salizzoni		Director

/s/ Harrison H. Schmitt Harrison H. Schmitt		Director

/s/ Scott L. Webster Scott L. Webster		Director

Our audit of the consolidated financial statements referred to in our report dated February 11, 2004 appearing in this Annual Report on Form 10-K also included an audit of the financial statement schedule as of and for the years ended December 31, 2003, 2002 and 2001 listed in Item 15(a)(2) of this Form 10-K. In our opinion, this financial statement schedule presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements.

ORBITAL IMAGING CORPORATION
(DEBTOR-IN-POSSESSION)
BALANCE SHEET
DECEMBER 31, 2002
(In thousands, except share data)
(unaudited)

The accompanying notes are an integral part of these unaudited financial statements.

ORBITAL IMAGING CORPORATION
(DEBTOR-IN-POSSESSION)
STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 2002
(In thousands, except share data)
(unaudited)

(1)

All potentially dilutive securities, such as preferred stock subject to repurchase, warrants and stock options, are antidilutive for the period presented.

The accompanying notes are an integral part of these unaudited financial statements.

ORBITAL IMAGING CORPORATION
(DEBTOR-IN-POSSESSION)
STATEMENT OF STOCKHOLDERS’ DEFICIT
(In thousands, except share data)
(unaudited)

The accompanying notes are an integral part of these unaudited financial statements.

ORBITAL IMAGING CORPORATION
(DEBTOR-IN-POSSESSION)
STATEMENT OF CASH FLOWS
YEAR ENDED DECEMBER 31, 2002
(In thousands)
(unaudited)

The accompanying notes are an integral part of these unaudited financial statements.

ORBITAL IMAGING CORPORATION
(DEBTOR-IN-POSSESSION)
NOTES TO FINANCIAL STATEMENTS
(unaudited)

Orbital Imaging Corporation (“ORBIMAGE” or the “Company”), a Delaware corporation, is a global provider of Earth imagery products and services. ORBIMAGE is developing an integrated system of digital remote sensing satellites, U.S. and international ground stations and Internet-based sales channels to collect, process and distribute Earth imagery products.

On April 5, 2002, ORBIMAGE filed a voluntary petition for reorganization under Chapter 11 of the United States Bankruptcy Code (“Chapter 11”) in the United States Bankruptcy Court for the Eastern District of Virginia. The Company had previously announced publicly that it intended to take such action in furtherance of its plan to reorganize and had been in negotiations with its bondholders, holders of its Series A Preferred Stock and Orbital Sciences Corporation (“Orbital”), its majority stockholder. Under Chapter 11, prosecution of certain claims (“Pre-Petition Claims”) against ORBIMAGE in existence prior to the filing of the petition are stayed by operation of the Federal bankruptcy laws while ORBIMAGE continues business operations as Debtor-in-Possession and attempts to develop a plan of reorganization.

Pre-Petition Claims are reflected in the December 31, 2002 balance sheet as liabilities subject to compromise. Additional claims may be determined by the Bankruptcy Court (or agreed to by parties in interest) subsequent to the filing date as a result of the Company’s rejection of executory contracts, including leases, and allowed claims for contingencies and other disputed amounts, which would also be classified as liabilities subject to compromise in the balance sheet. The liabilities in the accompanying balance sheets do not include all such additional claims which may arise subsequent to December 31, 2002. Claims secured against the Company’s assets also are stayed by operation of law, although the holders of such claims have the right to move the court for relief from the stay.

On June 19, 2002, the Official Committee of Unsecured Creditors (the “Creditors Committee”) appointed in the bankruptcy proceeding filed a motion in the Bankruptcy Court for authority to conduct discovery against Orbital under Federal Rules of Bankruptcy Procedure 2004. The stated purpose of the Creditors Committee in seeking such discovery was to investigate the details of ORBIMAGE’s relationship and transactions with Orbital in order to reveal whether claims were warranted against Orbital or certain of its directors, officers and former officers on theories that might include, among others, wrongful control and domination, breach of fiduciary duty, breach of contract, fraud and misrepresentation.

On July 24, 2002, ORBIMAGE initiated an adversary proceeding in the Bankruptcy Court by filing a complaint seeking damages and other relief from Orbital due to, 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 with Orbital and MacDonald, Dettwiler and Associates Ltd. (“MDA”), Orbital’s former subsidiary. The complaint also named certain officers/directors of Orbital as defendants in connection with certain of the claims. The Bankruptcy Court ordered that the majority of the claims against Orbital be referred to resolution by binding arbitration in accordance with the arbitration provisions of the procurement agreement between ORBIMAGE and Orbital.

On February 11, 2003, ORBIMAGE signed a Settlement Agreement with the Creditors’ Committee and Orbital that is intended to facilitate ORBIMAGE’s emergence from its Chapter 11 reorganization proceeding. Under the Settlement Agreement, ORBIMAGE agreed to suspend its pending litigation with Orbital in exchange for additional working capital and other consideration to be provided by Orbital. The Settlement Agreement provides for mutual releases of all claims among the parties, including the Company and a significant majority of its bondholders and preferred stockholders, Orbital, and certain officers/directors of Orbital. The releases will be effective upon launch of the OrbView-3 satellite by Orbital and payment by Orbital of $2.5 million to the Company (the “Orbital Payment”). In exchange, Orbital will receive new notes that are equal to the Orbital Payment and rank pari passu with the new notes to be issued to the Company’s pre-bankruptcy unsecured creditors provided the final reorganization plan is consistent with the Settlement Agreement. If the final plan is materially inconsistent with the Settlement Agreement, Orbital will have priority in right of payment over the unsecured creditors. As part of the Settlement Agreement, if OrbView-3 is not launched by April 30, 2003 or on-orbit check out is not successfully completed by July 31, 2003, Orbital will pay ORBIMAGE delay penalties. Orbital also agreed to defer certain payment obligations of ORBIMAGE and to forgive others, the details of which are discussed in Note 4 below. ORBIMAGE obtained formal approval of the Settlement Agreement from the Bankruptcy Court on February 19, 2003.

The RadarSat-2 Territorial License Agreement with MDA required ORBIMAGE to pay MDA $5.0 million on July 2, 2002 and $5.0 million on December 31, 2002. ORBIMAGE has not made either of these payments and disputes that such payments are actually due. The parties intend to resolve this issue as part of ORBIMAGE’s financial restructuring. Accordingly, no liability has been recorded for these amounts at December 31, 2002. ORBIMAGE’s relationship with MDA is currently the subject of negotiations between the parties and disputes in the bankruptcy process. There can be no assurance as to the outcome of the discussions.

In addition to the issues surrounding its bankruptcy filing, ORBIMAGE’s operations are subject to certain risks and uncertainties that are inherent in the remote sensing industry. ORBIMAGE has incurred losses since its inception, and management believes that it will continue to do so through the first year of OrbView-3 operations. As of December 31, 2002, ORBIMAGE had $6.3 million of unrestricted cash and cash equivalents. ORBIMAGE’s liquidity has been, and continues to be, constrained. ORBIMAGE is negotiating a financial restructuring, as discussed below, which will be required in order to provide adequate liquidity for operations through the launch and on-orbit verification of its OrbView-3 satellite, which is expected to be launched during the second quarter of 2003. ORBIMAGE defaulted on its senior

notes during the year; therefore, all amounts relating to its senior notes have been classified as current liabilities in the accompanying financial statements. ORBIMAGE’s ability to continue as a going concern is dependent on restructuring its senior notes (including the conversion of a substantial portion of the senior notes to equity) pursuant to an approved plan of reorganization, a timely and successful launch of the OrbView-3 satellite currently under construction, and obtaining additional liquidity to meet its capital requirements.

During 2002, ORBIMAGE funded its capital requirements for operations through cash from operations combined with cash on hand and insurance proceeds from the launch failure of its OrbView-4 satellite. Management expects that the financial restructuring described in its plan of reorganization will generate sufficient additional liquidity to satisfy ORBIMAGE’s capital and operating requirements through a successful launch of OrbView-3, but must obtain additional liquidity to meet its capital and operating requirements beyond the launch. If ORBIMAGE is unable to achieve its plan, it may be forced to liquidate its assets for significantly less than their current carrying value and its financial position and results of operations would be materially and adversely impacted.

The OrbView-2 satellite was launched on August 1, 1997, and completed its on-orbit checkout in October 1997. ORBIMAGE recognized revenues related to the OrbView-2 satellite of $9.8 million for the year ended December 31, 2002. The OrbView-4 satellite suffered a launch failure in September 2001 and did not reach its intended orbit. The OrbView-3 satellite is currently expected to be launched in the second quarter of 2003 and will provide one-meter panchromatic and four-meter multispectral imagery of the Earth. The imagery provided by OrbView-3 is expected to have a broad range of applications for U.S. and foreign national security and many commercial and scientific markets. ORBIMAGE acquired the current RadarSat Territorial License in February 2001, which granted ORBIMAGE exclusive marketing rights in the United States for RadarSat-2 imagery. RadarSat-2 is currently expected to be launched in the second quarter of 2004 and will provide high-resolution commercial radar imagery (see Note 1).

As of April 5, 2002, the date of the Company’s voluntary petition for reorganization under Chapter 11, ORBIMAGE adopted the financial reporting and accounting policies required for companies operating pursuant to Chapter 11 as prescribed in the American Institute of Certified Public Accountant’s Statement of Position 90-7, “Financial Reporting by Entities in Reorganization under the Bankruptcy Code” (“SOP 90-7”). In accordance with SOP 90-7, ORBIMAGE has classified in the accompanying balance sheet as of December 31, 2002 liabilities subject to compromise separately from those that are not subject to compromise. ORBIMAGE has reported separately in the accompanying statement of operations for the year

ended December 31, 2002, revenues, expenses, gains and losses relating to the reorganization.

The balance sheet as of December 31, 2002 and the related statements of operations, of stockholders’ deficit and of cash flows for the year then ended have not been audited or reviewed by any independent accountant.

The preparation of financial statements in conformity with general accepted accounting principles requires management to make estimates and assumptions that affect the amount reported in its financial statements and accompanying notes. Actual results could differ from these estimates.

ORBIMAGE’s principal source of revenue is the sale of satellite imagery to customers, value-added resellers and distributors. Such sales often require ORBIMAGE to provide imagery over the term of a multi-year sales contract. Accordingly, ORBIMAGE recognizes revenues on imagery contracts on a straight-line basis over the delivery term of the contract. Deferred revenue represents receipts in advance of the delivery of imagery. Revenue for other services is recognized as services are performed.

ORBIMAGE recognizes revenue on the contracts to construct OrbView-3 distributor ground stations and contracts to provide image-processing services using the percentage-of-completion method of accounting. Revenue on these contracts is recognized based on costs incurred in relation to total estimated costs. Revenues recognized in advance of becoming billable are recorded as unbilled receivables. Such amounts generally do not become billable until after OrbView-3 becomes operational with the individual ground stations. To the extent that estimated costs of completion are adjusted, revenue and profit recognized from a particular contract will be affected in the period of the adjustment. Anticipated contract losses are recognized as they become known.

Compensation expense for employee stock-based compensation plans is measured using the intrinsic value-based method of accounting prescribed by Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees.” Compensation expense is recognized over the vesting period for stock option grants to employees that have market values in excess of the strike price. To the extent that ORBIMAGE grants stock options to non-employee consultants or advisors, ORBIMAGE records costs equal to the fair value of the options granted as of the measurement date as determined using a Black-Scholes model.

The following table illustrates the effect on net loss if the fair value method of accounting for stock-based compensation had been applied for the year ended December 31, 2002 (in thousands, except per share amounts):

ORBIMAGE considers all highly liquid investments with original maturities of three months or less when purchased to be cash equivalents.

Financial instruments which potentially subject ORBIMAGE to concentrations of credit risk consist principally of temporary cash investments. ORBIMAGE places its temporary cash investments with high credit quality financial institutions which invest primarily in U.S. Government instruments guaranteed by banks or savings and loan associations which are members of the FDIC.

ORBIMAGE’s policy is to review its long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable in accordance with SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets.” ORBIMAGE recognizes an impairment loss when the sum of expected undiscounted net future cash flows is less than the carrying amount of the assets. The amount of the impairment is measured as the difference between the asset’s estimated fair value and its book value. Fair market value is determined primarily using the projected future cash flows discounted at a rate commensurate with the risk involved.

On January 1, 2002, ORBIMAGE adopted SFAS No. 142, “Goodwill and Other Intangible Assets,” which eliminated the amortization of goodwill and other intangibles with indefinite useful lives unless the intangible asset is impaired. ORBIMAGE performed an impairment test of its goodwill and determined that no impairment of recorded goodwill existed at December 31, 2002. Intangible assets that have finite useful lives continue to be amortized over those useful lives.

ORBIMAGE recognizes income taxes using the asset and liability method. Under this

method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to be applied to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. The deferred tax assets are reviewed periodically for recoverability and valuation allowances are provided as necessary.

ORBIMAGE purchased the OrbView-1, OrbView-3 and OrbView-4 satellites, the OrbView-2 License and the ground system assets from Orbital pursuant to the System Procurement Agreement, discussed in Note 4 below. ORBIMAGE is purchasing the RadarSat-2 Territorial License pursuant to a separate agreement with MDA. Amortization of the capitalized costs begins when the assets are placed in service. Capitalized costs include the cost of any applicable launch insurance.

Depreciation and amortization are provided using the straight-line method as follows:

In June 2002, the Financial Accounting Standards Board issued SFAS No. 146, “Accounting for Costs Associated with Exit or Disposal Activities.” SFAS No. 146 generally requires companies to recognize costs associated with exit or disposal activities when they are incurred rather than at the date of a commitment to an exit or disposal plan. The provisions of SFAS 146 are applicable to exit or disposal activities initiated after December 31, 2002. OBIMAGE has not completed its assessment or evaluation of SFAS 146.

In December 2002, the Financial Accounting Standards Board issued SFAS No. 148, “Accounting for Stock-Based Compensation — Transition and Disclosure, an amendment of FASB Statement No. 123.” 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 the December 31, 2002 financial statements.

ORBIMAGE was initially established as a wholly-owned subsidiary of Orbital. In 1997, ORBIMAGE issued preferred stock to private investors to fund a significant portion of the remaining costs of existing projects (the “Private Placement”). During 1997, ORBIMAGE also executed certain contracts with Orbital whereby all assets and liabilities of Orbital’s operating division, ORBIMAGE, were sold to ORBIMAGE at historical cost.

ORBIMAGE had three significant contracts with Orbital at the beginning of 2002: (i) the ORBIMAGE System Procurement Agreement dated November 18, 1996, as amended (the “System Procurement Agreement”), (ii) the OrbView-2 License Agreement dated May 8, 1997 (the “OrbView-2 License”), and (iii) the Amended and Restated Administrative Services Agreement dated May 8, 1997 (the “Administrative Services Agreement”).

ORBIMAGE did not incur costs under the System Procurement Agreement for the year ended December 31, 2002. As of December 31, 2002, $4.4 million of costs previously incurred under the System Procurement Agreement remain outstanding. The System Procurement Agreement further requires the Company to pay Orbital $1.5 million upon the successful on-orbit checkout of OrbView-3 and to pay Orbital annual on-orbit incentive payments based upon operational performance of up to $2.25 million on each of the first five anniversaries of OrbView-3, for a total of $11.25 million. Under the terms of the Settlement Agreement discussed in Note 1 above, once OrbView-3 is launched, Orbital is required to make a payment of $2.5 million to ORBIMAGE, and Orbital agrees to discharge the $4.4 million obligation discussed above, and to defer the $1.5 million milestone payment until one year from the date of acceptance by ORBIMAGE of the OrbView-3 system. In addition, the maximum amount of the annual post-launch on-orbit payments to Orbital would be reduced from $2.25 million to $1.125 million on each of the first five anniversaries of OrbView-3, for a total of $6.375 million.

If the OrbView-3 launch has not occurred by April 30, 2003 and the cause of any delay in launch is other than force majeure (as defined in the System Procurement Agreement), the terms of the Settlement Agreement require that Orbital will pay ORBIMAGE daily delay penalties of $16,430, payable beginning May 1, 2003 until Launch has occurred. If launch has occurred and OrbView-3 has achieved its intended orbit but acceptance by ORBIMAGE of the OrbView-3 System as provided in the System Procurement Agreement has not occurred by the earlier of 90 days after launch or July 31, 2003, Orbital will pay ORBIMAGE daily delay penalties of

$16,430, unless the delay is due to force majeure, any problems arising out of the ORBIMAGE software and equipment or work that ORBIMAGE agrees to perform in connection with OrbView-3 System on-orbit checkout, or if on-orbit checkout and acceptance is impossible due to an on-orbit failure. Orbital’s maximum aggregate liability for delay penalties is $5.0 million.

Under the OrbView-2 License Agreement, Orbital has granted an exclusive worldwide license to ORBIMAGE to use and sell OrbView-2 imagery. Pursuant to the terms of the OrbView-2 License Agreement, Orbital assigned to ORBIMAGE all amounts that are due or become due to Orbital under a contract Orbital had with NASA to deliver OrbView-2 imagery, and ORBIMAGE has sole responsibility for operating and controlling the OrbView-2 satellite. This contract expired on December 19, 2002. Effective December 20, 2002, ORBIMAGE executed a new contract to provide OrbView-2 imagery to NASA.

Under the Administrative Services Agreement, ORBIMAGE paid Orbital for office space and other administrative services, as well as certain direct and indirect operating services provided by Orbital. The Administrative Services Agreement was terminated on March 31, 2002. ORBIMAGE incurred costs of approximately $0.3 million under the Administrative Services Agreement for the year ended December 31, 2002. ORBIMAGE owes Orbital a maximum of $2.4 million under the Agreement as of December 31, 2002, which is included in liabilities subject to compromise as of that date. As part of the Settlement Agreement, ORBIMAGE and Orbital have executed a sublease agreement which permits ORBIMAGE to continue subleasing its current office space from Orbital through April 2005.

In 1998, ORBIMAGE entered into an agreement with MDA, then a Canadian subsidiary of Orbital, under which ORBIMAGE acquired the exclusive worldwide distribution rights for the RadarSat-2 satellite imagery (the “RadarSat-2 License”). Under the RadarSat-2 License, MDA would own and operate the RadarSat-2 satellite, and would provide operations, data reception, processing, archiving and distribution services to ORBIMAGE. The Company’s acquisition of the RadarSat-2 License was to cost $60.0 million, of which $30.0 million was paid in 1999. The remaining payments were not to exceed $15.0 million in 2001, $10.0 million in 2002 and $5.0 million upon the successful on-orbit checkout of RadarSat-2. The RadarSat-2 License Agreement was terminated on February 9, 2001 and replaced with a new RadarSat-2 Territorial License agreement (the “RadarSat-2 Territorial License”), pursuant to which MDA granted to ORBIMAGE an exclusive territorial license to distribute and sell RadarSat-2 imagery in the United States for $40.0 million. The $30.0 million of RadarSat-2 payments previously remitted to MDA under the original RadarSat-2 License agreement were applied to the $40.0 million license fee under the RadarSat-2 Territorial License. The License required ORBIMAGE to pay the remaining $10.0 million license fee obligation in two equal installments of $5.0 million each on July 2, 2002 and December 31, 2002. ORBIMAGE has not made either of these payments and disputes that such payments are actually due. Negotiations are ongoing with respect to a new Agreement as part of ORBIMAGE’s financial restructuring, but there can be no assurance as to its content or timing. No amounts have been accrued by ORBIMAGE at December 31, 2002. The impact of any financial restructuring is not determinable at present.

ORBIMAGE is also obligated under the RadarSat-2 Territorial License to pay 60 percent of the operating costs for RadarSat-2, up to a maximum of $6.0 million per year, following the

Due to continued delays in the completion of OrbView-3 and RadarSat-2, the entry of competitors in markets served by ORBIMAGE and the effect of terrorism activities on Federal funding for scientific imagery applications, ORBIMAGE evaluated the recoverability of its remaining satellites and ground station assets pursuant to SFAS No. 144. Accordingly, ORBIMAGE adjusted the carrying value of the satellites and related ground station assets to their most likely estimated fair values based on anticipated future discounted cash flows, resulting in the following non-cash impairment charge for the year ended December 31, 2002 (in thousands):

For the year ended December 31, 2002, there were no material differences between net loss as reported and comprehensive income (loss).

The computations of basic and diluted loss per common share were as follows for the year ended December 31, 2002 (in thousands, except share data):

Property, plant and equipment consisted of the following at December 31, 2002 (in thousands):

Depreciation and amortization expense was $1.4 million for the year ended December 31, 2002.

Satellites and related rights consisted of the following at December 31, 2002 (in thousands):

Satellite depreciation and amortization expense was $3.6 million for the year ended December 31, 2002.

ORBIMAGE recorded no income tax expense for the year ended December 31, 2002. The effective income tax rate varied from the statutory U.S. Federal income tax rate for the year ended December 31, 2002 because of the following differences:

The primary components of ORBIMAGE’s federal deferred tax assets and liabilities were as follows (in thousands):

The increase in valuation allowance is principally the result of current year operating losses. Management believes it is more likely than not that its existing deferred tax assets will not be realized. As of December 31, 2002, ORBIMAGE had net operating loss carryforwards totaling $183.6 million, which expire beginning the year ending December 31, 2014. Such net operating loss carryforwards are subject to certain limitations and other restrictions.

As of December 31, 2002, liabilities subject to compromise (see Note 1) were as follows (in thousands):

On February 25, 1998, ORBIMAGE issued 150,000 units consisting of senior notes and 1,312,746 warrants for common stock, raising net proceeds of approximately $144.6 million. The gross proceeds of the units offering of $150.0 million were allocated: $142.1 million to the senior notes and $7.9 million to the value of the warrants recorded as a debt discount. On April 22, 1999, ORBIMAGE completed an add-on debt offering of senior notes raising net proceeds of approximately $68.1 million. The debt discount and issuance costs are amortized using the interest method as an adjustment to interest expense over the term of the senior notes resulting in an effective yield of approximately 13.4%. As of December 31, 2002, the senior notes had a fair value of approximately $45 million as estimated by quoted market prices. Interest on ORBIMAGE’s senior notes due 2005 accrues at a rate of 11.625% per annum and is payable semi-annually in arrears on March 1 and September 1.

At December 31, 2001, ORBIMAGE was in default with regard to the senior notes because ORBIMAGE did not make the scheduled interest payments for that year. On February 10, 2002, the senior noteholders received approximately $28.4 million of insurance proceeds as payment of the outstanding interest on the senior notes, which cured the payment default. This payment included interest on the overdue installments of interest which was payable at a rate of 12.625 percent per annum. The Company made a partial payment of $5.9 million to the senior noteholders in conjunction with the March 1, 2002 semiannual interest payment on March 31, 2002, but was in default again on its interest obligations under the senior notes by $7.2 million with regard to that payment.

The holders of 25% of the face value of either offering of senior notes may accelerate the principal and accrued interest due with respect to their class of senior notes at any time due to an uncured payment default.

The senior notes mature on March 1, 2005. ORBIMAGE is not required to make mandatory redemption or sinking fund payments with respect to the senior notes. However, ORBIMAGE may be obligated, under certain circumstances, to make an offer to purchase: (i) all outstanding senior notes at a redemption price of 101% of the principal amount thereof, plus accrued and unpaid interest and liquidated damages (if any) to the date of purchase, upon a change of control, and (ii) outstanding senior notes with a portion of the net proceeds of certain asset sales at a redemption price of 100% of the principal amount thereof, plus accrued and unpaid interest and liquidated damages (if any) to the date of the purchase.

The indenture for the senior notes restricts, among other things, ORBIMAGE’s ability to pay cash dividends.

ORBIMAGE recorded interest expense for the period from January 1, 2002 to April 5, 2002. In accordance with SOP 90-7, interest expense is not recorded during the Chapter 11 proceedings except to the extent that it is probable that it will be allowed. Management does not believe it is probable that interest expense incurred during the Chapter 11 proceedings will be allowed, and therefore no interest expense for the period from April 6, 2002 through December 31, 2002 has been recorded. If ORBIMAGE had recorded interest expense for the period from April 6, 2002 through December 31, 2002, interest expense for the year ended December 31, 2002 would have increased by approximately $22.0 million.

In conjunction with the issuance of the senior notes, ORBIMAGE incurred debt financing costs which had been deferred and amortized over the term of the senior notes. Such amortization was reported as a component of interest expense. As a result of the Chapter 11 filing, ORBIMAGE has ceased amortizing these costs. The remaining unamortized costs of $4.5 million are included in goodwill, intangibles and deferred costs in the accompanying balance

The rights of the senior noteholders are subject to change if the plan of reorganization is confirmed by the Bankruptcy Court.

ORBIMAGE’s employees participate in the Orbital Imaging Corporation Retirement Savings Plan, as amended, a defined contribution plan (the “Plan”) in accordance with Section 401(k) of the Internal Revenue code of 1986, as amended. The Company’s contributions to the Plan are made based on certain plan provisions and at the discretion of the Board of Directors. ORBIMAGE’s annual contribution expense was $0.2 million for the year ended December 31, 2002.

Total rental expense under operating leases was $0.2 million for the year ended December 31, 2002. Aggregate minimum rental commitments under non-cancelable operating leases (primarily for office space and equipment) as of December 31, 2002 were as follows (in thousands):

ORBIMAGE has authorized 10,000,000 shares of $0.01 par value preferred stock, of which: (a) 2,000,000 shares of the Series A preferred stock have been authorized, of which 975,349 shares were issued and outstanding as of December 31, 2002; (b) 2,000,000 shares of the Series B preferred stock have been authorized, none of which have been issued and (c) 2,000,000 shares of the Series C preferred stock have been authorized, none of which have been issued.

The Series A preferred stock is assigned a stated value of $100 per share and is entitled to a cumulative dividend of 12% per annum payable semi-annually on May 1 and November 1 of each year, in cash or, in lieu thereof, payable in-kind in shares of Series A preferred stock on the basis of 120 shares of Series A preferred stock for each 1,000 shares of Series A preferred stock outstanding. To date, all dividends have been paid in-kind. As of December 31, 2002, cumulative preferred stock dividends in arrears totaled 50,393 shares.

Series A holders have certain preferences upon dividend distributions, distributions upon liquidation or distributions upon merger, consolidation or sale of assets over the holders of Series B preferred stock (if and when issued), Series C preferred stock (if and when issued), the common holders and any other class of stock ranking junior to the Series A preferred stock.

Each Series A holder is entitled to such number (rounded to the nearest whole number) of votes as such Series A holder would be entitled if such Series A holder had converted its Series A preferred stock into shares of common stock.

The Series A holders have the option, at any time, or from time to time, to convert their Series A preferred stock into fully paid and non-assessable shares of common stock. The number of shares of common stock issued upon such conversion will be determined by multiplying each Series A holder’s number of Series A preferred stock by a fraction, the numerator of which is the Series A preferred stock Stated Value and the denominator of which is a conversion price, subject to anti-dilutive adjustments. The per share conversion price is currently $4.17. Mandatory conversion of the Series A preferred stock into shares of common stock shall occur upon the earliest of any one of the following events to take place:

	•		the closing, under certain circumstances, of a public offering of the common stock;

	•		the culmination of a 180-day period in which the average price of the common stock exceeds a certain level relative to the conversion price; or

	•		the proposed sale of no less than 70% of the common stock on a fully diluted basis.

Although not redeemable at the option of the holders, ORBIMAGE has certain obligations to the Series A holders upon a “change of control” as deemed in the stock purchase agreement. If a change of control occurs before the latest of:

	•		the successful on-orbit checkout of OrbView-3,

	•		the closing of an initial public offering that meets certain criteria, or

	•		the end of a 180-day period in which the average price of the common stock exceeds a certain level relative to the conversion price of the Series A preferred stock,

then ORBIMAGE must offer to purchase, subject to the rights of the holders of the senior notes, all outstanding shares of Series A preferred stock for a purchase price of 101% of the liquidation

The activity in the preferred stock subject to repurchase was as follows for the year ended December 31, 2002 (dollars in thousands):

As a result of the Chapter 11 filing, ORBIMAGE did not accrue any dividends after April 5, 2002, the date of the Chapter 11 filing.

The rights of the Series A holders are subject to change if the plan of reorganization is confirmed by the Bankruptcy Court.

In connection with the units offering on February 25, 1998, ORBIMAGE issued 150,000 warrants, which entitle the holders to acquire 1,312,746 shares of ORBIMAGE’s common stock. The warrants were exercisable as of December 31, 2002 at a price is $0.01 per share. Each warrant entitles the holder to buy 8.75164 shares of common stock. The warrants expire on March 1, 2005.

The rights of the holders of the warrants are subject to change if the plan of reorganization is confirmed by the Bankruptcy Court.

Through ORBIMAGE’s stock option plan, as amended (the “Plan”), ORBIMAGE may issue to its employees, Orbital’s employees, consultants or advisors incentive or non-qualified options to purchase up to 4,800,000 shares of ORBIMAGE’s common stock. Under the Plan, stock options may not be granted with an exercise price less than 85% of the stock’s fair market value at the date of the grant as determined by the Board of Directors. ORBIMAGE’s options generally vest in one-third increments over either a two-year or a three-year period. The maximum term of an option is 10 years.

The following table summarizes the activity relating to the Plan for the year ended December 31, 2002:

No options were granted for the year ended December 31, 2002. As of December 31, 2002, the weighted average remaining contractual life of the options outstanding was 5.48 years.

The rights of the option holders are subject to change if the plan of reorganization is confirmed by the Bankruptcy Court.

ORBIMAGE operated as a single segment for the year ended December 31, 2002. ORBIMAGE recognized revenues related to contracts with the National Aeronautics and Space Administration of approximately $7.3 million for the year ended December 31, 2002, representing approximately 47% of total revenues recognized during 2002.

As of December 31, 2001 and 2000
and for the Three Years in the Period Ended December 31, 2001

In our opinion, the accompanying balance sheets and the related statements of operations, of stockholders’ equity and of cash flows present fairly, in all material respects, the financial position of Orbital Imaging Corporation at December 31, 2001 and 2000, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2001 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 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 provide a reasonable basis for our opinion.

The accompanying 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 experienced continuing operating losses, defaulted on its senior notes and requires a financial restructuring to meet its capital and operating requirements. These matters raise substantial doubt about its ability to continue as a going concern. Management’s plans in regard to these matters are also described in Note 1. These financial statements do not include any adjustments that might result from the outcome of this uncertainty.

ORBITAL IMAGING CORPORATION
STATEMENTS OF OPERATIONS
(In thousands, except share data)

ORBITAL IMAGING CORPORATION
STATEMENTS OF STOCKHOLDERS’ EQUITY (DEFICIT)
(In thousands, except share data)

The accompanying financial statements have been prepared on a going concern basis, which contemplates the realization of assets and satisfaction of liabilities in the normal course of business. ORBIMAGE has incurred losses since its inception, and management believes that it will continue to do so for the foreseeable future. As of December 31, 2001, ORBIMAGE had $13.4 million of unrestricted cash and cash equivalents. Current liabilities exceeded current assets by $223.5 million at December 31, 2001, and its accumulated deficit was $277.9 million on that date. ORBIMAGE’s liquidity has been, and continues to be, constrained. ORBIMAGE is negotiating a financial restructuring, as discussed below, that will be required in order to provide adequate liquidity for operations through the launch and on-orbit verification of its OrbView-3 satellite, which is expected to be launched during the fourth quarter of 2002. ORBIMAGE defaulted on its senior notes during the year; therefore, all amounts relating to its senior notes have been classified as current liabilities in the accompanying financial statements. ORBIMAGE’s ability to continue as a going concern is dependent on restructuring its senior notes (including the conversion of a substantial portion of the senior notes to equity) pursuant the filing of a petition and a plan of reorganization (“POR”) under Chapter 11 of the Bankruptcy Code, a timely and successful launch of the OrbView-3 satellite currently under construction, and a restructuring of the Company’s obligations with respect to the RadarSat-2 License, as discussed below. Negotiations are ongoing among ORBIMAGE, Orbital, the preferred stockholders and noteholders with respect to a new Agreement, but there can be no assurance as to its content or timing.

During 2001, ORBIMAGE funded its capital requirements for operations through cash from operations combined with cash on hand, advances from Orbital and insurance proceeds from the launch failure of its OrbView-4 satellite. Management expects that the financial restructuring strategy described below will generate sufficient additional liquidity to satisfy ORBIMAGE’s capital and operating requirements for 2002. If ORBIMAGE is unable to achieve its plan, it may be forced to liquidate its assets for significantly less than their current carrying value and its financial position and results of operations would be materially and adversely impacted.

On February 15, 2001, ORBIMAGE announced that it would not make the $13.1 million interest payment scheduled to be made on March 1, 2001 to the holders of its senior notes, and

that it had retained a financial advisor to assist in, among other things, restructuring these notes. ORBIMAGE is also having discussions with Orbital Sciences Corporation (“Orbital”), ORBIMAGE’s majority shareholder, in pursuit of additional sources of liquidity to meet its funding needs. As of March 31, 2001, ORBIMAGE was in default on its senior notes. ORBIMAGE also did not make the $13.1 million interest payment scheduled to be made on September 1, 2001. On September 20, 2001, ORBIMAGE reached an Agreement with an informal committee representing the holders of approximately 75 percent of the senior notes to undertake a financial restructuring, which was to include filing a petition for reorganization under Chapter 11 of the U.S. Bankruptcy Code with a POR. Certain key investors in ORBIMAGE’s Series A preferred stock and Orbital also agreed to the terms of the Agreement.

The Agreement was subject to certain conditions, including filing the petition for reorganization by December 15, 2001 and the POR by January 31, 2002, and approval of the plan no later than October 31, 2002. The unsuccessful launch of OrbView-4, described in Note 5 below, has resulted in these conditions not being met, and thus the Agreement is no longer in force. Negotiations are ongoing with respect to a new Agreement, but there can be no assurance as to its content or timing.

As part of these negotiations, ORBIMAGE has offered and may agree to an additional $10 million cash incentive to be paid by the Company to Orbital Sciences Corporation (“Orbital”), its majority shareholder, as annual on-orbit incentive payments under the System Procurement Agreement between ORBIMAGE and Orbital. The timing of such incentive payments is uncertain and will depend on the outcome of the negotiations. In addition, ORBIMAGE has offered to pay back to Orbital $5 million in launch penalties that Orbital paid to the Company in 2001 under the System Procurement Agreement by issuing a new subordinated note to Orbital that would mature at the time of its senior notes.

Under the current RadarSat-2 Territorial License Agreement with MacDonald Detwiller and Associates (“MDA”), a former subsidiary of Orbital, ORBIMAGE is obligated to pay MDA $5 million on July 2, 2002 and another $5 million on December 31, 2002, or the Company may lose all rights under that License for which it has already invested $30 million. ORBIMAGE is in discussions with MDA to extend those payment dates to up to October 1, 2003 and April 1, 2004, respectively, but there can be no assurance as to the outcome of the discussions.

The impact of any financial restructuring or bankruptcy filing is not determinable at present.

The OrbView-2 satellite was launched on August 1, 1997, and completed its on-orbit checkout in October 1997. ORBIMAGE recognized revenues related to the OrbView-2 satellite of $11.2 million, $10.6 million and $10.5 million for the years ended December 31, 2001, 2000 and 1999, respectively. The OrbView-4 satellite suffered a launch failure in September 2001 and did not reach its intended orbit. The OrbView-3 satellite is currently expected to be launched in the fourth quarter of 2002 and will provide one-meter panchromatic and four-meter multispectral imagery of the Earth. The imagery provided by OrbView-3 is expected to have a broad range of

applications for U.S. and foreign national security and many commercial and scientific markets. ORBIMAGE acquired the current RadarSat Territorial License in February 2001, which granted ORBIMAGE exclusive marketing rights in the United States for RadarSat-2 imagery. RadarSat-2 is currently expected to be launched in late 2003 and will provide high-resolution commercial radar imagery.

A substantial part of ORBIMAGE’s administrative services, including information systems and human resources, was provided to ORBIMAGE by Orbital pursuant to the Administrative Services Agreement.

Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation (“SFAS 123”) requires companies to recognize as expense the fair value of all

stock-based awards on the date of grant or continue to apply the provisions of Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees (“APB 25”), and provide pro forma net income (loss) disclosures for employee stock option grants as if the fair-value-based method defined in SFAS 123 had been applied. ORBIMAGE has elected to continue to apply the provision of APB 25 and provide the pro forma disclosure provisions of SFAS 123. Compensation expense is recognized over the vesting period for stock option grants to employees that have market values in excess of the strike price. To the extent that ORBIMAGE grants stock options to non-employee consultants or advisors, ORBIMAGE records costs equal to the fair value of the options granted as of the measurement date as determined using a Black-Scholes model.

ORBIMAGE considers all highly liquid investments with original maturities of three months or less when purchased to be cash equivalents.

ORBIMAGE’s policy is to review its long-lived assets, including goodwill, for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. ORBIMAGE recognizes an impairment loss when the sum of expected undiscounted net future cash flows is less than the carrying amount of the assets. The amount of the impairment is measured as the difference between the asset’s estimated fair value and its book value.

ORBIMAGE recognizes income taxes using the asset and liability method. Under this method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to be applied to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. The deferred tax assets are reviewed periodically for recoverability and valuation allowances are provided as necessary.

ORBIMAGE purchased the OrbView-1, OrbView-3 and OrbView-4 satellites, the OrbView-2 License and the ground system assets from Orbital pursuant to the System Procurement Agreement, discussed in Note 4 below. ORBIMAGE is purchasing the RadarSat-2 Territorial License pursuant to a separate agreement with MacDonald, Dettwiler and Associates Ltd. (“MDA”), a former subsidiary of Orbital. Amortization of the capitalized costs begins when the assets are placed in service. Capitalized costs include the cost of launch insurance.

Depreciation and amortization are provided using the straight-line method as follows:

Prior to 2001, ORBIMAGE had capitalized interest costs in connection with the construction of satellites and related ground segments and systems. The capitalized interest was recorded as part of the historical cost of the asset to which it related and will be amortized over the asset’s useful life when placed in service. Interest capitalization was discontinued in 2001 because all significant expenditures relating to the construction of the satellites were made. Capitalized interest totaled $28.8 million and $23.7 million for the years ended December 31, 2000 and 1999, respectively.

In July 2001, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 142, “Goodwill and Other Intangible Assets.” SFAS No.142 supersedes APB Opinion No. 17, “Intangible Assets,” and requires the discontinuance of goodwill amortization. In addition, SFAS No.142 includes provisions regarding the reclassification of certain existing recognized intangibles as goodwill, reassessment of the useful lives of existing recognized intangibles, reclassification of certain intangibles out of previously reported goodwill and the testing for impairment of existing goodwill and other intangibles. SFAS No.142 is required to be applied for fiscal years beginning after December 15, 2001, with certain early adoption permitted. ORBIMAGE will adopt SFAS No. 142 for its first fiscal quarter of 2002, and does not expect the adoption to have a material effect on its financial condition or results of operations.

In October 2001, the FASB issued SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” which supersedes SFAS No. 121, “Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of.” SFAS No. 144 addresses financial accounting and reporting for the impairment of long-lived assets and for long-lived assets to be disposed of. However, SFAS No. 144 retains the fundamental provisions of SFAS No. 121 for recognition and measurement of the impairment of long-lived assets to be held and used, and measurement of long-lived assets to be disposed of by sale. SFAS No. 144 is effective for fiscal years beginning after December 15, 2001. ORBIMAGE is in the process of assessing the effect of adopting SFAS No. 144.

ORBIMAGE had three significant contracts with Orbital at the beginning of 2000 which are still in effect: (i) the ORBIMAGE System Procurement Agreement dated November 18, 1996, as amended (the “System Procurement Agreement”), (ii) the OrbView-2 License Agreement dated May 8, 1997 (the “OrbView-2 License”), and (iii) the Amended and Restated Administrative Services Agreement dated May 8, 1997 (the “Administrative Services Agreement”).

Under the System Procurement Agreement, ORBIMAGE purchased (i) the OrbView-1 satellite, (ii) an exclusive license entitling ORBIMAGE to all of the economic rights and benefits of the OrbView-2 satellite, (iii) the OrbView-3 satellite and launch service, (iv) the OrbView-4 satellite and launch service and (v) the ground system assets used to command and control the satellites as well as receive and process imagery. Pursuant to the System Procurement Agreement through December 31, 2001, ORBIMAGE committed to purchase various satellites, rights and ground systems for approximately $279.9 million, net of $31.0 million to be funded by the U.S. Air Force through a contract with Orbital. The System Procurement Agreement originally called for the OrbView-3 satellite to be constructed and launched before OrbView-4; however, continuing schedule delays resulted in OrbView-4 being constructed and delivered first. ORBIMAGE incurred costs of $4.4 million, $4.8 million and $33.0 million for the years ended December 31, 2001, 2000 and 1999, respectively, under the System Procurement Agreement and currently owes Orbital $4.4 million under that Agreement. Under the System Procurement Agreement, the Company is to pay Orbital $1.5 million upon the successful checkout of OrbView-3. Further, the Company is obligated to pay Orbital annual on-orbit incentive payments based upon operational performance of up to $2.25 million on each of the first five anniversaries of OrbView-3, for a total of $11.25 million.

The System Procurement Agreement was amended in June 2000 to provide among other things for Orbital to pay ORBIMAGE a $2.5 million cash penalty if OrbView-4 was not launched by May 31, 2001, and an additional $2.5 million cash penalty if neither OrbView-3 nor OrbView-4 was launched by July 31, 2001. Orbital made both launch penalty payments in cash to ORBIMAGE as of December 31, 2001.

Under the OrbView-2 License Agreement, Orbital has granted an exclusive worldwide license to ORBIMAGE to use and sell OrbView-2 imagery. Pursuant to the terms of the OrbView-2 License Agreement, Orbital has assigned to ORBIMAGE all amounts that are due or become due to Orbital under a contract Orbital has with NASA to deliver OrbView-2 imagery, and ORBIMAGE has sole responsibility for operating and controlling the satellite.

Under the Administrative Services Agreement, ORBIMAGE is paying Orbital for office space and other administrative services, as well as certain direct and indirect operating services

provided by Orbital. ORBIMAGE incurred costs of approximately $1.4 million, $2.7 million and $2.1 million for the years ended December 31, 2001, 2000 and 1999, respectively, under the Administrative Services Agreement and currently owes Orbital $2.5 million under that Agreement. The parties have agreed to terminate the Administrative Services Agreement on March 31, 2002.

In 1998, ORBIMAGE entered into an agreement with MDA, then a Canadian subsidiary of Orbital, under which ORBIMAGE acquired the exclusive worldwide distribution rights for the RadarSat-2 satellite imagery (the “RadarSat-2 License”). Under the RadarSat-2 License, MDA would own and operate the RadarSat-2 satellite, and would provide operations, data reception, processing, archiving and distribution services to ORBIMAGE. ORBIMAGE’s acquisition of the RadarSat-2 License was to cost $60.0 million, of which $30.0 million was paid in 1999. The remaining payments were not to exceed $15.0 million in 2001, $10.0 million in 2002 and $5.0 million upon the successful on-orbit checkout of RadarSat-2. The RadarSat-2 License Agreement was terminated on February 9, 2001 and replaced with a new RadarSat-2 Territorial License agreement (the “RadarSat-2 Territorial License”), pursuant to which MDA granted to ORBIMAGE an exclusive territorial license to distribute and sell RadarSat-2 imagery in the United States for $40.0 million. The $30.0 million of RadarSat-2 payments previously remitted to MDA under the original RadarSat-2 License agreement were applied to the $40.0 million license fee under the RadarSat-2 Territorial License. The remaining $10.0 million license fee obligation is to be paid by ORBIMAGE in two equal installments of $5.0 million each on July 2, 2002 and December 31, 2002. If ORBIMAGE is unable to make either installment payment of the remaining license fee obligation, it may lose all rights with respect to the RadarSat-2 Territorial License and have to write off its prior payments of $30 million under the original RadarSat-2 License Agreement. ORBIMAGE is also obligated to pay 60 percent of the operating costs for RadarSat-2, up to a maximum of $6.0 million per year, following the launch of the satellite. Negotiations are ongoing with respect to a new Agreement, but there can be no assurance as to its content or timing. The impact of any financial restructuring or bankruptcy filing are not determinable at present.

In conjunction with the renegotiation of the RadarSat-2 Territorial License, on February 9, 2001, ORBIMAGE and Orbital entered into a purchase agreement whereby Orbital agreed to purchase receivables from ORBIMAGE in the future for an aggregate purchase price of $10.0 million (the “Purchase Agreement”). Orbital is obligated to make up to two $5.0 million cash purchases of receivables to coincide with the payment dates set forth in the RadarSat-2 Territorial License. Orbital’s obligation to make each purchase under the Purchase Agreement is conditioned, among other things, on ORBIMAGE notifying Orbital of its inability to make such payments to MDA due to financial hardship and ORBIMAGE having receivables sufficient to sell to Orbital in the amount of the payment.

For the year ended December 31, 2001, ORBIMAGE recorded revenue of $0.3 million on contracts with Orbital.

During 2001, ORBIMAGE recorded a $138.0 million charge consisting of $91.5 million related to the unsuccessful launch of OrbView-4, net of insurance recoveries, and $46.5 million related to the impairment of the carrying value of the remaining satellites and related ground stations.

In September 2001, ORBIMAGE purchased insurance coverage for the combined risk of launch, satellite checkout and on-orbit satellite operations with respect to OrbView-4. ORBIMAGE paid $2.8 million to purchase insurance coverage of approximately $13.1 million. An additional $50 million of insurance coverage was purchased by ORBIMAGE on behalf of the senior note holders. One of the members of the informal committee of holders of the senior notes loaned ORBIMAGE the funds necessary to purchase such additional insurance coverage for approximately $12.7 million (the “Bridge Loan”). Interest accrued on the Bridge Loan at an annual rate of 13.625%. ORBIMAGE was also required to pay a 20% commitment fee to the Bridge Loan lender out of the proceeds to be received by the senior noteholders.

On September 21, 2001, the OrbView-4 satellite suffered a launch failure and did not achieve its intended orbit. Accordingly, ORBIMAGE wrote off the value of OrbView-4 as well as the portion of the ground station assets that were directly related to the operation of OrbView-4. ORBIMAGE wrote off $144.2 million for OrbView-4 and an additional $10.5 million for the related ground station assets. These losses were offset by proceeds from insurance of $63.1 million. The components of the loss are summarized as follows (in thousands):

ORBIMAGE received $63.1 million of insurance proceeds from the OrbView-4 loss in December 2001. It used $15.7 million of the proceeds to payoff the Bridge Loan, related accrued interest and the commitment fee to the Bridge Loan lender. Additional insurance proceeds of $34.3 million were deposited with the trustee of the senior notes and are reflected on the balance sheet as restricted cash. The use of these proceeds is restricted to debt service payments to the senior noteholders. On February 10, 2002, the senior noteholders received approximately $28.4 million of the proceeds as payment of the outstanding interest on the senior notes. Further, restricted cash of $5.9 million is currently held by the trustee and is expected to be applied as a partial payment to the March 1, 2002 interest obligation on the senior notes. The remaining $13.1 million of the insurance proceeds were classified as unrestricted cash on the balance sheet.

Due to continued delays in the completion of OrbView-3 and RadarSat-2, the entry of competitors in markets served by ORBIMAGE and the potential effect of recent terrorism activities on Federal funding for scientific imagery applications, ORBIMAGE evaluated the recoverability of its remaining satellites and ground station assets pursuant to SFAS No. 121, “Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of.” Accordingly, ORBIMAGE adjusted the carrying value of the satellites and related ground station assets to their estimated fair values based on anticipated future discounted cash flows, resulting in the following non-cash impairment charges which were recorded in 2001 (in thousands):

For the years ended December 31, 2001, 2000 and 1999, there were no material differences between net loss as reported and comprehensive income (loss).

The computations of basic and diluted loss per common share were as follows (in thousands, except share data):

Depreciation and amortization totaled $3.3 million, $3.4 million and $3.2 million for the years ended December 31, 2001, 2000 and 1999, respectively.

Satellite depreciation and amortization totaled $7.4 million, $8.6 million and $8.6 million for the years ended December 31, 2001, 2000 and 1999, respectively.

The effective income tax rate varied from the statutory U.S. Federal income tax rate because of the following differences:

The primary components of ORBIMAGE’s federal deferred tax assets and liabilities were as follows (in thousands):

The increase in valuation allowance is principally the result of current year operating losses. Management believes it is more likely than not that its existing deferred tax assets will not be realized. As of December 31, 2001, ORBIMAGE had net operating loss carryforwards totaling $173.7 million, which expire beginning the year ending December 31, 2013. Such net operating loss carryforwards are subject to certain limitations and other restrictions.

On February 25, 1998, ORBIMAGE issued 150,000 units consisting of senior notes and 1,312,746 warrants for common stock, raising net proceeds of approximately $144.6 million. The gross proceeds of the units offering of $150.0 million were allocated: $142.1 million to the senior notes and $7.9 million to the value of the warrants recorded as a debt discount. On April 22, 1999, ORBIMAGE completed an add-on debt offering of senior notes raising net proceeds of approximately $68.1 million. The debt discount and issuance costs are amortized using the interest method as an adjustment to interest expense over the term of the senior notes resulting in an effective yield of approximately 13.4%. As of December 31, 2001, the senior notes had a fair value of approximately $45 million as estimated by quoted market prices. Interest on ORBIMAGE’s senior notes due 2005 accrues at a rate of 11.625% per annum and is payable semi-annually in arrears on March 1 and September 1.

At December 31, 2001, ORBIMAGE was in default with regard to the senior notes because ORBIMAGE did not make the scheduled March 1, 2001 and September 1, 2001 interest payments. On February 10, 2002, the senior noteholders received approximately $28.4 million

of the insurance proceeds as payment of the outstanding interest on the senior notes, which cured the payment default. This payment included interest on the overdue installments of interest which was payable at a rate of 12.625 percent per annum. The Company intends to make a partial payment of $5.9 million to the senior noteholders in conjunction with the March 1, 2002 semiannual interest payment, but expects to be in default again on its interest obligations under the senior notes by $7.2 million with regard to that payment. The holders of 25% of the face value of either offering of senior notes may accelerate the principal and accrued interest due with respect to their class of senior notes at any time due to an uncured payment default.

The indenture for the senior notes restricts, among other things, ORBIMAGE’s ability to pay cash dividends.

ORBIMAGE’s employees participate in the Orbital Imaging Corporation Retirement savings Plan, as amended, a defined contribution plan (the “Plan”) in accordance with Section 401(k) of the Internal Revenue code of 1986, as amended. ORBIMAGE’s contributions to the Plan are made based on certain plan provisions and at the discretion of the Board of Directors. For the years ended December 31, 2001, 2000 and 1999, ORBIMAGE’s contribution expense was $0.2 million, $0.2 million and $0.5 million, respectively.

Total rental expense under operating leases was $0.2 million, $0.2 million and $0.1 million for the years ended December 31, 2001, 2000 and 1999, respectively. Aggregate minimum rental commitments under non-cancelable operating leases (primarily for office space and equipment) as of December 31, 2001 were as follows (in thousands):

ORBIMAGE has authorized 10,000,000 shares of $0.01 par value preferred stock, of which: (a) 2,000,000 shares of the Series A preferred stock have been authorized, of which 975,349 shares were issued and outstanding as of December 31, 2001; (b) 2,000,000 shares of the Series B preferred stock have been authorized, none of which have been issued and (c) 2,000,000 shares of the Series C preferred stock have been authorized, none of which have been issued.

The Series A preferred stock is assigned a stated value of $100 per share and is entitled to a cumulative dividend of 12% per annum payable semi-annually on May 1 and November 1 of each year, in cash or, in lieu thereof, payable in-kind in shares of Series A preferred stock on the basis of 120 shares of Series A preferred stock for each 1,000 shares of Series A preferred stock outstanding. To date, all dividends have been paid in-kind. As of December 31, 2001, cumulative preferred stock dividends in arrears totaled 19,507 shares.

	•		the closing, under certain circumstances, of a public offering of the common stock;

	•		the culmination of a 180-day period in which the average price of the common stock exceeds a certain level relative to the conversion price; or

	•		the proposed sale of no less than 70% of the common stock on a fully diluted basis.

	•		the successful on-orbit checkout of OrbView-3,

	•		the closing of an initial public offering that meets certain criteria, or

	•		the end of a 180-day period in which the average price of the common stock exceeds a certain level relative to the conversion price of the Series A preferred stock,

then ORBIMAGE must offer to purchase, subject to the rights of the holders of the senior notes, all outstanding shares of Series A preferred stock for a purchase price of 101% of the liquidation amount of the stock.

The activity in the preferred stock subject to repurchase was as follows for the years ended December 31, 1999, 2000 and 2001 (dollars in thousands):

In connection with the units offering on February 25, 1998, ORBIMAGE issued 150,000 warrants, which entitle the holders to acquire 1,312,746 shares of ORBIMAGE’s common stock. The warrants were exercisable as of December 31, 2001 at a price is $0.01 per share. Each warrant entitles the holder to buy 8.75164 shares of common stock. The warrants expire on March 1, 2005.

As of December 31, 2001, the weighted-average remaining contractual life of the options outstanding was 6.54 years.

Had ORBIMAGE determined compensation expense based on the fair value at the grant date for its stock options in accordance with the fair value method prescribed by SFAS 123, ORBIMAGE’s pro forma net loss and pro forma basic loss per common share would have been approximately $182.1 million and $7.22, respectively, for the year ended December 31, 2001, $11.0 million and $1.01, respectively, for the year ended December 31, 2000 and $7.7 million and $0.82, respectively, for the year ended December 31, 1999. Pro forma diluted loss per common share for the years ended December 31, 2001, 2000 and 1999 would be the same as the pro forma basic loss per share shown above since all potentially dilutive securities are antidilutive and are excluded due to the net loss for each year presented. Pro forma net loss as stated above is not necessarily representative of the effects of reported net income (loss) for future years due to, among other things, the vesting period of the stock options and the fair value of the additional stock options in future years.

ORBIMAGE used the Black-Scholes options pricing model for the year ended December 31, 2001, 2000 and 1999 for options issued to employees and directors to determine the pro forma impact to its net loss. This model utilizes certain information, such as the interest rate on a risk-free security maturing generally at the same time as the option being valued, and requires certain assumptions, such as the expected amount of time an option will be outstanding until it is exercised or it expires, to calculate the weighted-average fair value per share of stock options granted. The assumptions used to determine the pro forma impact for the years ended December 31, 2001, 2000 and 1999 were as follows:

The fair value of the options granted to employees and directors during the years ended December 31, 2001, 2000 and 1999 were estimated at $1.42 per share, $3.26 per share and $2.69 per share, respectively. Compensation expense recognized during each of the years ended December 31, 2001, 2000 and 1999 on stock options granted to employees was not material.

ORBIMAGE operated as a single segment for the years ended December 31, 2001, 2000 and 1999. ORBIMAGE recognized revenues related to contracts with the National Aeronautics and Space Administration of approximately $8.7 million, $9.0 million and $9.4 million for the years ended December 31, 2001, 2000 and 1999, respectively, representing approximately 46%, 37% and 51%, respectively, of total revenues recognized during those years.

The following exhibits are filed as part of this report. Where such filing is made by incorporation by reference to a previously filed statement or report, such statement or report is identified in parentheses.


Exhibit
Number		Description of Exhibit

3.1		Restated Certificate of Incorporation (incorporated by reference to Exhibit 4.1 to the company’s Registration Statement on Form S-3 (File Number 333-08769) filed and effective on July 25, 1996)

3.2		By-Laws of Orbital Sciences Corporation, as amended on July 27, 1995 (incorporated by reference to Exhibit 3 to the company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 1995)

3.3		Certificate of Amendment to Restated Certificate of Incorporation, dated April 29, 1997 (incorporated by reference to Exhibit 3.3 to the company’s Annual Report on Form 10-K for the fiscal year ended December 31, 1998)

3.4		Certificate of Amendment to Restated Certificate of Incorporation, dated April 30, 2003 (incorporated by reference to Exhibit 3.3 to the company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2003)

3.5		Certificate of Designation, Preferences and Rights of Series B Junior Participating Preferred Stock, dated November 2, 1998 (incorporated by reference to Exhibit 2 to the company’s Registration Statement on Form 8-A filed on November 2, 1998)

4.1		Form of Certificate of Common Stock (incorporated by reference to Exhibit 4.1 to the company’s Registration Statement on Form S-1 (File Number 33-33453) filed on February 9, 1990 and effective on April 24, 1990)

4.2		Indenture, dated as of July 10, 2003, by and between Orbital Sciences Corporation and U.S. Bank, National Association, as Trustee (incorporated by reference to Exhibit 4.1 to the company’s Current Report on Form 8-K filed on July 18, 2003)

4.3		Form of 9% Senior Note due 2011 (incorporated by reference to Exhibit 4.2 to the company’s Current Report on Form 8-K filed on July 18, 2003)


Exhibit
Number		Description of Exhibit

4.4		Warrant Agreement, dated as of August 22, 2002, by and between Orbital Sciences Corporation and U.S. Bank, N.A., as Warrant Agent (incorporated by reference to Exhibit 4.2 to the company’s Current Report on Form 8-K filed on August 27, 2002)

4.5		Form of Common Stock Purchase Warrant (incorporated by reference to Exhibit 4.4 to the company’s Current Report on Form 8-K filed on August 27, 2002)

4.6		Warrant Agreement dated as of January 16, 2001, between Orbital Sciences Corporation and Fleet National Bank, as Warrant Agent (incorporated by reference to Exhibit 1 to the company’s Registration Statement on Form 8-A filed on August 31, 2001)

4.7		Form of Warrant Certificate (incorporated by reference to Exhibit 2 to the company’s Registration Statement on Form 8-A filed on August 31, 2001)

4.8		Rights Agreement dated as of October 22, 1998, between Orbital Sciences Corporation and BankBoston N.A., as Rights Agent (incorporated by reference to Exhibit 1 to the company’s Report on Form 8-A filed on November 2, 1998)

4.9		Form of Rights Certificate (incorporated by reference to Exhibit 3 to the company’s Report on Form 8-A filed on November 2, 1998)

10.1		Credit Agreement dated as of July 10, 2003, by and among Orbital Sciences Corporation, Bank of America, N.A., as administrative agent, General Electric Capital Corporation, as documentation agent, and the other parties thereto (incorporated by reference to Exhibit 10.2 to the company’s Current Report on Form 8-K filed on July 18, 2003)

10.2		Security Agreement dated as of July 10, 2003, by and among Orbital Sciences Corporation, Bank of America, N.A., as administrative agent, and the other parties thereto (incorporated by reference to Exhibit 10.3 to the company’s Current Report on Form 8-K filed on July 18, 2003)

10.3		Lease Agreement by and between Boston Properties Limited Partnership and Orbital Sciences Corporation dated May 18, 1999 (incorporated by reference to Exhibit 10.4 to the company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2001)


Exhibit
Number		Description of Exhibit

10.4		Lease Agreement by and between Boston Properties Limited Partnership and Orbital Sciences Corporation dated April 5, 1999 (incorporated by reference to Exhibit 10.5 to the company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2001)

10.5		Lease Agreement by and between Boston Properties Limited Partnership and Orbital Sciences Corporation dated December 1, 1999 (incorporated by reference to Exhibit 10.6 to the company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2001)

10.6		Office Lease, dated July 17, 1992, between S.C. Realty, Inc. and Orbital Sciences Corporation (incorporated by reference to Exhibit 10.3 to the company’s Annual Report on Form 10-K for the year ended December 31, 1992)

10.7		Sale/Leaseback Agreement, dated September 29, 1989, by and among Corporate Property Associates 8, L.P., Corporate Property Associates 9, L.P. and Space Data Corporation (incorporated by reference to Exhibit 10.2 to the company’s Registration Statement on Form S-1 (File Number 33-33453) filed on February 9, 1990)

10.8		First Amendment to Sale/Leaseback Agreement, dated as of December 27, 1990, by and among Corporate Property Associates 8, L.P., Corporate Property Associates 9, L.P. and Space Data Corporation (incorporated by reference to Exhibit 10.2.1 to the company’s annual Report on Form 10-K for the year ended December 31, 1991)

10.9		Orbital Sciences Corporation 1990 Stock Option Plan, restated as of April 27, 1995 (incorporated by reference to Exhibit 10.5.1 to the company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 1995).*

10.10		Orbital Sciences Corporation 1990 Stock Option Plan for Non-Employee Directors, restated as of April 27, 1995 (incorporated by reference to Exhibit 10.5.2 to the company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 1995).*

10.11		Amended and Restated Orbital Sciences Corporation 1997 Stock Option and Incentive Plan (incorporated by reference to Exhibit 10.18 to the company’s Annual Report on Form 10-K for the fiscal year ended December 31, 1998)

10.12		Orbital Sciences Corporation 2003 Nonqualified Management Deferred Compensation Plan (transmitted herewith).*


Exhibit
Number		Description of Exhibit

10.13		Executive Relocation Agreement between Orbital Sciences Corporation and Ronald J. Grabe, Executive Vice President and General Manager/Launch Systems Group dated August 7, 2003 (incorporated by reference to Exhibit 10.1 to the company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2003).*

10.14		Executive Employment Agreement dated as of August 9, 2000, by and between Orbital Sciences Corporation and Garrett E. Pierce (incorporated by reference to Exhibit 10.3 to the company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2000).*

10.15		Executive Employment and Change of Control Agreement dated as of August 9, 2000, by and between Orbital Sciences Corporation and Garrett E. Pierce (incorporated by reference to Exhibit 10.4 to the company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2000).*

10.16		Supplemental Employment Agreement between Garrett E. Pierce and Orbital Sciences Corporation dated July 19, 2002 (incorporated by reference to Exhibit 10.1 to the company’s Quarterly Report on Form 10-Q for the fiscal quarter ended June 30, 2002).*

10.17		Form of Director and Executive Officer Indemnification Agreement (incorporated by reference to Exhibit 10.23 to the company’s Annual Report on Form 10-K for the fiscal year ended December 31, 1998).*

10.18		Form of Executive Employment Agreement (incorporated by reference to Exhibit 10.2 to the company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2003).*

10.19		Agreement and Plan of Merger, dated as of May 25, 2001, by and among Orbital Sciences Corporation, Magellan Corporation, Thales North America, Inc. and Thomson—CSF Electronics, Inc. (incorporated by reference to Exhibit 10.1 to the company’s Quarterly Report on Form 10-Q for the fiscal quarter ended June 30, 2001)

10.20		Purchase Agreement, dated as of May 25, 2001, by and among Orbital Sciences Corporation, Orbital Navigation Corporation and Thales North America, Inc. (incorporated by reference to Exhibit 10.2 to the company’s Quarterly Report on Form 10-Q for the fiscal quarter ended June 30, 2001 filed on August 14, 2001)


Exhibit
Number		Description of Exhibit

10.21		Purchase Contract dated as of March 27, 2002, by and between Orbital Sciences Corporation and The Boeing Company (incorporated by reference to Exhibit 10.2 to the company’s Quarterly Report on Form 10-Q/A for the fiscal quarter ended March 31, 2003).**

12		Statement re computation of earnings to fixed charges (transmitted herewith)

23		Consent of PricewaterhouseCoopers LLP (transmitted herewith)

31.1		Certification of Chairman and Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. Sec. 1350) (transmitted herewith)

31.2		Certification of Vice Chairman and Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. Sec. 1350) (transmitted herewith)

32.1		Written Statement of Chairman and Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. Section 1350) (transmitted herewith)

32.2		Written Statement of Vice Chairman and Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. Section 1350) (transmitted herewith)


(Mark One)
þ		ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

		For the fiscal year ended December 31, 2003

or

o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

		For the transition period from to


Delaware		06-1209561
(State or Other Jurisdiction of Incorporation or Organization of Registrant)		(I.R.S. Employer Identification No.)

21839 Atlantic Boulevard, Dulles, Virginia		20166 (Zip Code)
(Address of principal executive offices)


Title of Each Class		Name of Each Exchange on Which Registered

Common Stock, par value $.01 per share		The New York Stock Exchange
Warrants to Subscribe for Common Stock		The New York Stock Exchange


Item		Page

	PART I
	Business >		1
	Properties >		14
	Legal Proceedings >		15
	Submission of Matters to a Vote of > Security Holders		15
	Executive Officers of the Registrant		15
	PART II
	Market for Registrant’s Common Equity and > Related Stockholder Matters		18
	Selected Financial Data >		19
	Management’s Discussion and Analysis of > Financial Condition and Results of Operations		21
	Quantitative and Qualitative Disclosures > About Market Risk		32
	Financial Statements and Supplementary > Data		34
	Changes in and Disagreements with > Accountants on Accounting and Financial Disclosure		63
	Controls and Procedures >		63
	PART III
	Directors and Executive Officers of the > Registrant		63
	Executive Compensation >		63
	Security Ownership of Certain Beneficial > Owners and Management		64
	Certain Relationships and Related > Transactions		65
	Principal Accountant Fees and Services		65
	PART IV
	Exhibits, Financial Statement Schedules > and Reports on Form 8-K		66
Ex-10.12
Ex-12
Ex-23
Ex-31.1
Ex-31.2
Ex-32.1
Ex-32.2


Product Line		Competitor(s)

Missile defense interceptor vehicles		Lockheed Martin Corporation Raytheon Company
Suborbital target vehicles		Lockheed Martin Corporation L-3 Communications, Inc. Space Vector Corporation, a wholly owned subsidiary of Pemco Aviation Group
Space launch vehicles		Russian and other international launch vehicles could represent competition for commercial, as opposed to U.S. government, launches
GEO communications satellites		The Boeing Company Lockheed Martin Corporation Alcatel Space Alenia Aerospazio EADS Astrium
LEO science and technology satellites and interplanetary spacecraft		Ball Aerospace and Technology Corporation Lockheed Martin Corporation Northrop Grumman Co. Spectrum Astro, Inc.
Military and classified space systems and satellites		Ball Aerospace and Technology Corporation Lockheed Martin Corporation Northrop Grumman Co. Spectrum Astro, Inc.
Space technical services		Jackson and Tull Northrop Grumman Co. Swales Aerospace
Transportation management systems		Siemens Corporation


Business Unit		Principal Location(s)

Corporate Headquarters		Dulles, Virginia
Launch Vehicles and Advanced Programs		Chandler, Arizona; Dulles, Virginia; Vandenberg Air Force Base, California
Satellites and Related Space Systems		Dulles, Virginia; Greenbelt, Maryland
Transportation Management Systems		Columbia, Maryland


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


Name	Age		Position

David W. Thompson		49	Chairman of the Board and Chief Executive Officer
James R. Thompson		67	Vice Chairman, President and Chief Operating Officer, Director
Garrett E. Pierce		59	Vice Chairman and Chief Financial Officer, Director
Ronald J. Grabe		58	Executive Vice President and General Manager/ Launch Systems Group
John M. Danko		62	Executive Vice President and General Manager/ Space Systems Group
Antonio L. Elias		54	Executive Vice President and General Manager/Advanced Programs Group
W. Jean Floyd		45	Senior Vice President and General Manager/ Transportation Management Systems Group
Leo Millstein		56	Senior Vice President, General Counsel and Corporate Secretary


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


2003	High		Low

4th Quarter	$	12.41	$	8.89
3rd Quarter	$	9.73	$	7.41
2nd Quarter	$	7.77	$	4.99
1st Quarter	$	5.96	$	4.25


2002	High		Low

4th Quarter	$	4.68	$	2.66
3rd Quarter	$	7.55	$	2.81
2nd Quarter	$	7.97	$	4.79
1st Quarter	$	8.08	$	4.00



		Years Ended December 31,

		2003(1)			2002			2001(2)			2000(3)			1999(4)


		*(In thousands, except share data)*
Operating Data:
	Revenues	$	581,500		$	551,642		$	415,249		$	379,539		$	459,700
	Costs of goods sold		477,273			460,231			387,433			379,504			437,409

	Gross profit		104,227			91,411			27,816			35			22,291
	Operating expenses		68,669			62,372			80,789			165,499			95,849

	Income (loss) from operations		35,558			29,039			(52,973	)		(165,464	)		(73,558	)
	Allocated share of losses of affiliates		—			—			(26,495	)		(119,183	)		(97,008	)
	Gain on reversal of allocated losses of affiliate		40,586			—			—			—			—
	Debt extinguishment expense		(38,836	)		—			—			—			—
	Other expense, net		(17,336	)		(15,089	)		(16,146	)		(18,929	)		(13,714	)

	Income (loss) before provision for income taxes and discontinued operations		19,972			13,950			(95,614	)		(303,576	)		(184,280	)
	Benefit (provision) for income taxes		265			(265	)		—			(9,886	)		—

	Income (loss) from continuing operations		20,237			13,685			(95,614	)		(313,462	)		(184,280	)
	Income from discontinued operations		—			875			114,565			35,272			62,343
	Cumulative effect of change in accounting		—			(13,795	)		—			—			—

	Net income (loss)	$	20,237		$	765		$	18,951		$	(278,190	)	$	(121,937	)

Basic Income (Loss) Per Share(5):
	Income (loss) from continuing operations	$	0.43		$	0.31		$	(2.49	)	$	(8.36	)	$	(4.94	)
	Income from discontinued operations		—			0.02			2.98			0.94			1.67
	Cumulative effect of change in accounting		—			(0.31	)		—			—			—

	Net income (loss)	$	0.43		$	0.02		$	0.49		$	(7.42	)	$	(3.27	)

	Shares used in computing basic per share amounts		46,718,435			43,907,897			38,424,363			37,467,520			37,281,065
Diluted Income (Loss) Per Share(5):
	Income (loss) from continuing operations	$	0.35		$	0.30		$	(2.49	)	$	(8.36	)	$	(4.94	)
	Income from discontinued operations		—			0.02			2.98			0.94			1.67
	Cumulative effect of change in accounting		—			(0.30	)		—			—			—

	Net income (loss)	$	0.35		$	0.02		$	0.49		$	(7.42	)	$	(3.27	)

	Shares used in computing diluted per share amounts		58,221,220			44,937,453			38,424,363			37,467,520			37,281,065
Statement of Cash Flow Data:
	Cash flow from operating activities	$	46,474		$	(29,848	)	$	(80,989	)	$	35,585		$	27,156
	Cash flow from investing activities		(15,594	)		(14,341	)		236,980			42,675			(97,029	)
	Cash flow from financing activities		(13,420	)		24,414			(137,852	)		(86,565	)		123,254


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



			Payments Due by Period

			Less than		1 to 3		3 to 5		More than
	Total		1 Year		Years		Years		5 Years

Long-term debt	$	136.8	$	—	$	—	$	—	$	136.8
Capital leases		0.6		0.3		0.3		—		—
Operating leases(1)		140.0		15.2		26.1		25.3		73.4
Purchase obligations(2)		123.3		122.6		0.7		—		—
Other long-term liabilities		2.7		2.5		0.2		—		—

Total	$	403.4	$	140.6	$	27.3	$	25.3	$	210.2


Item 7A.	*Quantitative and Qualitative Disclosures About Market Risk*


Item 1.	*Business*


Item 2.	*Properties*


Item 3.	*Legal Proceedings*


Item 4A.	*Executive Officers of the Registrant*


Item 8.	*Financial Statements and Supplementary Data*


	Page

Report of Independent Auditors		35
Consolidated Statements of Operations		36
Consolidated Balance Sheets		37
Consolidated Statements of Stockholders’ Equity		38
Consolidated Statements of Cash Flows		39
Notes to Consolidated Financial Statements		40



		For the Years Ended December 31,

		2003			2002			2001

Revenues		$	581,500		$	551,642		$	415,249
Costs of goods sold			477,273			460,231			387,433

Gross profit			104,227			91,411			27,816
Research and development expenses			7,835			4,671			7,722
Selling, general and administrative expenses			56,963			57,701			61,626
Amortization of goodwill			—			—			6,021
Settlement expense, net			3,871			—			5,420

Income (loss) from operations			35,558			29,039			(52,973	)
Interest expense			(18,683	)		(17,450	)		(21,671	)
Other income, net			1,347			2,361			5,525
Allocated share of losses of affiliates			—			—			(26,495	)
Gain on reversal of allocated losses of affiliate			40,586			—			—
Debt extinguishment expense			(38,836	)		—			—

Income (loss) before income taxes			19,972			13,950			(95,614	)
Benefit (provision) for income taxes			265			(265	)		—

Income (loss) from continuing operations before cumulative effect of change in accounting			20,237			13,685			(95,614	)
Discontinued operations:
	Loss from operations		—			—			(155	)
	Gain on disposal		—			875			114,720

Income from discontinued operations			—			875			114,565
Cumulative effect of change in accounting			—			(13,795	)		—

Net income		$	20,237		$	765		$	18,951

Basic earnings per share:
	Income (loss) from continuing operations	$	0.43		$	0.31		$	(2.49	)
	Income from discontinued operations		—			0.02			2.98
	Cumulative effect of change in accounting		—			(0.31	)		—

	Net income	$	0.43		$	0.02		$	0.49

Diluted earnings per share:
	Income (loss) from continuing operations	$	0.35		$	0.30		$	(2.49	)
	Income from discontinued operations		—			0.02			2.98
	Cumulative effect of change in accounting		—			(0.30	)		—

	Net income	$	0.35		$	0.02		$	0.49

Basic shares used in computing per share amounts			46,718,435			43,907,897			38,424,363

Diluted shares used in computing per share amounts			58,221,220			44,937,453			38,424,363



			December 31,

			2003			2002

ASSETS
Current Assets:
	Cash and cash equivalents		$	60,900		$	43,440
	Restricted cash and cash equivalents			19,258			10,301
	Receivables, net			149,508			135,176
	Inventories, net			12,642			17,136
	Other current assets			5,496			8,764

		Total current assets		247,804			214,817

Property, plant and equipment, net				82,364			88,751
Goodwill				95,293			95,293
Other non-current assets				13,839			17,449

		Total Assets	$	439,300		$	416,310

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current Liabilities:
	Short-term borrowings and current portion of long-term obligations		$	297		$	1,854
	Accounts payable			24,841			20,212
	Accrued expenses			91,185			72,307
	Deferred revenues			16,292			28,094

		Total current liabilities		132,615			122,467

Long-term obligations, net of current portion				137,116			114,833
Other non-current liabilities				2,692			3,856
Allocated losses of affiliate in excess of cost of investment				—			40,586
Commitments and contingencies
Stockholders’ Equity:
	Preferred Stock, par value $.01; 10,000,000 shares authorized, none outstanding			—			—
	Common Stock, par value $.01; 200,000,000 shares authorized, 48,072,580 and 45,610,621 shares outstanding, respectively			480			456
	Additional paid-in capital			591,482			579,285
	Deferred compensation			(502	)		(353	)
	Accumulated deficit			(424,583	)		(444,820	)

		Total stockholders’ equity		166,877			134,568

		Total Liabilities and Stockholders’ Equity	$	439,300		$	416,310


												Accumulated
												Other
			Common Stock				Additional					Comprehensive
							Paid-In		Deferred			Income			Accumulated
			Shares		Amount		Capital		Compensation			(Loss)			Deficit			Total

Balance, December 31, 2000				37,729,476	$	377	$	515,462	$	—		$	(7,152	)	$	(464,536	)	$	44,151
	Shares issued to employees, officers and directors			1,685,593		17		5,619		—			—			—			5,636
	Warrants issued for litigation settlement			—		—		11,500		—			—			—			11,500
	Shares issued to ORBCOMM and others			1,825,801		18		6,877		—			—			—			6,895
	Comprehensive income:
		Net income		—		—		—		—			—			18,951			18,951
		Translation adjustment		—		—		—		—			7,487			—			7,487
		Unrealized loss on short-term investments		—		—		—		—			(335	)		—			(335	)

		Total comprehensive income		—		—		—		—			—			—			26,103

Balance, December 31, 2001				41,240,870		412		539,458		—			—			(445,585	)		94,285
	Shares issued to employees, officers and directors			3,834,076		39		15,340		—			—			—			15,379
	Shares issued for litigation settlement			300,000		3		1,000		—			—			—			1,003
	Warrants issued, net of issuance costs			—		—		22,306		—			—			—			22,306
	Warrants exercised			35,675		—		123		—			—			—			123
	Issuance of restricted stock			200,000		2		1,058		(1,060	)		—			—			—
	Amortization of deferred compensation			—		—		—		707			—			—			707
	Comprehensive income:
		Net income		—		—		—		—			—			765			765

		Total comprehensive income		—		—		—		—			—			—			765

Balance, December 31, 2002				45,610,621		456		579,285		(353	)		—			(444,820	)		134,568
	Shares issued to employees, officers and directors			2,139,774		21		10,401		—			—			—			10,422
	Warrants exercised			122,185		1		436		—			—			—			437
	Issuance of restricted stock			200,000		2		1,360		(1,362	)		—			—			—
	Amortization of deferred compensation			—		—		—		1,213			—			—			1,213
	Comprehensive income:
		Net income		—		—		—		—			—			20,237			20,237

		Total comprehensive income		—		—		—		—			—			—			20,237

Balance, December 31, 2003				48,072,580	$	480	$	591,482	$	(502	)	$	—		$	(424,583	)	$	166,877


Buildings		20 years
Machinery, equipment and software		3 to 12 years
Leasehold improvements		Shorter of estimated useful life or lease term



	Years Ended
	December 31,

	2003		2002

Weighted average of outstanding shares for basic EPS		46,718		43,908
Dilutive effect of outstanding stock options		1,641		718
Dilutive effect of outstanding stock warrants		9,742		311
Dilutive effect of restricted stock		120		—

Shares for diluted EPS		58,221		44,937


Reported loss from continuing operations	$	(95,614	)
Goodwill amortization		6,021

Adjusted loss from continuing operations	$	(89,593	)

Reported loss per share from continuing operations	$	(2.49	)
Goodwill amortization		0.16

Adjusted loss per share from continuing operations	$	(2.33	)


	Operating		Capital

2004	$	15,219	$	314

2005		13,658		159

2006		12,474		69

2007		12,545		43

2008		12,672		—

Thereafter		73,393		—

	$	139,961		585


Less interest				(19	)

Less current portion				(297	)


Long-term portion			$	269



		As of December 31,

		2003			2002

Deferred Tax Assets:

U.S. Federal and state net operating loss carryforward		$	210,791		$	189,169

Other accruals and reserves			27,320			42,223

Percentage-of-completion accounting			3,257			3,233

U.S. Federal tax credit carryforward			2,809			2,933

Intangible assets			2,049			2,873


	Total deferred tax assets		246,226			240,431

Valuation allowance			(245,157	)		(232,244	)


Deferred tax assets, net			1,069			8,187

Deferred Tax Liabilities:

Excess deductions for tax reporting purposes			(141	)		(4,564	)

Excess tax depreciation			(928	)		(3,623	)


	Total deferred tax liabilities		(1,069	)		(8,187	)


	Net deferred taxes	$	—		$	—


							Weighted
							Average		Outstanding
		Number of			Option Price		Exercise		and
Options		Shares			Per Share		Price		Exercisable

Outstanding at December 31, 2000			6,975,001		$	3.51-$43.31	$	19.86		4,409,970

	Granted		3,138,499			1.30-4.30		3.75

	Exercised		—			—		—

	Cancelled or expired		(1,997,120	)		3.51-36.50		24.94


Outstanding at December 31, 2001			8,116,380			1.30-43.31		14.03		4,753,881

	Granted		607,500			2.95-6.15		5.31

	Exercised		(174,783	)		3.80-4.43		4.00

	Cancelled or expired		(2,425,370	)		3.45-43.31		21.58


Outstanding at December 31, 2002			6,123,727			1.30-43.31		10.53		4,397,349

	Granted		2,492,428			4.33-8.95		6.38

	Exercised		(639,323	)		3.45-5.79		3.85

	Cancelled or expired		(637,095	)		3.45-43.31		18.31


Outstanding at December 31, 2003			7,339,737		$	1.30-$43.31	$	9.01		4,854,429



		Options Outstanding
								Options Exercisable
				Weighted
		Number		Average		Weighted		Number		Weighted
Range of		Outstanding		Remaining		Average		Exercisable		Average
Exercise Prices		at Dec. 31, 2003		Contractual Life		Exercise Price		at Dec. 31, 2003		Exercise Price

$	1.30-$5.50		2,917,866		7.92	$	4.21		2,320,369	$	3.96
	5.70-11.06		2,464,902		9.01		7.22		577,091		9.03
	12.25-43.31		1,956,969		4.53		18.42		1,956,969		18.42

$	1.30-$43.31		7,339,737		7.38	$	9.01		4,854,429	$	10.39



		Quarters Ended

		March 31		June 30			Sept. 30			Dec. 31

2003(1)
	Revenues	$	136,681	$	158,400		$	128,629		$	157,790
	Gross profit		26,234		21,494			26,893			29,606
	Income from operations		9,387		1,451			11,224			13,496
	Net income (loss)		3,436		(4,626	)		(30,225	)		51,652
	Basic income (loss) per share		0.08		(0.10	)		(0.64	)		1.09
	Diluted income (loss) per share		0.07		(0.10	)		(0.64	)		0.82
2002(2)
	Revenues	$	120,712	$	135,435		$	134,833		$	160,662
	Gross profit		18,994		21,711			21,056			29,650
	Income from operations		5,201		7,242			5,836			10,760
	Income from continuing operations before cumulative effect of change in accounting		2,392		5,361			760			5,172
	Basic income per share, continuing operations		0.06		0.12			0.02			0.11
	Diluted income per share, continuing operations		0.05		0.12			0.02			0.11


Item 9.	*Changes in and Disagreements with Accountants on Accounting and Financial Disclosure*


Item 10.	*Directors and Executive Officers of the Registrant*


Item 12.	*Security Ownership of Certain Beneficial Owners and Management*


(a)		The equity compensation plans approved by our stockholders include our 1990 Stock Option Plan, our Non-Employee Director Stock Option Plan and our 1997 Stock Option and Incentive Plan (the “1997 Option Plan”). A subsequent amendment in 1998 to the 1997 Option Plan increasing the total number of authorized shares thereunder to 3,200,000 also was approved by our stockholders. For purposes of reporting on the options outstanding under the 1997 Option Plan, we have assumed that all 3,200,000 shares approved by stockholders were issued during 1997 and 1998. The share numbers shown in this row do not include shares that may be issued under the company’s 1999 Employee Stock Purchase Plan, which currently has approximately 1,500,000 shares available for issuance.

(b)		As permitted by the applicable rules of the NYSE, in 1999, 2000, 2001 and 2002, we amended the 1997 Option Plan to increase the number of securities available for issuance under that plan by 1,800,000, 1,800,000, 1,800,000 and 2,000,000 shares, respectively, without seeking the approval of our stockholders. As of December 31, 2003, the 1997 Option Plan provided for awards of up to 10,600,000 incentive or non-qualified stock options and shares of restricted stock to employees, directors, consultants and advisors of the company and its subsidiaries without giving effect to any exercises or cancellations. Under the terms of the 1997 Option Plan, options may not be issued at less than 100% of the fair market value of the company’s common stock on the date of grant. Options under the 1997 Option Plan vest at a rate set forth by the Board of Directors in each individual option agreement, generally in one-third increments over a three-year period following the date of grant. Options expire no more than ten years following the grant date. The 1997 Option Plan also provides for automatic grants of non-qualified stock options to our nonemployee directors.


Item 13.	*Certain Relationships and Related Transactions*


Item 15.	*Exhibits, Financial Statement Schedules and Reports on Form 8-K*


Dated: February 25, 2004	ORBITAL SCIENCES CORPORATION

	By:	/s/ David W. Thompson ------------------------------------------------ David W. Thompson Chairman of the Board and Chief Executive Officer