July 17, 2003

1. Industry Perspective: Critical Acquisition Issues July 17, 2003 Eleanor Spector Vice President, Contracts Lockheed Martin Corporation

2. Critical Acquisition Issues • Challenges Facing the Aerospace Defense Industry Today and As We Transform to the Future • Challenges Ahead as Aerospace Becomes More-and-More a Global Business

3. DoD Transformation Secretary of Defense Donald Rumsfeld on DoD Transformation "We need to transform not only our armed forces, but also the Department of Defense itself, by encouraging a culture of creativity and sensible risk taking. We need to encourage a more entrepreneurial approach to developing military capabilities—one that is not mired in the past and one that does not simply wait for new threats to emerge to take us by surprise."

4. Defense Transformation Driving Change • Product-Focused • Threat Driven • Requirements Driven • Recapitalization • Platforms • New Development • Services • Regional • Solution-Focused • Capabilities Driven • Architecture/Solution Driven • Modernization/Transformation • Network Centric • Spiral Development • Jointness • Global Transformation Era of Platforms Era of Solutions

5. Transformation Also Applies to theDefense Acquisition Process Transformation From To • What is the Capability Objective and What are the Alternatives for Achieving It? • What is the Preferred Alternative, Considering Affordability, Joint Operations, and Other Factors? Service-Unique Specifications Based on System Performance Specifications Based On Joint Military Objectives

6. Today: Program-by-Program Basis Lack of Resources in the Industry Inadequate Government Investment for Defense in Some Countries Path Forward: Integrated Transatlantic Marketplace Share Development Costs & Harmonize Requirements Increased Interoperability Expand Sharing of Industrial & Technical Knowledge Meet Security Requirements more Efficiently for Less Cost Increased Globalization International Market Place = Business Opportunities & Revenues And is Critical To Our Future Growth and Financial Health

7. JSF International Partners MOU Date • Level 1 • United Kingdom 17 Jan 01 • Level 2 • Netherlands 10 Jun 02 • Italy 24 Jun 02 • Level 3 • Canada 7 Feb 02 • Denmark 28 May 02 • Norway 20 Jun 02 • Turkey 11 Jul 02 • Australia 31 Oct 02 • Security Cooperation Participants (LOAs Pending) • Israel and Singapore 7

8. Poland F-16 Program “They will bring an economic and technological stimulus for Poland and strengthen our links with the U.S.” Polish Defense Minister J. Szmajdzinski

9. Top Defense Department Contractors(Fiscal Year Awards, in Billions) Source: DoD

10. Keys to Sustained Partnership Strong Base of Operations Leading Edge Technology Industry Government Cash Flow & Profitability Affordable Prices

11. Sustainment & Protection of theDefense Industrial Base A “Strong, Healthy & Flexible” Aerospace Industry Is Critical to Future Economic Vitality & National Security 11

12. Continuation of a Mutually Beneficial,Rapid-Service Relationship • Work Closely Together • Remove the Waste from Our Processes & Requirements • Empower “On the Spot” Decision Making

13. Source: FY04 Budget of the U.S.Government, Historical Tables Billions $ Projected Year Defense Outlays from 1952 – 2008in Constant FY 1996 Dollars

14. Lockheed Martin … What We Do Execute Complex Projects … Of High Visibility and Critical Importance … With Advanced Technology and Systems Integration Skills … Involving Multiple Organizations and Partners … For Our Government Customers Serving the Vital Interests of Our Customers At Their Defining Moments 14

15. How Do We Position Ourselves to MeetCustomer Requirements & Expectations? It Will Require: • Access to Capital • Access to Talent • Leadership • Program Performance

16. Lower Unit Costs … Savings Passed on to the Customer Supplier Confidence & Long Term Supplier Pricing Better Upfront & Long Term Planning of Resource Allocation Investor Confidence Multiyear Contracting Benefits

17. +10.1% +6.5% +4.4% +2.6% +2.6% -2.0% -8.3% Aerospace & Defense Have Provided Poor Returns to Investors If You Invested $10,000 (in 1997) – In 2002, Your 5 Yr. Total Return in Aero/Def Lagged T-Bills Source: Final Report of the Commission on The Future of The U.S. Aerospace Industry (Morgan Stanley)

18. U.S. Aerospace Industry Employment Lowest Employment Since WWII • 642,000 Jobs Have Been Lost Since 1989 (including 106,000 Since 9/11/01) • Average Age of Mfg. Employee is 51 • Average Age of Engineer is 54 • 27% of Workforce will Reach Retirement Eligibility in 2008 • Workers 34 or Younger Has Declined from 32% in ‘92 to 17% in ‘01 In Thousands 27% Source: AIA Update March 2003 Vol. 7, No.7

19. We Must Perform for Our Customers • Effectively Manage Our Programs, Meet Our Commitments, and Deliver Value • Every Program, Every Milestone, Every Day • Drive Operating Excellence • Continuous Improvement • Assure Financial Discipline & Sound Business Practices • Transparent, Truthful, Highest Ethical Standards Good Performance Brings Customer Desire to Partner

20. Savings Incentive • Two years agoSec. Aldridge announced he was considering a new policy to permit industry to keep 50% of the savings resulting from contractor-initiated process improvements. • Need for efficiency sharing was highlighted in the Presidential Commission on the Future of the Aerospace Industry report. • OSD draft rule was sent to OFPP/OMB for approval to publish in October 2002. • We still await issuance of the savings incentive.

21. Award Fee & Cash Flow • Nov. 22, 2002, DoD Proposed a Rule that would Permit Provisional Monthly Advance Billing of Award Fees • 50% of the Available Award Fee for the Initial Period • Up to 80% of the Evaluation Score for the Prior Evaluation Period Times the Award Fee Available for the Current Period Industry Strongly Encourages the Use of Provisional Award Fee Payments, Even to the Extent of Applying Retroactively to Existing Award Fee Contracts

22. Profit Weighted Guidelines • Dec. 2000 – Technology Incentive of up to 4% for Contracts with New, Significant Development or Production Technological Innovation • April 2002 – Cost Efficiency Incentive Permits Up to 4% Additional Profit Based on Demonstration of Cost Efficiencies that Benefit the Instant Contract. We Have Seen Minimal Use of These Factors … We Urge OSD to further encourage use of the DFARS WGL Factors

23. Alternative Dispute Resolution (ADR)

24. LOCKHEED MARTIN Lockheed GD Ft. Worth Martin Marietta GE Aerospace GD Space Loral Librascope LTV Missiles IBM Federal Systems Unisys Defense Boeing COMSAT OAO Rockwell Aerospace BOEING McDonnell Douglas Hughes-Satellites Tribune - Jeppesen Sanderson Raytheon BAe Corporate Jets RAYTHEON E-Systems CTAS TI Defense GM-Hughes GD Missiles CAE Link NORTHROP GRUMMAN Magnavox Northrop Grumman Vought Westinghouse Def Elect Logicon Litton PRC Sperry Marine Primark TASC Avondale Newport News TRW General Dynamics Bath Iron Works GENERAL DYNAMICS LMC Arm & Def Lucent - Adv Tech Sys Ceridian - Comp Devs Intl Nasco Holdings Gulfstream Aerospace GTE-Defense Telecom/IT Motorola Inc. Galaxy Aerospace 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002

25. Consolidation Has Been Fueled by Debt Financing . . . Aggregate Peer group total debt ($ billions) Source: Industry total UDI ATK GD NOC RTN LMT Note: Stacked chart where total debt numbers are layered on top of each other; companies included are Lockheed Martin (LMT), Raytheon (RTN), Northrop Grumman (NOC), General Dynamics (GD), Alliant Techsystems (ATK), United Defense Industries (UDI) Source: Datastream

26. . . . Leading to a Gradual Downward Trend in Sector Average Credit Ratings Aerospace & Defense sector credit ratings Source: Moody’s Global Credit Research

27. Business Risk in Aerospace as Viewed by Wall Street • Industry Is a Monopsony • Program Stability … Funding Stability • Program Performance • Single Year Procurements • Investment Requirements Versus Recovery with Adequate Returns 27

28. Stock Price PerformanceDecember 1996 to June 2003 S&P 500 45% Aero/Defense -0% NASDAQ 29% Index Value Aero/Defense

29. Stock Price Performance YTD June 30, 2003 Total Return(Stock Price + Dividends) Lockheed Martin High: 58.95 (1/2) Low: 40.64(3/12) NASDAQ 22% Index Value S&P 500 12% Aero/Def -2% LMT -17%

30. Key Factors to Improve Wall Street’s Outlook on Our Industry • Budget and Program Stability • Better Return on Investments • Improved Cash Flow • Greater Share of Savings Improvements 30

31. Risk/Reward Relationship for Development Programs Must Be Realigned • Development Programs are the Riskiest Part of Business Yet Receive the Lowest Returns • Lack of Funding and Profit for R&D Contracting is Endangering the Capacity for Dramatic Innovation or Invention

32. Customer Perception: Development Programs are Investments that Enable the Reward of Long-Term, Higher Margin Production Reality: Program Cuts, Stretch-Outs, Quantity Reductions and Competition of Support Business Lead to a Breakdown in the Business Economics Industry Missteps: Competitive “Must Win” Mentality Low-Margin “Bid-to-Win” Position Optimistic Cost Estimates Bid Resulting in Cost Growth and Reduced Profit as a Percent of Costs Cost Sharing Requirements The Customer & Industry Have Contributed to Low Development Profitability

33. Actions that Support theConcept of Fair Returns • Multi-year Contracting • Sharing of Cost and Efficiency Savings resulting from Contractor-Initiated Process Improvements (the 50-50 savings Model) • Reasonable Returns on Development Programs • Provisional Award Fee Payments • DFARS Guidance on Weighted Guidelines Including Technology and Efficiency Incentives • Alternative Dispute Resolution

34. Risk Management in Our Partnership Risk Examples Include: • Program Cancellations or Stretch-Outs • Significant Reductions in Production Quantities, Often After Substantial Contractor Investment Based on Initial Quantity Projections • Financing Early Program Starts to Preserve Schedule and/or Cover Annual Funding Shortfalls • Interest is an Unallowable Cost • Lack of insurance availability or liability limitation on the sale of Homeland Security products (we would like to see interim implementation of recently proposed rule) • Sale of Commercial Satellites and Launches at Prices Below Costs to Maintain Business Base.

35. Developing & Delivering Solutions • World-Class Technology • Long-Term, High Quality Employment • Breadth & Depth of Systems Integration Skills to the Transatlantic Marketplace 35