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Article by DailyStocks_admin    (08-20-08 06:21 AM)

The Daily Magic Formula Stock for 08/19/2008 is Lockheed Martin Corp. According to the Magic Formula Investing Web Site, the ebit yield is 10% and the EBIT ROIC is >100 %.

Dailystocks.com only deals with facts, not biased journalism. What is a better way than to go to the SEC Filings? It's not exciting reading, but it makes you money. We cut and paste the important information from SEC filings for you to get started on your research on a specific company.


Dailystocks.com makes NO RECOMMENDATIONS whatsoever, and provides this for informational purpose only.

BUSINESS OVERVIEW

General

Lockheed Martin Corporation principally researches, designs, develops, manufactures, integrates, operates and sustains advanced technology systems and products, and provides a broad range of management, engineering, technical, scientific, logistic and information services. We serve both domestic and international customers with products and services that have defense, civil and commercial applications, with our principal customers being agencies of the U.S. Government. We were formed in 1995 by combining the businesses of Lockheed Corporation and Martin Marietta Corporation. We are a Maryland corporation.

In 2007, 84% of our net sales were made to the U.S. Government, either as a prime contractor or as a subcontractor. Our U.S. Government sales were made to both Department of Defense (DoD) and non-DoD agencies. Sales to foreign governments (including foreign military sales funded, in whole or in part, by the U.S. Government) amounted to 13% of net sales in 2007, while 3% of our net sales were made to commercial and other customers.

Our principal executive offices are located at 6801 Rockledge Drive, Bethesda, Maryland 20817-1877. Our telephone number is (301) 897-6000. Our website home page on the Internet is www.lockheedmartin.com. We make our website 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 website as soon as reasonably practical after we electronically file that material with, or furnish it to, the SEC. You can learn more about us by reviewing our SEC filings. Our SEC reports can be accessed through the investor relations page of our website, www.lockheedmartin.com/investor. The SEC also maintains a website at www.sec.gov that contains reports, proxy statements and other information regarding SEC registrants, including Lockheed Martin.

Business Segments

We operate in four principal business segments: Aeronautics, Electronic Systems, Information Systems & Global Services (IS&GS) and Space Systems. This structure reflects a realignment of our operations announced in early 2007 to enhance support for critical customer missions and increase our integration of resources. The realignment included the combination of our former Information Technology & Global Services (IT&GS) and Integrated Systems & Solutions (IS&S) business segments into the new IS&GS business segment, and the following additional changes:


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The Aircraft & Logistics Centers, which had been reported in IT&GS, became part of Aeronautics;
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Our contract to manage the Sandia National Laboratories and our ownership in the joint venture that manages the Atomic Weapons Establishment in the United Kingdom, which had been reported in IT&GS, became part of Electronic Systems; and
•

Transportation and Security Solutions, which had been reported in Electronic Systems, became part of IS&GS.

The historical results, discussion and presentation of our business segments as set forth in this Form 10-K reflect this realignment. For more information concerning our segment presentation, including comparative segment sales, operating profits and related financial information for 2007, 2006 and 2005, see Note 15—Information on Business Segments beginning on page 90 of this Form 10-K.

Aeronautics

Aeronautics is engaged in the design, research and development, systems integration, production, sustainment, support and upgrade of advanced military aircraft, air vehicles and related technologies. Our customers include various government agencies and the military services of the United States and allied countries around the world. Major products and programs include design, development, production and sustainment of the F-35 stealth multi-role international coalition fighter; the F-22 air dominance and multi-mission stealth fighter; the F-16 international multi-role fighter; the C-130J tactical transport aircraft; the C-5 strategic airlifter modernization; and support for the F-117 stealth fighter, P-3 maritime patrol aircraft, S-3 multi-mission aircraft and U-2 high-altitude reconnaissance aircraft. We also produce major components for Japan’s F-2 fighter and are a co-developer of the T-50 advanced jet trainer. Our Skunk Works ® advanced development organization provides next generation innovative system solutions using rapid prototyping and advanced technologies.

Combat Aircraft

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


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The F-35 Lightning II Joint Strike Fighter – stealth multi-role international coalition fighter;
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The F-22 Raptor – air dominance and multi-mission stealth fighter; and
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The F-16 Fighting Falcon – low-cost, combat-proven, international multi-role fighter.

Both the F-35 and F-22 are 5 TH Generation fighters, combining stealth, supersonic speed, high maneuverability, sensor fusion and other attributes to achieve a level of capability and survivability unmatched by earlier generation combat aircraft. The F-16 is a 4 TH Generation fighter which, as a result of multiple upgrades, continues to play an important role in the defense of the U.S. and its allies.

F-35

The F-35 Lightning II is designed to be a superior multi-role stealth aircraft offering profound improvements in lethality, survivability, affordability and supportability over all existing international multi-role aircraft. The United States and its international partners (the United Kingdom, Italy, the Netherlands, Turkey, Canada, Australia, Denmark and Norway) are working together on the System Development and Demonstration (SDD) program to design, test and build a family of aircraft and sustainment systems to meet joint and coalition requirements. Israel and Singapore are security cooperation participants on the SDD program . In 2007, the partner countries’ government-to-government Production, Sustainment and Follow-On Development memoranda of understanding were finalized. The memoranda provide a long-term business framework for partner aircraft production, sustainment and future upgrades.

The F-35’s multiple-variant designs include:


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The F-35A, a conventional takeoff and landing variant (CTOL);
•

The F-35B, a short takeoff and vertical landing variant (STOVL); and
•

The F-35C, a carrier-based variant (CV).

The F-35 is planned to replace the F-16 and A-10 for the U.S. Air Force, the F/A-18A/C for the U.S. Navy, the AV-8B and
F/A-18A/C/D for the U.S. Marine Corps, and the Harrier GR.7 and Sea Harrier short takeoff and vertical landing attack aircraft for the United Kingdom Royal Air Force and Royal Navy.

Aeronautics was awarded the SDD contract for the F-35 in the fourth quarter of 2001. Calendar-year 2007 marked the sixth full year of performance on the planned 12-year development contract. Testing of airworthiness and systems evaluation using the first
F-35 CTOL aircraft continued in 2007, and component production has begun on all of the remaining SDD flight test aircraft (all variants) and both CTOL production aircraft in Low Rate Initial Production Lot 1. The first STOVL test airplane moved from the factory to the flight line in December 2007 and, after extensive ground testing, is expected to fly mid-year 2008. The first flight of the CV aircraft is planned to occur in the 2009 timeframe.

Given the size of the F-35 program, we anticipate that there will be a number of studies related to the program schedule and production quantities over time as part of the normal DoD, Congressional and international partners’ oversight and budgeting processes.

F-22

We are the industry team leader for the F-22 Raptor. In production since 1997, the F-22 has unmatched capabilities compared with other operational U.S. Air Force aircraft. The capabilities include enhanced maneuverability, stealth, supercruise speed (speed in excess of Mach 1.5 without afterburner) and advanced integrated avionics that enable pilots 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 full-rate production. Through 2007, a total of 110 F-22s have been delivered to the U.S. Air Force, including 24 Raptors delivered during 2007. In 2007, we received a 60-aircraft multi-year contract for Production Lots 7, 8 and 9. At December 31, 2007 there were 81 F-22s in backlog.

In 2007 we began delivering F-22s to the third operational squadron, the 90th Fighter Squadron at Elmendorf Air Force Base (AFB), Alaska, and we expect to deliver the first aircraft for the fourth operational unit, the 8th Fighter Squadron at Holloman AFB, New Mexico, in mid 2008. Also in 2007, the Raptor completed its deployment to Kadena Air Base, Japan, its first such deployment outside the U.S. and second deployment overall. The Raptor also participated in its first “Red Flag” exercise, a large-scale force-on-force exercise designed to prepare joint forces to respond to crises around the world. During the exercise, F-22s demonstrated exceptional performance, ensuring air dominance and enhancing the success of combat commanders by providing improved situational awareness for other ground and air assets. In December 2007, the U.S. Air Force declared Full Operational Capability for the F-22.

F-16

We produce the F-16 Fighting Falcon multi-role tactical fighter aircraft and continue to provide upgrades and support for the U.S. Air Force and our international customers. From the program’s inception in the mid-1970s through 2007, 4,389 F-16s have been delivered worldwide, representing nearly 30 years of continuous production deliveries. As of year-end 2007, the aircraft had been selected by 24 countries, with 52 follow-on buys by 14 of these countries.

In 2007, a total of 41 F-16 aircraft were delivered worldwide. In July 2007, an Undefinitized Contractual Action (UCA) was signed for the foreign military sales procurement of 30 new F-16 Block 50 aircraft to the Government of Turkey. Backlog at year end was 107 F-16 aircraft, including the 30 aircraft under the Turkey UCA.

Many technologically advanced multi-role capability improvements have been incorporated into new F-16 production aircraft as well as modification programs for in-service aircraft. Air-to-air and precision attack capabilities have been improved through the inclusion of new systems, sensors and weapons. Advanced electronic warfare systems have improved survivability. New fuel tank configurations have increased range and endurance. Modernized, upgraded engines have increased aircraft performance and improved supportability. Advanced communication links have given the F-16 network-centric warfare capabilities.

Other Combat Aircraft

We also participate in joint production of the F-2 fighter aircraft, and are a co-developer of the T-50 supersonic jet trainer aircraft.

Air Mobility

In Air Mobility, we design, develop, produce and provide full system support and sustainment of tactical and strategic airlift aircraft. Our major programs include production, support and sustainment of the C-130J Super Hercules, upgrade and support of the legacy C-130 fleet, support of the existing C-5A/B/C fleet and development, installation and support of the emerging C-5M Super Galaxy fleet.

C-130J

The C-130J Super Hercules is an advanced technology, tactical transport aircraft offering improved performance and reliability, and reduced operating and support cost, compared to earlier C-130 models. The C-130J incorporates state-of-the-art cockpit design and avionics, a more powerful and efficient propulsion system and other innovations into a proven, mission-tested airframe. It 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 warfare, weather reconnaissance and sea surveillance missions, and as an aerial tanker. In 2007, we delivered 12 C-130Js, including seven aircraft to the U.S. Air Force, four aircraft to the U.S. Marine Corps and one to the Royal Danish Air Force. A total of 213 C-130Js have been ordered, with 54 remaining in backlog at the end of 2007. Orders received in 2007 included six aircraft for the U.S. Government, four for Norway and 17 for Canada.

The Super Hercules is the latest variant produced on the longest continuously operating military aircraft assembly line in history. Including all models of the aircraft, we have delivered a total of 2,313 C-130s from the program’s inception in 1954 through 2007. In the U.S., the active-duty Air Force, Air Force Reserve Command and Air National Guard units fly C-130Js. The Marine Corps operates KC-130J tankers and the Coast Guard flies the HC-130J, which will soon be fully missionized for maritime patrol and search and rescue. International C-130J operators include the United Kingdom Royal Air Force, Royal Australian Air Force, Italian Air Force and the Royal Danish Air Force.

C-5

Three fully modernized C-5M Super Galaxy aircraft are performing in a flight test program and continue to be on schedule for completion of flight test in the third quarter of 2008. The C-5M is the product of two major modification programs to the C-5 strategic airlifter: the C-5 Avionics Modernization Program (AMP) and the C-5 Reliability Enhancement and Reengining Program (RERP). The C-5 AMP program replaces the 1960s and 1970s-era analog avionics system in the C-5 fleet with a digital suite along with an integrated architecture that allows for further upgrades as well as providing Global Air Traffic Management (GATM) capability. The RERP portion of C-5M modification, which is planned for 49 aircraft in addition to the three in flight test, replaces out-of-production components with commercially proven reliable systems. Together, the modification programs are expected to significantly extend the life of the C-5 fleet. A total of 111 C-5 aircraft are currently in the U.S. fleet, including the three C-5Ms in flight testing. Active duty U.S. Air Force, Air National Guard, and Air Force Reserve Command units operate the C-5.

Advanced Research and Development and Other

We are involved in advanced development programs incorporating advanced design and rapid prototype applications. Our Advanced Development Programs organization, known as the Skunk Works ® , has made unmanned air systems one focus of its efforts, and is actively developing the operational concepts and enabling technologies to provide these assets to the DoD in a cost effective manner. Additional focus on future systems includes next generation capabilities for both long-range strike and air mobility.

Some notable accomplishments in 2007 include the phase two award of the Advanced Composite Cargo Aircraft (ACCA) Flight Demonstration contract, continued participation as a subcontractor on the Unmanned Combat Air System Demonstration (UCAS-D) effort, successful component and engine testing of the Revolutionary Approach to Time-critical Long Range Strike (RATTLRS) vehicle and continued focus on Falcon, a hypersonic technologies initiative.

In addition, we continue to explore technology advancement and insertion in existing aircraft, such as the F-35, F-22, F-16 and C-130; are actively involved in numerous network enabled activities that allow separate systems to work together to increase effectiveness and lethality; and continue to invest in new technologies to maintain and enhance competitiveness in military aircraft design and development.

Global Sustainment

As part of each of our businesses, we provide a full range of logistics support, sustaining engineering, upgrade modifications and services for our full line of aircraft, including the F-35 Lightning II, the F-22 Raptor, the F-16 Fighting Falcon, the C-130 Hercules and the C-5 Galaxy airlifters, the P-3 Orion, the S-3 Viking, the F-117 Nighthawk and the U-2 Dragon Lady.

For the F-35 Lightning II SDD program, we have developed an Autonomic Logistics and Global Sustainment solution, focused on performance-based logistics, to provide an affordable total air system life-cycle sustainment solution for the aircraft’s multiple variants and worldwide customer base.

We will continue through mid-year 2008 to provide the U.S. Air Force with contractor-led support for the F-117 Nighthawk fleet through our Total System Sustainment Partnership. At that time, after a distinguished legacy that includes 26 years of operational service and over 250,000 flight hours accomplished, the F-117 fleet is planned to be retired. As winner of the first DoD performance-based logistics award for systems-level support, we are growing that heritage with a program for the sustainment of the F-22 called the Follow-On Agile Sustainment for the Raptor or FASTeR. Beginning in early 2008, we will be responsible for integrating and accomplishing all sustainment activities for the F-22 as the Product Support Integrator in partnership with the U.S. Air Force System Support Manager.

Under the Falcon 2020 program, we provide international F-16 operators with avionics and structural upgrade kits to enable those customers to keep their fleets viable for the future.

We have developed an extensive service life extension program, including the planned production of new wings, for the existing fleet of P-3 aircraft. The Royal Norwegian Air Force will be the first service life extension program customer, having signed a contract to upgrade its P-3 fleet in February 2007. We believe there are additional opportunities to implement this program with a number of domestic and international P-3 operators. We continue our nearly decade-long support effort for the U.S. Navy’s fleet of
S-3 Viking aircraft through the S-3 Prime Vendor Support contract, which will continue until the Navy’s planned retirement of the fleet in 2009.

With regard to the C-130, we continue as a key member of a team, including Rolls Royce and Marshall Aerospace, that was awarded the Hercules Integrated Operational Support (HIOS) contract for the long-term support of the United Kingdom’s fleet of
C-130 aircraft. In addition, we signed a partnering agreement in 2007 to provide long-term support for the Italian C-130J fleet for a period of three years. We also offer center wing box modifications and avionics upgrades to customers who fly legacy versions of the Super Hercules in addition to the support and partnerships provided to sustain our newest tactical aircraft.

The U-2 has been the backbone of our nation’s airborne intelligence collection operations for several decades, and continues to provide unmatched operational capabilities in support of Operation Enduring Freedom. As a result of the Reconnaissance Avionics Maintainability Program upgrade, which includes state of the art cockpit displays and controls along with other sensor modifications, the U-2 is expected to continue to provide leading-edge intelligence collection capabilities for years to come.

Through our Sustainment Services organization, we offer “nose-to-tail” aircraft maintenance, modifications and state-of-the-art upgrades, and provide the full range of depot services in addition to a full range of supply chain services. Under our Integrated Prime Vendor contract with the Defense Logistics Agency, we provide parts to the U.S. Air Force’s three Air Logistics Center depots.

Through Kelly Aviation Center, L.P., a joint venture with GE-Aviation and Rolls-Royce, we provide engine maintenance, repair and overhaul and new engine assembly and testing for military and commercial customers.

Competition

We are a major worldwide competitor in combat aircraft, air mobility and military aircraft research and development. Military aircraft are subject to a wide variety of U.S. Government controls ( e.g ., export restrictions, market access, technology transfer, industrial cooperation and contracting practices). Although a variety of criteria determine the results of different competitions, price is a major factor, as are past performance and customer confidence. Other critical factors are technical capabilities, release of technology, prior purchase experience, financing and total cost of ownership.

In international sales, the purchasing government’s relationship with the U.S. and its industrial cooperation programs are also important factors in determining the outcome of a competition. 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 agreements as part of securing some international business. For more information concerning offset agreements, see “Contractual Commitments and Off-Balance Sheet Arrangements” in Management’s Discussion and Analysis beginning on page 54 of this Form 10-K.

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 commercial-aircraft derivatives to missions that require large aircraft and the application of unmanned systems to various missions.

With respect to tactical fighters, the F-16 remains a formidable competitor especially on the basis of price and our continued ability to update its capabilities with changes in sensor and weapons systems. The F-22 and F-35 are recognized as the world’s only 5 TH Generation fighter aircraft and are designed to be both lethal and survivable against emerging high-threat systems. The F-22 is designed to provide air-dominance, strike and multi-mission stealth combat capabilities required for conventional military operations. The U.S. Air Force is the only F-22 customer since international sales of the Raptor are presently prohibited by the U.S. Congress. The F-35 is a cornerstone of future global defense cooperation and is planned to replace several existing multi-role fighters for the U.S. and its allied partners. Due to the number of governments that have agreed to participate in the SDD phase, we anticipate that significant international demand will develop for purchasing the F-35.

Demand for air mobility aircraft is driven by the need to maintain or replace large numbers of aircraft for which maintenance costs have been increasing and by the high development costs for new replacement aircraft. In some cases, the choice has been to modernize and update the available aircraft. With some customers, 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. In 2007, domestic and international customers opened numerous competitions for air mobility aircraft or elected to procure new C-130J aircraft. The C-130J provides intra-theater airlift and a full range of tactical mobility, refueling and humanitarian airlift capabilities.

In concert with changes in the way products are deployed, operated and supported, our customers are changing their approach to sustainment of our platforms. Historically, nearly all domestic and international users of our fighter, transport and special mission aircraft have sought to develop and maintain the capability to perform 100 percent of the necessary support functions. Due to the combined factors of defense budget constraints, increased component reliability and decreased (or eliminated) depot inspections, it is no longer cost effective for many customers to perform substantially all of their own support functions. As a result, sustainment and logistics support opportunities have increased.

As the original equipment manufacturer for numerous platforms, we are focused on expanding our global sustainment services, an increasingly important portion of the Aeronautics business. We continue to provide support through depot partnerships and industrial cooperative relationships. Third-party providers offer competition within elements of the sustainment portfolio. However, in the major areas of sustaining engineering, modification and upgrade, and supply chain management, we, as the original equipment manufacturer, can spread development costs among multiple users and are in the best position to affordably integrate production improvements into a customer’s existing complex systems.

Maritime Systems & Sensors

Maritime Systems & Sensors (MS2) provides ship systems integration services, including command, control, communications, computers, intelligence, surveillance and reconnaissance (C4ISR) capability across shore-based command centers; surface ship and submarine combat systems, sea-based missile defense systems; sensors; tactical avionics; port traffic management systems; missile launching systems; aerostat surveillance systems; and supply chain management programs and systems.

The AEGIS weapon system is a fleet defense system and a sea-based element of the U.S. missile defense system. It is a radar and missile launching system, integrated with its own command and control system, designed to defend against advanced air, surface and subsurface threats. The AEGIS program encompasses activities in development, production, ship integration and test and lifetime support for ships of the U.S. Navy and international customers. We test and integrate these 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 F105 class frigates for Spain, the Fridtjof Nansen class frigate for Norway, the KDX class destroyer for Korea and the Hobart class air warfare destroyer for Australia. Since program inception in 1978, MS2 has received contracts for 111 AEGIS weapons systems, including 27 for the Ticonderoga class cruiser, 62 for the Arleigh Burke class destroyer and 22 international systems. During 2007, our production workscope included four international systems and three domestic systems.

In 2007, the DoD’s Missile Defense Agency (MDA) awarded MS2 a contract for continued development and evolution of the AEGIS Ballistic Missile Defense System (BMDS). There are 18 ships planned with BMDS technology and long-range surveillance and tracking capability. During the year, we performed a number of successful ballistic missile intercept tests. The latest test achieved an unprecedented result in which the BMDS successfully intercepted and destroyed two non-separating ballistic missile targets nearly simultaneously.

In early 2007, we were awarded a program to manage the logistics and warehousing for all tires used on U.S. Air Force and Army aircraft around the world, supporting the tire manufacturer and prime contractor on the program. This performance based contract will leverage our global supply chain management expertise as the U.S. military seeks to integrate the production and the logistics for aircraft tires.

The U.S. Navy has approved a revised ship delivery date of August 2008 for the Littoral Combat Ship Freedom (LCS-1), the first in a new class of ships designed to provide added flexibility to operate in coastal waters. Delivery is to be followed by a 60-day crew move aboard period in order to complete ship load-out activities and conduct ship crew familiarization training. At the end of 2007, the ship was over 80% complete, with compartment closeout and system testing proceeding. Our production activities continue to focus on preparing for a series of dockside tests in support of builder’s sea trials to be held in Spring 2008. A second ship with a different design (LCS-2) is being built by a competitor. In 2007, work on the next two ships in the program (LCS-3, under contract to us, and LCS-4, under contract to our competitor) was terminated by the U.S. Navy. A competition to build the next ship in the program is expected to be held in 2008, with additional phases of the program to follow.

We were awarded a contract by the Portuguese Ministry of Defense to provide a full mission system avionics upgrade on five
P-3C maritime surveillance aircraft The upgrades include electronic support measures, acoustics, communications, electro-optic and infrared systems as well as new data management software and hardware including controls, displays and mission computers. Delivery of the first upgraded aircraft is scheduled for late 2009.

MANAGEMENT DISCUSSION FROM LATEST 10K

Our Business

We principally research, design, develop, manufacture, integrate, operate and sustain advanced technology systems and products, and provide a broad range of management, engineering, technical, scientific, logistic and information services. We mainly serve customers in domestic and international defense, civil agencies, and homeland security. Our sales to agencies of the U.S. Government, including those to the Department of Defense (DoD), represented 84% of our sales in 2007. Of the remaining 16% of sales, approximately 13% related to sales to international customers (including foreign military sales funded, in whole or in part, by the U.S. Government), with the remainder attributable to commercial and other customers. In 2006 and 2005, sales to agencies of the U.S. Government represented 84% and 85% of our total sales. Our main areas of focus are in defense, space, intelligence, homeland security and government information technology.

In February 2007, we announced a realignment of our operations to enhance support for critical customer missions and increase our integration of resources. The realignment included the combination of our former Information Technology & Global Services (IT&GS) and Integrated Systems & Solutions (IS&S) business segments into a new business segment named Information Systems & Global Services (IS&GS), along with certain other changes. All business segment disclosures and amounts in this Form 10-K have been reclassified to reflect the realignment.

We now operate in four principal business segments: Aeronautics, Electronic Systems, IS&GS and Space Systems. As a lead systems integrator, our products and services range from electronics and information systems, including integrated net-centric solutions, to missiles, aircraft and spacecraft. We organize our business segments based on the nature of the products and services offered.

Financial Section Overview

The financial section includes the following:

Management’s discussion and analysis, or MD&A (pages 32 through 58) – provides our 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 59 through 61) – include the following:


•

A report from management, indicating our responsibility for financial reporting, the financial statements, and the system of internal control over financial reporting and an assessment of the effectiveness of those controls;
•

A report from Ernst & Young LLP, an independent registered public accounting firm, which includes their opinion on the effectiveness of our system of internal control over financial reporting; and
•

A report from Ernst & Young LLP which includes their opinion on the fair presentation of our financial statements based on their audits.

Financial statements (pages 62 through 65) – 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 U.S. generally accepted accounting principles (GAAP).

Notes to the financial statements (pages 66 through 95) – provide insight into and are an integral part of our financial statements. The notes contain 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.

Highlights

The financial section of our Form 10-K 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 our consolidated company. We would like to draw your attention to the following items disclosed in this financial section and where you will find them:

U.S. Government – Department of Defense Business

The President’s budget proposal for fiscal year 2009 focuses on ensuring America’s economic prosperity and keeping our country safe. The Administration’s priorities include balancing the budget by 2012, combating terrorism and protecting the homeland, promoting economic growth, and controlling non-security and entitlement spending. Over half of the discretionary spending in the budget proposal is allocated to defense and other security needs to be addressed by the Departments of Defense, Homeland Security, and State – all key customers of ours.

For fiscal year 2009, the President’s budget proposes $515.4 billion for the Department of Defense (DoD), reflecting the Administration’s commitment to continued modernization of our Armed Forces and sustainment of current capabilities. This amount, called the base budget, excludes any funding for ongoing military operations in Iraq and Afghanistan or the global war on terrorism. These costs, discussed below, are requested as emergency supplemental funding. The fiscal year 2009 DoD base budget is an increase of $35.9 billion, or 7.5%, over the fiscal year 2008 base budget as enacted into law at the end of 2007. The 2009 DoD base budget includes $104.2 billion for procurement of systems and equipment (Procurement) and $79.6 billion for research, development, test, and evaluation (RDT&E), collectively termed the investment accounts. The proposed investment budget of $183.8 billion represents a nearly 5% increase in the investment accounts over fiscal year 2008 enacted levels and represents a record-high level of funding for these accounts.

The Operations and Maintenance accounts, which contain the bulk of funding for training, logistics, services, and other sustainment activities, total approximately $179.8 billion for fiscal year 2009, an increase of $15.6 billion, or nearly 10%, over fiscal year 2008 enacted levels. The balance of the budget, $151.8 billion, includes amounts for military pay and benefits, construction, and other activities.

Over the fiscal years 2009-2013, total DoD funding is expected to rise to $549.0 billion in 2013, or 14.4% higher than the fiscal year 2008 budget. Total proposed funding for the DoD over this five-year period is nearly $2.7 trillion, reflecting both the significant increase in the same five-year period in the budget proposal submitted in February of 2007, as well as a small additional increase in this year’s plan.

In addition to the base DoD budget, the Administration is again requesting funding to defray costs for Operation Iraqi Freedom and Operation Enduring Freedom in Afghanistan. The fiscal year 2009 budget proposal includes $70.0 billion in supplemental funding for the ongoing war on terrorism, which is $20 billion higher than anticipated in last year’s budget proposal. This amount reflects only costs anticipated to be incurred in the first several months of fiscal year 2009 to ensure continuity of funding during the transition to the next Administration, which will begin in January of 2009, and the budget proposal assumes the next Administration will determine what additional amounts may be required for these activities. The budget proposal also assumes Congress will approve the full $183.8 billion in supplemental funding requested for fiscal year 2008, of which only $86.8 billion had been approved at the time of the budget submission. Total funding requested for the fiscal year 2009 base and supplemental budgets is $585.4 billion.

Details of the supplemental funding request have not yet been released. Supplemental funding enables the DoD to proceed on critical modernization and acquisition programs, versus using funds available for those programs to pay for the Iraq and Afghanistan missions. While Congress has expressed concern about the size of supplemental budgets, funding for ongoing operations has not been significantly curtailed by Congress. We expect that Congress will approve the remaining fiscal year 2008 supplemental funding in a timely fashion, and, thus, we do not believe that the cost of ongoing operations in Iraq and Afghanistan will materially impact the investment accounts in the near term.

We believe our broad mix of programs and capabilities continues to position us favorably to support the current and future needs of the DoD. Our key aircraft programs are strongly supported in the fiscal year 2009 DoD budget request. The request includes $4.0 billion for 20 F-22 Raptor air dominance fighter aircraft produced under a multiyear contract entered into in 2007, and $6.7 billion for the F-35 Lightning II Joint Strike Fighter program. Funding of $933 million is proposed for procurement of 8 C-130J aircraft, as well as advance procurement for 16 additional C-130Js. The budget also includes $798.2 million to continue upgrades of the C-5 strategic airlift aircraft.

The fiscal year 2009 budget request includes $10.5 billion, an increase of $600 million over fiscal year 2008, for missile defense capabilities. We are represented in almost every aspect of land, sea, air and space-based missile defense, including the AEGIS weapon system program, the 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 (MKV) program.

In the areas of space-based intelligence and information superiority, we have leadership positions on programs such as the TSAT Mission Operations System (TMOS), Mobile User Objective System (MUOS), the Advanced Extremely High Frequency (AEHF) system, the Space-Based Infrared System-High (SBIRS-H) and classified programs. Space-based systems are robustly funded in the fiscal year 2009 request at $10.7 billion.

The fiscal year 2009 budget proposes $16.4 billion for an array of command, control, communications, computers, intelligence, surveillance, and reconnaissance (C4ISR) programs. We are well-positioned in these capabilities, including the Air Operations Center Weapons System Integrator, the Warfighter Information Network – Tactical, the Combatant Commanders Integrated Command and Control System, and the Global Communications Support System – Air Force.

We will continue to perform on contracts to develop and deliver essential munitions, missile, and other systems, such as Hellfire, Guided Multiple Launch Rocket Systems, and EQ-36, to our warfighters. We are bringing our systems integration expertise as well as our existing advanced technology products and services into adjacent military product lines, such as the Littoral Combat Ship and the VH-71 U.S. Presidential Helicopter programs, both of which are supported in the fiscal year 2009 budget request. We are well-positioned to expand in these adjacent markets, as well as in unmanned systems capabilities, including air, ground, and underwater systems.

We are a significant presence in information technology support and modernization for the DoD. We see opportunities for expansion of our sustainment and logistical support activities to enhance the longevity of the systems procured by our customers and improving global supply chain management, and we see opportunities to grow our business in providing global services and business process management across the DoD enterprise.

Most of the aforementioned programs require funding over several annual government budget cycles. There is always an inherent risk that these and other DoD programs could become potential targets for future reductions or elimination of funding to pay for other programs, either in the Administration’s budget reviews or in the Congressional process of annual appropriations.

U.S. Government – Non-Department of Defense Business

The war on terrorism has focused greater attention on the security of our homeland and the need for better communication and interoperability among law enforcement, civil government agencies, intelligence agencies, and our military services. Our experience in the defense arena, together with our core information technology and services expertise, has enabled us to provide products and services to a number of government agencies, including the Departments of Homeland Security, Justice, Commerce, Health and Human Services, State, Transportation and Energy, the U.S. Postal Service, the Social Security Administration, the Federal Aviation Administration, the National Aeronautics and Space Administration (NASA), the Environmental Protection Agency (EPA), and the Library of Congress.

The Administration’s budget proposal for fiscal year 2009 seeks to limit overall growth in the civil agency budgets to one percent per year or less. Despite this limitation on total non-defense discretionary spending in the President’s proposal, our key programs are well supported in the budgets of the various agencies with which we do business.

The fiscal year 2009 budget submission for NASA is $17.6 billion, $500 million higher than the fiscal year 2008 level, and our key programs are well supported in the request. The next-generation human space flight crew transportation system, known as the Crew Expeditionary Vehicle (CEV) or Orion, is a key element of NASA’s Vision for Space Exploration and will succeed the Space Shuttle in transporting a new generation of human explorers to and from space. Orion is supported at a level of $1.1 billion in the budget proposal for NASA.

Though we have continued to receive new orders from the U.S. military in 2007 for satellites to support missile defense, battlefield communications and other defense initiatives, the environment for our commercial satellites business continues to be very competitive due mainly to low demand for new satellites as a result of excess capacity in the telecommunications industry. We are managing our commercial satellite business with an expectation of receiving fewer orders due to market constraints.

The Department of Homeland Security fiscal year 2009 budget request of $37.6 billion is an increase of 7.7% over fiscal year 2008 enacted level. Within the budget, the Coast Guard Deepwater system is funded at $990.4 million. Despite overall decreases in the total budgets for the Departments of Transportation and Justice, the Transportation Workers Identity Card (TWIC) program, the Federal Aviation Administration’s Automated Flight Services Station Network, and the Federal Bureau of Investigation’s Sentinel program are well supported in their respective agency budgets. Other key programs are well supported in the civil agency budgets.

We have continued to expand our capabilities in critical intelligence, knowledge management and e-Government solutions for our customers, including the Social Security Administration and the EPA, as well for the DoD. We also provide program management, business strategy and consulting, complex systems development and maintenance, complete life-cycle software support, information assurance and enterprise solutions. The expected growth in business process outsourcing has been enabled by rule changes for public/private competitions. In addition, recent trends continue to indicate 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 continuing strong emphasis on homeland security may increase demand for our capabilities in areas such as air traffic management, ports, waterways and cargo security, biohazard detection systems for postal equipment, employee identification and credential verification systems, information systems security, and other global security systems solutions. In addition, we may see an increase in demand from the Department of State and the United Nations for mission services, global security and stability operations, and facility services.

Similar to the risks inherent in our defense business, funding for our civil agency business is contingent on approval in annual appropriations acts for each of the agencies with which we have business. Major programs may be funded over several annual government budget cycles, with the risk of future reductions or elimination in the Administration’s budget review or in the annual Congressional appropriations process.

In the civil government business, some risks are unique to particular programs. For example, 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. In addition, there are some instances where the U.S. Government could provide indemnification under applicable law, but elects not to do so. 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, 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. SAFETY Act qualification is less useful in mitigating potential liability for international applications of our homeland security products and services. Where we are unable to secure indemnification or qualification under the SAFETY Act or choose not to do so, we may nevertheless elect to provide the product or service when we think the related risks are manageable or when emergency conditions relative to national security make qualification impracticable.

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 net 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.

The following discussion of net sales and operating results provides an overview of our operations by focusing on key elements in our Statement of Earnings. The “Discussion of Business Segments” which follows describes the contributions of each of our business segments to our consolidated Net sales and Operating profit for 2007, 2006 and 2005. We follow an integrated approach for managing the performance of our business, and generally focus the discussion of our results of operations around major lines of business versus distinguishing between products and services. Product sales are predominantly generated in the Aeronautics, Electronic Systems and Space Systems segments, while most of our services revenues are generated in our IS&GS segment.

For 2007, Net sales were $41.9 billion, a 6% increase over 2006 sales. Sales for 2006 were $39.6 billion, a 6% increase over 2005 sales. Sales increased during 2007 in all segments as compared to 2006. Except for anticipated reductions at Aeronautics, sales increased in all segments in 2006 as compared to 2005. The U.S. Government is our largest customer, accounting for about 84% of our sales in 2007, 84% in 2006, and 85% in 2005.

Other income (expense), net was $293 million for 2007 compared to $336 million in 2006. This decrease was primarily due to gains recognized in 2006 from the sale of shares of Inmarsat and assets of Space Imaging, offset partially by increased equity earnings in affiliates in 2007. Other income (expense), net increased $20 million from 2005 to 2006 due to higher equity earnings in affiliates and gains from the sale of land in 2006.

Effective January 1, 2006, we adopted FAS 123(R), Share-Based Payments , and related rules, on a modified prospective basis (see Note 11). Under this method, we recognize compensation cost related to the estimated fair value of nonvested stock options and restricted stock granted in 2006 and prior years. Prior to January 1, 2006, we measured compensation cost for stock options using the intrinsic value method, but disclosed the pro forma effects on Net earnings and Earnings per share as if compensation cost had been recognized based upon the fair value-based method. During the years ended December 31, 2007 and 2006, we recorded compensation cost related to stock options and restricted stock totaling $149 million and $111 million which is included in the Statement of Earnings in Cost of sales. The net impact to earnings was $96 million ($0.22 per share) and $70 million ($0.16 per share). Compensation cost related to restricted stock in 2005 was not material. As of December 31, 2007, we had $136 million of total unrecognized compensation cost related to nonvested stock options, restricted stock units and restricted stock awards. That cost is expected to be recognized over a weighted-average period of 1.6 years.

State income taxes are included in our operations as general and administrative costs and, under U.S. Government regulations, are allowable in establishing prices for the products and services we sell to the U.S. Government. Therefore, a substantial portion of state income taxes is included in our Net sales and Cost of sales. As a result, the impact on our Operating profit of certain transactions and other matters disclosed in this Form 10-K is disclosed net of state income taxes.

Our Operating profit for 2007 was $4.5 billion, an increase of 20% compared to 2006. Our Operating profit for 2006 was $3.8 billion, an increase of 32% compared to 2005. Operating profit increased across all business segments in both comparative periods and was also favorably impacted by lower Unallocated Corporate costs, primarily due to a decline in the FAS/CAS pension adjustment.

Interest expense for 2007 was $352 million, $9 million lower than 2006. This decrease was mainly driven by lower interest expense associated with the September 2006 debt exchange. Interest expense for 2006 was $361 million, $9 million lower than in 2005. This decrease in interest expense primarily was due to reductions in our debt outstanding.

Other non-operating income (expense), net totaled $193 million in 2007, an increase of 5% from 2006, and was $183 million in 2006, an increase of 38% from 2005. The increase in 2007 was mainly due to the $16 million of debt exchange expenses recorded in 2006, as there were no comparable charges in 2007. The increase in 2006 over 2005 primarily was attributable to higher interest rates and amounts invested.

Our effective tax rates were 30.6% for 2007, 29.6% for 2006, and 30.2% for 2005. The effective rates for all years were lower than the statutory rate of 35% primarily due to tax deductions for U.S. manufacturing activities, dividends related to our employee stock ownership plan, and research and development (R&D) tax credits. In addition, the rate for 2007 reflected a reduction in Income tax expense of $59 million related to the completion of an IRS audit in the first quarter. The rate for 2006 reflected a reduction in Income tax expense of $62 million related to a refund claim for additional extraterritorial income exclusion (ETI) benefits in prior years recognized in the third quarter of 2006. The rates in 2006 and 2005 also reflected tax benefits related to ETI.

The increase in the 2007 effective tax rate when compared to 2006 is primarily the result of the elimination of the extraterritorial tax benefits in 2007, partially offset by additional tax benefits resulting from a statutory increase in U.S. manufacturing benefits, new legislation that provided enhanced R&D tax credits, and the favorable closure of an IRS audit. The small decrease in the 2006 tax rate when compared to 2005 is primarily the result of higher extraterritorial tax benefits in 2006 resulting from a refund claim for additional prior year benefits.

Net earnings increased as compared to the prior year for the sixth consecutive year. We reported Net earnings of $3.0 billion ($7.10 per share) in 2007, Net earnings of $2.5 billion ($5.80 per share) in 2006, and Net earnings of $1.8 billion ($4.10 per share) in 2005.

Discussion of Business Segments

In February 2007, we announced a realignment of our operations to enhance support for critical customer missions and increase our integration of resources. The realignment included the combination of our IT&GS and IS&S business segments into a new business segment named IS&GS, along with certain other changes.

We now operate in four principal business segments: Aeronautics, Electronic Systems, IS&GS and Space Systems. We organize our business segments based on the nature of the products and services offered.

Our Aeronautics business segment is engaged in the design, research and development, systems integration, production, sustainment, support and upgrade of advanced military aircraft, air vehicles and related technologies, primarily for U.S. and allied country military services. Combat aircraft programs include the F-35, F-22 and F-16 aircraft. The F-35 Lightning II is currently in the System Development and Demonstration phase and has entered low rate production. Aeronautics has been producing F-22 Raptors since 1997, and delivered 24 to the U.S. Air Force in 2007, bringing the total deliveries to 110. We also received a 60 aircraft multi-year contract for Production Lots 7, 8 and 9. A total of 41 F-16 Fighting Falcons were delivered in 2007 worldwide, bringing the total deliveries to 4,389. Sales at Aeronautics are expected to decline in 2008 primarily due to a projected reduction in F-16 activities. In the area of Air Mobility, we produce the C-130J Super Hercules aircraft. We delivered 12 aircraft in 2007. A total of 213 have been ordered and 159 delivered through 2007. In addition to aircraft production, the segment provides logistics support, sustainment, and upgrade modification and services for its aircraft.

The Electronic Systems business segment is engaged in the design, research, development, integration, production and sustainment of high performance systems and subsystems for undersea, shipboard, land and airborne applications, including tactical missiles, surface ship and submarine combat systems, ground combat vehicle integration and radars, among others. With such a broad portfolio of products and services, many of its activities involve a combination of both development and production contracts with varying delivery schedules. This business segment has continued to expand its core competencies as a leading systems integrator. Some of its more significant programs, including the Terminal High Altitude Area Defense (THAAD) system, the VH-71 Presidential helicopter, the AEGIS weapon system and the Arrowhead fire control system for the Apache helicopter, demonstrate the diverse products and services Electronic Systems provides.

The IS&GS business segment combines a full range of information competencies with a global delivery capability. The segment provides full life cycle support and expertise in the areas of software and systems engineering, including in space, air and ground systems, and provides logistics, mission operations support, peacekeeping and nation-building services for a wide variety of U.S. defense and civil government agencies. Key programs and activities include the Transformational Communications MILSATCOM Mission Operations Segment (TMOS) program, the FAA Automated Flight Service Station (AFSS) program and a number of task order vehicles (indefinite-delivery/inde finite-quantity (IDIQ) contracts) in our Information Technology line of business. We expect continued strong growth in providing information technology solutions to government agencies.

The Space Systems business segment is engaged in the design, research, development, engineering and production of satellites for both government and commercial customers, strategic and defensive missile systems and space transportation systems. Through ownership interests in two joint ventures, the segment also includes Space Shuttle processing activities and expendable launch services for the U.S. Government. Government satellite programs include the Advanced Extremely High Frequency (AEHF) system, the Mobile User Objective System (MUOS), the Global Positioning System (GPS) and the Space-Based Infrared System (SBIRS). Strategic and missile defense programs include the Targets and Countermeasures Program and the Fleet Ballistic Missile program. Space transportation includes the NASA Orion program.

In the following table of financial data, total Operating profit of the business segments is reconciled to the corresponding consolidated amount. The reconciling item “Unallocated Corporate expense, net” includes the FAS/CAS pension adjustment (see the discussion of “Postretirement Benefit Plans” under “Critical Accounting Policies”), costs for 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. Since the activities of the investees in which certain business segments hold equity interests are closely aligned with the operations of those segments, the equity earnings (losses) from those investees are included in the Operating profit of the respective segments.

This table shows Net sales and Operating profit of the business segments and reconciles to the consolidated total. For all years presented, interest income has been reclassified from segment Operating profit and Unallocated Corporate income (expense), net to Other non-operating income (expense), net to conform to the 2007 consolidated Statement of Earnings presentation (see Note 1). In 2006, we reclassified $199 million, including $182 million from Unallocated Corporate expense, net and $17 million from across the business segments. In 2005, we reclassified $143 million, including $132 million from Unallocated Corporate expense, net and $11 million from across the business segments. The impact on the individual segments’ operating results was not material. In addition, we reclassified $16 million in expenses associated with the debt exchange in 2006 and $10 million related to a charge for the early repayment of debt in 2005, each from Unallocated Corporate expense, net to Other non-operating income (expense), net in the respective years.

MANAGEMENT DISCUSSION FOR LATEST QUARTER

Consolidated 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 quarter, or quarter-to-quarter comparisons of recorded sales and profits, may not be indicative of our future operating results. The following discussions of comparative results among periods should be viewed in this context. All per share amounts cited in the following discussions are presented on a “per diluted share” basis.

The following discussion of Net sales and operating results provides an overview of our operations by focusing on key elements set forth in our Statement of Earnings. The “Discussion of Business Segments” section which follows describes the contributions of each of our business segments to our consolidated Net sales and Operating profit for the quarter and six-month periods ended June 29, 2008 and June 24, 2007. We follow an integrated approach for managing the performance of our businesses and generally focus the discussion of our results of operations around major lines of business, versus distinguishing between products and services. Product sales are predominantly generated in the Aeronautics, Electronic Systems and Space Systems segments, while most of our services revenues are generated in our IS&GS segment.

Net sales for the second quarter of 2008 were $11.0 billion, a 4% increase over the second quarter 2007 sales of $10.7 billion. Net sales for the six months of 2008 were $21.0 billion, a 6% increase over the $19.9 billion recorded in the comparable 2007 period. Sales increased in every business unit except Aeronautics, which declined mainly due to lower volume on F-16 programs.

Other income (expense), net was $172 million for the second quarter of 2008 compared to $110 million recorded in the comparable 2007 period. Other income (expense), net for the six months ended June 29, 2008 and June 24, 2007 were $281 million and $185 million, respectively. The increase was primarily due to higher equity earnings in affiliates and the benefits from the impact of certain items included in Other income (expense), net (see Note 7 under the caption “Matters Included in Earnings”).

Operating profit for the second quarter of 2008 was $1,363 million, an increase of 17% from the $1,164 million recorded in the comparable 2007 period. During the quarter, operating profit increased in every business unit except Aeronautics, which declined slightly due to the lower volume on F-16 programs. Operating profit for the six months ended June 29, 2008 was $2,541 million, an 18% increase over the $2,149 million recorded in the comparable 2007 period. Operating profit for the first half of 2008 increased in every business segment. The second quarter and first six months of 2008 were also favorably impacted by the decline in the FAS/CAS pension adjustment and by the benefits of certain items included in Other income (expense), net.

Other non-operating income (expense), net was income of $34 million in the second quarter of 2008 as compared to income of $67 million in the second quarter of 2007. For the six months ended June 29, 2008, other non-operating income (expense), net was income of $27 million compared to income of $104 million for the six months ended June 24, 2007. The decrease was primarily due to lower interest income on invested cash balances and reduced investment income on marketable securities we hold in a trust related to certain of our non-qualified benefit plans.

Interest expense for the second quarter and six months ended June 29, 2008 was $92 million and $179 million, respectively, as compared to $93 million and $186 million in the comparable 2007 periods. This decrease was mainly driven by interest expense we accrued in the first quarter of 2007 related to acquisition activities.

Our effective income tax rates were 32.4% and 32.5% for the quarter and six months ended June 29, 2008 and 31.6% and 29.0% for the quarter and six months ended June 24, 2007. The effective rates for all periods were lower than the statutory rate of 35% due to tax benefits for U.S. manufacturing activities and dividends related to our employee stock ownership plans. The effective tax rates for the quarter and six-month periods in 2008 are higher than the comparable periods in 2007 primarily due to the expiration of the research tax credit at the end of 2007 and a reduction of income tax expense of $59 million recorded in the first quarter of 2007 arising from the closure of the IRS examination of the 2003 and 2004 tax years.

Net earnings for the second quarter of 2008 were $882 million ($2.15 per share) compared to $778 million ($1.82 per share) reported in the second quarter of 2007. Net earnings for the six months ended June 29, 2008 were $1,612 million ($3.90 per share) compared to $1,468 million ($3.42 per share) reported in the comparable 2007 period.

DISCUSSION OF BUSINESS SEGMENTS

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 6. In our discussions of comparative results, changes in Net sales and Operating profit are generally expressed in terms of volume and/or performance. Volume refers to increases (or decreases) in sales resulting from varying production activity levels, deliveries or service levels on individual contracts. Volume changes typically include a corresponding change in Operating profit based on the estimated profit rate at completion for a particular contract for design, development and production activities.

Changes in segment Operating profit are also expressed in terms of performance. Performance generally refers to changes in contract profit rates at completion. These changes on our contracts for products usually relate to profit recognition associated with revisions to total estimated costs at completion of the contract that reflect improved (or deteriorated) operating or award fee performance on a particular contract. Changes in estimates of Net sales and Operating profit on contracts for products are recognized by recording adjustments in the current period for the inception-to-date effect of the changes on current and prior periods.

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 larger 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.

Net sales for Aeronautics decreased by 8% for the quarter and 4% for the six months of 2008 from the comparable 2007 periods. In both periods, decreases in Combat Aircraft sales more than offset increases in Air Mobility and Other Aeronautics Programs. The decrease in Combat Aircraft for both the quarter and the six months was due primarily to lower volume on F-16 programs. The increase in Air Mobility for the quarter and first half of the year was due primarily to higher volume on C-130J programs, including deliveries and support activities. There were three C-130J deliveries in the second quarter of 2008 and six during the first six months of the year compared to three and five deliveries in the comparable periods of 2007. The increase in Other Aeronautics Programs for both periods was due mainly to higher volume in sustainment services activities.

Operating profit decreased by 3% for the quarter and increased by 2% for the six months of 2008 from the comparable 2007 periods. During the quarter, operating profit decreases in Combat Aircraft and Air Mobility offset an increase in Other Aeronautics Programs. In Combat Aircraft, the decline was due mainly to lower volume on F-16 programs. The decrease in operating profit at Air Mobility was attributable primarily to performance on C-5 programs offset partially by improved performance on C-130 programs. The increase in Other Aeronautics Programs was due mainly to higher volume and improved performance in sustainment services activities. During the first six months of the year, an increase in Other Aeronautics Programs was offset partially by declines in Air Mobility and Combat Aircraft. The increase in Other Aeronautics Programs was due mainly to higher volume in sustainment services activities. In Air Mobility, operating profit decreased due to performance on C-5 programs which was partially offset by improved performance and the delivery of one additional C-130J in 2008.

Net sales for Electronic Systems increased by 6% for the quarter and 8% for the six months of 2008 from the comparable 2007 periods. During the quarter and the first half of the year, sales increased due mainly to higher volume in fire control and tactical missile programs at Missiles & Fire Control (M&FC) and undersea systems, surface systems, and radar systems activities at Maritime Systems & Sensors (MS2). These increases were offset partially in both periods by declines in platform integration activities at Platform, Training & Energy (PT&E).

Operating profit for Electronic Systems increased by 6% for the quarter and 10% for the six months of 2008 from the comparable 2007 periods. In both the quarter and six month periods, the increases in operating profit were attributable primarily to higher volume and improved performance in tactical missile and fire control programs at M&FC and radar systems at MS2. In both periods, these increases were offset partially by declines in operating profit at PT&E due mainly to performance in the second quarter on platform integration programs.

Net sales for IS&GS increased by 13% for the quarter and 15% for the six months of 2008 from the comparable 2007 periods. Sales increased in all three lines of business for both the quarter and six months. The increase in Global Services was due principally to global and mission services activities. The increase in Mission Solutions was driven primarily by mission and combat support solutions activities and global security solutions programs. The increase in Information Systems was due to higher volume on information technology programs.

Operating profit for IS&GS increased by 18% for the quarter and 17% for the six months of 2008 from the comparable 2007 periods. In both the quarter and the six-month periods, the increase in operating profit was driven by Information Systems and Mission Solutions. The increase in Information Systems was due to higher volume on IT programs and a benefit from a contract restructuring during the first quarter of 2008. Mission Solutions operating profit grew due to higher volume and improved performance on secure enterprise solutions and mission and combat support solutions activities.

Net sales for Space Systems increased by 6% for both the quarter and six-month periods of 2008 from the comparable 2007 periods. In both periods, sales growth in Space Transportation was offset partially by a decline in Satellites. The sales growth in Space Transportation was due primarily to higher volume on the Orion program. In Satellites, reduced volume in government satellite activities was offset partially by an increase in commercial satellite activities in both periods. There was one commercial satellite delivery during the second quarter and two during the first six months of 2008. In the first six months of 2007, there was one commercial satellite delivery in the second quarter.


CONF CALL

Jerry F. Kircher, III - Vice President, Investor Relations

Thank you Rufus and good morning everyone. I'd like to welcome you to our second quarter 2008 earnings conference call. Joining me today on the call is Bruce Tanner, our Executive Vice President and Chief Financial Officer.

Statements made in today's call that are not historical facts are considered forward-looking statements and are made pursuant to the Safe Harbor provisions of federal securities law, actual results may differ. Please see today's press release and our SEC filings for description of some of the factors that may cause actual results to vary materially from anticipated results. We have posted charts on our website, which supplement our comments today. And with that, I would like to turn the call over to Bruce.

Bruce L. Tanner - Executive Vice President and Chief Financial Officer

Thanks Jerry. Good morning everyone and welcome to the call. Consistent with our expectations, we had a strong second quarter. Our results reflect the operational, strategic, and financial progress we are making across the corporation. This progress is enabling us to build upon our continuing momentum in delivering value to shareholders and customers.

As our press release outlined, second quarter results across the corporation were strong, highlighted by an 18% increase in reported earnings per share. We also achieved a 50 basis point increase in segment operating margins that help generate our earnings growth. This margin expansion is a result of improved performance and successful risk reduction activities across multiple programs. Electronic Systems continue to generate operating margin in excess of 13% and our other three business segments all expanded margins this quarter.

In the area of cash flows, we generated $1.5 billion in cash from operations in the quarter, bringing our year-to-date total to $2.4 billion. Our cash performance as is well positioned to achieve full-year cash flow and generate free cash in excess of the earnings for the 11th consecutive year. This long-term performance is a direct demonstration of our strong focus on management of working capital and cash optimization. With this established expense in cash generation, we remain focused on optimal utilization of our cash to enhance shareholder value. As a part of that focus, we are continuing to implement our long stated practice of making opportunistic share purchases.

During the second quarter, we repurchased over 7.3 million shares of our stock for $770 million. This activity brings our year-to-date share repurchases to 18.6 million shares for $2 billion. Our repurchase actions had enabled us to continued to reduce our weighted average diluted share count to approximately 410 million shares for the second quarter, the lowest quarterly average diluted share count level since the third quarter of 2000.

In addition to share repurchases, we also paid a second quarter dividend to shareholders of $168 million. With our year-to-date dividend payments and share repurchases, we have already exceeded our commitment to return at least half of our annual free cash flow to shareholders for the sixth constitutive year. Based on our solid first half performance, we are increasing our 2008 full-year financial guidance, reflecting an improved outlook for additional growth in sales, earnings, cash flow and return on invested capital.

Today's press release and our supporting webcast charts outline the details of our new increased guidance. These strong financial results and improved guidance are direct reflections of our focus on program execution. Delivery of critical products and services to our customers consistent with their needs and expectations is a conventional goal of all of our 140,000 employees. Each of our business areas successfully made noteworthy accomplishments this quarter in support of their customers requirements.

In Aeronautics, on our Joint Strike Fighter Program, the F-35B Lightning II short take-off/vertical landing aircraft conducted its non-Euro [ph] flight with successful accomplishment of all flight objectives. The STOVL aircraft returned Code One without any flight anomalies and was immediately ready to re-fly. The superb performance of this inaugural flight is a testament to the quality of the aircraft being produced by our worldwide design and manufacturing team. The F-35B flight marks the first flight of an aircraft with a combination of supersonic speed, stealth and STOVL capability and will provide unmatched capabilities for the U.S. Marine Corps and the Royal... and the UK Royal Air Force and Royal Navy.

Aeronautics also continue their outstanding quality and manufacturing performance across other aircraft production lines with the F-22, F-16 and C-130J programs delivering increasing numbers of zero defect aircrafts to customers this quarter. This outstanding performance is a direct salvation of our world-class factory efficiency and ongoing pursuit of flawless program execution as we strive to provide customers the highest quality products at the best value.

Tuning to Electronic Systems. Our team continued to demonstrate their technological expertise in the increasingly important area of missile defense. The Terminal High Altitude Area Defense Weapon System or THAAD successfully detected, tracked and intercepted a separating target. This challenging fits with a strong verification of the target tracking and discrimination capability of the THAAD system.

In other missile defense activities, the Aegis Ballistic Missile Defense Weapon System successfully intercepted short-range unitary ballistic missile target in the terminal phase of its trajectory, further validating the expanding capabilities of the Aegis system. Recent test firings of offensive missiles by international countries illustrate the growing risk of missile proliferation around the world and are creating a significant increase and interest in missile defense systems. This interest is resulting in international customers examining our proven systems for potential deployment to protect their national interests.

Space Systems continued to achieve significant accomplishments, both on Earth and beyond. The Phoenix Mars Lander spacecraft successfully landed on Mars and began its science mission research regarding environment suitable for life and the history of water on the planet. Experiments completed to date have confirmed the existence of frozen water and the spacecraft continues to conduct other scientific analysis.

Closer to home, but also in space, the first telecommunication satellite for the nation of Vietnam was successfully launched this quarter. This satellite enables state-of-the-art communications to all corners of the country and expand the international use of our proven A2100 satellite platform. Finally, the Trident II D5 Fleet Ballistic Missile for the U.S. Navy achieved its 122nd consecutive successful test launch, a record extending back to 1989.

Turning to IS&GS, several key milestones were achieved this quarter and this portion of our portfolio continues to build momentum. Our support of the National Air Traffic System continued with delivery of the newest version of the En Route Automation Modernization Software to five government sites. This software is used to manage the nation's air traffic and build upon our legacy systems on which 60% for the world air traffic flights. IS&GS also achieved initial operating capability of a key data storage module for the National Archives and Records Administration. This module will be used by the executive office to electronically process and store key data in the National Archives.

This major initiative enables the move to government-wide electronic records preservation. The system will capture electronic information regardless of format, save it permanently and make it accessible on future generations of hardware and software. This is a direct application of our diverse information technologies and systems integration capabilities.

In addition to program execution, another essential component in our drive for expansion of shareholder value is our success in winning new business. Significant new business awards were achieved this quarter and I will highlight a few of the most noteworthy new contract wins.

In Space Systems, new awards include their successful receipt of a $1.4 billion contract from the U.S. Air Force to build the next-generation global positioning system called GPS III. This award builds upon our demonstrative legacy of the success on prior GPS systems. This program will improve position, navigation and timing services for war fighters and civilian users worldwide and provide advanced anti-jam capabilities, superior system security, accuracy and reliability.

We are honored to have been selected to construct these critical national assets with delivery scheduled over the next decade. Aeronautics new business wins continued from both domestic and international customers. On the Joint Strike Fighter Program, we received the authorization of $2.2 billion for six conventional takeoff and landing aircraft for U.S. Air Force under the Low-Rate Initial Production Lot 2 contract.

Based on the recent successful STOVL flight, we expect a near-term award under LRIP 2 for six STOVL aircraft for the U.S. Marine Corps. Additionally, over $200 million were received for long lead funding for 19 additional F-35 aircrafts under LRIP 3. These awards enable us to move forward and continue our production ramp up on the F-35 program.

Aeronautics also received a work in the U.S. Air Force for six C-130J aircraft for special operation forces. This award demonstrates the strong user community support and validation of the proven capabilities of this aircraft and began the critical recapitalization of the Air Force's 18 fleet of CTOL [ph] and special operation forces C-130s. The high operational tempo and ageing of existing airlift assets make it increasingly important to expand our national airlift fleet. The FY08 GWOT supplemental budget recently approved $2.9 billion to purchase up to 34 new C-130J aircraft to help address this critical airlift shortage.

Internationally, Aeronautics successfully secured an award from Morocco for the purchase of 24 F-16 aircrafts. This marks the first sale of F-16 aircraft to Morocco and expands the global footprint of this multi-role fighter to 25 countries around the world.

This award is expected to enable extension of the F-16 production line to at least 2013 and demonstrates the continuing viability and ongoing new business opportunities for this aircraft. The F-16 program continues to generate new order interest from current and new international customers as they take proven cost effective solutions for their fighter aircraft requirements.

The Electronic Systems segment, expanded their international presence with the award of a contract to provide turnkey military flight training to the U.K. Royal Air Force, Navy and Army Air Force. This 25 year effort will be performed in our joint-venture between Lockheed Martin and VT Group and has a potential order value in excess of $1 billion.

Electronic Systems also received a $107 million contract in U.S Air Force and Australian Air Force for a seventh production lot of the JASSM cruise missile. This award serves as a validation of the re-certification of the program after recent successful flight tests prove the reliability and capability of the missile across a wide variety of targets. The JASSM program has potential production quantities in excess of 4,000 missiles and should provide significant long-term sales opportunities from U.S and international defense customers.

Finally, our IS&GS segment continued to develop momentum in key areas. In early July, we received an award worth $1.2 billion for the integrated hiring operations and personnel program from the Transportation Security Administration. The work to be performed will include recruitment, hiring, payroll and benefit administration for TSA personnel previously performed by three separate companies.

Our effort will include streamlining and integrating these previously separate activities. This builds upon our prior strength in providing integrated human resource administration systems to other government agencies. Also in the quarter, the protest for the FBI's Next-Generation Identification System contract was resolved and work resumed on the program.

This 10-year $1 billion contract had been awarded in the first-quarter of this year. This resumption of work enabled us to move forward in providing state-of-the-art, multi-modal biometric systems needed by local, state and federal authorities.

Finally, IS&GS was awarded a contract to support the U.S. Navy's Joint Medical Information System. This system will provide key information assurance capabilities, including network operations, security and identity management. These awards demonstrate how IS&GS continues to broaden its customer footprint by offering cost effective and innovative solutions.

These wins across all of our business segments show the broad customer support of our products and have us well positioned and on track for increased revenue growth in 2009 and beyond. Beyond our success in new business awards this quarter, we also continue to execute our strategy of making acquisitions that provide us with new technology, capabilities or customer access.

During the second quarter, we completed the acquisition of Eagle Group International. Eagle is a proven provider of integrated logistics, information technology, healthcare services and base operations support to the U.S. Department of Defense. Their work is primarily in support of the U.S. Army activities here in the United States and will be managed by our IS&GS segment.

These highlights demonstrate our strong program and operational execution, solid win rate and financial performance. This results in the positive business outlook have us solidly position to continue our momentum as we deliver increased value to shareholders and customers.

Finally, we are proud to be recognized by Aviation Week and Space Technology magazine as the Best-Performing Large-Cap Aerospace Company in their recently released top-performing companies study. Our high scorers in all four measurement categories of financial health, return on invested capital, earnings momentum and asset management underscore our daily focus and commitment to provide value to shareholders is a direct reflection of our talented work force.

Now, we'd like to open up the lines for your questions. Rufus, if you would, please open the lines.

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