• Satellites and Space Systems. Small- and medium-class spacecraft that are used to enable global and regional communications and broadcasting, to conduct space-related scientific research, to carry out interplanetary and other deep-space exploration missions, to enable national security applications, to collect imagery and other remotely-sensed data about the Earth and demonstrate new space technologies.

• Advanced Space Programs. Human-rated space systems for Earth-orbit and lunar exploration, advanced launch systems for medium-class satellites, and small satellites and satellite subsystems primarily used for national security space programs and to demonstrate new space technologies.

The following discussion should be read along with our 2008 Annual Report on Form 10-K filed with the Securities and Exchange Commission, and with the unaudited condensed consolidated financial statements included in this Form 10-Q.
Consolidated Results of Operations for the Quarters Ended March 31, 2009 and 2008
Prior Period Adjustment For Adoption of New Accounting Standard - As discussed in Note 3 to the accompanying financial statements, our 2008 financial statements have been adjusted as required for the adoption of a new accounting standard pertaining to our convertible debt. As a result of the new accounting guidance, we recorded additional non-cash interest expense of $1.2 million and $1.1 million in the first quarter of 2009 and 2008, respectively, resulting in a $0.01 decrease in diluted earnings per share in both quarters.

Revenues - Our consolidated revenues were $295.7 million in the first quarter of 2009, an increase of $12.2 million, or 4%, compared to the first quarter of 2008. The revenue increase was due to increased contract activity on missile defense programs in the launch vehicles segment and communications satellite programs in the satellites and space systems segment.
Operating Income - Operating income was $11.2 million in the first quarter of 2009, a decrease of $8.8 million, or 44%, compared to the first quarter of 2008. This decrease was primarily due to a $3.8 million increase in unrecovered Taurus II launch vehicle research and development expenses and a $3.5 million loss recorded on two advanced space programs contracts due to cost increases. Our research and development expenses are generally recoverable under contracts with the U.S. Government. For competitive reasons, we have established a self-imposed ceiling on the amount of research and development costs that we would recover under our U.S. Government contracts, although we believe that such costs would otherwise be allowable and recoverable. In the first quarters of 2009 and 2008, our operating income was reduced by $6.1 million and $2.3 million, respectively, of unrecovered research and development expenses that exceeded our self-imposed ceiling on such costs.
Research and Development Expenses - Research and development expenses are comprised of our product research and development activities. Our research and development expenses were $19.0 million, or 6% of revenues, in the first quarter of 2009, a $10.8 million increase compared to $8.2 million, or 3% of revenues, in the first quarter of 2008. This increase is primarily due to our Taurus II launch vehicle development program discussed below.
Our launch vehicles and our advanced space programs business units are jointly engaged in a major product development program of a medium-capacity rocket called Taurus II that could substantially increase the payload capacity of our space launch vehicle platforms. Approximately $14.5 million and $5.3 million of the research and development expenses in the first quarter of 2009 and 2008, respectively, were attributable to the Taurus II program. We believe that we will continue to incur significant research and development expenses in 2009 through 2011 on the Taurus II development effort.
The majority of our revenues are attributable to contracts with the U.S. Government and we believe that a majority of our research and development expenses are recoverable and billable under such contracts. Charging practices relating to research and development and other costs that may be charged directly or indirectly to government contracts are subject to audit by U.S. Government agencies to determine if such costs are reasonable and allowable under government contracting regulations and accounting practices. We are currently engaged in discussions with U.S. Government agencies regarding the allowability of research and development costs incurred in connection with our Taurus II development program. We believe that such costs are allowable, although the U.S. Government has not yet made a determination. Since the inception of the Taurus II development program in 2007 through the first quarter of 2009, we have incurred $43 million of expenses that have been recorded as allowable costs. If such costs were determined to be unallowable, we could be required to record revenue and profit reductions in future periods.

In the first quarter of 2008, we entered into an agreement with the National Aeronautics and Space Administration ("NASA") to design, build and demonstrate a new space transportation system under a program called Commercial Orbital Transportation Services ("COTS") that has the capability to deliver cargo and supplies to the International Space Station. Under the agreement, NASA has agreed to pay us $170 million in cash milestone payments, partially funding our project costs which are currently estimated to be approximately $240 million.
The COTS agreement is being accounted for as a best-efforts research and development cost-sharing arrangement. As such, the amounts funded by NASA are recognized proportionally as an offset to our COTS project research and development expenses. In the quarter ended March 31, 2009, $14.8 million of costs were incurred on the COTS program, $11.9 million of which were proportionally offset by NASA funding, resulting in net research and development expenses of $2.9 million recorded by us. Costs incurred in the first quarter of 2008 were not significant. The net research and development expenses have been recorded as allowable costs under U.S. Government contracts.
Investment Impairment Charge - We recorded an other-than-temporary impairment charge of $0.7 million in the first quarter of 2009 to record the reduction in fair value of one of our investments.
Interest Income and Other - Interest income and other increased to $5.7 million in the first quarter of 2009, compared to $2.4 million in the first quarter of 2008. This increase is attributable to a $5.3 million insurance recovery accrual recorded in connection with the launch failure of our Taurus XL rocket in February 2009. This increase was offset by a $1.4 million decrease in interest income which was attributable to a reduction in interest rates on our short-term cash investments.
Interest Expense - Interest expense was $2.3 million and $2.1 million in the first quarter of 2009 and 2008, respectively, attributable to interest on our $143.8 million of long-term debt.
Income Taxes - We recorded income tax expense of $4.7 million in the first quarter of 2009, compared to $8.2 million of income tax expense attributable to income from continuing operations in the first quarter of 2008. The effective income tax rate for the first quarter of 2009 and 2008 was 33.7% and 40.4%, respectively. The decrease in the effective tax rate is primarily due to an increase in tax credits in 2009 related to research and development programs.
Net Income - Our net income for the first quarter of 2009 was $9.2 million, or $0.16 diluted earnings per share, compared to net income from continuing operations of $12.1 million, or $0.20 diluted earnings per share in the first quarter of 2008. Net income in the first quarter of 2008, including income from discontinued operations, was $13.0 million, or $0.21 diluted earnings per share.

Segment Results for the Quarters Ended March 31, 2009 and 2008 Our products and services are grouped into three reportable segments:
(i) launch vehicles; (ii) satellites and space systems; and (iii) advanced space programs. Corporate office transactions that have not been attributed to a particular segment, as well as consolidating eliminations and adjustments, are reported in corporate and other. The following tables of financial information and related discussion of the results of operations of our business segments are consistent with the presentation of segment information in Note 4 to the financial statements in this Form 10-Q. Launch Vehicles
Launch vehicles segment operating results were as follows:

                                                   First Quarter
        (in thousands, except percentages)      2009          2008        % Change
        Revenues                             $ 119,240     $ 105,257          13 %
        Operating income                         4,286         7,615         (44 %)
        Operating margin                           3.6 %         7.2 %

Launch vehicles segment revenues increased $14.0 million, or 13%, in 2009 primarily due to increased activity on missile defense interceptor launch vehicles contracts. Revenues from interceptor launch vehicles contracts increased $11.0 million primarily due to an increase in contract activity on our Ground-based Midcourse Defense ("GMD") program in 2009. Interceptor launch vehicle contracts accounted for 55% and 52% of total launch vehicles segment revenues in 2009 and 2008, respectively. Space launch vehicle program revenues increased $3.5 million primarily due to an increase in Minotaur program activity during the first quarter of 2009.
Launch vehicles segment operating income declined $3.3 million, or 44%, in 2009 mainly due to a $3.8 million increase in unrecovered Taurus II launch vehicle research and development expenses and a $0.8 million contract loss recorded in connection with the February 2009 Taurus XL launch failure that offset higher profits generated by the increase in interceptor launch vehicles contract activity. Interceptor launch vehicle operating income increased quarter-over-quarter primarily due to increased activity on the GMD program. Operating income from interceptor launch vehicles contracts was $8.1 million and $6.7 million in the first quarter of 2009 and 2008, respectively.
Segment operating margin was lower in the first quarter of 2009 due to the increase in unrecovered research and development expenditures and the costs related to the Taurus XL launch failure.

Satellites and Space Systems
   Satellites and space systems segment operating results were as follows:

                                                   First Quarter
        (in thousands, except percentages)      2009          2008        % Change
        Revenues                             $ 110,157     $ 106,402           4 %
        Operating income                         7,800         7,869          (1 %)
        Operating margin                           7.1 %         7.4 %

Satellites and space systems segment revenues increased $3.8 million, or 4%, primarily as a result of increased activity on communications satellite contracts. Communications satellite revenues accounted for 76% and 75% of total segment revenues in the first quarter of 2009 and 2008, respectively.
Satellites and space systems segment operating income decreased marginally in the first quarter of 2009 compared to the first quarter of 2008. Favorable profit adjustments on certain science and technology satellite contracts were more than offset by the impact of cost increases on certain communications satellite contracts. Communications satellite contracts accounted for 69% and 81% of total segment operating income in the first quarter of 2009 and 2008, respectively.
Segment operating margin decreased slightly in the first quarter of 2009 primarily due to the cost increases on certain communications satellite contracts.
Advanced Space Programs
Advanced space programs segment operating results were as follows:

                                                   First Quarter
         (in thousands, except percentages)      2009          2008       % Change
         Revenues                             $ 68,346      $ 72,609          (6 %)
         Operating income                         (922 )       4,841        (119 %)
         Operating margin                         (1.3 %)        6.7 %

Advanced space programs segment revenues decreased $4.3 million, or 6%, primarily due to a reduction in contract activity on the Orion human spacecraft program for NASA partly offset by increased activity on national security satellite contracts. The Orion program accounted for 49% and 84% of total segment revenues in the first quarter of 2009 and 2008, respectively.
The advanced space programs segment reported an operating loss in the first quarter of 2009 primarily as a result of a $3.5 million loss recorded on two contracts due to cost increases and $0.8 million of legal fees incurred in connection with a protest of the NASA Commercial Resupply Services contract recently awarded to us in late 2008. In April 2009, the protest was denied by the U.S. Government Accountability Office and the award to Orbital was upheld.
This segment's operating margin decreased significantly in the first quarter of 2009 as a result of the cost increases discussed above.

Corporate and Other
Corporate and other revenues were comprised solely of the elimination of intercompany revenues. There was no corporate and other operating income in 2009. Corporate and other operating income in 2008 consisted solely of corporate general and administrative expenses associated with a discontinued business unit which was sold in the second quarter of 2008. Backlog
Our firm backlog was approximately $2.1 billion at March 31, 2009 and December 31, 2008. While there can be no assurance, we expect to convert approximately $700 million of the March 31, 2009 firm backlog into revenue during the remainder of 2009. Firm backlog consists of aggregate contract values for firm product orders, excluding the portion previously included in revenues, and including government contract orders not yet funded and our estimate of potential award fees.
Total backlog was approximately $5.8 billion at March 31, 2009 and $5.9 billion at December 31, 2008. Total backlog includes firm backlog in addition to unexercised options, indefinite-quantity contracts and undefinitized orders and contract award selections.
Liquidity and Capital Resources
Cash Flow from Operating Activities
Cash flow from operating activities in the first quarter of 2009 was $16.1 million as compared to $24.5 million in the first quarter of 2008. This decrease in operating cash flow was primarily due to a $3.8 million reduction in income and a $3.0 million decrease in cash flow due to a net increase in working capital and other assets and liabilities. Cash Flow from Investing Activities
In the first quarter of 2009, we spent $5.9 million for capital expenditures, as compared to $6.7 million in the first quarter of 2008. Cash Flow from Financing Activities
During the first quarters of 2009 and 2008, we repurchased and retired 1.0 million and 0.5 million shares of our common stock at a cost of $14.6 million and $11.8 million, respectively. During the first quarters of 2009 and 2008, we received $0.5 million and $1.7 million, respectively, from the issuance of common stock in connection with stock option exercises and employee stock plan purchases.
Convertible Notes - In December 2006, we issued $143.8 million of 2.4375% convertible senior subordinated notes due 2027 with interest payable semi-annually each January 15 and July 15. The convertible notes are convertible into cash, or a combination of cash and common stock at our election, based on an initial conversion rate of 40.8513 shares of our common stock per $1,000 in principal amount of the convertible notes (equivalent to an initial conversion price of approximately $24.48 per share) under certain circumstances.

At any time on or after January 21, 2014, the convertible notes are subject to redemption at our option, in whole or in part, for cash equal to 100% of the principal amount of the convertible notes, plus unpaid interest, if any, accrued to the redemption date.
Holders of the convertible notes may require us to repurchase the convertible notes, in whole or in part, on January 15, 2014, January 15, 2017 or January 15, 2022, or, if a "fundamental change" (as such term is defined in the indenture governing the convertible notes) occurs, for cash equal to 100% of the principal amount of the convertible notes, plus any unpaid interest, if any, accrued to the redemption date.
Credit Facility - We have a $100 million revolving secured credit facility (the "Credit Facility"), with the option to increase the amount of the Credit Facility up to $175 million to the extent that any one or more lenders commit to be a lender for such additional amount. At our election, loans under the Credit Facility bear interest at either (i) LIBOR plus a margin ranging from 0.75% to 1.25%, with the applicable margin varying according to our total leverage ratio, or (ii) at a prime rate. The Credit Facility expires in 2012 and is secured by substantially all of our assets. Up to $75 million of the Credit Facility may be reserved for letters of credit. As of March 31, 2009, there were no borrowings under the Credit Facility, although $12.6 million of letters of credit were issued under the Credit Facility. Accordingly, as of March 31, 2009, $87.4 million of the Credit Facility was available for borrowings.
Debt Covenants - Our Credit Facility contains covenants limiting our ability to, among other things, pay cash dividends, incur debt or liens, redeem or repurchase company stock, enter into transactions with affiliates, make investments, merge or consolidate with others or dispose of assets. In addition, the Credit Facility contains financial covenants with respect to leverage and interest coverage. As of March 31, 2009, we were in compliance with all of these covenants.
Available Cash and Future Funding
At March 31, 2009, we had $324.5 million of unrestricted cash and cash equivalents. Management currently believes that available cash, cash expected to be generated from operations and borrowing capacity under our Credit Facility will be sufficient to fund our operating and capital expenditure requirements, including research and development expenditures, over the next twelve months. However, there can be no assurance that this will be the case. We believe that we will continue to incur significant research and development costs as well as capital expenditures in 2009 through 2011 on the Taurus II development effort. Our ability to borrow additional funds is limited by the terms of our Credit Facility. Additionally, significant unforeseen events such as termination of major orders or late delivery or failure of launch vehicle or satellite products could adversely affect our liquidity and results of operations.
As discussed in Note 8 to the accompanying financial statements, we currently hold investments in auction-rate securities and preferred stock with a cost basis of $34.5 million that have experienced a significant decline in fair value. Given the sufficiency of our available cash and other funding sources as discussed above, we believe that we will not need to liquidate our investments in auction-rate securities in the foreseeable future. Accordingly, we do not believe that any fluctuations in the fair values of these securities will have a significant impact on our liquidity.

In April 2008, our Board of Directors authorized a plan for the purchase of up to $50 million of outstanding common stock over a 12-month period. As of March 31, 2009 we fully utilized the $50 million approved under this plan.
In March 2009, our Board of Directors authorized a new program for the purchase of up to $50 million of our outstanding common stock over a 12-month period. In the first quarter of 2009, we repurchased 179,701 shares of our common stock for $2.3 million under this program. Accordingly, we may purchase up to an additional $47.7 million of our common stock pursuant to this repurchase program through March 5, 2010. Off-Balance Sheet Arrangements
The conversion feature of our convertible notes is considered to be an off-balance sheet arrangement. We do not have any material off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.
Recent Accounting Pronouncements
In April 2009 the Financial Accounting Standards Board issued three related Staff Positions: (i) FSP No. FAS 157-4, "Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly;" (ii) FSP No. FAS 115-2 and FAS 124-2, "Recognition and Presentation of Other-Than-Temporary Impairments;" and (iii) FSP No. FAS 107-1 and APB 28-1, "Interim Disclosures about Fair Value of Financial Instruments," which will be effective for us in the second quarter of 2009. FSP No. FAS 157-4 provides guidance on how to determine the fair value of assets and liabilities under SFAS 157. FSP No. FAS 115-2 and FSP No. FAS 124-2 modifies the requirements for recognizing impaired debt securities and requires additional disclosures for debt and equity securities. FSP No. FAS 107-1 and APB 28-1 enhance the disclosure of instruments under the scope of SFAS 157 for both interim and annual periods. We are currently evaluating these FSPs.