NOTE 1 – BASIS OF PRESENTATION

We prepared the condensed consolidated financial statements in this Form 10-Q in accordance with accounting principles generally accepted in the United States for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. We followed the accounting policies used and disclosed in the consolidated financial statements included in our 2009 Form 10-K filed with the Securities and Exchange Commission.

We close our books and records on the Sunday prior to the end of the calendar quarter to align our financial closing with our business processes. The interim financial statements and tables of financial information included herein are labeled based on that convention. This practice only affects interim periods, as our fiscal years end on December 31.

The interim financial information in this Form 10-Q reflects all adjustments, consisting of normal recurring adjustments except as otherwise disclosed, necessary for a fair presentation of our results of operations for the interim periods. The results of operations for the quarter or six months ended June 27, 2010 are not necessarily indicative of results to be expected for the full year.

NOTE 2 – PLANNED BUSINESS DIVESTITURES

In June 2010, we announced plans to divest Pacific Architects and Engineers, Inc. (PAE) and most of our Enterprise Integration Group (EIG), two businesses within our Information Systems & Global Solutions (IS&GS) reporting segment.

PAE

PAE’s operating results are included in discontinued operations on our Statements of Earnings for all periods presented, as we believe that closing a sale of the business around the end of 2010 is probable. PAE’s assets and liabilities are classified as held for sale on our Balance Sheets. As a result of our decision to sell PAE, we were required to record a $96 million deferred tax asset to reflect the tax benefit that we expect to realize on the sale of PAE because our tax basis is higher than our book basis.

The plan to divest PAE is a result of changes in customer priorities. When we acquired the business, we envisioned it as an entry point to a new customer set that would need additional services, primarily in the areas of information technology and systems integration. Those customers, however, are seeking a different mix of services, such as the construction of facilities and provision of physical security, that does not fit with our long-term strategy.

Summary financial information related to discontinued operations is as follows:

The major classes of assets related to the PAE business classified as held for sale on our Balance Sheets are listed in the table below. There were no major classes of liabilities that were material for separate disclosure related to the PAE business.

EIG

We are currently evaluating the relative merits of a sale transaction for EIG compared to a spin-off of the EIG business to our stockholders. EIG’s financial results will remain in continuing operations until we either conclude that a sale is probable or close a spin-off transaction. We expect a transaction to occur around the end of 2010.

Our decision to divest EIG was based on our analysis of the U.S. Government’s increased concerns about perceived organizational conflicts of interest within the defense contracting community. We have never had an organizational conflict of interest violation; however, the potential for conflicts arises in circumstances where a contractor providing certain types of advisory services or support to the U.S. Government is also involved in systems development activities. EIG provides systems engineering, architecture, and integration services and support to a broad range of government customers.

Net sales and earnings before income taxes related to the EIG business were as follows:

NOTE 3 – EARNINGS PER SHARE

We compute basic and diluted per share amounts based on net earnings for the periods presented. We use the weighted average number of common shares outstanding during the period to calculate basic earnings per share. Our calculation of diluted per share amounts includes the dilutive effects of stock options and restricted stock units based on the treasury stock method in the weighted average number of common shares. Unless otherwise noted, we present all per share amounts cited in these consolidated financial statements on a per diluted share basis.

The calculations of basic and diluted earnings per share are as follows:

Stock options to purchase 11.2 million shares of common stock for the quarter and six months ended June 27, 2010 and June 28, 2009 had exercise prices that were in excess of the average market price of our common stock for the respective periods. As such, we did not include these stock options in our calculation of diluted earnings per share, as their effect would have been anti-dilutive.

NOTE 4 – BUSINESS SEGMENT INFORMATION

We 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.

In June 2010, we announced the realignment of two IS&GS businesses, Readiness & Stability Operations (RSO) and Savi Technology, Inc., with our simulation, training and support business to form the Global Training & Logistics line of business within Electronic Systems. The following financial information has been reclassified to reflect this realignment and to exclude the PAE business from the IS&GS business segment information (see Note 2) for all periods presented. The realignment had no effect on our consolidated results of operations, financial position, or cash flows. In connection with the realignment and divestitures activities announced in June, IS&GS’ name was changed to Information Systems & Global Solutions, replacing “Services” with “Solutions” to better reflect its focus and scope.

In the following table, we present net sales and operating profit of our four business segments. Net sales exclude intersegment revenue, as these activities are eliminated in consolidation. Intercompany transactions are generally negotiated and accounted for under terms and conditions similar to other government and commercial contracts.

Operating profit includes the equity earnings (losses) from investees in which certain of our business segments hold equity interests, because the activities of the investees are closely aligned with the operations of those segments. Operating profit of the business segments excludes the FAS/CAS pension adjustment discussed below; expense for certain stock-based compensation programs including costs for stock options and restricted stock units; the effects of items not considered part of management’s evaluation of segment operating performance, such as gains or losses from divestitures and the effects of legal settlements; Corporate costs not allocated to the business segments; and other miscellaneous Corporate activities. These items are included in “Unallocated Corporate expense, net” in the following table which reconciles operating profit from the business segments to operating profit in our Statements of Earnings.

The results of operations of our segments include pension expense only as determined and funded in accordance with U.S. Government Cost Accounting Standards (CAS) rules. The FAS/CAS pension adjustment represents the difference between pension expense or income calculated in accordance with GAAP and pension costs calculated and funded in accordance with CAS. CAS is a major factor in determining our pension funding requirements, and governs the extent to which pension costs can be allocated to and recovered on government contracts. The CAS expense is recovered through the pricing of our products and services on U.S. Government contracts and, therefore, is recognized in each of our segments’ net sales and cost of sales.

Selected Financial Data by Business Segment