Marc Kaplan - VP, Investor Relations Bill Swanson - Chairman and CEO Dave Wajsgras - SVP and CFO

Robert Spingarn - Credit Suisse Cai von Rumohr - Cowen and Company Troy Lahr - Stifel Nicolaus Sam Pearlstein - Wells Fargo Securities Robert Stallard - Macquarie Ronald Epstein - Merrill Lynch David Strauss - UBS Noah Poponak - Goldman Sachs Joseph Nadal - JPMorgan

Good day ladies and gentlemen and welcome to the Raytheon second quarter 2009 conference call. My name is Lauren and I'll be your coordinator for today. At this time all participants are in listen-only mode. We will be facilitating a question-and-answer session towards the end of this conference. (Operator Instructions). As a reminder this conference is being recorded for replay purposes. I'd now like to turn the presentation over to your host for today's call Mr. Marc Kaplan, Vice President, Investor Relations.

Thank you, Lauren. Good morning everyone and thank you for joining us today on our second quarter conference call. The results that we announced this morning, the audio feed of this call and the slides that we'll reference are available on our website at raytheon.com. Following the live call, an archive of both the audio replay and a printable version of the slides will be available in the Investor Relations section of our website. With me today are Bill Swanson, our Chairman and Chief Executive Officer, and Dave Wajsgras, our Chief Financial Officer. We'll start with some brief remarks by Bill and Dave and then we'll move on to questions. Please limit your questions to two per caller to allow for broader participation. Before I turn the call over to Bill, I'd like to caution you regarding our forward-looking statements. Any matters discussed today that are not historical facts, particularly comments regarding the Company's future plans, objectives and expected performance, constitute forward-looking statements. These statements are based in a wide range of assumption that the Company believes are reasonable, but are subject to a range of uncertainties and risks that are summarized at the end of our earnings release, and that we discussed in detail in our SEC filings. Bill?

Thank you, Mark. Good morning everyone. We delivered solid performance during the quarter and continue to maintain our strong financial position. Our sales were up 4%, EPS was up 25%, and we continued to have good cash flow. We also had strong bookings, ending the quarter with $37 billion backlog. 29% of our bookings came from international customers and 18% came from classified awards, and as we announced in our news release this morning we increased our guidance for full year 2009 sales, EPS and ROIC. Our financial results during the quarter and our improved outlook for the year demonstrate that our strategy is working. We built a diverse portfolio of increasingly strong programs all aligned with the current and evolving needs of our customers in the U.S. and internationally. Speaking of international at the Paris Air Show last month I had the opportunity to meet with many of our domestic and international customers and I was encouraged by what I heard. Our programs are performing well and the level of demand for our technologies and capabilities continues to increase. The political threat environment around the world is driving a lot of interest in our areas of strength, particularly in ISR, missile defense, border security, training and mission support, and cyber security. We continue to differentiate ourselves by our approach and our performance. The unique characteristics of our business model, is that we benefit whether our technologies are used to build new capabilities or upgrade the capabilities of existing systems. We support our customers in multiple ways. Dave's going to take you through the details of our financial performance in the quarter and our full year outlook. And we want to leave plenty of time for your questions. So, let me wrap up by saying that, we delivered solid results for the quarter. We expect to continue to perform well in the second half of the year, and we are optimistic about our future. With that, let me turn it over to Dave.

Okay. Thanks, Bill. I have a few opening remarks starting with the second quarter highlight and then we'll move on to questions. During my remarks, I'll be referring to the web slides that we issued earlier this morning. Everyone would please move to page 3 as Bill noted, we performed well in the second quarter. EPS from continuing operations was $1.24, up 25%. Income from continuing operations of $504 million was up 17% and our book-to-bill ratio was 1.2 times. Operating cash flow from continuing operations during the quarter of $512 million was above the high end of our prior guidance, primarily due to timing. I want to highlight the fact that our cash performance during the quarter included $395 million in higher cash contributions to our pension plans, compared to the same period last year. For the full year, we expect a total gross cash contribution to our plans to be $1.1 billion in line with our total contributions in 2008. Also related to cash, the Company repurchased 6.6 million shares of common stock for $300 million in the second quarter, bringing the year-to-date repurchase the 13.4 million shares for $600 million. And as Bill noted earlier, we increased our full year guidance for sales, EPS and ROIC. I'll provide additional color on guidance in just a few minutes. Turning now to page 4, let me provide you with some more detail on our second quarter results. As I just mentioned we had a book-to-bill ratio of 1.2 times on bookings of $7.6 billion in the quarter. On a year-to-date basis our book-to-bill ratio was 1.1 times. During the quarter IDS booked $877 million to provide advanced Patriot air and missile defense capability for several domestic and international customers including the U.S. Army, the UAE, Taiwan and Kuwait. IDS also booked a $157 million to provide SL-AMRAAM systems to Finland, a $150 million for JLENS for the U.S. Army, and a $142 million for two Volume Search Radar arrays for the U.S. navy, one for the Zumwalt-class destroyer program and one for the CVN 78 aircraft carrier. Other notable awards during the quarter included $521 million of missiles for the production for the AMRAAM for the U.S. Air Force and international customers, and $260 million for Phalanx Weapon Systems for the U.S. Navy and U.S. Army. Missiles also booked $207 million for the production of Tactical Tomahawk cruise missiles and $167 million for AIM-9X missiles for the U.S. Navy and international customers. TS booked $553 million for work on the Warfighter FOCUS contract for the U.S. army, bringing the year-to-date bookings on the program to $731 million. TS also booked a $160 million to upgrade Phalanx Weapon Systems for the Royal Canadian Navy and a $100 million on a contract for DTRA, The Defense Threat Reduction Agency. Looking now at the graph on the right side of page 4, backlog at the end of the second quarter was $37.3 billion, compared to $37.5 billion at the end of the second quarter of 2008. As we noted on the page, as a result of the Missile Defense Agency's change in priority to the early intercept phase. The KEI program was terminated for convenience during the quarter. This impacted our backlog by $2.4 billion. However, as you can see with our strong bookings we've been able to largely offset the impact of KEI and sustain our backlog at $37 billion. If you'd now move to page 5, you can see that our overall sales increased by 4% in the second quarter of 2009 and 7% year-to-date in line with our previous guidance. IDS net sales of 1.3 billion were up 6% compared to the same period last year and this is primarily due to growth on international Patriot programs. Intelligence and information systems had net sales of $812 million, down slightly from the comparable period last year and as expected the change in sales was primarily due to lower volume on the e-Borders program. Missile Systems net sales of $1.4 billion were up from last year, driven by higher volume on the Phalanx Weapon Systems. Network Centric Systems, net sales of $1.2 billion were also up driven by increased volume of U.S. Army programs. Space and Airborne Systems had net sales of $1.1 billion, up 6% versus the second quarter of 2008, primarily due to growth on international airborne tactical radar programs as well as classified business. Technical services had net sales of $780 billion, up 21% the result of strong growth on training programs, primarily Warfighter FOCUS and ATCOTS. If you move to page 6, operating margins for the total Company and that each of our individual businesses remains strong. Margin before the FAS/CAS adjustment was 12.3% or 30 basis points higher than last year. Our overall operating margin for the quarter which includes the FAS/CAS adjustment was 12.5% which was an increase of a 110 basis points from the second quarter of 2008. Both NCS and SAS posted very strong margins during the quarter, driven by improved program performance and higher volumes. SAS also benefited from a benefited from a favorable contract settlement, which we had previously expected to close later in the year. As we discussed on our prior calls, we expected IDS to have lower margins in last year, due to a change in contract mix, principally the result of completing some international programs in 2008. Both IIS and Technical Services margins were in-line with last year. Missiles had lower margins in the quarter, due to higher award fees in Q2 of 2008 as a result of the successful flight test milestone on the Standard Missile-3 program. Overall, we had strong operational performance at each of our businesses resulting in meaningful margin expansion for the Company. Turning now to page 7. Second quarter EPS from continuing operations was $1.24, of 25% from $0.99 in the prior year. Operational improvement share count and the FAS/CAS adjustment contributed to the increase. If you please turn to page 8, I'd like to comment on our updated outlook for the year. We now expect sales to be in the range of between $25.5 billion and $25 billion an increase of a $100 million. We’ve raised our EPS guidance by $0.05 to a range of between $4.60 and $4.75. I'd like to point out that the increase was all due to operational improvements driven by both volume growth and margin expansion. And we've increased our guidance for ROIC by 10 basis points to between 11.2% and 11.7% to reflect the continued improvement in our operational performance. ROIC is one of the primary metrics that we use to manage our business and we continue to be pleased with the progress that we are making in this area. Now before moving on, let me briefly comment on our pension plan. As most of you know we have an annual measurement date of December 31 and it's still premature to suggest meaningful assumptions about the return on planed assets and the discount rate environment at year end. With that said, our pension assets had a positive return of approximately 6% during the first six months of the year putting us on track to meet our annual return assumption of eight and three quarters percent. Turning now to page 9, we provide a detail on our full year guidance for 2009 by business. As I mentioned a moment ago, we increased our guidance for full year total company sales by $100 million this was primarily due to the strong growth in training program at our Technical Services business. We expect our rate of year-over-year growth at TS will remain strong through the balance of the year, but should moderate. Next we increased the range of our full year operating margin guidance of our SAS business and for the total company. The increase in our expected profit margin at SAS is due to improved program performance and mix. Finally on page 10, we provided you with a summary of our earnings per share results and outlook. Both including and excluding the impact of the FAS/CAS pension adjustment. We defined FAS/CAS adjust EPS as EPS from continuing operations excluding the FAS/CAS pension adjustment. We recognized that many analysts and investors look at FAS/CAS adjusted EPS as another important financial measure because of adjust for non-cash and temporary differences between FAS and CAS and so we hope you find this table useful. Let me conclude by saying that the Company had a very strong second quarter. We delivered solid growth in sales, double digit growth in earnings per share, good cash flow generation, strong bookings and we increased our guidance for the full year. And so like Bill said earlier, we are in a strong financial position. We are strategically aligned with our customers and we are optimistic about our future. With that, we'll open up the call for questions. Lauren?

(Operator Instructions). And your first question comes from the line of Robert Spingarn with Credit Suisse. Robert Spingarn - Credit Suisse: A couple of quick things. Bill, with regard to the backlog we knew KEI would come out. Is there anything else based on the changes down in Washington that would remove from the backlog over the second half of the year?

The only thing that might be in there would be FCS but we've looked at what's happening on the program given our sensors and missile systems, and the ground systems work we're doing, we believe all of that stays basically the same. The vehicles are moving around, so you still need to put stuff on them. So my answer would be there might be some movement there, but it'll be in the noise. We probably won't even see it. Robert Spingarn - Credit Suisse: Okay. Can you give us a size, perhaps size of the FCS in the backlog for us?

I don't have that off the top of my head. I don't break it out. The problem is we have spin outs and things that are part of it. If you look at, NLOS, it's one of the systems that goes in there. I don't even know if it's in the FCS line off the top of my head. We can get you some kind of ballpark of what's there. Robert Spingarn - Credit Suisse: All right, that would be helpful. And then on IIS based on the margins in the first half of the year, how do you get to the target range that you show in the slides for the full year?

Yeah. This is Dave. From an IIS perspective the cadence of the margin is pretty much lined up with what we saw in 2008. IIS does have some operational improvements expected in the second half, and you'll recall that just from an overall perspective, that's the Group that primarily is responsible for cyber security, and we continue to invest in that area as well. Robert Spingarn - Credit Suisse: Okay. And then just Dave as you talk about cadence in the second half of the year, you have more days in Q3, but clearly based on your guidance more revenue in Q4. Could you walk a little bit through the mechanics of that?

Yes. In Q4 is always our stronger quarter from a cadence standpoint. In the guidance, we provided in the appendix we are just getting a little more precise relative to Q3 and Q4. There’s nothing in particular going on there. Robert Spingarn - Credit Suisse: Okay. Thanks so much.

Rob, I should say one thing just so that theirs is not confusion on the call. We expect our bookings this year to be about 25 billion plus or minus 500 million for those that track us all the time, you'll remember at the beginning of the year, we were about 24 billion, 500 million plus or minus. So, this quarter we kind of believe we'll be up, we took at least internally our guidance up about 500 million. So, we expect bookings to be strong this year. Robert Spingarn - Credit Suisse: Thanks, Bill.

Okay.

Your next question comes from the line of Cai von Rumohr with Cowen and Company. Cai von Rumohr - Cowen and Company: Thank you very much. Bill, could you update us on your foreign potential Lockheed mentioned that Taiwan packed three order, they expect coming up, but just kind of take us through that and essentially what percent you expect international to be of your bookings this year?

Let me start with the back half at least on international. 29% as I mentioned was bookings this quarter. Year-to-date we are running around 28%. We expect our bookings to be about 25% to 30% this year international. International sales year-to-date are about 20%. We expect we should be in the range of anywhere from 22% to 22% this year. So that will be in volume wise double-digit growth year-over-year. So that puts the real meat in perspective. As far as opportunities, we think our international pipeline is strong. We are off to a good start this year with various programs whether its air traffic control satellites award for India, Japan air borne radars. We have got Phalanx upgrades even for Canada and then of course AMRAAM and 9X continue to do well around the world. I went through where we think things are. Patriot, we have got surface launched AMRAAM. We have got opportunities in Australia on self-defense, and we have got a couple of good sized classified international efforts on border security that we expect. So for us, I'll add a little more color. We're still going through UAE, Patriot great customer there and continue to do well with bookings with them. Saudi Arabia will be upgrading their missiles and probably ground hardware sometime this year, next year. Taiwan, we expect them to purchase new systems and maybe in the fourth quarter this year, first quarter next year and of course we got Kuwait, Turkey, Gutter and I could go on countries there. Surface Launched AMRAAM, Dave mentioned Finland. We expect the UAE will buy there for lower tier and then in Self Defense we are hoping to hear on the Australian Land 17 and then I mentioned international classified, so a lot of lot of activity going on in international. Cai von Rumohr - Cowen and Company: It tends historically to be kind of centered in the fourth quarter. Is that likely to be the case or are there any Q3 opportunities that it might be kind of in the range you talked about, 25% in the third quarter? Do we have to wait for the fourth quarter to see all the big ones?

Cai, fortunately you and I have been together a long time and we know that international happens when it happens. And so that's why we try and give ranges in the quarter. We'll keep updating you where we are at on this thing, but internationally the awards happen on different time tables than they do here in the U.S. Our process is more defined. It's more visible, and so it's easier for us to predict domestically than it is internationally, but I hope you could tell from that run down there's a lot going on and we have got a lot of irons in the fire. We just got to bring them home. Cai von Rumohr - Cowen and Company: Last one would be we have a new administration. Are you seeing any changes in terms of how the new administration reacts in terms of supporting foreign sales?

I would probably use India's example. It's in the news, if I don't have to qualify it. We see good support there. It's a good market. We've done business there for a while, and it's nice doing an air traffic control system that's kind of leading the rest of the world and we are doing it for that country and it also contains some development work that we'll be doing, which is a real nice mix as we look at it. So for me, I'm encouraged by the support. It's still hard. There are still a lot of people that can say no in the process, but it's encouraging and as you can tell, we are bringing in bookings. Cai von Rumohr - Cowen and Company: Terrific. Thank you very much.

Okay. Thanks, Cai.

Your next question comes from the line of Troy Lahr with Stifel Nicolaus. Troy Lahr - Stifel Nicolaus: Thanks. You guys did really good margins this quarter. Can you just explain though your thought process on how you look to expand margins going forward and really what level of confidence you have that you can keep increasing these margins year-after-year gradually?

The way I would describe it is insatiable when it comes to margins. We view that's a real measure of how we are performing on our programs that the better we do, the better we should be able to capture what we said we were going to do when we bid the programs. So, there's a constant process here where every month we go through the outliers. It's kind of tough on the operating team because we deal with the exceptions, so there is a lot of great things going on in the company, but we spend our time on the stuff that's left (enormed), and Six Sigma is a big part of what we do. It's still ingrained in our culture and we use it to drive performance in everything we do. I always kid the finance team used to take us about 10 days to close, now we can close the books in three days and we are on our way to one day close. And that's all about continuous improvement. So I think the way we go at it is no place in the Company is safe from being looked at and being improved. So for us I think our track record over the last six years, seven years is working hard to keep performing, and so it's just part of our ongoing process. And I know Dave will probably want to say something here about margin, so I'll turn it over to him and let him add any other color.

Okay. Thanks, bill. I think another perspective might be if you look at full year 2009 from an operational perspective that is excluding the adjustment for FAS/CAS, we are essentially on top of last year's margins and you'll remember or recall that this year's margins includes the absorption of 15 to 20 basis points of the CAS flow through that I talked about on the January earnings call. So the point here is operationally year-over-year we are continuing to see very solid performance and I guess the last point I'd like to make is, since our initial guidance back in January, we've increased our margin outlook in three of our businesses in Missiles, NCS and SAS. Troy Lahr - Stifel Nicolaus: Okay. And if you look at your six segments do you see improvement across the board or do you see some of these guys where they have actually more room to go, where there is still some low hanging fruit? Could you may be just kind of walk through some of the segments and say okay, IDS very good margins, but we think we are kind of peaking here maybe gradually, but then there is more improvements at other places at the segment level?

I think one of the things we look at by business is what is the work that they are bringing in and where is it. So, if you look at missiles on a program like Phalanx, we know how to do that. We know how to do it well. So how do we work on shortening our overall schedules? How do we get costs out in support? How do we get touch labor efficiencies up? How do we get better supply chain leverage? So those are easier and I guess the operational guys wouldn't like me saying that, but let me just say we are focused and we know how to do that part. When you bring in a big international order, you want to make sure that you understand the risk, the account for that risk and then you retire the risk as you go through the program. So the recognitions of those are more towards mid or later part in the program. So, the mix has something to do with it and so if we look through it, you'd see businesses, the ones that have hardware probably have bigger opportunities than those that have had headcounts like IIS or RTSC when I look at them there you are really looking at productivity and software or in management or other things. So it's a little harder to get the margins up there, but we really work hard on them to not have that as being a reason for not improving. Troy Lahr - Stifel Nicolaus: So just kind of go forward maybe blocking and tackling maybe a 20 basis points a year is kind of what we should expect going forward? Right? Troy Lahr - Stifel Nicolaus: I figured I'd put words in your mouth.

Your next question comes from the line of Sam Pearlstein with Wells Fargo Securities. Sam Pearlstein - Wells Fargo Securities: Good morning. Since you are talking about margins, I just wanted to ask one on NCS, if you just look at where you are year-to-date clearly well ahead of what you are expecting for the year. So can you just talk about what you are expecting to see in the second half that might bring you down so where your guidance is?

NCS is continuing the very strong performance that they started a few years ago, evidenced by what they were able to deliver in the second quarter. Year-to-date margins as you just pointed out are also very strong. What the team has been able to do there is basically pull forward a number of performance improvements that were initially planned for later in the year. So, what you'll see is you'll see sort of the slightly higher margin profile in the first half versus the second half and with all that said though, there is still posting exceedingly strong margins and we do see them at the higher end of the margin guidance that we provided. Sam Pearlstein - Wells Fargo Securities: Okay. And so I guess there was a profit accrual change then as what we have seen would have happened later in the year?

Well, I wouldn't term it profit accrual. I would say they've taken a number of operational objectives such as parallel production, material cost savings, those types of efforts, and they've been basically putting a full core press on delivering stronger earnings earlier than initially anticipated. That's really the way to say it. It's not a profit accrual. It's just the timing of what’s happening within the four walls of NCS. Sam Pearlstein - Wells Fargo Securities: Okay. And then can you just size the SAS contract settlement?

Yeah that was about $7 million and it was worth about 60 basis points. I think the more important point is even with that they were up over a 100 basis points from operations period-over-period and they are also performing quite well, again on the heels of the very strong performance from last year. Sam Pearlstein - Wells Fargo Securities: Okay. And then just last question is, just when you had laid out your quarterly assumptions I guess back in April, it would have certainly implied things being I guess at a lower level of earnings than you saw this quarter. Is that NCS where it was pulled forward or were there other areas where the timing kind of shifted forward?

It was actually spread through a number of different businesses. It was SAS, RTSC, NCS. So it's really spread across a number of different programs. Sam Pearlstein - Wells Fargo Securities: Okay. Thank you.

All right.

And your next question comes from the line of Robert Stallard with Macquarie. Robert Stallard - Macquarie: Good morning.

Good morning Robert. Robert Stallard - Macquarie: Just follow-on this margin issue. Space and air borne again similar to Sam's question you 7are expecting this to trend down in the second half even disregarding this contract settlement. What are the factors that are driving margin down in the second half of this year?

Yeah, it's almost the same discussion that we just had in Network Centric Systems. There are a number of operational improvement objectives that the team has been able to pull into the first half. There is a positive impact from the mix of new business and how that is ramping up in the first half, which is stronger than anticipated and that will on a comparable basis overall moderate at some level in the back half of the year. Again it's very strong overall performance. I think the other point to make here is we did mention the claim settlement in Q2. You'll recall that there was also a couple of claim settlements in Q1. Notwithstanding those improvements and how they impact earnings operationally, they are still knocking the cover off the ball. Robert Stallard - Macquarie: Okay. And secondly, Bill on the export front, I was wondering if you could comment on whether the economy has been affecting your customers interest in (purchasing) defense product and also whether you are seeing increased competition given that every defense company pays to be chasing exports at the moment?

I think from our standpoint I mentioned on the last call, that the prize of oil per barrel had an effect as our international customers worked through their financial planning, but as we see that, that seems to have taken a turn for the better part at least from our standpoint. So, that part of the world, part of the little bit of the cloud has disappeared and little more sunshine coming in. In Asia or that part of the world, we have not seen a change. There's still a demand there. I think the economy has an effect in the sense that people are double and triple checking everything, but the political threats are still there around the world. I don't need to get into that whether it's North Korea or Iran or so forth. The big ones are known to everybody. So that's really what drives our market as we look at it. Homeland Security, ISR, those are big. Usually when times like this people want to know what's going on outside their borders or right on their borders. So what we do is extremely important. Our international business we've been doing it a long time. We sell in 80 countries around the world. We have an established presence. What I particularly enjoyed about this air show was every customer that came in was pleased about our performance. Now I know I'm biased, but it was our businesses are performing, and that reflects in a lot of what we do. So competition doesn't bother us. We’re used to putting on our helmets our pads and getting on the field and competing and we do that best. Robert Stallard - Macquarie: Alright, thank you.

Okay.

Your next question comes from the line of Ronald Epstein with Merrill Lynch. Ronald Epstein - Merrill Lynch: Good morning.

Good morning. Ronald Epstein - Merrill Lynch: Just going back to KEI, what kind of opportunities does that open up for Raytheon? Given KEI is going away, presumably something is going to replace it. Is there an opportunity there for you guys?

No really as I mean as that was one of the things about the 2.4 billion backlog adjustment. It was a downward adjustment. The upwards aren't there yet, and the upwards will include at least from our standpoint can talk about the QDR for a minute. If you look at, what they are looking is a regular warfare, high-end (inaudible) metric threats those are threats that don't have any symmetry in case anybody wanted to know. As Civil and Homeland defense, the focus is really going to be on ISR and mature BMD and that's where our strength really comes in. They are going to have an evolutionary approach to modernization. I think of that as (inaudible) preplanned product improvements that’s ingrained in every one of our designs when we do it and cyber. So, if we get back to the mature BMD, that’s where the Standard Missile comes into play and its ability to do that. The report is they’ll end up tripling that quantity. The tripling is not in our numbers. We also believe that a land based Standard Missile System is going to prove to be of merit, specially as you start to worry about early intercept because that's what they are worried about with the fine threats. Our big radars that we build are going to be needed there to be able to detect these over the horizon. And, so from our standpoint we expect to see activity there and as they get ready to put their FY'11 budget together we expect to see some of that in there taking shape. That won't all happen at once, but they'll phase it in. So net-net it may all turn up to the same in the wash by the time it's over but that's too early to tell, but that would be my gut feel. Ronald Epstein - Merrill Lynch: Okay. Bill and maybe one other question if I can, a much broader question. When you think about Raytheon looking forward into kind of the changing political environment, the changing budgetary environment, I mean how do you view the competitive positioning of the company? And I mean what do you think is the right way forward for Raytheon?

Well, I think we are positioned extremely strong from a standpoint that most people don't understand that about 85% we do in the company is direct with customers domestically and internationally. So that means we're right there as primarily responsible for the job. We are the prime of all of those. If you look at it, 27 of our contracts have a 100 million worth of sales. All these are like '08 numbers, but it'll be in perspective because '09 will be similar. We only have one contract that has more than 500 million in sales. We have 25 contracts that makeup 25% of our business add 125 contracts to that you are at 50% and then the balance is made up at 15,350 contracts. So you look at it, we have a lot of things going on in here. So we come at the budget in different ways. And as things change, we are able to look in our portfolio and come up with a capability that helps; and our international customers like that and so do our domestic customers. So we think we've got a good strategy. We think it's flexible. We think it's adaptable to changing environments and for us we do a lot of work in the classified. This quarter, 18% of our bookings were classified. I think we are 14% year-to-date. Sales are running about 12% this year, and we expect that to be double digit growth. So, we do well on that market too. So we feel good about our position and where we are going, and I would describe it as one word, flexibility, and we exude technology and innovation. Now I am biased I will admit that, but I think it shows up in the way we run and manage the company. Ronald Epstein - Merrill Lynch: Great. Thanks.

Okay.

And your next question comes from the line of David Strauss with UBS. David Strauss - UBS: Bill, just based on your last comments it sounds like classified is running better than you would have expected at the beginning of the year and also it sounds like international, the bookings you are still expecting to be about the same but it sounds like the sale on sale for international it sounds like it's a little lighter than what you had previously expected?

No I would say. Everything is pretty much on the realm we thought. We expect international sales to be about 22% to 20% of our total sales this year, and that's right in line. One of the things I'm always careful when I describe this, because we look at a mix of domestic and international when we put it together and if the domestic runs at a pretty good rate, the percentage is really they are relevant, but they really don't mean a lot. What's really important to me are we increasing our international sales at double digit and we are. That's the real driver. So I really feel good about the volume as we looked at it in that case. David Strauss - UBS: Okay. And then touching on domestic a little bit, you talked about KEI coming down I am thinking in '11 you might [call] some of that back. But just looking at the '10 budget, how do you think you did I mean, looking at it kind of beyond KEI looks like some of the missile programs that you are on were also funded at a lower level than prior years. Just how do you kind of think about how Raytheon did in the ’10 domestic budget as it stands now?

Well right now we are in the fourth inning. We still got to go through the balance of the committees and then you have to go through conference. And so, it's too early to tell in the scheme of things, but I think based on the performance of the company on our programs, our programs are being well supported on [that] at least from my visits, it was nice walking and talking to people. They are not telling me about problem programs. David Strauss - UBS: Okay. Dave, I got to ask you one on pension. You talked about your year-to-date return tracking pretty close to your assumed rate of return but how are you thinking about basically pulling in the loss from last year where your performance was well below, your assumed rate of return. Any thought on how big of a negative impact that's going to be as we think about what pension expense could look like in 2010?

In 2010? Yeah. Let me try to characterize this briefly. There's a lot of variable that go into this and like I just said, through June the plans did outperform the market with a gain of about 6% and this is important. The yields in the current corporate bond market which is the basis for the pension discount rate, slightly higher than where they were at year end, and given the volatility of both these assumptions which impact both the funded position status at year end and the expense going forward, it's really impossible to predict. And I know you realized this during Q3. We have done this in the past. Historically we also finalized our actuarial results for the current year using the most recent senses and actuarial data. The update could also potentially impact our 2010 pension expense estimates. So given all of this, we'll provide guidance on 2010 pension expense on the Q3 call based on our latest estimate at that point in time and we'll give a range of potential outcomes and we'll also talk somewhat to the expected funded status at year end. But to get out in front of this as Bill likes to say, you are getting out over your tips. David Strauss - UBS: Okay. Thanks. I thought I'd give it a shot.

I know you did.

Lauren I think we are all ready for the next caller.

Your next question comes from the line of [Noah Popanack] with Goldman Sachs. Noah Poponak - Goldman Sachs: The balance sheet is obviously in very good shape and will be in even better shape after you throw out this big cash number in the fourth quarter, and you bought stock in the first half of the year, but you've put up bigger numbers before. I mean you are a little below the pace of last year when the stock was a lot higher. Can we read that to say you are looking at increased M&A opportunities and if you are what kind of size deals are you looking at and just generally how should we think about capital deployment?

Let me, since you asked about M&A. I would like to put it in perspective. For us M&A focus is really selectively to enhance our core business and to help us grow in key defined growth markets. We always like to protect and grow our existing core markets whether it's Sensing, Effects, C3I or Mission Support. The other is we like to leverage our domain knowledge in these areas to develop new and exciting and expanding opportunities in Homeland Security and IO and IA and I should have mentioned that if you look at Homeland Security, we expect bookings this year of about $1 billion plus in that. That'll be a doubling over last year and we expect sales to be in the $900 million to $1 billion range, by the time we finish up the year. So that's a good growth market for us and has been showing that. Clearly for us IO/IA is a marketplace that's starting to take off here and we want to make sure we continue to develop Mission Support and a strong emphasis on services and planning and training capabilities, and then as we've always talked about international is a key part of our business where we've demonstrated results. So for us that's where it would be. Nothing is changed. Always like to articulate it so that people know where we are coming from and that we are predictable and what we say we are going to do through our performance. Noah Poponak - Goldman Sachs: I'm sure you are looking at a lot of different things, but can you may be give us some color on the likely sizes of deals so we can see? Should we be shocked if we see a $3 billion or $4 billion deal from Raytheon, or are you looking in the couple of hundred million dollar area?

We are looking in the area where we've always looked and I think you could probably define it from a few bucks up to 500 million, probably in that range. Noah Poponak - Goldman Sachs: Okay. And the Technical Services growth has been very, very strong. Can you give us a little more color on the drivers there and then additionally a little more color on why expected to slow down so dramatically in the second half of the year?

Well they have been on a real terror as far as growth. So, part of it is the wins that we had and Warfighter FOCUS. We have the ability to deliver education and training and battlefield conditions and virtual, live and constructive training for the army and they are doing a good job on that end of the business. ATCOTS, is where we are doing all the training for the air traffic controllers across the U.S., that’s taking off now. And so, what we've seen is that ramp up and that rate of increase or what I'll call the delta increase over time, that vector is not as steep going forward as it's been here in the beginning. Clearly, for us we think we have a strong niche, and a capability in delivering training. It's a strength we've learned it on the commercial side, we actually do training for automobile industries and others and when you do work for them, you learn to be really efficient and still make money, and we've been able to take the delivery of that education and training and really adapt it to what I'll call as military training and it's a good market for us and we do it well.

Let me just add one thing too that on the Warfighter program. You will just recall that in the back end of Q2 of 2008 is where the program began to ramp up. So, on a comparable basis, second half '09 versus second half '08 you won't see that rate of growth, because it's not really comparable given the cadence of the Warfighter program. Noah Poponak - Goldman Sachs: Very helpful. Thank you.

Lauren I think we have time for one more question please.

Your last question comes from the line of Joseph Nadal with JPMorgan. Joseph Nadal - JPMorgan: Thanks good morning. Bill just wondering on international as we look at foreign direct versus [FMS] you've been talking about a shift more towards FMS. I am just wondering what you are seeing in that regard with all these bookings this year and what you are seeing the administration on this particular topic?

Yeah, we are seeing a mix of about 57% direct and about 43% FMS to be exact, and so not a lot of change here. It's really country dependent. If a country wants direct, we are able to go direct. If they want FMS, we are able to go FMS. So for us we're comfortable on both sides. We really want to go with the way the country that's buying does it. Have not seen a shift or a push to make it go one way or another out of the administration. Joseph Nadal - JPMorgan: So you had talked before about perhaps a bit of margin pressure on international as a category, and are you seeing that or I mean I guess it doesn't really play into it.

No, it doesn't play into it. There is always pressure. I mean it's a way of life. Our job is to make sure we get what we think it takes to perform the job and then once we get it, figure out how we do it better, faster, less expensive with less risk in a shorter period of time and if we do it that way we get our margins and maybe a little extra through performance. Joseph Nadal - JPMorgan: Okay. Just the second question on borders, you had them from a lower volume on e-Borders in the quarter and of course the Saudi program unfortunately went the other way to a competitor, but you talked about in your comments about some big opportunities out there and the classified realm I guess. Just wondering if you could characterize the borders business for you, how big is it and I guess what's going on right now with all these moving parts?

One on the Saudi thing I think we talked about that a few quarters ago, so, and it was never in our numbers. So that's the part of it. They went with a different solution. I would say it wasn't the high tech solution. We are not in the fences and [cortina] wire and berms and bunkers and stuff. That's not our strength. That's more of the construction side. And so they chose a different way, and they chose it at a time when basically they wanted to maintain their financial structure in the best way. So they went with a different solution. For us, we expect to get work there. We've been there a long time, and there are great customer. So you learn from every deal. But clearly for us there were other countries that are concerned about border surveillance and we come at it in different ways. We can put together a whole command and control structure or we can take King Air 350's and put sensors on them and fly them around their borders or we can put systems like (inaudible) around coast lines to be able to monitor traffic or you can put in (inaudible) which is a long range radar looking over the horizon to look for boat traffic. So it's a back to a point I made earlier. Our tool kit is loaded with different ways to go at the problem and so we are not wedded to one solution. It's really for one particular country. Taiwan; we provide them with SRP which is a long range radar, sits on top of a hill to look for long distances of what might be coming. So from our standpoint there is not one simple answer. It's just that if people want border security and they want it on the surface or they want it in the air or they want it in different ways, we can provide it for them. Joseph Nadal - JPMorgan: Okay. Thank you.

Okay.

Okay. Thank you Bill. I'd like to close by thanking everyone for joining us this morning. We appreciate your interest learning more about our company, our recent performance and our outlook and we look forward to speaking with you again on our third quarter conference call in October. Lauren.

And thank you for your participation in today's conference. This concludes the presentation. And you may now disconnect good day.