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Filed February 28, 2005

United States

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-K

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

THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2004

Commission file number 1-11437

LOCKHEED MARTIN CORPORATION

(Exact name of registrant as specified in its charter)

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

(Address and telephone number of principal executive offices)

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

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

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

Yes x No ¨

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

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

Yes x No ¨

State the aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was last sold, or the average bid and asked price of such common equity, as of the last business day of the registrant’s most recently completed second quarter.

Approximately $23 billion as of June 30, 2004.

Indicate the number of shares outstanding of each of the registrant’s classes of common stock, as of the latest practicable date. Common Stock, $1 par value, 441,141,338 shares outstanding as of January 31, 2005.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of Lockheed Martin Corporation’s 2005 Definitive Proxy Statement are incorporated by reference in Part III of this Form  10-K.

PART I

General

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

In 2004, approximately 80% of our net sales were made to the U.S. Government, either as a prime contractor or as a subcontractor. Approximately 16% of our net sales in 2004 were made to foreign governments (including foreign military sales). Approximately 4% of our net sales in 2004 were made to commercial customers (mainly launch services and satellites).

Our principal executive offices are located at 6801 Rockledge Drive, Bethesda, Maryland 20817. Our telephone number is (301) 897-6000. Our home page on the Internet is www.lockheedmartin.com. We make our web site content available for information purposes only. It should not be relied upon for investment purposes, nor is it incorporated by reference into this Form 10-K.

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

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

Business Segments

We operate in five principal business segments: Aeronautics; Electronic Systems; Space Systems; Integrated Systems & Solutions (IS&S); and Information & Technology Services (I&TS). For more information concerning our segment presentation, see Note 15 - Information on Business Segments beginning on page 77 of this Form 10-K. A brief description of each of our five business segments follows:

Aeronautics – Engaged in the design, research and development, systems integration, production, support and upgrade of advanced military aircraft and related technologies. Our customers include the military services of the United States and allied countries throughout the world. Major products and programs include the F-16 multi-role fighter, F/A-22 air dominance, attack and multi-mission combat aircraft, F-35 Joint Strike Fighter, C-130J tactical airlift aircraft, C-5 strategic airlift aircraft, and support for the F-117 stealth fighter and special mission and reconnaissance aircraft (e.g. P-3 Orion, S-3 Viking and U-2). We also produce major components for the F-2 fighter and are a co-developer of the C-27J tactical transport and T-50 advanced jet trainer.

Electronic Systems – Engaged in the design, research, development, integration and production of high performance systems for undersea, shipboard, land and airborne applications. Major product lines include: missiles and fire control systems; air and theater missile defense systems; surface ship and submarine combat systems; anti-submarine and undersea warfare systems; avionics and ground combat vehicle integration; systems integration and program management for fixed and rotary-wing aircraft systems; radars; platform integration systems; homeland security systems; surveillance and reconnaissance systems; advanced aviation management; security and information technology solutions; simulation and training systems; and postal automation systems.

Space Systems – Engaged in the design, research, development, engineering and production of satellites, strategic and defensive missile systems and launch services. The satellite product line includes both government and commercial satellites. Strategic and defensive missile systems include airborne and missile defense technologies and fleet ballistic missiles. Launch services include launches on Atlas, Proton and Titan launch vehicles, and also include the Space Shuttle’s external tank. In addition, the segment has investments in joint ventures that are principally engaged in businesses that complement and enhance other activities of the segment.

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Integrated Systems & Solutions – Engaged in the design, research, development, integration and management of net-centric solutions supporting the command, control, communications, computers, intelligence, surveillance and reconnaissance (C4ISR) activities of the U.S. Department of Defense (DoD), intelligence agencies, other federal agencies and allied countries. IS&S provides technology, full life-cycle support and highly specialized talent in the areas of software and systems engineering, including expertise in space, air and ground systems. IS&S serves as the Corporation’s focal point for customers with joint and net-centric operations requiring overarching architectures, horizontal systems integration, software development, and inter-connected capabilities for the gathering, processing, storage and delivery of on-demand information for mission management, modeling, simulation and large-scale systems integration. In that role, IS&S operates the Center for Innovation, a newly established facility for modeling and simulation.

Information & Technology Services – Engaged in a wide array of information technology (IT), IT-related, and other technology services to federal agencies and other customers. Major product lines include: information technology integration and management; enterprise solutions; application development, maintenance, and consulting for strategic programs for the DoD and civil government agencies; aircraft and engine maintenance and modification services; management, operation, maintenance, training and logistics support for military, homeland security and civilian systems; launch, mission and analysis services for military, classified and commercial satellites; engineering, science and information services for the National Aeronautics and Space Administration (NASA); and research, development, engineering and science in support of nuclear weapons stewardship and naval reactor programs.

Comparative segment revenues, operating profits and related financial information for 2004, 2003, and 2002 are provided in Note 15 - Information on Business Segments on page 77 of this Form 10-K.

Aeronautics

Aeronautics designs, develops, researches, integrates, produces, upgrades and supports advanced military fighter and airlift aircraft and related technologies. In 2004, Aeronautics’ net sales of $11.8 billion represented 33% of our total net sales. Aeronautics’ major lines of business and the percentage that each contributed to Aeronautics’ 2004 net sales are:

Our Combat Aircraft business designs, develops, produces and provides systems support for fighter/attack aircraft. Our major fighter/attack aircraft programs include:

We are the prime contractor on the F-16 “Fighting Falcon” multi-role tactical fighter aircraft and continue to provide upgrades for the U.S. Air Force and our international customers. Since the program’s inception, over 4,200 F-16s have been delivered worldwide. The F-16 program has posted over 25 years of continuous production deliveries. To date, the F-16 has been selected by 24 countries. Multi-role capability improvements have been incorporated into new production aircraft as well as modification programs for in-service assets. Air-to-air and precision attack capabilities have benefited from the inclusion of new systems, sensors and weapons. Advanced electronic warfare systems have improved survivability. New fuel tank configurations have increased range and endurance. Enhanced engines have increased aircraft performance and improved supportability. Advanced communication links have enabled the F-16 to become a player in network-centric warfare. In 2004, 83 F-16 aircraft were delivered worldwide. Our firm backlog of 205 F-16 aircraft at year end is expected to continue production deliveries into 2008.

For the next generation F-35 “Joint Strike Fighter,” the United States, United Kingdom, Netherlands, Italy, Canada, Denmark, Norway, Turkey and Australia are working together to design, test and build a “family of aircraft” to meet their joint and coalition requirements. Israel and Singapore also have signed onto the program as security cooperation participants. Our F-35’s multiple-variant design will include a conventional takeoff and landing variant (CTOL), a carrier-based variant and a short takeoff and vertical landing variant (STOVL). The F-35 is designed to be an affordable, superior multi-role, stealth aircraft offering improvements in lethality, survivability and supportability over existing allied multi-role aircraft. The F-35 is planned to replace the F-16 and A-10 for the U.S. Air Force, the F/A-18 for the U.S. Navy, the AV-8B and F/A-18 for the U.S. Marines, and the Harrier jet for the U.K. Royal Air Force and Navy.

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Aeronautics was awarded the System Development and Demonstration (SDD) contract for the F-35 in the fourth quarter of 2001. Calendar year 2004 marked the third full year of performance on the contract. During 2004, the program initiated a weight reduction effort focusing on the STOVL aircraft. Approximately 3,000 pounds were removed from the STOVL aircraft design and significant weight-savings were applied to the other two variant configurations. The Defense Acquisition Board met in October 2004 and approved a revised program plan reflecting the STOVL redesign effort, revised costs and an extended base-line schedule. The revised plan retains the original sequence of first flights for the three variants. The first CTOL aircraft, which is planned as a non-optimized design to test airworthiness and systems evaluation is currently in production and is scheduled for first flight in 2006. This will be followed by the planned first flights of the optimized aircraft including the STOVL in 2007, CTOL in 2008 and the carrier variant in 2009. Given the size of the F-35 program, we anticipate that there will be a number of studies related to the program and production quantities over time as part of the normal DoD and Congressional budgeting process.

We are the team leader for the F/A-22 “Raptor.” The F/A-22 is an air-dominance, attack and multi-mission stealth combat aircraft with improved capabilities over current U.S. Air Force aircraft, including enhanced maneuverability, stealth, super-cruise speed and advanced integrated avionics that enable it to attack critical air and surface targets to gain and maintain air superiority against air-to-air and ground-to-air threats. The program is in low-rate production. In 2004, 15 F/A-22s were delivered, including the final six Production Lot 1 aircraft and the first nine Production Lot 2 aircraft. During 2004, we received contract awards for Production Lot 4 (22 aircraft) and advanced procurement funding for Production Lot 5. In April 2004, the program entered into the Initial Operational Test and Evaluation (IOT&E) phase. In February of 2005, the U.S. Air Force confirmed that IOT&E is complete. The U.S. Air Force concluded that the F/A-22 Raptor demonstrated overwhelmingly effective warfighting capability and met or exceeded performance expectations in altitude, speed, maneuverability and survivability. In the area of suitability, which measures the degree to which a system can be sustained in the field, the U.S. Air Force rated the F/A-22 potentially suitable, because it met interim milestones but did not meet all requirements for operational use. We plan to work closely with the U.S. Air Force with a goal of ensuring that the F/A-22 is prepared for initial operational capability by the end of 2005.

The F/A-22 program was funded at $4.72 billion (99.2% of the President’s budget request) in the fiscal year 2005 appropriations bill signed into law on August 5, 2004. That amount represents total program funding and does not reflect our expected sales under the F/A-22 contracts with the U.S. Air Force for the year. The 2005 fiscal year funding covers completion of the F/A-22 engineering, manufacturing and development contract phase, post-production modifications, squadron operational costs, advanced procurement funding for Production Lot 6, and production of up to 24 F/A-22s in Production Lot 5.

As has been widely reported, the President’s budget request for fiscal year 2006 and budget plan for subsequent years proposes reductions in funding for a number of existing defense programs in which Lockheed Martin participates, including termination of the Joint Common Missile system (see Electronics discussion below) in 2006 and reduction or termination in out-years of the F/A-22 and C-130J programs. We are participating in and monitoring discussions regarding these proposals, but are unable to predict the extent to which they will be approved as part of the 2006 or subsequent budgets approved by Congress. In the same context, we cannot predict whether the proposals and potential changes in the priorities that they reflect will afford new or additional opportunities for Lockheed Martin in terms of existing, follow-on or replacement programs. Therefore, it is difficult to accurately assess what impact the proposals will have on our business going forward until more is known, including whether we would have to close existing manufacturing facilities or incur expenses beyond those that would be reimbursed if one or more of our existing contracts were terminated for convenience due to lack of funding. In this section of the 10-K (Item 1- Business), we have focused our discussion on how our business was developed and conducted in 2004. We address budget, funding and other trends affecting our business and industry in the Management’s Discussion and Analysis – “Industry Considerations” section at pages 30 through 34 and in “Risk Factors and Forward-Looking Statements” at pages 16 through 20 of this report. As a result, we have not attempted to identify each program that may be subject to a current budget proposal and have chosen not to include duplicate text or multiple cross-references to that discussion throughout this section.

Our goal is to continue to work with our customers and suppliers, through cost-saving, efficiency and technology initiatives, to maximize the number of F/A-22s that can be purchased and to provide the best-value solutions for the budget allocated. We also plan to continue to structure our businesses and deploy our resources, so that we can compete effectively for opportunities that may result from assessment of troop transformational requirements, budgetary constraints or changes in priorities in the nation’s defense, homeland security and information technology needs.

In Air Mobility, we design, develop, produce and provide full system support of tactical and strategic airlift and cargo aircraft. The
C-130J is an advanced technology tactical transport aircraft offering improved performance and reliability and reduced operating and support cost over prior C-130 models. The C-130 is designed primarily to support the military mission of tactical combat transport. It also is a multi-mission platform that has been purchased in support of electronic combat, weather reconnaissance, sea surveillance and as an aerial tanker. The year 2004 marked the 50^th anniversary of the first flight of the C-130 prototype. Since that first flight, more

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than 2,270 C-130 “Hercules” aircraft of all types in more than 70 different variants have been produced on the Marietta, Georgia production line (the longest active military-aircraft production line in history). Today, 67 countries fly the C-130.

The C-130J is the latest model and incorporates state-of-the-art cockpit and avionics, a more powerful and efficient propulsion system and other innovations into a proven, mission-tested airframe. In 2004, we began recording profits on the C-130J program. For the year, we delivered 13 C-130Js including the first two KC-130J aircraft to the U.S. Marine Corps under a multi-year production contract signed in 2003. A total of 180 C-130Js have been ordered and 120 have been delivered through 2004. In the United States, U.S. Air Force Reserve Command and Air National Guard units fly C-130Js. The U.S. Marine Corps operates KC-130J tankers and the Coast Guard flies the HC-130J. International C-130J operators include the U.K. Royal Air Force, Royal Australian Air Force, Italian Air Force, and the Royal Danish Air Force, all of which have recently operated, or are currently operating, deployed C-130J aircraft in Southwest Asia. A multi-national C-130 force also has been deployed for tsunami relief in South Asia.

Other Air Mobility programs include the C-5 aircraft modernization and the C-27J. For the C-5 aircraft, we are involved in avionics modernization, reliability enhancement and re-engining programs for the U.S. Air Force. The C-27J is a medium size and range military transport aircraft. We provide avionics, propulsion systems and support to Alenia Aeronautica and are currently performing on contracts with the Italian and Greek Air Forces. First flight of the first C-27J production aircraft sold to the Greek Air Force occurred in December 2004. Delivery of the first C-27J to Greece is scheduled to occur in 2005.

In addition, we participate in the joint Japan/U.S. production of the F-2 fighter aircraft. We are a co-developer of the T-50 supersonic jet trainer aircraft for Korea. We also provide sustaining engineering, modifications and upgrades for existing aircraft that we manufactured, including the F-117, P-3, S-3 and U-2 reconnaissance aircraft.

In our Aeronautical Research & Development business, we are involved in advanced development programs and advanced design and rapid prototype applications. Our Advanced Development Program organization has made unmanned air vehicles (UAVs) and unmanned combat air vehicles (UCAVs) one focus of their efforts, and is actively developing the operational concepts as well as enabling technologies to provide these assets to the DoD in a cost effective manner.

We are a major competitor in combat aircraft, air mobility and military aircraft research & development throughout the world. Unlike commercial aircraft, military aircraft are subject to a wide variety of U.S. Government controls (e.g., export restrictions, market access, technology transfer and contracting practices). While a variety of factors determine the results of different competitions, price is a major determinant, as is past performance and customer confidence. Other critical factors are technical capabilities, release of technology, prior purchase experience, financing and total cost of ownership. In many cases internationally, the relationship with the U.S. and industrial cooperation programs are also important factors in determining the outcome of competitions. It is common for international customers to require contractors to comply with their industrial cooperation regulations, sometimes referred to as offset requirements. As a result, we have undertaken foreign offset requirements as part of securing some international business.

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

With respect to tactical fighters, the F-16 remains a formidable competitor, especially on the basis of price and the continuing ability to update its capabilities with changes in sensor and weapons systems. The F-35 is envisioned to be a cornerstone of future defense capability and is planned to replace several existing multi-role fighters currently in production for the U.S. and its allied partners. Due to the number of governments that have signed up to participate in the system development and demonstration phase, we anticipate that significant international demand could develop for the F-35. The F/A-22 is designed to satisfy the long-range weapon delivery needs of our customers while providing the air-dominance, strike and multi-mission stealth combat capabilities needed for conventional military operations. Given its air-dominance mission role and current export restrictions, we do not anticipate making foreign sales of the F/A-22 in the near term.

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

Transport aircraft sales are driven by the need to maintain or replace large numbers of aircraft for which maintenance costs have been increasing and by high development costs for new replacement aircraft. In most cases, the choice has been to modernize and

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update the available aircraft. In some mission segments, new commercial aircraft derivatives may make suitable replacement platforms and may be the final choice. In other cases, existing platforms may perform the job more capably if modernized.

The segment is dependent on the U.S. military and international governments as customers. In 2004, U.S. Government customers accounted for about two-thirds of the segment’s net sales.

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Electronic Systems

Our Electronic Systems segment has several lines of business that mainly are engaged in U.S. defense work. Electronic Systems serves as a lead systems integrator. In 2004, Electronic Systems’ net sales of $9.7 billion represented 27% of our total net sales. Electronic Systems’ three major lines of business and the percentage that each contributed to 2004 net sales are:

Missiles & Fire Control develops and produces land-based, air, and theater missile defense systems, tactical battlefield missiles, electro-optical systems, fire control and sensor systems, and precision-guided weapons and munitions. Maritime Systems & Sensors provides ship systems integration services, surface ship and submarine combat systems, sea-based missile defense systems, sensors, tactical avionics, port traffic management systems and missile launching systems. Our PT&TS business integrates mission-specific applications for fixed and rotary-wing platforms, develops and integrates postal automation and material handling systems, and provides information management solutions for government customers. PT&TS also provides simulation, training and support services, integrates advanced air traffic control systems and develops homeland security systems and products.

Some of Electronic Systems’ significant programs in 2004 included: the Terminal High Altitude Area Defense (THAAD) system; the AEGIS Weapon System; the Patriot Advanced Capability (PAC-3) missile; the Multiple Launch Rocket System (MLRS); and the Apache Electro-Optical Fire Control (AEOFC) system. These top five programs represent less than 30% of Electronic Systems’ sales. The segment has a diverse portfolio of over 1,000 programs. Historically, this diversity has provided a stable backlog and reduced potential risks that can result from reductions in funding or changes in customer priorities.

The THAAD program is a transportable defensive missile system designed to engage targets both inside and outside of the earth’s atmosphere. The THAAD system is comprised of the THAAD battle management/command control, communications and intelligence units, missiles, launchers and ground support equipment. Lockheed Martin began manufacturing the THAAD missile for the test portion of the contract in May 2004. The program currently is in the engineering, manufacturing and development phase.

The AEGIS Weapon System is a fleet defense system and the sea-based element of the U.S. missile defense system. The AEGIS Weapon System is a radar and missile system, integrated with its own command and control system, intended to defend against advanced air, surface and subsurface threats. The AEGIS program encompasses activities in development, production, ship integration and test support for ships at sea. We manufacture major portions of the AEGIS Weapon System for the U.S. Navy. We test and integrate weapon systems for the U.S. Navy’s Ticonderoga Class Cruiser and Arleigh Burke Class destroyer, along with the Kongo Class Destroyer for Japan, the F100 and F102 Class Frigates for Spain, the Fridtjof Nansen Class Frigate for Norway and the KDX Class Destroyer for Korea. In 2004, the AEGIS Weapon System received major upgrades associated with development of an open-systems architecture to allow future spiral development and sea-based missile defense capabilities.

The PAC-3 missile is an advanced defensive missile designed to intercept incoming airborne threats. We were awarded a second production contract in February of 2004 to produce a total of 159 PAC-3 Missiles, which includes 22 PAC-3 Missiles to replenish the Patriot missiles expended during Operation Iraqi Freedom. We received our first international contracts for PAC-3 Missile-related equipment in 2004 through a foreign military sales contract for The Netherlands and a direct sale contract for Japan.

The MLRS program is a fast-reaction, mass-firepower supplement to cannon artillery. MLRS has been in production since 1982 in various configurations. Customers include the U.S. Army, U.S. Marine Corps and the National Guard, as well as several foreign governments. During 2004, we began deliveries under low-rate, initial production contracts for the current configuration of both rockets and launchers. The system can be fired from different launchers and has a global-positioning-system aided, inertial-guidance package integrated on the MLRS extended-range rocket body in addition to technologies that improve maneuverability and further enhance system accuracy.

The AEOFC system provides a new targeting and piloting system to the U.S. Army for Apache helicopter crews, continuing our over 20-year legacy of providing pilot-night vision sensors for the Apache. More than 1,000 legacy sensor systems have been delivered to the U.S. Army and foreign military customers since they were first fielded in 1983. The AEOFC system will replace legacy hardware on the U.S. Army Apache helicopters to provide a modernized sensor for safer flight in day, night and bad weather missions. Our contract was awarded in 2003. The first production units are to be delivered in 2005.

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Our Missiles & Fire Control line of business received a number of new contracts and follow-on orders and achieved key program milestones in 2004. We won a contract to develop the Joint Common Missile system, the next generation air-to-ground missile that will be carried on U.S. Armed Forces’ rotary and fixed-wing platforms. Additionally, we received a contract to continue development of a compact kinetic energy missile to serve as the U.S. Army’s next-generation hypervelocity anti-tank weapon, and won two SDD programs to develop ground sensors for the U.S. Army’s Future Combat Systems program. NetFires LLC, a joint venture in which we are a 50% participant, was awarded a contract to produce a non-line-of-sight launch system for the U.S. Army. We participate in a multinational venture that is developing the Medium Extended Air Defense System (MEADS), a mobile air defense system designed to replace Patriot systems in the United States and Germany and Nike Hercules systems in Italy. The venture completed the final system demonstration requirement clearing the way for the MEADS program to enter design and development.

In Maritime Systems and Sensors, the most significant new business order in 2004 was our selection as one of two contractors to complete the final design and construction program to develop a new Littoral Combat Ship (LCS), a naval combatant fast ship designed to maneuver in coastal waters. The U.S. Navy selected and funded us to build the first ship in the new LCS class, which is to be delivered in 2006. We are also on the national team developing the U.S. Navy’s next-generation destroyer, DD(X), receiving a subcontract to support ship systems engineering, command and control, undersea warfare, weapons control and phased array volume search radar efforts. In support of the nation’s seaport security requirements, we have a contract with the U.S. Coast Guard to install vessel traffic service systems in three U.S. ports that enhance maritime safety and surveillance. Major program milestones achieved during 2004 included successful demonstration of open architecture capabilities for the AEGIS Weapon System and the launching of the first AEGIS-equipped Norwegian frigate. The Integrated Coast Guard Systems joint venture, in which we are a 50% participant, upgraded 10 cutters to the U.S. Coast Guard under the Deepwater program to support coastal protection and homeland security missions.

In our PT&TS line of business, the U.S. Postal Service selected us to provide managed network services on an enterprise-wide basis, encompassing more than 37,000 locations. The National Archives and Records Administration also selected Lockheed Martin as one of two companies that will compete to design a permanent archives system to preserve and manage electronic records. The Federal Aviation Administration (FAA) announced site acceptance of our advanced technologies and oceanic procedures system. In training and support, we received a contract to provide C-130J training systems and services to the U.S. Air Force and a contract to develop and deliver eight virtual combat convoy trainers to aid U.S. troops in dealing with ambushes and roadside bomb threats. We also delivered to the U.S. Army the first warfighters’ simulation system - a computer-based, next-generation simulation tool that supports the training of brigade, joint and coalition level commanders and staffs in joint service, interagency, intergovernmental and multi-national settings. We received follow-on orders for our close combat tactical trainer for the U.S. Army and our combined arms tactical trainer for the United Kingdom.

Electronic Systems’ broad portfolio of products and services forces it to compete against other large aerospace and defense companies and numerous smaller competitors. Electronic Systems’ business units often form teams with other companies that are competitors in other areas. The principal factors of competition include technical and management capability, price, past performance and our ability to provide solutions to our customers’ requirements on a timely basis.

The segment is heavily dependent on both military and civilian agencies of the U.S. Government as customers. In 2004, U.S. Government customers accounted for approximately 81% of the segment’s total net sales.

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Space Systems

Space Systems designs, develops, researches, engineers and produces military and commercial space systems. In 2004, Space Systems’ net sales of $6.4 billion represented approximately 18% of our total net sales. Space Systems’ principal lines of business and the percentage that each contributed to 2004 net sales are:

Our Satellites business designs, develops, manufactures and integrates advanced technology satellite systems for government and commercial applications. We are responsible for various classified systems and services in support of vital national security systems.

We are the prime contractor for the DoD’s next generation of highly secure communications satellites known as the Advanced Extremely High Frequency (AEHF) system. The fully operational AEHF constellation is envisioned to include four networked satellites, plus an in-orbit spare. These satellites are designed to provide improved secure data throughput capability and coverage flexibility to regional and global military operations and to be compatible with the Milstar I and II systems. The AEHF communication system includes the satellite constellation, mission control segment and terminal development. Our current contract includes the first two space vehicles and development of the ground segment.

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

We are the prime contractor for the Global Positioning System (GPS) IIR program, which includes 20 satellites that will improve navigation accuracy and provide longer autonomous satellite operation than current global positioning satellites. In 2004, we successfully delivered four GPS IIR satellites.

In 2004, we were awarded one of two contracts for the Phase A element of the GPS III program. GPS III is intended to deliver major improvements in accuracy, assured service delivery, integrity, and flexibility for civil and military users. The Phase A work will assess mission needs and requirements, and evaluate innovative architecture recommendations. During this phase, we will be conducting studies to mature systems requirements culminating in a systems requirements review.

We also were awarded one of two contracts to enter into the risk reduction and system definition phase of the U.S. Air Force’s Transformational Satellite program. Under the current contract, we will conduct risk reduction demonstrations and system studies over a 27-month period. The program represents the next step toward transitioning the DoD wideband and protected communications satellite architecture into a single network comprised of multiple satellite, ground, and user segment components. The system will network mobile warfighters, sensors, weapons, communications command and control nodes located on UAVs, piloted aircraft, on the ground, in the air, at sea or in space.

In 2004, we were awarded a contract to be the prime contractor and systems integrator for the Mobile User Objective System (MUOS) program. MUOS is a next-generation narrowband tactical satellite communications system that will provide significantly improved and assured communications for the mobile warfighter. MUOS is planned to replace the current narrowband tactical satellite communications system known as the Ultra High Frequency Follow-On (UFO) system. The MUOS satellites are designed to be compatible with the existing UFO system and associated legacy terminals and provide increased military communications availability. Operational turnover of the first MUOS satellite is planned for 2010.

In 2004, the U.S. Air Force Space and Missile Systems Center awarded us one of two 24-month Phase A contracts for the Space Based Radar program. Space Based Radar is a transformational system being developed for the DoD to provide global intelligence, surveillance and reconnaissance for the military and intelligence community. The system will be comprised of a constellation of spacecraft that will provide rapid-revisit coverage of the entire Earth’s surface. During the concept development effort, we will

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develop and evaluate multiple candidate architectures for the system, including the horizontal integration of the system with other existing and planned assets.

We produce exploration spacecraft, earth-orbiting satellites and sensors for Earth observation and environmental monitoring. The spacecraft we have produced include the Hubble Space Telescope, Spitzer Space Telescope, Defense Meteorological Satellite Program satellites, Mars Odyssey, Mars Reconnaissance Orbiter, Mars Phoenix Lander, Genesis and Stardust.

Our satellite business also designs, builds, markets and operates turnkey commercial satellite systems for space-based telecommunications and other applications. In 2004, we completed four satellites and were awarded contracts to construct two new commercial satellites.

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

We currently produce and sell the Atlas V configuration of the Atlas launch vehicle. In 2004, we launched the final Atlas II launch vehicle, capping an overall success record of 100%. The final Atlas III was launched in 2005. Atlas V, the newest member of the Atlas family, offers improved performance and value to our customers. The Atlas V is powered by the RD-180 liquid oxygen/kerosene engine and can be configured with up to five solid rocket boosters. The flexible solid rocket booster configuration enables the Atlas to perform launch missions from low-Earth orbit to geo-synchronous orbit. The Atlas V utilizes a modular design and is more operationally efficient than prior systems. As a result, less time is required to process and prepare each vehicle for launch. This affords greater flexibility in meeting customer launch schedule and mission performance requirements. We developed the Atlas V in cooperation with the U.S. Air Force as part of the Evolved Expendable Launch Vehicle (EELV) program. Atlas V serves as both a commercial and government launch system. As of year-end 2004, the Atlas family of launch vehicles had a record of 74 consecutive successful launches.

We also produced the Titan IV, the nation’s largest expendable launch vehicle. Our contract with the U.S. Air Force calls for the launch of 39 vehicles. The last two Titan IV launches are scheduled in 2005.

The commercial side of our Launch Services business includes the Lockheed Martin-built Atlas family of launch vehicles and the Proton family of launch vehicles manufactured by our primary joint venture partner, Khrunichev State Research and Production Space Center in Russia. Launch services are marketed to customers worldwide through International Launch Services (ILS). In 2004, ILS was awarded twelve contracts for launch services.

In 1992, we entered into a joint venture with two Russian government-owned space firms to form Lockheed-Khrunichev-Energia International, Inc. (LKEI). LKEI has exclusive rights to launches of commercial, non-Russian-origin space payloads on the Proton family of rockets from a launch site in Kazakhstan. We consolidate the results of operations of LKEI and ILS into our financial statements. For additional information concerning LKEI and ILS, see Management’s Discussion and Analysis - “Space Business” on pages 32 through 33 of this Form 10-K.

We also manufacture the NASA Space Shuttle external tank. We operate the assembly facility for NASA under a government-owned, contractor-operated agreement. The tank is the only major non-reusable element of the Space Shuttle. One tank is used for each launch. Our existing contract for production of the external tanks runs through 2008.

Our Launch Services business also includes a 50% ownership interest in United Space Alliance, LLC (USA). USA is responsible for the day-to-day operation and management of the Space Shuttle fleet for NASA. USA also performs the modification, testing and checkout operations required to prepare Space Shuttles for launch.

Our Strategic & Defensive Missile Systems business has been the sole supplier of strategic fleet ballistic missiles to the U.S. Navy since the program’s inception in 1955. The Trident II D5 is the latest generation of submarine launched ballistic missiles, following the highly successful Polaris, Poseidon, and Trident I C4 programs. The Trident II D5 began full production in 1988 and has achieved a mission-success track record of 108 consecutive successful test launches. The Trident II D5 is the only intercontinental ballistic missile in production in the United States.

We are integrally involved with several missile defense programs. The Boost Vehicle-Plus contract is part of the ground-based, midcourse design program’s dual-boost vehicle strategy, in which we are developing one of two booster configurations. We are completing the boost vehicle design. The Airborne Laser Weapon (ABL) is being developed, by a team of three industry participants, and designed to acquire, track and destroy missiles during boost phase, over the launch area and away from friendly forces. It is being designed to counter ballistic missiles, and may have capability against other types of airborne threats. We are responsible for the beam control/fire control system, surveillance sensors within the battle management segments, and the command and control segment

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of the weapon system. We delivered and integrated all the elements of the beam and fire control system in 2004. We also are the prime contractor for the Missile Defense Agency’s targets and countermeasures contract. We are responsible for the selection, development, acquisition, integration, and launch of individual target vehicles to support the Missile Defense Agency’s test program for emerging interceptors. In 2004, the Missile Defense Agency awarded us the Multiple Kill Vehicles (MKV) program. The MKV program is being designed to destroy ballistic missile threats and decoys with a single launch.

We compete worldwide for satellites and launch services against several competitors.

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

Based on current projected DoD, NASA and other government spending profiles and budget priorities, we believe we are well positioned to compete for government satellites, launch systems and strategic and defensive missile systems programs. Future competitions for government systems include DoD initiatives for transformational communications, global positioning, space-based radar, planetary exploration and science, EELV procurements, and NASA’s Space Exploration initiative.

Commercial demand for geo-stationary telecommunications satellites and intermediate class launch vehicles that place these commercial satellites in orbit has been flat and manufacturing remains in an overcapacity situation. This has created significant price and competitive pressures. For further discussion of competitive factors in the sales of commercial satellites, see Management’s Discussion & Analysis – “Space Business” on pages 32 through 33 of this Form 10-K.

The segment is heavily dependent on both military and civilian agencies of the U.S. Government as customers. In 2004, U.S. Government customers accounted for approximately 81% of the segment’s net sales.

Integrated Systems & Solutions

Integrated Systems & Solutions is engaged in the design, research, development, integration and management of net-centric solutions supporting the command, control, communications, computers, intelligence, surveillance and reconnaissance (C4ISR) activities of the DoD, intelligence agencies, other federal agencies and allied countries. IS&S provides technology, full life-cycle support and highly specialized talent in the areas of software and systems engineering, including expertise in space, air and ground systems. IS&S serves as the Corporation’s focal point for customers with joint and net-centric operations requiring overarching architectures, horizontal systems integration, software development and inter-connected capabilities for the gathering, processing, storage and delivery of on-demand information for mission management, modeling and simulation, and large-scale systems integration. In that role, IS&S operates the Center for Innovation, a newly established facility for modeling and simulation.

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In 2004, IS&S had net sales of $3.8 billion, which represented 11% of Lockheed Martin’s net sales. IS&S’ major lines of business and the percentage that each contributed to its 2004 net sales are:

Our Intelligence Systems & Solutions business develops classified systems in support of the nation’s intelligence community and homeland security. We help plan and define future capabilities, as well as develop large enterprise system solutions. We provide capabilities spanning products from consumers of intelligence to systems that gather, process, assimilate, fuse and distribute data from ground, air and space assets.

The DoD C4ISR business is responsible for complex systems integration support to provide real-time situational awareness of actionable decision quality information to the DoD warfighter community. This information is generated through the fusion of open architectures and horizontal integration of multiple systems to provide mission critical support in the areas of battlespace awareness, missile defense and strategic C4ISR. We also provide systems engineering, integration and test support to the national space launch range system and real-time support for satellite telemetry processing. IS&S provides the DoD with a messaging system that has full interoperability with the U.S. Government, allies, defense contractors and other authorized users. In addition, we provide assistance in generating IT solutions for combat support logistics and supply tracking systems.

Some of IS&S’ major programs are:

We are the prime contractor for the U.S. Air Force’s Integrated Space Command & Control program. Our primary role is to integrate and modernize air, missile, and space command and control infrastructure. This program provides for the evolution, sustainment and support for the U.S. Space Command legacy command and control systems into a net-centric, modern system architecture that will provide data in a single common operational picture.

On the Command and Control Battle Management & Communications program, we are a member of the national team that is constructing the complex systems that will comprise the global missile defense shield for the Missile Defense Agency. Our role is to develop the battle management command, control and communications architecture and provide assistance in the development of operational concepts and testing.

The Global Positioning System is a space-based radio navigation, time distribution, and nuclear detonation detection system. Its mission is to provide precise, continuous, and all-weather three-dimensional position, velocity, timing, and information to properly equipped air, land, sea and space-based users. Under a subcontract to the ground segment prime contractor, we provide system engineering, program management, system test & evaluation, software development & testing, sustainment and integrated logistics support. Our Space segment is the prime contractor for the GPS-IIR spacecraft.

The Range Standardization and Automation program provides support to the U.S. Air Force in the consolidation and automation of critical range telemetry, tracking, safety and management systems for space launch operations at Vandenberg Air Force Base and Kennedy Space Center. This program provides integrated launch data in a common operational picture for the customer.

The Theater Battle Management Core System program includes system architecture and design, software development, integration, system test, deployment and field support. The principal objectives of the program are improved interoperability, standard user interfaces and flexible architecture to adapt to changing user requirements and new C4I technologies. We are the prime contractor for the U.S. Air Force on this program.

In 2004, the U.S. Army awarded us a six-year contract to develop the Aerial Common Sensor (ACS), a next generation airborne intelligence, surveillance, reconnaissance and target identification system that is to replace the U.S. Army’s Guardrail Common Sensor and Airborne Reconnaissance Low-aircraft and the U.S. Navy’s EP-3 aircraft.

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IS&S is heavily dependent on both military and civilian agencies of the U.S. Government as customers. In 2004, the U.S. Government customers accounted for 97% of IS&S’ net sales.

The range of products and services at IS&S results in competition with other large aerospace and defense companies as well as with numerous smaller competitors. The principal competitive discriminators include technical and management capability, the ability to develop and implement complex, integrated system architectures, price and past performance. Program requirements frequently result in the formation of teams such that companies teamed on one program are competitors for another.

Information & Technology Services

Our Information & Technology Services segment provides a wide array of information, management, engineering, scientific and logistics solutions and services to government agencies and other customers. In 2004, I&TS had net sales of $3.8 billion, which represented 11% of our total net sales. I&TS has three lines of business:

Our Information Technology business provides IT support to federal, state and local government agencies. Our customers include the U.S. Social Security Administration, FAA, U.S. Environmental Protection Agency (EPA), DoD, Department of Energy (DoE), NASA, and the Departments of Justice and Health and Human Services. We provide program management, business strategy and consulting, complex systems development and maintenance, complete life-cycle software support, information assurance and enterprise solutions. Much of the work we perform is contracted through task order vehicles (indefinite-delivery/indefinite-quantity contracts) or a Government Services Administration schedule.

Our Defense business provides a wide range of professional, engineering, and technical solutions and services for the DoD, the Department of Homeland Security, the U.S. intelligence community and several foreign governments. We provide solutions for IT-related programs, training and simulation, document management and supply chain management. We perform aircraft and aircraft-engine maintenance, modifications, repair and overhaul. In addition, we manage mission critical infrastructure and systems. We provide operation management, integration and assembly, maintenance, logistics and engineering functions for a wide array of military systems. These include aircrew training, flight-simulator engineering support and assembly. We install, integrate, upgrade and perform repair services for a variety of aircraft, computer, communications, command and control, radar, target, simulation and surveillance systems. We also provide facility support, field teams, spacecraft transportation, “clean-room” based satellite processing, launch pad activation, satellite early-orbit test and checkout, satellite mission operations, ground systems development and sustainment, and post-processing information analysis and related ground systems sustainment.

Our Defense business also manages two large laboratory facilities in the U.S. for the DoE and participates in the management of a large facility in the U.K. The Knolls Atomic Power Laboratory designs nuclear reactors for the U.S. Navy. It also supports the existing fleet of nuclear powered ships and trains the U.S. Navy personnel who operate those ships. Sandia National Laboratories supports the stewardship of the U.S. nuclear weapons stockpile, developing sophisticated research and technology in the areas of engineering sciences, materials and processes, pulsed power, micro-electronics and photonics, micro-robotics, and computational and information sciences. In the U.K., we own one-third of a joint venture that manages the Atomic Weapons Establishment program.

For NASA, we provide engineering, science and information services at several NASA centers across the country. We perform or provide mission operations, flight hardware and payload development and integration, engineering and technical support for life sciences, information technology engineering design and support services, and software design, development and process control.

I&TS received several new and follow-on contracts in 2004. We received awards from the U.S. Social Security Administration for agency-wide IT modernization and other IT services, the EPA for IT solutions and environmental systems engineering, the U.S. Navy for the Seaport Enhanced and the National Center for Critical Information Processing contract vehicles, and NASA for desktop IT activities and mission support operations. We also received an award-term option year from the U.S. Air Force for aircraft engine overhauls at Kelly Aviation Center and one for management and operation of Sandia National Laboratories.

I&TS competes against other aerospace and defense firms, IT service providers and other service companies. The competitive landscape is highly fragmented with no single company or small group of companies in dominant positions. The principal factors of competition include price, technical and management capability, past performance and, increasingly, the ability to develop and implement complex, integrated solutions to meet the challenges facing government customers across their entire enterprise. On some outsourcing procurements we may also compete with a government-led bidding entity.

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The segment is heavily dependent on both military and civilian agencies of the U.S. Government as customers. In 2004, U.S. Government customers accounted for approximately 94% of the segment’s total net sales.

Patents

We routinely apply for, and own a substantial number of U.S. and foreign patents related to the products and services our business areas provide. In addition to owning a large portfolio of intellectual property, we also license intellectual property to, and from, third parties. The U.S. Government has licenses in our patents that are developed in performance of government contracts, and it may use or authorize others to use the inventions covered by such patents for government purposes. Unpatented research, development and engineering skills also make an important contribution to our business. While our intellectual property rights in the aggregate are important to the operation of our business segments, we do not believe that any existing patent, license or other intellectual property right is of such importance that its loss or termination would have a material adverse effect on our business taken as a whole.

Raw Materials and Seasonality

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

Aluminum and titanium are important raw materials used in certain of our Aeronautics and Space programs. Aluminum and titanium generally have been in good supply. Carbon fiber is an important ingredient in the composite material that is used in our Aeronautics programs, such as the F/A-22 and F-35. Nicalon fiber also is a key material used on the F/A-22 aircraft. One type of carbon fiber and the nicalon fiber that we use are currently only available from single-source suppliers. Aluminum lithium, which we use to produce the Space Shuttle’s external tank and for F-16 structural components, also is currently only available from limited sources. We have been advised by some suppliers that pricing and the timing of availability of materials in some commodities markets can fluctuate widely. These fluctuations may negatively affect price and the availability of certain materials, including titanium. While we do not anticipate material problems regarding the supply of our raw materials and believe that we have taken appropriate measures to mitigate these variations, if key materials become unavailable or if pricing fluctuates widely in the future, it could delay one or more of our programs, result in increased costs or reduce award fees.

No material portion of our business is considered to be seasonal. Various factors can affect the distribution of our revenue between accounting periods, including the timing of government awards, the availability of government funding, product deliveries and customer acceptance.

Government Contracts and Regulation

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

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

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

The U.S. Government, and other governments, may terminate any of our government contracts and, in general, subcontracts, at their convenience, as well as for default based on performance. Upon termination for convenience of a fixed-price type contract, we

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normally are entitled to receive the purchase price for delivered items, reimbursement for allowable costs for work-in-process and an allowance for profit on the contract or adjustment for loss if completion of performance would have resulted in a loss. Upon termination for convenience of a cost reimbursement contract, we normally are entitled to reimbursement of allowable costs plus a portion of the fee. The amount of the fee recovered, if any, is related to the portion of the work accomplished prior to termination and is determined by negotiation.

A termination arising out of our default could expose us to liability and have a material adverse effect on our ability to compete for future contracts and orders.

In addition, our U.S. Government contracts typically span one or more base years and multiple option years. The U.S. Government generally has the right to not exercise option periods and may not exercise an option period if the agency is not satisfied with our performance of the contract. We do not include unexercised options or potential indefinite-delivery/indefinite-quantity (IDIQ) orders in our backlog. If any of our contracts are terminated by the U.S. Government, our backlog would be reduced by the expected value of the remaining terms of such contracts and our financial condition and operating results could be materially adversely affected. In addition, on those contracts for which we are teamed with others and are not the prime contractor, the U.S. Government could terminate a prime contract under which we are a subcontractor, irrespective of the quality of our services as a subcontractor.

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

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

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

Backlog

At December 31, 2004, our total negotiated backlog was $74.0 billion compared with $76.9 billion at the end of 2003. Of our total 2004 year-end backlog, approximately $45.6 billion, or 62%, is not expected to be filled within one year.

These amounts include both funded backlog (unfilled firm orders for our products for which funding has been both authorized and appropriated by the customer or Congress in the case of U.S. Government agencies) and unfunded backlog (firm orders for which funding has not been appropriated). Negotiated backlog does not include unexercised options or task orders to be issued under IDIQ type contracts. Funded backlog was $40.2 billion at December 31, 2004. The backlog for each of our business segments is provided as part of Management’s Discussion and Analysis - “Discussion of Business Segments” on pages 40 through 45 of this Form 10-K.

Environmental Regulation

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

We manage various government-owned facilities on behalf of the government. At such facilities, environmental compliance and remediation costs have historically been the responsibility of the government and we relied (and continue to rely with respect to past practices) upon government funding to pay such costs. While the government remains responsible for capital and operating costs associated with environmental compliance, responsibility for fines and penalties associated with environmental noncompliance are typically borne by either the government or the contractor, depending on the contract and the relevant facts. Fines and penalties are no longer deemed allowable costs under the contracts pursuant to which such facilities are managed.

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Most of the laws governing environmental matters include criminal provisions. If we were convicted of a violation of the Federal Clean Air Act or the Clean Water Act, our facility or facilities involved in the violation would be placed by EPA on the “Excluded Parties List” maintained by the General Services Administration. The listing would continue until the EPA concluded that the cause of the violation had been cured. Listed facilities cannot be used in performing any U.S. Government contract awarded to us during any period of listing by the EPA.

We have incurred and will likely continue to incur liabilities under various state and federal statutes for the cleanup of pollutants previously released into the environment. We are, for example, expending significant funds to conduct soil and groundwater remediation under administrative orders and consent decrees at the sites of the Corporation’s discontinued operations in Burbank and Redlands, California. The extent of our financial exposure cannot in all cases be reasonably estimated at this time. Among the variables management must assess in evaluating costs associated with these cases and remediation sites generally are changing cost estimates, continually evolving governmental environmental standards and cost allowability issues. For information regarding these matters, including current estimates of the amounts that we believe are required for remediation or clean-up to the extent estimable, see “Environmental Matters” in Management’s Discussion and Analysis of Results of Operations and Financial Condition on page 36 and Note 14 —Legal Proceedings, Commitments and Contingencies on page 75 through page 77 of this Form 10-K.

Research and Development

We conduct research and development activities under customer-funded contracts and with our own independent research and development funds. Our independent research and development costs include basic research, applied research, development, systems and other concept formulation studies, and bid and proposal efforts related to government products and services. These costs are generally allocated among all contracts and programs in progress under U.S. Government contractual arrangements. Corporation-sponsored product development costs not otherwise allocable are charged to expense when incurred. Under certain arrangements in which a customer shares in product development costs, our portion of the unreimbursed costs is generally expensed as incurred. Total independent research and development costs charged to costs of sales in 2004, 2003 and 2002, including costs related to bid and proposal efforts, were $962 million, $903 million and $830 million, respectively. See “Research and development and similar costs” in Note 1 — Significant Accounting Policies on page 60 of this Form 10-K.

Employees

At December 31, 2004, we had approximately 130,000 employees, the majority of whom were located in the U.S. We have a continuing need for numerous skilled and professional personnel to meet contract schedules and obtain new and ongoing orders for our products. The demand for workers with specialized engineering, information technology, technical skills and security clearances within the aerospace, defense and information technology industries is likely to remain high for the foreseeable future, while growth of the pool of trained individuals with those skills has not matched demand. As a result, we are competing with other companies with similar needs in hiring skilled employees, and we may incur increased labor, recruiting or training costs. Management considers employee relations generally to be good.

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

Risk Factors and Forward-Looking Statements

An investment in our common stock or debt securities involves risks and uncertainties. You should consider the following factors carefully, in addition to the other information contained in this Form 10-K, before deciding to purchase our securities.

This Form 10-K also contains statements which, to the extent they are not recitations of historical fact, constitute forward-looking statements within the meaning of federal securities law. The words believe, estimate, anticipate, project, intend, expect, plan, outlook, scheduled, forecast and similar expressions are intended to identify forward-looking statements.

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

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Reduced funding for defense procurement and research and development programs could adversely affect our ability to grow or maintain our revenues and profitability.

We and other U.S. defense contractors have benefited from an upward trend in overall defense spending in the last few years. The President’s budget request for fiscal year 2006 of $419.3 billion reflects a 4.8% increase in budget authority for overall defense spending. The largest portion of the proposed 2006 defense budget will go toward operations and maintenance activities. The budget proposal also appears to continue the trend of funding the direct costs of operations in Iraq and Afghanistan through separate supplemental appropriations. We derive about 60% of our sales from the U.S. Government’s defense investment budget. The defense investment budget includes funds for weapons procurement and research and development. The investment budget proposed for 2006 remains steady at $78 billion, and is projected to increase in 2007 and 2008 under the President’s budget plan. The President’s budget plan does, however, reduce the rate at which the investment budget will grow, with net cuts of some $30 billion in proposed spending through 2011. In addition, the President’s current budget plan contemplates further reductions or curtailment of some defense programs in subsequent years and a commitment to cut the federal budget deficit in half by 2009, while aggressively prosecuting the global war on terrorism and seeking to implement improvements in force responsiveness and homeland security.

We participate in some of the programs that are proposed for future reductions in funding, including the F/A-22, C-130J and Joint Common Missile. We are participating in and monitoring discussions regarding these proposals, but are unable to predict the extent to which these proposals ultimately will be approved as part of the 2006 or subsequent budgets approved by Congress. In the same context, we also cannot predict whether the proposals and potential changes in priorities due to defense transformation will afford new or additional opportunities for our businesses in terms of existing, follow-on or replacement programs. Therefore, it is difficult to accurately assess what impact the proposals will have on our business going forward until more is known, including whether we would have to close existing manufacturing facilities or incur expenses beyond those that would be reimbursed if one or more of our existing contracts were terminated for convenience due to lack of funding. See “Management’s Discussion and Analysis – Industry Considerations” on pages 30 through 34 of this report.

Although the ultimate size of future defense budgets remains uncertain, current indications are that the total defense budget and the investment budget as a component of overall defense spending will increase over the next few years. U.S. Government programs in which Lockheed Martin participates, or seeks to participate in the future, must compete with other programs for consideration during our nation’s budget formulation and appropriation processes. Budget decisions made in this environment may have long-term consequences for the size and structure of Lockheed Martin and the defense industry. While we believe that our programs are a high priority for national defense, there remains the possibility that one or more of our programs will be reduced, extended, or terminated. Reductions in our existing programs, unless offset by other programs and opportunities, could adversely affect our ability to grow our revenues and profitability.

Military transformation and planning may affect future procurement priorities and existing programs.

Operations in Iraq, Afghanistan and the continuing global war on terrorism reaffirm the need for the rapid projection of decisive combat power around the world and emphasize the need for new capabilities and solutions for the warfighter. They also highlight the need for improved logistics, intelligence and information gathering, and continued operations capability at completion of hostilities. Toward that end, the DoD is committed to a transformation that will achieve and maintain advantages through changes in operational concepts, organizational structure and technologies that significantly improve warfighting capabilities.

This defense transformation is evidenced by a trend toward smaller, more capable, interoperable and technologically advanced forces. To achieve these capabilities, a transformation in acquisition is underway that advances an increasing trend toward early deployment of initial program capabilities followed by subsequent incremental improvements, cooperative international development programs and a demonstrated willingness to explore new forms of development, acquisition and support. Along with these trends, new system procurements are being evaluated for the degree to which they support the concept of jointness and interoperability among the services. The DoD plans to undertake a Quadrennial Defense Review (QDR) and Base Re-Alignment and Closure Review (BRAC) during 2005. We believe that both these DoD internal assessments, as well as potentially other studies, will contribute to reshaping national security modernization, infrastructure and organizational priorities.

We are continuing to invest in business opportunities where we can use our customer knowledge, technical strength and large-scale systems integration capabilities to win new business. We believe that we are well positioned as a company to compete for new business in an environment of fewer opportunities and flat or reduced investment spending for defense procurement and research and development. Whether we are successful in continuing to grow revenues and profits will depend, in large measure, on whether we are able to deliver the best value solutions for our customer. For that reason, we are keenly focused on continuing to improve operational and financial performance, selectively pursuing acquisitions of businesses and expanding into adjacent product lines as a means to drive growth in 2005 and beyond.

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Our existing U.S. Government contracts are subject to continued appropriations by Congress and may be terminated if future funding is not made available.

We rely heavily upon and derive approximately 80% of our revenues from sales to the U.S. Government. Future sales under our existing U.S. Government contracts are conditioned upon the continuing availability of Congressional appropriations. Congress usually appropriates funds on a fiscal-year basis even though contract performance may extend over many years. Long-term government contracts and related orders are subject to termination if appropriations for subsequent periods become unavailable. If the U.S. Government terminates a particular contract for convenience, we generally would be entitled to receive payment for work completed and allowable termination or cancellation costs.

We provide a wide range of defense, homeland security and information technology products and services to the U.S. Government. While we believe that this diversity makes it less likely that cuts in any specific contract or program will have a long-term impact on the Corporation, termination of multiple or large programs or contracts could adversely affect our business and future financial performance. In addition, termination of large programs or multiple contracts affecting a particular business site could require us to evaluate the continued viability of operating that site.

As a U.S. Government contractor, we are subject to a number of procurement rules and regulations.

We must comply with and are affected by laws and regulations relating to the award, administration and performance of U.S. Government contracts. Government contract laws and regulations affect how we do business with our customers and, in some instances, impose added costs on our business. A violation of specific laws and regulations could result in the imposition of fines and penalties or the termination of our contracts or debarment from bidding on contracts. In some instances, these laws and regulations impose terms or rights that are more favorable to the government than those typically available to commercial parties in negotiated transactions. For example, the U.S. Government may terminate any of our government contracts and, in general, subcontracts, at their convenience, as well as for default based on performance. See “Government Contracts and Regulation” on page 14 of this report.

Our business could be adversely affected by a negative audit by the U.S. Government.

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

Developing new technologies entails significant risks and uncertainties that may not be covered by indemnity or insurance.

Our business consists of designing, developing and manufacturing advanced defense and technology systems and products. We are often tasked to develop or integrate new technologies that may be untested or unproven. Components of certain of the defense systems and products we develop are explosive and inherently dangerous. Failures of launch vehicles, spacecraft and satellites, missile systems, command and control systems, software applications, air-traffic control systems, train-control systems, homeland security applications, nuclear facilities, and aircraft have the potential to cause loss of life and extensive property damage. We may face liabilities related to the maintenance or servicing of aircraft or other platforms or for training services we supply in the course of our business. In addition, from time-to-time, we have employees deployed on-site at active military installations or locations or in support of military operations in hostile locations. Although indemnification by the U.S. Government may be available in some instances for our defense businesses, this is not always the case. In some instances where the U.S. Government could provide indemnification under applicable law, it elects not to do so. In addition, U.S. Government indemnification may not be available to cover potential claims or liabilities resulting from a failure of technologies developed and deployed for homeland security purposes.

While we maintain insurance for some business risks, it is not possible to obtain coverage to protect against all operational risks and liabilities. We generally seek indemnification where we believe that the U.S. Government is permitted to extend indemnification under applicable law and generally seek limitation of potential liabilities related to the sale and use of our homeland security products and services through qualification by the Department of Homeland Security under the SAFETY Act provisions of the Homeland Security Act of 2002. Where we are unable to secure indemnification or qualification under the SAFETY Act, we may nevertheless elect to provide the product or service. Finally, some technologies, particularly those related to Homeland Security, may raise potential liabilities related to privacy issues for which neither indemnification nor SAFETY Act coverage is available.

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Substantial claims resulting from an accident in excess of any U.S. Government indemnity and our insurance coverage (or for which indemnity or insurance is not available) could harm our financial condition and operating results. Moreover, any accident or incident for which we are liable, even if fully insured, could negatively affect our reputation among our customers and the public, thereby making it more difficult for us to compete effectively, and could significantly impact the cost and availability of adequate insurance in the future.

Our earnings and margins may vary based on the mix of our contracts and programs.

At December 31, 2004, our backlog included both cost reimbursable and fixed-price contracts. Cost reimbursable contracts generally have lower profit margins than fixed-price contracts. Production contracts are mainly fixed-price contracts, and developmental contracts are generally cost reimbursable contracts. Our earnings and margins may vary materially depending on the types of long-term government contracts undertaken, the costs incurred in their performance, the achievement of other performance objectives and the stage of performance at which the right to receive fees, particularly under incentive and award fee contracts, is finally determined.

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

If our subcontractors or suppliers fail to perform their contractual obligations, our prime contract performance and our ability to obtain future business could be materially and adversely impacted.

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

We use estimates in accounting for many of our programs. Changes in our estimates could affect our future financial results.

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

Because of the significance of the judgments and estimation processes described above, it is likely that materially different amounts could be recorded if we used different assumptions or if the underlying circumstances were to change. Changes in underlying assumptions, circumstances or estimates may adversely affect future period financial performance. For additional information on accounting policies and internal controls we have in place for recognizing sales and profits, see our discussion under Management’s Discussion and Analysis — “Critical Accounting Policies — Contract Accounting/Revenue Recognition” on page 34 through 35 and “Controls and Procedures” on page 50, and Note 1 — Significant Accounting Policies on page 58 through 62 of this Form 10-K.

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The level of returns on pension and post-retirement plan assets, changes in interest rates and other factors could affect our earnings in future periods.

Our earnings may be positively or negatively impacted by the amount of expense we record for our employee benefit plans. This is particularly true with expense for our pension plans. Generally Accepted Accounting Principles (GAAP) require that we calculate expense for the plans using actuarial valuations. These valuations are based on assumptions that we make relating to financial market and other economic conditions. Changes in key economic indicators can result in changes in the assumptions we use. The key year-end assumptions used to estimate pension expense for the following year are the discount rate, the expected long-term rate of return on plan assets and the rate of increase in future compensation levels. For a discussion regarding how our financial statements can be affected by pension plan accounting policies, see “Management’s Discussion and Analysis—Critical Accounting Policies—Post-Retirement Benefit Plans” on page 35 through 36 of this Form 10-K.

International sales and suppliers may pose potentially greater risks.

Our international business may pose greater risks than our domestic business due to the greater potential for changes in foreign economic and political environments. Our international business is also highly sensitive to changes in foreign national priorities and government budgets. We frequently team with international subcontractors and suppliers. International transactions frequently involve increased financial and legal risks arising from stringent contractual terms and conditions and the widely differing legal systems and customs in foreign countries. Our contracts, however, generally are denominated in U.S. dollars. Some international customers require contractors to agree to offset programs and may require in-country purchases, manufacturing and financial support arrangements as a condition to awarding contracts. The contract may provide for penalties in the event we fail to perform in accordance with the offset requirements.

We are involved in a number of legal proceedings. We cannot predict the outcome of litigation and other contingencies with certainty.

Our business may be adversely affected by the outcome of legal proceedings and other contingencies (including environmental remediation costs) that cannot be predicted with certainty. As required by GAAP in the U.S., we estimate material loss contingencies and establish reserves based on our assessment of contingencies where liability is deemed probable and reasonably estimable in light of the facts and circumstances known to us at particular point in time. Subsequent developments in legal proceedings may affect our assessment and estimates of the loss contingency recorded as a liability or as a reserve against assets in our financial statements. For a description of our current legal proceedings, see Item 3 — Legal Proceedings on page 22 through 23 and Note 14 — Legal Proceedings, Commitments and Contingencies on page 75 through page 77 of this Form 10-K.

Our forward-looking statements and projections may prove to be inaccurate.

Our actual financial results likely will be different from those projected due to the inherent nature of projections and may be better or worse than projected. Given these uncertainties, you should not rely on forward-looking statements. The forward-looking statements contained in this Form 10-K speak only as of the date of this Form 10-K. We expressly disclaim a duty to provide updates to forward-looking statements after the date of this Form 10-K to reflect the occurrence of subsequent events, changed circumstances, changes in our expectations, or the estimates and assumptions associated with them. The forward-looking statements in this Form      10-K are intended to be subject to the safe harbor protection provided by the federal securities laws.

In addition, general economic conditions and trends, including interest rates, government budgets and inflation, can and do affect our businesses. For a discussion identifying additional risk factors and important factors that could cause actual results to vary materially from those anticipated in the forward-looking statements, see the discussion of Government Contracts and Regulation on page 14 through page 15, “Industry Considerations” in Management’s Discussion and Analysis on page 30 through page 34, Note 1 — Significant Accounting Policies on page 58 through page 62, and “Critical Accounting Policies” in Management’s Discussion and Analysis on page 34 through page 37 of this Form 10-K. Other factors, in addition to those described, may affect our forward-looking statements or actual results.

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At December 31, 2004, we operated in 425 locations (including, offices, manufacturing plants, warehouses, service centers, laboratories and other facilities) throughout the United States and internationally. Of these, we owned 47 locations aggregating approximately 32 million square feet and leased space at 378 locations aggregating approximately 22 million square feet. We also manage or occupy various government-owned facilities. The U.S. Government also furnishes equipment that we use in some of our businesses.

At December 31, 2004, our lines of business had major operations at the following locations:

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At December 31, 2004, a summary of our floor space by core operating unit consisted of:

At December 31, 2004, we owned various large tracts of land that are available for sale or development. The location and approximate size of these tracts include:

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

We are a party to or have property subject to litigation and other proceedings, including matters arising under provisions relating to the protection of the environment. In the opinion of management and in-house counsel, the probability is remote that the outcome of these matters will have a material adverse effect on the Corporation’s consolidated results of operations, financial position or cash flows. The results of legal proceedings, however, cannot be predicted with certainty. These matters include the proceedings summarized in Note 14 - Legal Proceedings, Commitments and Contingencies.

From time-to-time, agencies of the U.S. Government investigate whether our operations are being conducted in accordance with applicable regulatory requirements. U.S. Government investigations of us, whether relating to government contracts or conducted for other reasons, could result in administrative, civil or criminal liabilities, including repayments, fines or penalties being imposed upon us, or could lead to suspension or debarment from future U.S. Government contracting. U.S. Government investigations often take years to complete and many result in no adverse action against us.

We are subject to federal and state requirements for protection of the environment, including those for discharge of hazardous materials and remediation of contaminated sites. As a result, we are a party to or have our property subject to various other lawsuits or proceedings involving environmental protection matters. Due in part to their complexity and pervasiveness, such requirements have resulted in us being involved with related legal proceedings, claims and remediation obligations. The extent of our financial exposure cannot in all cases be reasonably estimated at this time. For information regarding these matters, including current estimates of the amounts that we believe are required for remediation or clean-up to the extent estimable, see “Environmental Matters” in Management’s Discussion and Analysis of Results of Operations and Financial Condition on page 36 through page 37 and Note 14—Legal Proceedings, Commitments and Contingencies on page 75 through page 77 of this Form 10-K.

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

In addition, as previously reported, on July 2, 2004, the New Mexico Environment Department issued three administrative compliance orders to the DoE and Sandia Corporation. Sandia Corporation, a wholly-owned subsidiary of Lockheed Martin, is the management and operating contractor for Sandia National Laboratories pursuant to a contract with DoE, and is the co-operator of the facility. The orders allege violations of regulations under the Resource Conservation and Recovery Act pertaining to matters such as

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the accumulation of materials for re-use, record-keeping, waste characterization, and other management issues. The orders seek penalties totaling $3.2 million for the alleged violations. Sandia and DoE are contesting the orders.

No matters were submitted to a vote of security holders during the fourth quarter of 2004.

Our executive officers are listed below, as well as information concerning their age at December 31, 2004, positions and offices held with the Corporation, and principal occupation and business experience over the past five years. There were no family relationships among any of our executive officers and directors. All officers serve at the pleasure of the Board of Directors.

Robert J. Stevens (53), President and Chief Executive Officer

Mr. Stevens has served as Chief Executive Officer since August 2004 and President since October 2000. He previously served as Chief Operating Officer from October 2000 to August 2004; Executive Vice President and Chief Financial Officer from October 1999 to March 2001; Vice President of Strategic Development from November 1998 to September 1999; President and Chief Operating Officer, Energy & Environment Sector from January 1998 to June 1999; President, Air Traffic Management Division from June 1996 to January 1998; Executive Vice President and Senior Vice President and Chief Financial Officer of Air Traffic Management from December 1993 to May 1996; and General Manager of Loral Systems Manufacturing Company from 1987 to 1993.

Rajeev Bhalla (41), Vice President and Controller

Mr. Bhalla has served as Vice President and Controller since August 2001. Prior to joining Lockheed Martin, he was a partner with PricewaterhouseCoopers LLP.

Michael F. Camardo (62), Executive Vice President—Information & Technology Services

Mr. Camardo has served as Executive Vice President — Information & Technology Services since October 1999. He previously served as President, Lockheed Martin Technology Services Group from March 1995 to September 1999; and President, Martin Marietta Services Group from April 1993 to March 1995.

Robert B. Coutts (54), Executive Vice President — Electronic Systems

Mr. Coutts has served as Executive Vice President — Electronic Systems since June 2003. He previously served as Executive Vice President—Systems Integration from October 1999 to May 2003; President and Chief Operating Officer, Electronics Sector from October 1998 to September 1999; President, Lockheed Martin Government Electronics Systems from January 1997 to September 1998; President, Lockheed Martin Aero and Naval Systems from September 1994 to December 1996; and as Vice President, Sourcing for the Martin Marietta Corporation.

Ralph D. Heath (56), Executive Vice President —Aeronautics

Mr. Heath was elected Executive Vice President — Aeronautics in January 2005. He previously served as Executive Vice President and General Manager of the F/A-22 Program from November 2002 to December 2004; Chief Operating Officer for Aeronautics from November 1999 to November 2002; and Vice President of Business Development for Lockheed Martin Tactical Aircraft Systems from January 1996 to November 1999.

Christopher E. Kubasik (43), Executive Vice President and Chief Financial Officer

Mr. Kubasik has served as Executive Vice President since August 2004, and as Chief Financial Officer since February 2001. He previously served as Senior Vice President from October 2001 to August 2004; Vice President from February 2001 to September 2001; and Vice President and Controller from November 1999 to August 2001.

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George T. Marsh (61), Executive Vice President —Space Systems

Mr. Marsh has served as Executive Vice President — Space Systems since July 2003. He previously served as President of Lockheed Martin Space and Strategic Missiles from January 2003 to June 2003; President of Lockheed Martin Astronautics from June 1999 to January 2003; Executive Vice President, Engineering & Technology for Lockheed Martin Missiles and Space from January 1999 to June 1999; and President, Special Programs for Lockheed Martin from January 1997 to January 1999.

Frank H. Menaker (64), Senior Vice President and General Counsel

Mr. Menaker has served as Senior Vice President and General Counsel since July 1996. He previously served as Vice President and General Counsel for Lockheed Martin Corporation from March 1995 to July 1996, having served in the same capacity for Martin Marietta Corporation from 1981 to March 1995.

Stanton D. Sloane (54), Executive Vice President — Integrated Systems & Solutions

Mr. Sloane has served as Executive Vice President — Integrated Systems & Solutions since June 2004. He previously served as President, Lockheed Martin Management & Data Systems from April 2003 to May 2004; Executive Vice President, Lockheed Martin Management & Data Systems from January 2000 to March 2003; and Senior Vice President, Lockheed Martin Global Telecommunications from February 1998 to December 1999.

Anthony G. Van Schaick (59), Vice President and Treasurer

Mr. Van Schaick has served as Vice President and Treasurer since October 2002. He previously served as President and CEO, Lockheed Martin Investment Management Company from 1997-2002. He also served as Senior Vice President and CFO, John Wieland Homes, Inc. 1995-1997; Vice President, Group Business Operations, Lockheed Corporation, 1992-1995; and Vice President and Treasurer, Lockheed Corporation, 1985-1992.

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PART II

At January 31, 2005, we had approximately 44,123 holders of record of our common stock, par value $1 per share. Our common stock is traded on the New York Stock Exchange, Inc. under the symbol LMT. Information concerning the stock prices as reported on the NYSE composite transaction tape and dividends paid during the past two years is as follows:

Common Stock — Dividends Paid and Market Prices

Issuer Purchases of Equity Securities

The following table provides information about purchases by Lockheed Martin during the three-month period ended December 31, 2004 of equity securities that are registered by the Corporation pursuant to Section 12 of the Exchange Act.

In 2004, we did not make any unregistered sales of equity securities.

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Consolidated Financial Data - Five Year Summary

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Notes to Five Year Summary

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AND RESULTS OF OPERATIONS

Financial Section Roadmap

The financial section of our Annual Report includes management’s discussion and analysis, our consolidated financial statements, notes to those financial statements and a five-year summary of financial information. We have prepared the following summary, or “roadmap,” to assist in your review of the financial section. It is designed to give you an overview of our company and focus your review by directing you to some of the more important activities and events that occurred this year.

Lockheed Martin’s Business

Lockheed Martin Corporation principally researches, designs, develops, manufactures, integrates, operates and sustains advanced technology systems, products and services. We mainly serve customers in domestic and international defense, civil markets, and homeland security, and about 80% of our sales over the past three years have been to agencies of the U.S. Government. Our main areas of focus are in the defense, space, intelligence/homeland security, and government information technology markets. Our commercial activities represent about 4% of our sales in 2004 and primarily relate to launch services and satellites.

We operate in five principal business segments: Aeronautics, Electronic Systems, Space Systems, Integrated Systems & Solutions (IS&S), and Information & Technology Services (I&TS). As a lead systems integrator, our products and services range from electronics and information systems, including integrated net-centric solutions, to missiles, aircraft, spacecraft and launch services.

Financial Section Overview

The financial section includes the following:

Management’s discussion and analysis, or MD&A (pages 28 through 50) – provides management’s view about industry trends, risks and uncertainties relating to Lockheed Martin, accounting policies that we view as critical in light of our business, our results of operations, including discussions about the key performance drivers of each of our business segments, our financial position and cash flows, commitments and contingencies, important events or transactions that have occurred over the last three years, and forward-looking information, as appropriate.

Reports related to the financial statements and internal control over financial reporting (pages 51 through 53) – include the following:

Financial statements (pages 54 through 57) – include our consolidated statements of earnings, cash flows and stockholders’ equity for each of the last three years, and our balance sheet as of the end of the last two years. Our financial statements are prepared in accordance with GAAP.

Notes to the financial statements (pages 58 through 84) – provide insight into and are an integral part of our financial statements. There are explanations of our significant accounting policies, details about certain of the captions on the financial statements, information about significant events or transactions that have occurred, discussions about legal proceedings, commitments and contingencies and selected financial information relating to our business segments. The notes to the financial statements also are prepared in accordance with GAAP.

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Highlights

The financial section of our Annual Report describes our ongoing operations, including discussions about particular lines of business or programs, our ability to finance our operating activities and trends and uncertainties in our industry and how they might affect our future operations. We also discuss those items affecting our results that were not considered in senior management’s assessment of the operating performance of our business segments. We separately disclose these items to assist in your evaluation of our overall operating performance and financial condition of the consolidated company. We would like to draw your attention to the following items disclosed in this financial section and where you will find them:

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Industry Considerations

Defense Business Considerations

The markets for defense and related advanced technology systems for 2005 and beyond will continue to be affected by the global war on terrorism, through the continued need for military missions and reconstruction efforts in Iraq and Afghanistan and the related fiscal consequences of war. The realities of the war on terrorism have focused greater attention on the security of our homeland and better communication and interplay between law enforcement, civil government agencies, intelligence agencies and our military services. At the same time, our nation’s overall defense posture continues to move toward a more capabilities-based structure, which creates the ability for a more flexible response with greater force mobility, stronger space capabilities, enhanced missile defense and improved information systems capabilities and security.

We anticipate that the next Congressionally mandated Quadrennial Defense Review (QDR) undertaken by the U.S. Department of Defense (DoD) will reinforce and advance efforts at the DoD to refocus activities toward joint operations, net-centric command and control, and integrated capabilities for the armed forces. To address this customer priority, we formed the Integrated Systems & Solutions business segment and established the Center for Innovation to help us better focus our integrated solutions capabilities across the Corporation and enhance our ability to serve as a lead partner with the DoD.

The President’s budget for fiscal year 2006 and beyond represents an agenda for a second term in office, and presents a framework to reduce the federal budget deficit while aggressively prosecuting the global war on terrorism. The rate of growth for budget increases at the DoD is reduced, while spending across non-defense federal agencies is projected to decline through 2011. These changes in the White House budget plan reflect a commitment to cut the federal budget deficit in half by 2009, and sentiment expressed by the Federal Reserve that sustained federal deficits could hamper economic growth.

The Future Years Defense Plan (FYDP) submitted with the President’s budget request for fiscal year 2006 projects a strong commitment to research and development of transformational capabilities across the military services, while reducing quantities of near-term systems compared to previous projections. As has been widely reported, the President’s budget request for fiscal year 2006 includes $419.3 billion for overall defense spending and proposes reductions in funding for a number of existing defense programs, including out-year reductions to the F/A-22 and C-130J programs and termination in 2006 of the Joint Common Missile and other programs in which Lockheed Martin participates. We are actively participating in and monitoring discussions regarding these proposals, but are unable to predict the extent to which these proposals ultimately will be approved as part of the 2006 or subsequent budgets approved by Congress or what the ultimate impact on Lockheed Martin would be. Many key decisions on future program quantities and force structure will be reached through the QDR and the Base Realignment and Closure (BRAC) actions to be undertaken in 2005. Budget pressures within DoD also may create additional opportunities for business process management and outsourcing of service functions by the military services, expanding the scope of private sector contracting opportunities at the DoD.

In September 2004, Congress passed an initial $25 billion supplemental appropriation to defray costs for Operation Enduring Freedom and Operation Iraqi Freedom during the first quarter of fiscal year 2005. The Administration has requested an additional $80 billion to meet these costs through the remainder of 2005. These supplemental appropriations enabled the DoD to proceed on critical modernization and acquisition programs, versus using amounts available for those programs to pay for the Iraq and Afghanistan missions. Congress will likely act on this further 2005 supplemental request by April 2005. While there is no assurance that additional supplemental appropriations will be approved by Congress, we do not anticipate that sustained operations in Iraq and Afghanistan will materially impact the procurement and research and development budget levels projected in the near term.

Our broad mix of programs and capabilities gives us the ability to support the needs of the various agencies of the U.S. Government that require our solutions. Our major programs and capabilities include: missile defense; space intelligence; command, control, communications, computers, intelligence, surveillance and reconnaissance (C4ISR); air mobility aircraft; and air-power projection/precision-strike capability. In terms of size and long-term potential impact, two of our more significant programs are the F/A-22 Raptor and the F-35 Joint Strike Fighter. The Air Force recently completed the Initial Operational Test and Evaluation (IOT&E) for the F/A-22 air dominance, attack and multi-mission combat aircraft. The determination that the Raptor is operationally suitable will permit the DoD to complete the upcoming Defense Acquisition Board review which, if successful, will authorize additional production of the F/A-22.

We are also represented in almost every aspect of land, sea, air and space-based missile defense, including the AEGIS Weapon System program, Medium Extended Air Defense System (MEADS), the Patriot Advanced Capability (PAC-3) missile program, the Terminal High Altitude Area Defense (THAAD) system, and the Multiple Kill Vehicle program. In the areas of space intelligence and information superiority, we have leadership positions on programs such as the Mobile User Objective System (MUOS), the Advanced Extremely High Frequency (AEHF) system, and the Space-Based Infrared System-High (SBIRS-H), and in classified

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programs and battle management command and control capabilities. In airlift, we have the C-130J program and are under contract to upgrade the C-5 strategic airlift aircraft. Many of these programs are large and require funding over several budget cycles. As discussed earlier, there are risks associated with these and other large, highly visible programs subject to appropriation by Congress that, because of their size, could be expected to become potential targets for reduction or extension of funding to pay for other programs. The 2005 QDR will assess current and future capabilities required by the DoD, and may result in program and force structure changes to be reflected in future defense budget requests.

We continue to expand our capabilities in critical intelligence, knowledge management and E-Government solutions for our customers, including the U.S. Social Security Administration, the Environmental Protection Agency, and the DoD. We provide program management, business strategy and consulting, complex systems development and maintenance, complete life-cycle software support, information assurance and enterprise solutions. Consistent with the President’s agenda, the expected growth in business process outsourcing has been enabled by rule changes for public/private competitions, such as the recent selection of Lockheed Martin to operate the Federal Aviation Administration’s Automated Flight Services Station Network. In addition, recent trends have indicated an increase in demand by federal and civil government agencies for upgrading and investing in new information technology systems and solutions. As a result, we continue to focus our resources in support of infrastructure modernization that allows for interoperability and communication across agencies.

In addition, the increase in emphasis on homeland security may increase demand for our capabilities in areas such as air traffic management, ports and waterways security, biohazard detection systems for postal equipment, information systems security and other technical systems solutions.

During the 1990s, companies in our industry reacted to shrinking defense budgets for procurement and research and development by combining to maintain critical mass. More recently, we have sought to expand into adjacent product lines such as with the Littoral Combat Ship program and the recently awarded Marine One U.S. Presidential Helicopter contract. In addition, we have focused our efforts on select core acquisitions, cost savings and improving efficiency, as well as generating cash to repay debt incurred during the period of consolidation. Through these activities, we have been able to pass along savings to our customers, mainly the DoD.

Non-U.S. defense budgets have generally been flat or declining over the past decade. As a result, consolidation has also been occurring in the European aerospace industry, resulting in fewer but larger and more capable competitors.

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Space Business

The commercial launch vehicle marketplace remains very competitive due mainly to lower-than-expected demand for new satellites as a result of excess capacity in the telecommunications industry. The reduction in demand has resulted in pricing pressures in both the launch vehicle and satellite markets. We received new orders for both commercial satellites and launch vehicles in both 2003 and 2004.

The above factors have impacted orders for our commercial launch vehicles, including the Evolved Expendable Launch Vehicle (EELV or Atlas V), our next generation launch vehicle program in which we have made significant investments over the past few years. The Atlas V is available for both commercial and U.S. Government use. This program has required investment of funds for research and development, start-up and other nonrecurring costs, and launch facilities. Some of these expenditures have been funded under an agreement with the U.S. Government. Commercial orders to-date for the Atlas V launch vehicle have been lower than originally expected and at lower prices. However, we have received a total of 19 launch assignments from the U.S. Government (including those described in the following paragraph), six of which are under contract and in backlog. The U.S. Government has been awarding missions incrementally as it continues to develop its acquisition strategy for future national missions. We had six Atlas launches in 2004, including our fourth Atlas V commercial launch. As of year-end 2004, the Atlas family of launch vehicles had a record of 74 consecutive successful launches.

In July 2003, the U.S. Air Force announced that our competitor in the EELV competition had violated the Procurement Integrity Act. As a result of that determination, the Air Force reassigned seven launch vehicles from the initial competition (referred to as “Buy I”) to us and removed our exclusion from West Coast launches. At the same time, the Air Force assigned us three new West Coast launches. To prepare for these, we are upgrading West Coast launch facilities, which requires further investment in the EELV program (see Note 5 to the financial statements). The investment will be recovered through pricing of the West Coast launches. The seven reassigned launches are expected to occur over the 2006 through 2009 time period. It is currently anticipated that the West Coast launch facilities will be operational during 2005.

The U.S. Government wants to maintain assured access to space to the maximum extent possible and has recognized the need to fund additional EELV infrastructure costs created by the weaker-than-originally-anticipated commercial market for launch services. The assured access monies approved in the 2005 defense budget will cover a portion of these costs. There is no assurance that the assured access funding provided for in the President’s fiscal year 2006 budget request will be approved by Congress.

Lockheed-Khrunichev-Energia International, Inc. (LKEI), a joint venture we have with two Russian government-owned space firms, has exclusive rights to market launches of commercial, non-Russian-origin space payloads on the Proton family of rockets from a launch site in Kazakhstan. Commercial Atlas and Proton launch services are marketed around the world through International Launch Services (ILS), a joint venture between Lockheed Martin and LKEI. We consolidate the results of operations of LKEI and ILS into our financial statements based on our controlling financial interest. We received six new awards for launches on Proton vehicles in 2004. Contracts for launch services usually require substantial advances from the customer prior to launch. At the end of 2004, $348 million of advances received from customers for Proton launch services not yet provided was included as a liability in our balance sheet in customer advances and amounts in excess of costs incurred.

A sizeable percentage of the advances we receive from customers for Proton launch services are sent to Khrunichev State Research and Production Space Center (Khrunichev), the manufacturer of the launch vehicle and provider of the related launch services in Russia. If a contracted launch service is not provided, a sizeable percentage of the related advance would have to be refunded to our customer. In addition, we have sent advances to Khrunichev for launches we purchased which have not yet been assigned to our customers. The advances sent to Khrunichev are included on our balance sheet in inventories. Advances for launches not under contract are subject to an agreement entered into in 2002 which provides for reduced future launch payments from us to Khrunichev, contingent on the receipt of new orders as well as a minimum number of actual launches each year. At year-end 2004, payments to Khrunichev included in inventories totaled $301 million. Our ability to realize the remaining amounts may be affected by Khrunichev’s ability to provide the launch services and the political environment in Russia. Through the end of 2004, launch services through LKEI and ILS have been provided according to contract terms.

The Corporation has entered into an agreement with RD AMROSS, a joint venture of the Pratt & Whitney division of United Technologies Corporation and the Russian firm NPO Energomash, for the purchase, subject to certain conditions, of RD-180 booster engines for use in the Corporation’s Atlas launch vehicles. Terms of the agreement call for payments to be made to RD AMROSS upon the achievement of certain milestones in the manufacturing process. Payments of $64 million made under this agreement for engines not yet delivered were included in the Corporation’s inventories at December 31, 2004.

In prior years, the U.S. Department of State has authorized one year International Traffic in Arms Regulations (ITAR) license extensions authorizing Lockheed Martin to have discussions with NPO Energomash on the RD-180 Engine and its use on the Atlas V

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launch vehicle. In 2004, the U.S. Department of State issued a three year license extension, therefore mitigating the need for the annual license renewal process, and providing for longer term stability for Atlas V sales. In addition, the Proton launch services license also was extended for three years.

As discussed above, the commercial satellite market has continued to experience pricing pressures due to excess capacity. However, in the past two years, we have received seven commercial satellite orders and are in active discussions for additional satellite orders. We expect to continue to control costs in our commercial satellite manufacturing business while keeping our focus on providing a reliable product. In addition to commercial activity, we also have received new orders for government satellites in 2004 including the MUOS program and certain classified activities. A significant portion of the work on the MUOS program will be performed in our commercial satellite manufacturing facility.

Other Business Considerations

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

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

We provide products and services to government agencies such as the Departments of Energy, Homeland Security, Justice, and Health and Human Services, the U.S. Postal Service, the Social Security Administration, the Federal Aviation Administration, the National Aeronautics and Space Administration (NASA), the U.S. Coast Guard and the Transportation Security Administration. Although our lines of business addressing civil government needs are not dependent on defense budgets, they share many of the same risks as our defense businesses, as well as other risks unique to the particular programs. Although indemnification by the U.S. Government to cover potential claims or liabilities resulting from a failure of technologies developed and deployed may be available in some instances for our defense businesses, U.S. Government indemnification may not be available for homeland security purposes. While we maintain insurance for some business risks, it is not possible to obtain coverage to protect against all operational risks and liabilities. We do plan to seek, and in certain cases have obtained, limitation of such potential liabilities related to the sale and use of our homeland security products and services through qualification by the Department of Homeland Security under the “SAFETY Act” provisions of the Homeland Security Act of 2002. During 2004, we received SAFETY Act approvals for two such activities. In the event we were to provide homeland security-related products and services to a customer without such qualification, we would not be afforded the benefit of the SAFETY Act’s cap on tort liability or U.S. Government indemnification. Other risks unique to the civil government markets may include development of competing products, technological feasibility and product obsolescence.

We provide products and services to NASA, including the Space Shuttle program, mainly through our Space Systems and Information & Technology Services business segments. We also have a 50% equity interest in United Space Alliance, LLC which provides ground processing and other operational services to the Space Shuttle program. We are committed to securing return to flight of the Space Shuttle in 2005. We expect to compete for NASA programs related to the new Space Exploration Vision announced by the President and funded by Congress for fiscal year 2005.

We have entered into various joint venture, teaming and other business arrangements to help support our portfolio of products and services in many of our lines of business, including commercial space. Some of these business arrangements include foreign partners. The conduct of international business introduces other risks into our operations, including changing economic conditions, fluctuations in relative currency values, regulation by foreign countries and the potential for unanticipated cost increases resulting from the possible deterioration of political relations.

The nature of our international business also makes us subject to the export control regulations of the U.S. Department of State and the Department of Commerce. If these regulations are violated, it could result in monetary penalties and denial of export

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privileges. We are currently unaware of any violations of export control regulations which are reasonably likely to have a material adverse effect on our business or our results of operations, cash flows or financial position.

Critical Accounting Policies

Contract Accounting / Revenue Recognition

A large part of our business is derived from long-term contracts for development, production and service activities which we account for consistent with the American Institute of Certified Public Accountants’ (AICPA) audit and accounting guide, Audits of Federal Government Contractors, the AICPA’s Statement of Position 81-1, Accounting for Performance of Construction-Type and Certain Production-Type Contracts, and other relevant revenue recognition accounting literature. We consider the nature of these contracts and the types of products and services provided when we determine the proper accounting for a particular contract.

Generally, we record long-term, fixed-price contracts on a percentage of completion basis using units-of-delivery as the basis to measure progress toward completing the contract and recognizing sales. For example, we use this method of revenue recognition on our C-130J tactical transport aircraft program, Atlas and Proton launch vehicle programs, and Multiple Launch Rocket System program. For certain other long-term, fixed-price contracts that, along with other factors, require us to deliver minimal quantities over a longer period of time or to perform a substantial level of development effort in comparison to the total value of the contract, sales are recorded when we achieve performance milestones or using the cost-to-cost method to measure progress toward completion. Under the cost-to-cost method of accounting, we recognize sales based on the ratio of costs incurred to our estimate of total costs at completion. As examples, we use this methodology for our F/A-22 Raptor program and the AEGIS Weapon System program. In some instances, long-term production programs may require a significant level of development and/or a low level of initial production units in their early phases, but will ultimately require delivery of increased quantities in later, full rate production stages. In those cases, the revenue recognition methodology may change from the cost-to-cost method to the units-of-delivery method after considering, among other factors, program and production stability. As we incur costs under cost-reimbursement-type contracts, we record sales. Cost-reimbursement-type contracts include time and materials and other level-of-effort-type contracts. Examples of this type of revenue recognition include the F-35 Joint Strike Fighter system development and demonstration (SDD) program and the THAAD missile defense program. Most of our long-term contracts are denominated in U.S. dollars, including contracts for sales of military products and services to foreign governments conducted through the U.S. Government (i.e., foreign military sales).

As a general rule, we recognize sales and profits earlier in a production cycle when we use the cost-to-cost and milestone methods of percentage of completion accounting than when we use the units-of-delivery method. In addition, our profits and margins may vary materially depending on the types of long-term government contracts undertaken, the costs incurred in their performance, the achievement of other performance objectives, and the stage of performance at which the right to receive fees, particularly under incentive and award fee contracts, is finally determined. We have accounting policies in place to address these as well as other contractual and business arrangements in accounting for long-term contracts. For other information on accounting policies we have in place for recognizing sales and profits, see our discussion under “Sales and earnings” in Note 1 to the financial statements.

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

The majority of our sales are driven by pricing based on costs incurred to produce products or perform services under contracts with the U.S. Government, and therefore not necessarily on market-based factors. Cost-based pricing is determined under the Federal Acquisition Regulations (FAR). The FAR provides guidance on the types of costs that are allowable in establishing prices for goods and services under U.S. Government contracts. For example, costs such as those related to charitable contributions, advertising, interest expense, and public relations are unallowable, and therefore not recoverable through sales. In addition, we may enter into agreements with the U.S. Government that address the subjects of allowability and allocability of costs to contracts for specific matters. For example, some of the amounts we spend for groundwater treatment and soil remediation related to discontinued operations and sites operated in prior years are allocated to our current operations as general and administrative costs under agreements reached with the U.S. Government.

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

Post-Retirement Benefit Plans

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

We account for our pension plans using Statement of Financial Accounting Standards (FAS) 87, Employers’ Accounting for Pensions. Those rules require that the amounts we record, including the expense or income for the plans, be computed using actuarial valuations. These valuations include many assumptions, including assumptions we make relating to financial market and other economic conditions. Changes in key economic indicators can result in changes in the assumptions we use. The key year-end assumptions used to estimate pension expense or income for the following fiscal year are the discount rate, the expected long-term rate of return on plan assets and the rate of increase in future compensation levels.

We use judgment in reassessing these assumptions each year because we have to consider current market conditions and, in the case of the expected long-term rate of return on plan assets, past investment experience, judgments about future market trends, changes in interest rates and equity market performance. We also have to consider factors like the timing and amounts of expected contributions to the plans and benefit payments to plan participants.

An example of how changes in these assumptions can affect our financial statements occurred in 2004. We reassess the discount rate assumption at the end of each year. Based on our review of interest rates at the end of the year, we lowered our discount rate assumption to 5.75% at year-end 2004, compared to 6.25% used at the end of 2003. This change, together with other factors such as the effects of the actual return on plan assets over the past few years, resulted in our projecting that the amount of pension expense for 2005 will increase by approximately 25% to 30% as compared to 2004 expense. The change in the discount rate is the main factor causing this result. The decrease of 50 basis points in the discount rate increased the estimated 2005 pension expense by approximately $160 million. This annual review of our pension plan assumptions also affects the pension liability recorded in our balance sheet.

At the end of each of the last three years, we recorded a noncash after-tax adjustment in the stockholders’ equity section of our balance sheet to reflect a minimum pension liability for most of our pension plans. These adjustments were calculated on a plan-by-plan basis, and were determined by comparing the accumulated benefit obligation (ABO) for each plan to the fair value of that plan’s assets. The amount by which the ABO exceeds the fair value of the plan assets, after adjusting for previously recorded accrued or prepaid pension cost for the plan, must be recorded as a minimum pension liability, with a corresponding increase in an intangible asset, if appropriate, and a reduction to stockholders’ equity. In 2004, the adjustment we recorded reduced stockholders’ equity by about $275 million, mainly due to the change in the discount rate at December 31, 2004. This comes after stockholders’ equity increased by about $300 million from the adjustment made in 2003, mainly due to favorable asset returns for the year. At the end of 2002, the adjustment reduced stockholders’ equity by $1.5 billion. These minimum pension liability adjustments did not impact earnings. The amount of the minimum pension liability is computed at each year-end and could decrease or increase depending on changes in interest rates and other factors.

U.S. Government Cost Accounting Standards (CAS) are a major factor in determining our funding requirements and govern the extent to which our pension costs are allocable to and recoverable under contracts with the U.S Government. Funded amounts are recovered over time through the pricing of our products and services on U.S. Government contracts, and therefore are recognized in our net sales. The total funding requirement for pension plans under CAS in 2004 was $289 million. For 2005, we expect our funding requirements under CAS to increase. Also in 2005, funding in addition to the amount calculated under CAS will likely be required under Internal Revenue Code rules. Any additional amounts computed under those rules are considered to be prepayments under the CAS rules, and therefore are recorded on our balance sheet and recovered in future periods. In 2004 and 2003, we made discretionary

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prepayments of $485 million and $450 million, respectively, to the pension trust, which reduced or will reduce our cash funding requirements in the following year.

The FAS/CAS pension adjustment represents the difference between pension expense calculated in accordance with FAS 87 and pension costs calculated and funded in accordance with CAS. Since the CAS expense is recovered through the pricing of our products and services on U.S. Government contracts, and therefore recognized in a particular segment’s net sales, the results of operations of our segments only include pension expense as determined and funded in accordance with CAS rules. Accordingly, the FAS/CAS adjustment is an amount included in the reconciliation of total segment operating profit to consolidated operating profit under GAAP. See the discussion of “Net Unallocated Corporate (Expense) Income” under “Discussion of Business Segments.”

The Medicare Prescription Drug, Improvement and Modernization Act of 2003 (the Act) was signed into law in December 2003. Under the Act, Medicare will provide a prescription drug benefit beginning in 2006. Based on current estimates and pending review of the final regulations related to the Act, we calculated a reduction in our retiree healthcare benefit obligation of $295 million at December 31, 2004. The impact on net earnings of the reduction in the net periodic post-retirement benefits cost for 2005, after application of government contracting regulations, is not expected to be material.

Environmental Matters

We are a party to various agreements, proceedings and potential proceedings for environmental clean-up issues, including matters at various sites where we have been designated a potentially responsible party (PRP) by the Environmental Protection Agency or by a state agency. We record financial statement accruals for environmental matters in the period that it becomes probable that a liability has been incurred and the amounts can be reasonably estimated (see the discussion under “Environmental matters” in Note 1 to the financial statements). Judgment is required when we develop assumptions and estimate costs expected to be incurred for environmental remediation activities due to, along with other factors, difficulties in assessing the extent of environmental remediation to be performed, complex environmental regulations and remediation technologies, and agreements between PRPs to share in the cost of remediation as discussed below.

We enter into agreements (e.g., administrative orders, consent decrees) which document the extent and timing of our obligation. We are also involved in remediation activities at environmental sites where formal agreements exist but do not quantify the extent and timing of our obligation. Environmental clean-up activities usually cover several years, which makes estimating the costs more judgmental due to, for example, changing remediation technologies. To determine the costs related to clean-up sites, we have to assess the extent of contamination, the appropriate technology to be used to accomplish the remediation and continually evolving regulatory environmental standards. We consider these factors in our estimates of the timing and amount of any future costs that may be required for remediation actions. In cases where a date to complete activities at a particular environmental site cannot be estimated by reference to agreements or otherwise, we project costs over a reasonable time frame not to exceed 20 years. Given the level of judgment and estimation which has to occur, it is likely that materially different amounts could be recorded if different assumptions were used or if circumstances were to change (e.g., a change in environmental standards).

If we are ultimately found to have liability at those sites where we have been designated a PRP, we expect that the actual costs of remediation will be shared with other liable PRPs. Generally, PRPs that are ultimately determined to be responsible parties are strictly liable for site clean-up and usually agree among themselves to share, on an allocated basis, the costs and expenses for investigation and remediation of hazardous materials. Under existing environmental laws, however, responsible parties are jointly and severally liable and, therefore, we are potentially liable for the full cost of funding such remediation. In the unlikely event that we were required to fund the entire cost of such remediation, the statutory framework provides that we may pursue rights of contribution from the other PRPs. The amounts we record do not reflect the fact that we may recover some of the environmental costs we have incurred through insurance or from other PRPs, which we are required to pursue by agreement and U.S. Government regulation.

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

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At the end of 2004, the total amount of liabilities recorded on our balance sheet for environmental matters was approximately $420 million. About 60% of the liability relates to sites in Redlands, Burbank and Glendale, California, and in Great Neck, New York, mainly for remediation of soil and groundwater contamination. The remainder of the liability related to other properties (including current operating facilities and certain facilities operated in prior years) for which our obligation is probable and the financial exposure can be estimated. We have recorded an asset for the portion of environmental costs that are probable of future recovery in pricing of our products and services for U.S. Government businesses. The amount that is expected to be allocated to our commercial businesses has been expensed through cost of sales. Any recoveries we receive would reduce the allocated amounts included in our future U.S. Government sales and cost of sales.

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Acquisition and Divestiture Activities

We continuously strive to strengthen our portfolio of products and services to meet the current and future needs of our customers. This is accomplished internally, through our independent research and development activities or with acquisitions. We selectively pursue the acquisition of businesses that complement our current portfolio and allow expansion into adjacent markets or access to new technologies. We have made a number of such niche acquisitions during the past several years.

In February 2005, we entered into a definitive agreement to acquire The SYTEX Group, Inc. (TSGI) for net consideration of $462 million. TSGI provides information technology solutions and technical support services to the DoD and other federal agencies. The transaction is subject to government approvals, including a review under the Hart-Scott-Rodino Antitrust Improvements Act and satisfaction of other closing conditions. We expect the transaction will close in early 2005.

In June 2004, we terminated our September 2003 merger agreement, as amended, with The Titan Corporation, as certain closing conditions were not met on or before June 25, 2004 as required.

We may also explore the sale of non-core businesses and surplus real estate. If we were to decide to sell any such businesses or real estate, the resulting gains, if any, would be recorded when the transactions are consummated and losses, if any, would be recorded when the value of the related asset is determined to be impaired.

Results of Operations

Since our operating cycle is long-term and involves many types of development and production contracts with varying production delivery schedules, the results of operations of a particular year, or year-to-year comparisons of recorded sales and profits, may not be indicative of future operating results. The following discussions of comparative results among periods should be viewed in this context. All per share amounts cited in this discussion are presented on a “per diluted share” basis.

Net Sales

(In billions)

The following discussion of net sales and operating results will provide an overview of our operations by focusing on key elements set forth in our statement of earnings. The “Discussion of Business Segments” which follows, will describe the contributions of each of our business segments to our consolidated results for 2004, 2003 and 2002.

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For 2004, net sales were $35.5 billion, a 12% increase over 2003 sales. Sales for 2003 were $31.8 billion, an increase of 20% compared to 2002. Sales increased in all segments as compared to the prior year for the third straight year. The U.S. Government is our largest customer, accounting for about 80% of our sales for 2004, compared to 78% in 2003 and 80% in 2002. For 2004, 2003 and 2002 the operating (loss) profit items in the table below, in addition to other items, were included in “Net Unallocated Corporate (Expense) Income” (see the related “Discussion of Business Segments” below).

Our operating profit for 2004 was $2.1 billion, an increase of 3% compared to 2003. Our operating profit for 2003 was $2.0 billion, an increase of 74% compared to 2002.

Interest expense for 2004 was $425 million, $62 million lower than in 2003 mainly due to reductions in our debt portfolio. Interest expense for 2003 was $487 million, $94 million lower than the amount for 2002. This was primarily the result of reductions in our debt portfolio and the favorable impact of having issued $1.0 billion of floating rate convertible notes in August 2003 to replace higher cost fixed rate debt.

Our effective tax rates were 23.9% for 2004, 31.3% for 2003 and 7.7% for 2002. A $144 million reduction in our income tax expense primarily resulting from the closure of an Internal Revenue Service (IRS) examination reduced our 2004 tax rate. A $90 million tax benefit related to settlement of a research and development tax credit claim reduced our tax rate for 2002. Tax benefits related to export sales, tax refund initiatives, and adjustments to true-up actual tax return liabilities reduced our tax rate for each of the three years.

Recently enacted tax legislation has repealed the Extraterritorial Income (ETI) exclusion relating to export sales. Over a transition period beginning in 2005, the new tax rules phase-out the ETI exclusion benefit and provide for a new tax deduction in computing profits from the sale of products manufactured in the United States. The tax benefit we realize from the new legislation is expected to be substantially equivalent to the benefit we realized under the repealed ETI exclusion.

Net earnings increased as compared to the prior year for the third straight year. We reported net earnings of $1.3 billion ($2.83 per share) in 2004, compared to net earnings of $1.1 billion ($2.34 per share) in 2003. Net earnings for 2002 were $500 million ($1.11 per share), and reflected losses from discontinued operations of $33 million ($0.07 per share).

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Discussion of Business Segments

We operate in five business segments: Aeronautics, Electronic Systems, Space Systems, Integrated Systems & Solutions (IS&S) and Information & Technology Services (I&TS).

Net sales have increased in each of our business segments over the last three years. Our demonstrated performance and broad portfolio of capabilities have contributed to this growth.

In the Aeronautics business segment, sales growth has been driven by Combat Aircraft activities, which made up over 80% of this business segment’s revenue. Sales on the F-35 Joint Strike Fighter program have increased as we completed the third full year on the SDD contract. During 2004, we initiated a weight reduction effort focusing on the Short Take-Off Vertical Landing (STOVL) variant of the aircraft. Approximately 3,000 pounds were removed from the STOVL design and significant weight-savings were applied to the other two variants. The F/A-22 program has contributed to our sales growth as we continue to build aircraft under low-rate initial production contracts. In 2004, 15 F/A-22s, our highest annual total to date on the program, were delivered including the final six Production Lot 1 aircraft and the first nine Production Lot 2 aircraft. Activities on our F-16 programs increased as we delivered 83 aircraft during 2004 as compared to 62 aircraft in 2003. Activity on the C-130J program included delivery of 13 aircraft in 2004, which represented the near completion of the initial 119 aircraft program and delivery of the first two aircraft under the multi-year award for 60 aircraft that was received in 2003. We began to recognize profits on the 13 C-130J aircraft delivered in 2004.

The Electronics Systems business segment has a broad portfolio of products and services. Many of its activities involve a combination of both development and production contracts with varying delivery schedules. The mix of contract types varies, and we expect this to continue in the short term; it may affect the year-to-year comparisons of segment margins and the operating results of the lines of businesses within Electronic Systems.

The Space Systems business segment is a key supplier of space solutions, primarily to our U.S. Government customers. Satellites and Strategic & Defensive Missile System activities are expected to experience steady growth. The commercial satellite and launch vehicle industries continue to be very competitive, with resulting pricing pressures. The activities in the Titan launch vehicle program will continue, though at a lower level than prior years, as we work to complete the remaining two U.S. Government missions.

The IS&S and I&TS business segments continue to focus their capabilities in providing information technology services to defense, intelligence and other government customers. We expect continued strong growth in providing information technology solutions to government agencies.

In the following tables of financial data, the total of the operating results of the business segments is reconciled to the corresponding consolidated amount. With respect to the caption “Operating profit,” the reconciling item “Net unallocated Corporate expense” includes the FAS/CAS pension adjustment (see discussion below), earnings and losses from equity investments, interest income, costs for certain stock-based compensation programs, the effects of items not considered part of management’s evaluation of segment operating performance, and Corporate costs not allocated to the operating segments, as well as other miscellaneous Corporate activities.

The FAS/CAS pension adjustment represents the difference between pension expense or income calculated for financial reporting purposes in accordance with FAS 87, and pension costs calculated and funded in accordance with U.S. Government CAS, which are reflected in the business segment results. CAS is a major factor in determining our pension funding requirements, and governs the extent of allocability and recoverability of pension costs on government contracts. The CAS expense is recovered through the pricing of our products and services on U.S. Government contracts, and therefore recognized in segment net sales. The results of operations of the segments only include pension expense as determined and funded in accordance with CAS rules.

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

Segment Operating Profit

(In millions)

The following segment discussions also include information relating to negotiated backlog for each segment. Total negotiated backlog was $74 billion at December 31, 2004. This amount included both funded backlog (unfilled firm orders for which funding has been both authorized and appropriated by the customer - Congress in the case of U.S. Government agencies) and unfunded backlog (firm orders for which funding has not yet been appropriated). Negotiated backlog does not include unexercised options or task orders to be issued under indefinite-delivery/indefinite-quantity (IDIQ) type contracts. Funded backlog was approximately $40.2 billion at December 31, 2004.

The Aeronautics segment generally includes fewer programs that have much larger sales and operating results than programs included in the other segments. Therefore, due to the large number of comparatively smaller programs in the remaining segments, the discussions of the results of operations of these business segments generally focus on lines of business within the segments rather than on specific programs. The following tables of financial information and related discussions of the results of operations of our business segments are consistent with the presentation of segment information in Note 15 to the financial statements.

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Aeronautics

Aeronautics’ operating results included the following: