<PAGE>
 
                      SECURITIES AND EXCHANGE COMMISSION

                             Washington, D.C. 20549

                                   FORM 10-K

                                        
(X)  ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
     ACT OF 1934

                  For the fiscal year ended December 31, 1997
                                       or
( )  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
     EXCHANGE ACT OF 1934
     For the transition period from                  Commission file number
          to                                                 1-3229

                          NORTHROP GRUMMAN CORPORATION
             (Exact name of registrant as specified in its charter)

       DELAWARE                                                 95-1055798
(State or other jurisdiction of                             (I.R.S. Employer
incorporation or organization)                             Identification No.)

  1840 Century Park East
  Los Angeles, California                                         90067
(Address of principal executive offices)                        (Zip Code)

       Registrant's telephone number, including area code (310) 553-6262
          Securities registered pursuant to Section 12(b) of the Act:

                                                       Name of each exchange
     Title of each class                                on which registered
     -------------------                             ------------------------
   Common Stock, $1 par value                        New York Stock Exchange
                                                      Pacific Stock Exchange

          Securities Registered pursuant to Section 12(g) of the Act:
                                        
                                     None
                                     ----

Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or such shorter period that the Registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.

          Yes  X                                           No 
              ---                                             ---  

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not  contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]

As of February 25, 1998, 67,448,258 shares of Common Stock were outstanding, and
the aggregate market value of the Common Stock (based upon the closing price of
the stock on the New York Stock Exchange) of the Registrant held by
nonaffiliates was approximately $9,017 million.

                      DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Proxy Statement for the 1998 Annual Meeting of Stockholders.

Part III

                                       1

<PAGE>
 
NORTHROP GRUMMAN CORPORATION


                                     PART I
                                        

ITEM 1.  BUSINESS

     Northrop Corporation was incorporated in Delaware in 1985.  Effective May
18, 1994, Northrop Corporation was renamed Northrop Grumman Corporation.
Northrop Grumman is an advanced technology company operating in the aircraft,
electronics, and information technology and services industry segments of the
broadly defined aerospace industry.  The aircraft segment includes the design,
development and manufacturing of aircraft and aircraft subassemblies. The
electronics segment includes the design, development, manufacturing and
integration of electronic systems and components for military and commercial
use.  The information technology and services segment includes the design,
development, operation and support of computer systems for scientific and
management information.

     Additional information required by this Item is contained in Part II, Item
7 of this Annual Report on Form 10-K.

                                       2

<PAGE>
 
NORTHROP GRUMMAN CORPORATION


I
tem 2.  Properties

     The major locations, general status of the company's interest in the
property and identity of the industry segments that use the property described,
are indicated in the following table.


<TABLE>
<CAPTION>
          Location                                                          Property Interest
          --------                                                          -----------------
    <S>                                                                     <C>
      Albuquerque, New Mexico (3) (a)......................................            Leased
      Annapolis, Maryland (2) (b) (e)......................................             Owned
      Arlington, Virginia (2) (3) (4) (a) (c)..............................            Leased
      Auburn, Washington (1) (c)...........................................            Leased
      Baltimore, Maryland (2) (a) (c)......................................            Leased
      Benton, Pennsylvania (2) (b).........................................            Leased
    * Bethpage, New York  (1) (2) (3) (4) (a) (c) (d) (e)..................     Owned, Leased
      Bohemia, New York (3) (a)............................................             Owned
      Bremerton, Washington (2) (d)........................................            Leased
      Bridgeport, West Virginia (2) (a) (b)................................     Owned, Leased
      Burlington, Canada (2) (a) (b) (d)...................................             Owned
      Calverton, New York (4) (e)..........................................             Owned
      Carson, California (1) (c)...........................................            Leased
      Chandler, Arizona (1) (a) (b)........................................             Owned
      Cincinnati, Ohio (2) (a) (b).........................................            Leased
      Cleveland, Ohio (2) (a) (b)..........................................             Owned
      College Station, Texas (a) (2) (b)...................................             Owned
      Colorado Springs, Colorado (3) (a)...................................            Leased
      Compton, California (1) (b) (c)......................................     Owned, Leased
      Dahlgren, Virginia (3) (a)...........................................            Leased
      El Segundo, California (1) (a) (b) (c) (d) (e).......................             Owned
      Elk Grove Village, Illinois (2) (c)..................................            Leased
      Fairfax, Virginia (3) (a)............................................            Leased
      Falls Church, Virginia (3) (a).......................................            Leased
      Fort Tejon, California (1) (d).......................................     Owned, Leased
      Glen Burnie, Maryland (2) (a)........................................             Owned
      Grand Prairie, Texas (1) (a) (b) (c) (d).............................     Owned, Leased
      Great River, New York (2) (a) (b)....................................             Owned
      Hanover, Maryland (2) (3) (a) (d)....................................            Leased
      Hawthorne, California (1) (2) (3)(4) (a) (b) (c) (d) (e).............     Owned, Leased
      Herndon, Virginia (3) (a)............................................            Leased
    * Hicksville, New York  (2) (e)........................................     Owned, Leased
      Houston, Texas (3) (a)...............................................            Leased
      Hunt Valley, Maryland (2) (a) (b) (c) (d)............................     Owned, Leased
      Huntsville, Alabama (2) (a) (b) (d)..................................            Leased
      Kent, Washington (1) (c).............................................            Leased
      Knoxville, Tennessee (2) (a).........................................            Leased
</TABLE>


                                       3

<PAGE>
 
NORTHROP GRUMMAN CORPORATION


<TABLE>
<CAPTION>
      <S>                                                                       <C> 
      Lake Charles, Louisiana (1) (a) (b) (c)..............................            Leased
      Lexington, South Carolina (2) (c)....................................             Owned
      Linthicum, Maryland (2) (a) (b) (c) (d)..............................     Owned, Leased
      Los Angeles, California (1) (2) (3) (4) (a)..........................            Leased
      Melbourne, Florida (2) (a) (b) (c) (d) (e)...........................     Owned, Leased
      Melville, New York (2) (a) (b) (d)...................................            Leased
      Middleton, Rhode Island (3) (a)......................................     Owned, Leased
      Milledgeville, Georgia (1) (b) (c) (d) (e)...........................     Owned, Leased
      Mojave, California (1) (e)...........................................     Owned, Leased
      New Town, North Dakota (1) (b) (c)...................................     Owned, Leased
      Newbury Park, California  (4) (a) (b) (c) (d)........................             Owned
      Norwalk, Connecticut (2) (a) (b) (c) (d).............................            Leased
      Norwood, Massachusetts (4) (a) (b)...................................             Owned
      Palmdale, California (1) (a) (b) (c) (d) (e).........................     Owned, Leased
      Perry, Georgia (1) (a) (b) (c) (d)...................................             Owned
      Pico Rivera, California (1) (a) (b) (c) (d)..........................     Owned, Leased
      Pittsburgh, Pennsylvania (2) (a) (d).................................            Leased
      Point Mugu, California (1) (a) (b) (c) (d)...........................     Owned, Leased
      Portsmouth, Rhode Island (4) (b) (e).................................     Owned, Leased
      Reston, Virginia (3) (a).............................................            Leased
      Rolling Meadows, Illinois (2) (a) (b) (c)............................     Owned, Leased
      San Diego, California (1) (3) (a) (b) (c)............................     Owned, Leased
      San Pedro, California (3) (a)........................................     Owned, Leased
      Santa Isabel, Puerto Rico (2) (a) (b) (c) (d)........................            Leased
      St. Augustine, Florida (1) (a) (b) (c) (d)...........................     Owned, Leased
      Stuart, Florida (1) (a) (b) (c)......................................            Leased
      Sunnyvale, California (2) (a) (b) (c) (d)............................     Owned, Leased
      Sykesville, Maryland (2) (b).........................................             Owned
      Torrance, California (1) (b) (c).....................................     Owned, Leased
      Warner Robins, Georgia (2) (a).......................................     Owned, Leased
      Warren, Michigan (4) (b).............................................            Leased
</TABLE>



__________
* Certain portions of the properties at each of these locations are leased or
  subleased to others.  The company believes that in the aggregate the property
  covered by such leases or subleased to others is not material compared to the
  property actually utilized by the company in its business.

                                       4

<PAGE>
 
NORTHROP GRUMMAN CORPORATION

Following each described property are numbers indicating the industry segments
utilizing the property:

         (1)  Aircraft
         (2)  Electronics
         (3)  Information Technology and Services
         (4)  General Corporate Asset

Following each described property are letters indicating the types of facilities
located at each location:

         (a)  office
         (b)  manufacturing
         (c)  warehouse
         (d)  research and testing
         (e)  other

     Government-owned facilities used or administered by the company consist of
9 million square feet at various locations across the United States.

     The company believes its properties are well-maintained and in good
operating condition.  Under present business conditions and the company's volume
of business, productive capacity is currently in excess of requirements.

                                       5

<PAGE>
 
NORTHROP GRUMMAN CORPORATION


Item 3.  Legal Proceedings

WALSH, ET AL. V. NORTHROP GRUMMAN CORPORATION
- ---------------------------------------------

     In November 1994, a class action complaint was filed against Northrop
Grumman Corporation, Grumman Corporation, and four named individuals in the U.S.
District Court for the Eastern District of New York, Case No. CV 94-5105
(Platt C.J.). A first amended complaint was filed on November 29, 1994 alleging
that Grumman Corporation's March 8 and April 4, 1994 Form 14D-9 filings with the
Securities and Exchange Commission incorporated a statement concerning the
Grumman Severance Plan which violated Sections 10(b) and 14(e) of the Securities
and Exchange Act of 1934, as amended (the "Act") and Rule 10b-5 of the Rules and
Regulations under the Act. The complaint also contains a cause of action for
equitable estoppel based upon the same statement and plaintiffs' alleged
reliance thereon.  The complaint also alleges that the trustees of Grumman's
Employee Investment Plan ("EIP") violated their fiduciary obligations by voting
the EIP's shares in favor of the merger of Grumman Corporation and
Northrop Corporation (the "Acquisition") without consulting the class members.
The complaint seeks an order enjoining the defendants from amending or
discontinuing the Grumman Severance Plan for a period of thirty (30) months
from the date of the Acquisition and an order mandating that defendants permit
class members who have accepted voluntary termination with severance pay to
rescind their elections. On December 8, 1994, the court denied plaintiffs'
application for a preliminary injunction but declined to dismiss the action.
On April 7, 1995, the court granted plaintiffs' motion to amend their complaint
to add a claim for damages based on post Acquisition changes to Grumman benefit
plans. In July 1995, the court certified a class of plaintiffs consisting of all
employees who, at the time of the tender offer, were Grumman employees, owned
Grumman stock either directly or beneficially through the EIP, and were injured
as a result of defendants' conduct. The liability trial of this matter began in
late 1997 and concluded in 1998. A decision is expected in the second quarter of
1998. If liability is found, the matter will proceed to a remedy phase.  The
company intends to vigorously defend this litigation and does not expect
this matter to have a material adverse effect on its financial condition.

U.S. EX REL JORDAN V. NORTHROP GRUMMAN CORPORATION
- --------------------------------------------------

     In January 1998, the company was served with an amended complaint that was
filed by the government in the U.S. District Court for the Central District
of California. The complaint alleges that the company violated the False Claims
Act by knowingly supplying BQM-74C aerial target drones that contained various
defective components between 1992 and 1995. The government seeks to recover
unspecified damages under theories of fraud, payment by mistake, unjust
enrichment, breach of warranty and breach of contract.  The company intends
to vigorously defend this matter.

U.S. v. Lockheed Martin Corporation and Northrop Grumman Corporation
- --------------------------------------------------------------------
     On March 23, 1998, the United States, acting through the Department of
Justice, filed a civil action in the United States District Court for the
District of Columbia against Lockheed Martin and the company requesting
that the acquisition of the company by Lockheed Martin be adjudged to
violate Section 7 of the Clayton Act and that Lockheed Martin and the
company be permanently enjoined and restrained from carrying out the
Agreement and Plan of Merger dated July 2, 1997, or from entering into
or carrying out any agreement, understanding or plan, the effect of
which would be to combine the business or assets of Lockheed
Martin and the company.  The United States is also seeking
costs of the action.

General
- -------
The company, as a government contractor, is from time to time
subject to U.S. Government investigations relating to its operations.
Government contractors that are found to have violated the False Claims
Act, or are indicted or convicted for violations of other Federal laws,
or are considered not to be responsible contractors may be suspended or
debarred from government contracting for some period of time.  Such
convictions could also result in fines.  Given the company's dependence
on government contracting, suspension or debarment could have a material
adverse effect on the company.  The company is involved in certain other
legal proceedings arising in the ordinary course of business, none of which
the company's management believes will have a material adverse effect on the
company's financial condition.






                                       6

<PAGE>
 
NORTHROP GRUMMAN CORPORATION

Executive Officers of the Registrant

     The following individuals were the elected officers of the company as of
March 1998:


<TABLE>
<CAPTION>

                                                                                             Business Experience
Name                         Age             Office Held                  Since                Last Five Years
- ----                        ----             -----------                  -----              -------------------
<S>                          <C>       <C>                                 <C>           <C>
Kent Kresa                   60        Chairman, President & CEO           1990

Herbert W. Anderson          58        Corporate Vice President and        1995          Vice President and Deputy General
                                       General Manager,                                  Manager, Data Systems and Services
                                       Data Systems & Services Division                  Division; Prior to 1994, Vice
                                                                                         President and Center General
                                                                                         Manager, Northrop Information
                                                                                         Services Center

Ralph D. Crosby, Jr.         50        Corporate Vice President and        1996          Corporate Vice President and Deputy
                                       General Manager, Commercial                       General Manager, Commercial Aircraft
                                       Aircraft Division                                 Division; Prior to March 1996,
                                                                                         Corporate Vice President and Deputy
                                                                                         General Manager, Military Aircraft
                                                                                         Systems Division; Prior to January
                                                                                         1996 Corporate Vice President and
                                                                                         General Manager, B-2 Division; Prior
                                                                                         to 1994, Vice President Business and
                                                                                         Advanced Systems Development at the
                                                                                         B-2 Division

Marvin Elkin                 61        Corporate Vice President and        1996          Corporate Vice President and Chief
                                       Chief Human Resources,                            Human Resources and Administrative
                                       Communications and                                Officer; Prior to 1994, Corporate
                                       Administrative Officer                            Vice President Administration and
                                                                                         Services

Nelson F. Gibbs              60        Corporate Vice President and        1991
                                       Controller

John E. Harrison             62        Corporate Vice President and        1994          Senior Vice President and General
                                       General Manager,                                  Manager, Electronics Programs,
                                       Electronics and Systems                           Aerospace and Electronics Group,
                                       Integration Division                              Grumman Corporation

Robert W. Helm               46        Corporate Vice President,           1994          Vice President, Legislative Affairs
                                       Government Relations
</TABLE>


                                       7

<PAGE>
 
NORTHROP GRUMMAN CORPORATION


<TABLE>
<CAPTION>
                                                                                             Business Experience
Name                            Age              Office Held                 Since             Last Five Years
- ----                            ---              -----------                 -----           -------------------
<S>                             <C>     <C>                                  <C>         <C>
James C. Johnson                45      Corporate Vice President and         1996        Corporate Vice President and
                                        Secretary and Assistant General                  Secretary; Prior to 1995, Senior
                                        Counsel                                          Corporate Counsel

Charles L. Jones, Jr.           56      Corporate Vice President and         1996        Corporate Vice President, Quality
                                        Chief Strategic Planning                         Operations
                                        Advanced Development and
                                        Programs Officer

William H. Lawler               57      Corporate Vice President and         1997        Vice President and Deputy General
                                        General Manager, Military                        Manager, Military Aircraft Systems
                                        Aircraft Systems Division                        Division; Prior to 1996, Vice
                                                                                         President and Deputy General
                                                                                         Manager, B-2 Division; Prior to
                                                                                         1995, Vice President and B-2 Program
                                                                                         Manager; Prior to June 1994, Vice
                                                                                         President, Business and Advanced
                                                                                         Systems Development, B-2 Division;
                                                                                         Prior to 1994, Vice President and
                                                                                         Deputy Chief Engineer, Business and
                                                                                         Advanced Systems Development, B-2
                                                                                         Division

Richard R. Molleur              65      Corporate Vice President and         1991
                                        General Counsel

Albert F. Myers                 52      Corporate Vice President and         1994        Vice President, Business Strategy
                                        Treasurer

James G. Roche                  58      Corporate Vice President and         1996        Corporate Vice President and Chief
                                        General Manager, Electronic                      Advanced Development, Planning, and
                                        Sensors and Systems Division                     Public Affairs Officer; Prior to
                                                                                         1993, Corporate Vice President
                                                                                         Advanced Development and Planning
                                                                                         Officer

Richard B. Waugh, Jr.           54      Corporate Vice President and         1993
                                        Chief Financial Officer
</TABLE>


                                       8

<PAGE>
 
NORTHROP GRUMMAN CORPORATION


ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

         A special meeting of stockholders of Northrop Grumman was held on
February 26, 1998, to approve the proposed merger with Lockheed Martin
Corporation. The results of the vote are as follows:


<TABLE>
                    <S>                    <C> 
                    Votes for              53,063,873
                    Votes against           1,035,488
                    Shares abstaining         171,003
</TABLE>



                                    PART II
                                        

ITEM 5.  MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
    
         The information required by this Item is contained in Part II, Item 8
of this Annual Report on Form 10-K.



ITEM 6.  SELECTED FINANCIAL DATA

         The information required by this Item is contained in Part II, Item 7
of this Annual Report on Form 10-K.

                                       9

<PAGE>
 
NORTHROP GRUMMAN CORPORATION


ITEM 7.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE COMPANY'S
         FINANCIAL CONDITION AND RESULTS OF OPERATIONS

BUSINESS CONDITIONS

Northrop Grumman's three industry segments-aircraft, electronics, and
information technology and services-are each a factor in the broadly defined
aerospace industry.  While Northrop Grumman is subject to the usual vagaries of
the marketplace, it is also affected by the unique characteristics of the
aerospace industry and by certain elements peculiar to its own business mix.

     Northrop Grumman is one of the major companies that competes in both the
defense and commercial segments of the aerospace business.  It is common in the
aerospace industry for work on major programs to be shared between a number of
companies.  A company competing to be a prime contractor can turn out to be a
subcontractor.  It is not uncommon to compete with customers, and simultaneously
to be both a supplier to and customer of a given competitor.  Over the past
several years the aerospace industry has been going through a consolidation
process and, along with it, significant downsizing.  These actions, in which
Northrop Grumman has participated, have made competition even more intense than
in the past.  The nature of major aerospace programs, conducted under binding
contracts, allows companies that perform well to benefit from a level of program
continuity unknown in many industries.  Lockheed Martin Corporation, The Boeing
Company, and Raytheon Company are the largest companies in the aerospace
industry at this time.  Northrop Grumman competes against these and other
companies for a number of large and smaller programs.  Intense competition and
long operating cycles are both characteristics of the industry's-and Northrop
Grumman's-business.

     The collapse of communism and the subsequent reductions in the U.S. defense
budget have fundamentally altered the landscape of the global aerospace and
defense industry.  Consolidation has become the logical response by the
industry, with nearly $100 billion in U.S. mergers and acquisitions since 1990.
Some thirty companies/subsidiaries that existed in the early 1990s have been
combined-or are in the process of combining-into just three large companies.

     The current composition of Northrop Grumman resulted from a series of
strategic acquisitions by the former Northrop Corporation beginning in 1992,
when the company acquired a 49 percent interest in the Vought Aircraft Company,
a designer and builder of commercial and military aerostructures.  In the second
quarter of 1994, the company purchased the outstanding common stock of Grumman
Corporation for $2.1 billion.

                                       10

<PAGE>
 
NORTHROP GRUMMAN CORPORATION

     Northrop Corporation was renamed Northrop Grumman Corporation on May 18,
1994.  The new company purchased the remaining 51 percent interest in Vought
Aircraft for $130 million in August 1994.  In the first quarter of 1996,
Northrop Grumman acquired the defense electronic systems group (ESG) of
Westinghouse Electric Corporation for $2.9 billion.  This business is being
operated as a component of the electronics industry segment.

     Effective August 1, 1997, the company consummated its merger with Logicon,
Inc. (Logicon), a leading  defense information technology company.  The merger
was accounted for as a pooling of interests.  Accordingly, the accompanying
financial statements have been retroactively restated for the merger with
Logicon.  The results of Logicon are included in the information technology and
services industry segment along with similar Northrop Grumman business which
previously had been classified in the aircraft and electronics industry
segments.   Logicon  had previously acquired two defense information technology
and services companies:  Geodynamics Corporation (Geodynamics) in March 1996 for
$32 million and Syscon Corporation (Syscon) in February 1995 for $45 million.

     On July 3, 1997, the company announced that it had entered into a
definitive agreement with Lockheed Martin Corporation to combine
the companies.  Under the terms of the agreement, 1.1923 shares of
Lockheed Martin common stock would be exchanged for each share of
Northrop Grumman common stock.  On February 26, 1998, shareholders
of Northrop Grumman approved the merger.  On March 23, 1998, the United
States, acting through the Department of Justice, filed a civil action
in the United States District Court for the District of Columbia against
Lockheed Martin and the company requesting that the acquisition of the
company by Lockheed Martin be adjudged to violate Section 7 of the Clayton Act
and that Lockheed Martin and the company be permanently enjoined and restrained
from carrying out the Agreement and Plan of Merger dated July 2, 1997, or from
entering into or carrying out any agreement, understanding or plan, the
effect of which would be to combine the business or assets of Lockheed Martin
and the company.  The United States is also seeking costs of the action.  The
outcome of this lawsuit cannot be predicted at this time.

           The company will record a charge of $180 million in the first
quarter of 1998 for costs related to the proposed combination.   The
charge will cover vesting of restricted stock which became issuable
following shareholder approval of the merger and other costs associated
with the pending combination, such as investment banking fees, legal and
accounting fees, and costs related to responding to the Government's request for
information.

     The B-2 bomber, for which the company is the prime contractor, is Northrop
Grumman's largest program and is reported under the aircraft segment.  In
November 1997, the company delivered to the U.S. Air Force the last B-2
currently on order.  At its Palmdale, California facility, the company continues
to perform modifications to early Block 10 and Block 20 aircraft to bring them
to the fully operational Block 30 configuration.  The U.S. Air Force currently
plans to operate two B-2 bomber squadrons of eight aircraft each with an
additional five aircraft available to fill in for those in depot for periodic
maintenance.

                                       11

<PAGE>
 
NORTHROP GRUMMAN CORPORATION

     The company manufactures portions of the Boeing 737, 747, 757, 767 and 777
jetliners, the Gulfstream IV and V business jets, and the Boeing C-17 military
transport.  Northrop Grumman has been a principal airframe subcontractor for the
Boeing 747 jetliner since the program began in 1966, producing the fuselage and
aft body section for the 747 as well as cargo and passenger doors, the vertical
and horizontal body stabilizers, floor beams and smaller structural components.
The majority of the Boeing jetliner work is performed at the aircraft segment's
production sites in Hawthorne, California and Grand Prairie, Texas.

     Northrop Grumman manufactures engine nacelles for the Gulfstream IV and
other business jets and produces the integrated wings for Gulfstream's newest
business jet, the Gulfstream V.  The company also produces the empennage, engine
nacelles, and control surfaces for the C-17, the U.S. Air Force's most advanced
airlifter.  The work performed on the C-17, Gulfstream IV and V, 757, 767, 777
and some components of the 747 were added as a result of the Grumman and Vought
acquisitions.

     The company also is the principal subcontractor to The Boeing Company on
the F/A-18 program.  The F/A-18 is a fighter/ground-attack aircraft with
configurations equipped for either one or two crew members.  Principally
deployed by the U.S. Navy on aircraft carriers, it also has been purchased by
several other nations as a land-based combat aircraft.  The company builds
approximately 40 percent of the aircraft including the center and aft fuselage,
vertical tails, and associated subsystems.  Of the versions of the F/A-18
currently in production, the C is a single-seat combat aircraft that was first
delivered to the U.S. Navy in 1987 and the D is a two-seat version principally
used for training.  The F/A-18 single-seat E and two-seat F are enhanced
versions currently in the low rate initial production phase and will serve as
the U.S. Navy's next-generation multimission aircraft.

     The company serves as prime contractor for the E-8 Joint Surveillance
Target Attack Radar System (Joint STARS), which is included in the electronics
segment.  Joint STARS detects, locates, classifies, tracks and targets
potentially hostile ground movement in all weather conditions.  It is designed
to operate around the clock in constant communication through secure data links
with Air Force command posts, Army mobile ground stations or centers of military
analysis far from the point of conflict.  The Joint STARS platform is a
remanufactured Boeing 707-300 airframe.  The 707 is remanufactured at Northrop
Grumman's Lake Charles, Louisiana site.  Final installation of electronics and
testing are performed at the electronics segment integration and test facility
in Melbourne, Florida.

     Northrop Grumman also is a major producer of airborne early warning and
control systems, including the all-weather E-2C Hawkeye aircraft.  The E-2C,
reported under the company's electronics segment, has been in active service
with the U.S. Navy since 1973 and is employed by the air forces of five other
nations.

                                       12

<PAGE>
 
NORTHROP GRUMMAN CORPORATION

     The company's electronics segment also is a major producer of airborne
radar systems.  Included in this business area are the AN/APG-66 and AN/APG-68
fire control radars for the F-16 aircraft, of which more than six thousand have
been produced since 1976.  The AN/APG-66 is presently on 16 airborne platforms
and is deployed in 20 countries.  Northrop Grumman currently is leading a joint
venture with Raytheon to develop the AN/APG-77 radar for the F-22 aircraft.  The
AN/APG-77 is designed for air-superiority and strike operations and features a
low observable, active aperture, electronically-scanned array with multi-target,
all-weather capability.  The company's electronics segment also produces the
AN/APY-1/2 surveillance radar system which provides air-to-air surveillance
capability for the E-3 Airborne Warning And Control System (AWACS).  AWACS is
designed to detect and track both enemy and friendly aircraft throughout a large
volume of airspace.

     The company is a leader in producing marine machinery and advanced
propulsion systems,  missile launchers, shipboard instrumentation and control
systems, mine countermeasures and undersea vehicles.  Every Nimitz-class
aircraft carrier is fitted with eight turbine generator sets that are produced
at the electronics segment Sunnyvale, California site.  Each shipset of these
powerful generators develops enough power to supply a city of 75,000 people.
The company also produces the main propulsion system for the Navy's Seawolf-
class attack submarines.

     ECM denotes electronic countermeasures equipment manufactured by the
company's electronics segment.  The company's Rolling Meadows, Illinois site
produces the AN/ALQ-135, an internally mounted radar jammer deployed on F-15
fighter aircraft as part of that aircraft's tactical electronic warfare system.
The AN/ALQ-162 Shadowbox, a jammer built specifically to counter continuous
wave radars, has been installed on the AV-8B and certain foreign F/A-18
aircraft.  It also is being deployed on U.S. Army helicopters and special
mission aircraft and has been sold to the air forces of three other nations.
The company is also under contract to develop and produce a directional infrared
countermeasures (DIRCM) system for the United Kingdom and the U.S. Special
Operations Command slated for use on British helicopters, transports, and U.S.
Special Operations Command C-130 transports to reduce vulnerability to
heatseeking missiles.  DIRCM is designed to provide high-powered jamming to
counter more advanced seekers expected in the twenty-first century.  The
company's Linthicum, Maryland site produces the Airborne Self-Protection Jammer
(ASPJ) in a joint venture with ITT-Avionics.  The ASPJ is an internally mounted
system that protects tactical aircraft against numerous radar-guided threats.
It currently is installed on selected F/A-18 and F-14 aircraft.

     Northrop Grumman, as prime contractor to the U.S. Army, is developing a
"brilliant" anti-armor submunition, designated as BAT, with production scheduled
to commence in 1998.  BAT is a three-foot-long, forty-four pound, wide-area-
attack submunition that will be used to disable and destroy armored vehicles and
trucks.  BATs are meant to be carried and dispensed by a larger missile and are
designed to be ejected over an armored vehicle column or attacking formation.
Each BAT has an acoustic sensor that can home in on the noise

                                       13

<PAGE>
 
NORTHROP GRUMMAN CORPORATION

created by a tank's or truck's engine and an infrared sensor that can home in on
the heat generated by a vehicle's engine.

     In addition, the company produces air defense and air traffic control radar
systems for airspace management for domestic and international customers.  The
three-dimensional AN/TPS-70/75 radars and predecessor AN/TPS-43 are among the
products in this business area.  They have been the U.S. Air Force air defense
system standard since 1968.  These systems currently operate in more than 30
countries, supporting air defense, air sovereignty, air traffic control and
counternarcotics needs. The ASR-12, a solid-state, next generation derivative of
the company's ASR-9 Terminal Radar, is designed to detect and display aircraft
and weather simultaneously, helping air traffic controllers guide aircraft
through the crowded skies surrounding airports.

     Northrop Grumman designs, develops, operates and supports computer systems
for scientific and management information.  This business is included in the
information technology and services segment. Services provided include systems
integration, systems service, information conversion, and training for federal,
state and local governments and private industry.  The company also provides
military base support functions and aircraft maintenance at a number of U.S.
Government facilities.  Logicon, included in the information technology and
services segment, provides advanced technology systems and services to support
national security, civil and industrial needs in the following areas:  command,
control, communications and intelligence; information systems development and
support; mission planning and battle management; training and simulation; and
science and technology.  Contracts with the U.S. Government account for most of
Logicon's revenues.

     Tables of contract acquisitions, net sales and funded order backlog follow
and complement industry segment data.  B-2, Boeing Jetliners (the 737, 747, 757,
767 and 777), F/A-18, and C-17 are currently the major programs of the aircraft
industry segment.  Surveillance Aircraft (the E-2C Hawkeye and E-8 Joint STARS),
Airborne Radar, Marine, ECM, Space and Airspace Management are the major
programs of the electronics industry segment.

     In the following table of industry segment and major customer data, revenue
from the United States Government includes revenue from contracts on which
Northrop Grumman is the prime contractor as well as those on which the company
is a subcontractor and the ultimate customer is the U.S. Government.

                                       14

<PAGE>
 
NORTHROP GRUMMAN CORPORATION


RESULTS OF OPERATIONS BY INDUSTRY SEGMENT AND MAJOR CUSTOMER


<TABLE>
<CAPTION>
Year ended December 31, $ in millions                               1997       1996       1995
- --------------------------------------------------------------------------------------------------
<S>                                                                <C>         <C>         <C>
Revenue
Aircraft
    United States Government                                       $2,779      $3,060      $3,556
    Other customers                                                 1,313         798         835
    Intersegment sales                                                313         254         187
- --------------------------------------------------------------------------------------------------
                                                                    4,405       4,112       4,578
- --------------------------------------------------------------------------------------------------
Electronics
    United States Government                                        3,547       3,336       1,831
    Other customers                                                   512         508         228
    Intersegment sales                                                 42          39         103
- --------------------------------------------------------------------------------------------------
                                                                    4,101       3,883       2,162
- --------------------------------------------------------------------------------------------------
Information Technology and Services
    United States Government                                          884         828         761
    Other customers                                                   118          77          61
    Intersegment sales                                                 20           5           1
- --------------------------------------------------------------------------------------------------
                                                                    1,022         910         823
- --------------------------------------------------------------------------------------------------
Intersegment eliminations                                            (375)       (298)       (291)
- --------------------------------------------------------------------------------------------------
Total revenue                                                      $9,153      $8,607      $7,272
==================================================================================================

Operating Profit
    Aircraft                                                       $  654      $  499      $  465
    Electronics                                                       309         360         197
    Information Technology and Services                                95          49          58
- --------------------------------------------------------------------------------------------------
    Total operating profit                                          1,058         908         720
    Adjustments to reconcile operating profit to operating margin:
    Other income included above                                        (6)        (17)
    State and local income taxes                                       (6)        (52)        (39)
    General corporate expenses                                       (127)       (123)       (109)
    Mark-to-market restricted stock rights                            (39)        (13)
- --------------------------------------------------------------------------------------------------
    Operating margin                                               $  880      $  703      $  572
==================================================================================================
</TABLE>


                                       15

<PAGE>
 
NORTHROP GRUMMAN CORPORATION


<TABLE>
<CAPTION>
Year ended December 31, $ in millions                   1997        1996        1995
- --------------------------------------------------------------------------------------   
<S>                                                   <C>         <C>         <C>
Contract Acquisitions
   Aircraft                                           $ 3,041     $ 3,890     $ 1,808
   Electronics                                          4,369       6,228       2,408
   Information Technology and Services                    938         977         836
- --------------------------------------------------------------------------------------    
   Total acquisitions                                 $ 8,348     $11,095     $ 5,052
======================================================================================    

Funded Order Backlog
   Aircraft                                           $ 5,993     $ 7,044     $ 7,012
   Electronics                                          5,422       5,112       2,728
   Information Technology and Services                    447         511         439
- --------------------------------------------------------------------------------------   
   Total backlog                                      $11,862     $12,667     $10,179
======================================================================================    

Identifiable Assets
   Aircraft                                           $ 2,386     $ 2,357     $ 2,481
   Electronics                                          5,451       5,583       1,948
   Information Technology and Services                    559         640         662
- --------------------------------------------------------------------------------------   
   Operating assets                                     8,396       8,580       5,091
   General corporate                                    1,281       1,065         551
- --------------------------------------------------------------------------------------   
   Total assets                                       $ 9,677     $ 9,645     $ 5,642
======================================================================================   

Capital Expenditures
   Aircraft                                           $    93     $    84     $    85
   Electronics                                            126          91          36
   Information Technology and Services                     17          22          16
   General corporate                                        2           1           3
- --------------------------------------------------------------------------------------
   Total expenditures                                 $   238     $   198     $   140
======================================================================================

Depreciation and Amortization
   Aircraft                                           $   126     $   117     $   172
   Electronics                                            255         230          84
   Information Technology and Services                     35          26          33
   General corporate                                        2           2           1
- --------------------------------------------------------------------------------------
   Total depreciation and amortization                $   418     $   375     $   290
======================================================================================   
</TABLE>

     Individual companies prosper in the competitive aerospace/defense
environment according to their ability to develop and market their products.
They also must have the ability to provide the people, facilities, equipment and
financial capacity needed to deliver those products with maximum efficiency.  It
is necessary to maintain, as the company has, sources for raw materials,
fabricated parts, electronic components and major subassemblies.  In this
manufacturing and systems integration environment, effective oversight of
subcontractors and suppliers is as

                                       16

<PAGE>
 
NORTHROP GRUMMAN CORPORATION

vital to success as managing internal operations.  Northrop Grumman's operating
policies are designed to enhance these capabilities.  The company also believes
that it maintains good relations with its employees, approximately 12 percent of
whom are covered by collective bargaining agreements.

     U.S. Government programs in which Northrop Grumman either participates, or
strives to participate, must compete with other programs for consideration
during our nation's budget formulation and appropriation processes.  As a
consequence of the continued pressure to reduce the overall federal budget, the
U.S. defense budget is not expected to increase substantially in the near term.
Budget decisions made in this environment will have long-term consequences for
the size and structure of Northrop Grumman and the entire defense industry.  An
important factor in determining Northrop Grumman's ability to compete
successfully for future contracts will be its cost structure vis-a-vis other
bidders.

     Although the ultimate size of future defense budgets remains uncertain, the
defense needs of the nation are expected to provide substantial research and
development (R&D) funding and other business for the company to pursue well into
the future.

     Northrop Grumman has historically concentrated its efforts in such high
technology areas as stealth, airborne surveillance, battle management, precision
weapons and systems integration.  Even though a high priority has been assigned
by the Department of Defense to the company's major programs, there remains the
possibility that one or more of them may be reduced, stretched or terminated.

     Northrop Grumman, with its involvement on various Boeing jetliners, is
optimistic about the long-term prospects for its commercial aerostructures
business.

     Northrop Grumman pursues new business opportunities when justified by
acceptable financial returns and technological risks.  The company examines
opportunities to acquire or invest in new businesses and technologies to
strengthen its traditional business areas.  Northrop Grumman continues to
capitalize on its technologies and skills by entering into joint ventures,
partnerships or associations with other companies.

                                       17

<PAGE>
 
NORTHROP GRUMMAN CORPORATION

     Northrop Grumman, as well as many other companies in the defense industry,
suffered the effects of the Department of Defense's practice in the 1980s of
structuring high-risk research and development contracts, such as the 
Tri-Service Standoff Attack Missile (TSSAM), as fixed-price or capped 
cost-reimbursement type contracts.  Although Northrop Grumman has stopped
accepting these types of contracts, it has experienced financial losses on TSSAM
and other similar programs acquired under them in the past. In the event of
termination for convenience, contractors are normally protected by provisions
covering reimbursement for costs incurred subsequent to termination. The company
received a termination for convenience notice on the TSSAM program in February
1995. In December 1996, the company filed a lawsuit against the U.S. Government
in the U.S. Court of Federal Claims seeking the recovery of approximately $750
million for uncompensated performance costs, investments, and a reasonable
profit. In prior years, the company had charged to operations in excess of $600
million related to this program. Northrop Grumman is unable to predict whether
it will realize some or all of its claims against the U.S. Government from the
TSSAM contract.

     Prime contracts with various agencies of the U.S. Government and
subcontracts with other prime contractors are subject to a profusion of
procurement regulations, with noncompliance found by any one agency possibly
resulting in fines, penalties, debarment or suspension from receiving additional
contracts with all agencies.  Given the company's dependence on U.S. Government
business, suspension or debarment could have a material adverse affect on the
company's future.  Moreover, these contracts may be terminated at the U.S.
Government's convenience as was done with the TSSAM program.  While Northrop
Grumman conducts most of its business with the U.S. Government, principally the
Department of Defense, commercial sales still represent a significant portion of
total revenue.

     Federal, state and local laws relating to the protection of the environment
affect the company's manufacturing operations.  The company has provided for the
estimated cost to complete remediation where it is probable that the company
will incur such costs in the future, including those for which it has been named
a Potentially Responsible Party (PRP) by the Environmental Protection Agency or
similarly designated by other environmental agencies.  The company has been
designated a PRP under federal Superfund laws at 15 hazardous waste sites and
under state Superfund laws at five sites.  It is difficult to estimate the
timing and ultimate amount of environmental cleanup costs to be incurred in the
future due to the uncertainties regarding the extent of the required cleanup and
the status of the law, regulations and their interpretations.  Nonetheless, to
assess the potential impact on the company's financial statements, management
estimates the total reasonably possible remediation costs that could be incurred
by the company.  Such estimates take into consideration the professional
judgment of the company's environmental engineers and, when necessary,
consultation with outside environmental specialists.  In most instances, only a
range

                                       18

<PAGE>
 
NORTHROP GRUMMAN CORPORATION

of reasonably possible costs can be estimated.  However, in the determination of
accruals the most probable amount is used when determinable and the minimum is
used when no single amount is more probable.  The company records accruals for
environmental cleanup costs in the accounting period in which the company's
responsibility is established and the costs can be reasonably estimated.
Management estimates that at December 31, 1997, the reasonable range of future
costs for environmental remediation, including Superfund sites, is $51 million
to $86 million, of which $61 million has been accrued.  The amount accrued has
not been offset by potential recoveries from insurance carriers or other PRPs.
Should other PRPs not pay their allocable share of remediation costs, the
company may have to incur costs in addition to those already estimated and
accrued.  The company is making the necessary investments to comply with
environmental laws; the amounts, while not insignificant, are not considered
material to the company's financial position,  results of operations, or cash
flows.

     The company has a program to identify, evaluate and implement changes to
computer programs as necessary to address the year 2000 issue.  The issue
affects computer applications which may not properly recognize and process data
for the year 2000 and beyond.  The evaluation and the development of conversion
plans where necessary are being performed in coordination with customers and
suppliers.  Based on information developed to date, management does not
anticipate any significant impact on the company or that future expenditures for
required modifications and conversions will have a material adverse effect on
the company's financial position, results of operations, or cash flows.


MEASURES OF VOLUME

Contract acquisitions tend to fluctuate and are determined by the size and
timing of new and add-on orders.  The effects of multiyear orders and/or funding
can be seen in the highs and lows shown in the following table.  The funded
order backlog of ESG on the date the business was acquired is reflected as
acquisitions in 1996.  The Airborne Radar, Marine, Space and Airspace Management
business areas were added as part of the ESG acquisition.

     B-2 acquisitions in 1996 included $453 million for the upgrade of test
vehicle AV-1 to operational status increasing the program to 21 operational
aircraft.  The balance of B-2 acquisitions in 1996 and acquisitions for 1997 and
1995 include incremental funding for ongoing development work, spares and other
customer support for the operational aircraft program.  The company still stands
to gain future new post production business, such as airframe depot maintenance,
repair of components, operational software changes and product improvement
modifications.  The debate over the future of the B-2 continues.  Without future
production orders the nation's multibillion-dollar investment in the company's
B-2 capability will be disassembled and become retrievable only at a large
additional cost.

                                       19

<PAGE>
 
NORTHROP GRUMMAN CORPORATION


Contract Acquisitions


<TABLE>
<CAPTION>
$ in millions                                          1997         1996        1995
- -------------------------------------------------------------------------------------         
<S>                                                 <C>          <C>         <C>
B-2                                                 $   710      $ 1,682     $   475
Surveillance Aircraft                                 1,216        1,330       1,084
Boeing Jetliners                                        940          737         464
Airborne Radar                                          842        1,639
Marine                                                  577          901
F/A-18                                                  622          759         888
ECM                                                     357          335         592
Space                                                   318          414
Airspace Management                                     388          629
C-17                                                    104          383         208
Information Technology and Services                     938          977         836
All other                                             1,336        1,309         505
- -------------------------------------------------------------------------------------     
                                                    $ 8,348      $11,095     $ 5,052
=====================================================================================
</TABLE>


     In 1997, the company received orders for 12 F/A-18E/F shipsets.
Acquisitions in 1996 included orders for 62 F/A-18C/D shipsets.  In 1996 the
company also received long-lead funding for the first phase of the Low Rate
Initial Production (LRIP) of the F/A-18E/F along with continued funding of the
engineering and manufacturing development (EMD) phase of the program.  Orders
for 128 F/A-18C/D shipsets were finalized in 1995.

     The company received final authorization to produce 50 747 jetliner
shipsets in each of the years 1997 and 1996.

     The company recorded orders for 6, 18, and 16 wing shipsets for the
Gulfstream V business jet in 1997, 1996 and 1995, respectively.  Northrop
Grumman is producing the Gulfstream V wings under a revenue-sharing agreement
with Gulfstream Aerospace (Gulfstream).  Northrop Grumman will recognize revenue
for its proportionate share of the revenue of each business jet when they are
delivered to the ultimate customer by Gulfstream.  Northrop Grumman has
received 76 orders for the Gulfstream V through December 1997. The Gulfstream V
received aircraft certification in April 1997.  The company is using program
accounting for the Gulfstream V with an estimated 250 shipsets to be delivered
over a ten-year period.  Inventoried costs at December 31, 1997 include $81
million of learning-curve costs

                                       20

<PAGE>
 
NORTHROP GRUMMAN CORPORATION

for this program.  The learning-curve costs represent the excess of production
cost of delivered and in-process items over the estimated average unit cost.
This concept assumes that production cost per unit decreases over time due to
efficiencies from continuous improvements in the performance of repetitive
tasks.  All nonrecurring costs for the development of the wings have been
expensed as incurred.

     ECM acquisitions for 1995 included an award of $279 million from the United
Kingdom Ministry of Defence to develop and produce the DIRCM systems.

     The balance of ESG funded order backlog at the date of acquisition, for
those programs not listed in the table, is included in the "all other" category.
ESG accounts for the major increase in the "all other" category in 1996 over
1995.

     Year-to-year sales vary less than contract acquisitions and reflect
performance under new and ongoing contracts.  The 1996 results of operations
include ESG since the acquisition in March 1996.  Comparative results for 1995
do not include ESG data.

     Sales for 1997 were the highest in the company's history and were 6 percent
higher than the previous record registered  in 1996.  Without the ESG
acquisition, sales for 1996 would have declined 8 percent from the 1995 level.


Net Sales


<TABLE>
<CAPTION>
$ in millions                                           1997        1996        1995
- -------------------------------------------------------------------------------------      
<S>                                                   <C>         <C>         <C>
B-2                                                   $1,615      $1,725      $1,914
Surveillance Aircraft                                  1,073       1,104       1,179
Boeing Jetliners                                         858         569         569
Airborne Radar                                           668         560
Marine                                                   590         496
F/A-18                                                   551         715         822
ECM                                                      384         398         351
Space                                                    328         315
Airspace Management                                      297         223
C-17                                                     276         249         244
Information Technology and Services                    1,002         905         822
All other                                              1,511       1,348       1,371
- -------------------------------------------------------------------------------------    
                                                      $9,153      $8,607      $7,272
=====================================================================================
</TABLE>


                                       21

<PAGE>
 
NORTHROP GRUMMAN CORPORATION

     The decreasing trend in the B-2 revenues from both EMD and production work
continued in 1997.  The level of EMD effort, included in amounts reported as
contract R&D, constituted 19 percent of the total B-2 revenue, down from 33
percent in 1996 and 30 percent in 1995.  Current planning data indicate that the
level of overall B-2 revenue will decline roughly 20 percent in 1998 as compared
to 1997.

     Sales decreased in 1997 for the C/D version of the F/A-18 program with a
decrease of deliveries to 35, as compared to 68 deliveries in 1996 and 56
deliveries in 1995.  The company currently plans to deliver 33 F/A-18C/D
shipsets in 1998. F/A-18E/F revenue increased in 1997 due to the acceleration of
the program's LRIP phase, which began in late 1996. The final three shipsets for
the EMD phase of the program were delivered in 1996. A total of seven shipsets
were delivered under the F/A-18E/F EMD contract in 1995. In 1998 the company
plans to deliver the first seven shipsets under the F/A-18E/F LRIP contract.

     Deliveries of 747 shipsets were 46 in 1997, 28 in 1996, and 24 in 1995.
Increased deliveries of all Boeing jetliner shipsets in 1997 resulted in  a 51
percent increase in revenue from these programs.  The change in the mix of
Boeing jetliners delivered in 1996 resulted in the same level of sales as in
1995.  Sixty-one 747 shipsets are currently expected to be delivered in 1998.

     The electronics industry segment revenues increased 80 percent in 1996 as a
result of the inclusion of the ESG operations, which more than offset the
reduction in revenue on the company's other electronics programs.

     The year-end funded order backlog is the sum of the previous year-end
backlog plus the year's contract acquisitions minus the year's sales.  Backlog
is converted into the following years' sales as costs are incurred or deliveries
are made.  It is expected that approximately 60 percent of the 1997 year-end
backlog will be converted into sales in 1998.

                                       22

<PAGE>
 
NORTHROP GRUMMAN CORPORATION


Funded Order Backlog


<TABLE>
<CAPTION>
$ in millions                                            1997           1996         1995
- --------------------------------------------------------------------------------------------
<S>                                                   <C>            <C>            <C>
B-2                                                   $ 2,788        $ 3,693        $ 3,736
Surveillance Aircraft                                   1,807          1,664          1,438
Boeing Jetliners                                        1,562          1,480          1,312
Airborne Radar                                          1,253          1,079
Marine                                                    392            405
F/A-18                                                    746            675            631
ECM                                                       657            684            747
Space                                                      89             99
Airspace Management                                       497            406
C-17                                                      239            411            277
Information Technology and Services                       447            511            439
All other                                               1,385          1,560          1,599
- --------------------------------------------------------------------------------------------
                                                      $11,862        $12,667        $10,179
============================================================================================
</TABLE>


     Total U.S. Government orders, including those made on behalf of foreign
governments (FMS), comprised 72 percent of the backlog at the end of 1997
compared with 76 percent at the end of 1996 and 77 percent at the end of 1995.
Total foreign customer orders, including FMS, accounted for 17 percent of the
backlog at the end of 1997 compared with 17 percent in 1996 and 13 percent in
1995.  Domestic commercial business in backlog at the end of 1997 was 17
percent and at the end of both 1996 and 1995 was 16 percent.


MEASURES OF PERFORMANCE

The company's operating profit for 1997 was a record high.  Company-wide efforts
to reduce costs, install tighter business controls, improve cash management,
dispose of excess assets and more effectively utilize productive assets are all
goals aimed at contributing to the future success of Northrop Grumman.  This
financial report demonstrates the degree to which the accomplishment of these
goals is being achieved.

     Operating profit in the aircraft segment increased to its highest level
ever in 1997 principally as a result of increased pension income, a $55 million
cumulative margin rate adjustment on the B-2 production contract, and higher
levels of Boeing jetliner sales.  The improvements were partially offset by
lower F/A-18 operating margin on reduced sales.  Aircraft segment operating
profit in 1996 benefited from increased operating margin on the C-17 military
transport and Boeing jetliners and the favorable settlement of a claim involving
productivity

                                       23

<PAGE>
 
NORTHROP GRUMMAN CORPORATION

improvements on the F/A-18.  These items offset the reduced operating margin on
the B-2 program due to lower sales volume, a $25 million charge related to the
company's work for Fokker Aircraft N.V., which declared bankruptcy in March
1996, and $22 million in charges related to plant closures.  The amount and rate
of operating margin recognized on the 747 increased in 1996 due to increased
deliveries and higher operating margin on the deliveries of the last phase of a
300-shipset production contract.  Aircraft segment operating profit in 1995
includes $31 million in expenditures for company-sponsored research and
development for commercial aerostructures.

     Following the award of the last increment of production funding for the 
B-2, the company began recording future operating margin increases on all
production aircraft as these units are delivered and accepted by the customer.
At the time each unit is delivered, an assessment is made of the status of the
production contract so as to estimate the amount of any probable additional
margin available beyond that previously recognized.  That unit's proportionate
share of any such unrecognized remaining balance is then recorded.  In this
fashion it is believed that margin improvements will be recognized on a more
demonstrable basis.  All 15 production units have been initially delivered.
Twelve units remain to be retrofitted with final deliveries scheduled for the
year 2000.

     Electronics segment operating profit in 1997 was reduced by cumulative
margin rate adjustments of $53 million on the E-8 Joint STARS and $33 million on
the DIRCM program. Both charges resulted from an increase in the cost estimate
to complete the company's work on these two programs.  Partially offsetting
these downward adjustments was the settlement of a claim involving work
performed in the 1980's on the MX missile Interface Test Adapter (ITA), which
resulted in an $8 million increase in operating margin and $12 million in
interest income.

     Operating profit in the electronics segment in 1996 benefited from the
addition of ESG, which more than offset the reductions in the company's other
electronics programs.  The reductions were primarily due to reduced volume and a
$29 million charge recorded as a result of the write-down of a claim related to
avionics work performed by the former Grumman Corporation prior to its
acquisition by Northrop in 1994.

                                       24

<PAGE>
 
NORTHROP GRUMMAN CORPORATION

     Information technology and services segment operating profit improved in
1997 as a result of the return to profitability of the company's data systems
activities and increased margin rates on higher sales at Logicon. The decrease
in 1996 operating profit in the information technology and services segment
resulted from increased costs in the data systems activities, partially offset
by an increase in operating margin due to the acquisition of Geodynamics.

     Operating margin in 1997 included $133 million of pension income compared
with $39 million in 1996 and $23 million in 1995.  Also impacting operating
margin is the cost of providing retiree health care and life insurance 
benefits-$89 million in 1997, $91 million in 1996 and $87 million in 1995.

     In 1996, the company recorded a $90 million pretax charge related to the
closure of four plants.  The charge included $30 million for costs related to
the reduction of personnel and other closure activities, which lowered operating
profit in the aircraft and electronics industry segments by $22 million and $8
million, respectively, and $60 million for the write-down of facilities included
in Other Deductions in the Consolidated Statements of Income.  These charges
were a result of the company's continuing efforts to reduce operating costs and
dispose of assets that have become excess due to changes in the company's
business strategy.

     Interest expense decreased $13 million in 1997, following an increase of
$133 million in 1996.  The increase in 1996 came primarily from the issuance of
debt to finance the ESG acquisition.  Total debt at December 31, 1997, stood at
$2.8 billion compared to $3.4 billion at the end of 1996 and $1.4 billion at the
end of 1995.

     The company's effective federal income tax rate was 37.5 percent in 1997,
38.9 percent in 1996 and  38.2 percent in 1995.


MEASURES OF LIQUIDITY AND CAPITAL RESOURCES

The trend and relationship of sales volume with net accounts receivable and
inventoried costs is a useful measure in assessing the company's liquidity.  In
1997, the company's yearend net investment in these balances represented 30
percent of sales, approximately the same as in 1996 and 1995.

     Cash flows from operations have averaged $750 million annually over the
last three years.  The $730 million of cash flow from operations in 1997 was a
decrease of $13 million from 1996 which was a decrease of $34 million over 1995.
These cash flows have been sufficient to service debt, finance capital expansion
projects and continue paying dividends to shareholders.

                                       25

<PAGE>
 
NORTHROP GRUMMAN CORPORATION

     The following table is a condensed summary of the detailed cash flow
information contained in the Consolidated Statements of Cash Flows.


<TABLE>
<CAPTION>

Year ended December 31                                         1997       1996       1995
- ------------------------------------------------------------------------------------------ 
<S>                                                            <C>        <C>        <C>
Cash came from
  Customers                                                     94%        66%        96%
  Lenders                                                        4         29          2
  Shareholders                                                              4
  Buyers of assets/other                                         2          1          2
- ------------------------------------------------------------------------------------------ 
                                                               100%       100%       100%
========================================================================================== 

Cash went to
  Employees and suppliers of services and materials             83%        58%        84%
  Sellers of assets                                              2         24          2
  Lenders                                                       10         13         10
  Suppliers of facilities/other                                  4          4          3
  Shareholders                                                   1          1          1
- ------------------------------------------------------------------------------------------ 
                                                               100%       100%       100%
========================================================================================== 
</TABLE>


     The cash received from lenders in 1996 resulted from borrowing for the
acquisition of ESG.  The cash received from shareholders in 1996 was from a
public stock offering in which the company issued approximately 8 million shares
of common stock at $63.25 per share.  The net proceeds of $493 million were used
to pay down outstanding debt under the company's Credit Agreement.

     During the first quarter of 1996, the company sold to institutional
investors $400 million of 7 percent notes due in 2006, $300 million of 7 3/4
percent debentures due in 2016 and $300 million of 7 7/8 percent debentures due
in 2026.  The proceeds from these issuances were used to finance a portion of
the purchase price of ESG.  The debt indenture contains restrictions relating to
limitations on liens, sale and leaseback arrangements and funded debt of
subsidiaries.

     To finance the balance of the purchase price of ESG, in 1996, the company
amended its Credit Agreement with a group of domestic and foreign banks to
provide for three credit facilities:  $1.8 billion available on a revolving
credit basis through March 2002;  a variable interest rate $500 million two-year
term loan due March 1, 1998, which was repaid in July 1996; and a variable
interest rate $1.5 billion six-year term loan due in 24 quarterly installments
of $62.5 million plus interest beginning June 1996.  Effective November 1, 1996,
the Credit

                                       26

<PAGE>
 
NORTHROP GRUMMAN CORPORATION

Agreement was further amended to reduce the $1.5 billion term loan to 
$1.05 billion payable in 21 quarterly installments of $50 million plus interest
beginning March 1, 1997.  Cash flow from operations in 1997 was sufficient to
allow the company to make the $200 million required term loan payment as well as
to reduce borrowings under the revolving credit facility by $250 million.

     To provide for long-term liquidity the company believes it can obtain
additional capital from such sources as:  the public or private capital markets;
the further sale of assets; sale and leaseback of operating assets; and leasing
rather than purchasing new assets.

     The cost reduction and cash improvement programs underway throughout the
company have produced favorable results, with the expectation that further
efforts will result in minimizing the need to incur additional borrowings during
1998.  Cash generated from operations is expected to be sufficient in 1998 to
service debt, finance capital expansion projects and continue paying dividends
to the shareholders.

     Capital expenditure commitments at December 31, 1997 were approximately
$170 million including $3 million for environmental control and compliance
purposes.

     The company will continue to provide the productive capacity to perform its
existing contracts, dispose of assets no longer needed to fulfill operating
requirements, prepare for future contracts and conduct R&D in the pursuit of
developing opportunities.  While these expenditures tend to limit short-term
liquidity, they are made with the intention of improving the long-term growth
and profitability of the company.


MARKET RISK

The company has fixed-rate long-term debt obligations, most of which are not
callable until maturity.  The company also has financial instruments that are
subject to interest rate risk, principally variable-rate short-term debt
outstanding under the Credit Agreement.  The company may enter into interest
rate swap agreements to offset the variable-rate characteristics of these loans.
At December 31, 1997, no interest rate swap agreements were in effect.

     Only a small portion of the company's transactions are contracted in
foreign currencies.  The company does not consider the market risk exposure
relating to foreign currency exchange to be material.

                                       27

<PAGE>
 
NORTHROP GRUMMAN CORPORATION


NEW ACCOUNTING STANDARDS

In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131 - Disclosures about Segments of an
Enterprise and Related Information.  This standard changes and expands operating
segment disclosure requirements for interim and annual periods.  The Statement
is effective for fiscal years beginning after December 15, 1997; however,
application is not required for interim periods of 1998.  The adoption of this
standard will have no effect on the company's results of operations, financial
position or cash flows.  Management has not yet determined the extent to which
adoption of this standard will effect operating segment disclosures.


FORWARD-LOOKING INFORMATION

Certain statements and assumptions in Management's Discussion and Analysis
contain or are based on "forward-looking" information (as defined in the Private
Securities Litigation and Reform Act of 1995) that involves risk and
uncertainties, including statements and assumptions with respect to future
revenues, program performance and cash flows, the outcome of contingencies
including litigation and environmental remediation, and anticipated costs of
capital investments and planned dispositions.  The company's operations are
necessarily subject to various risks and uncertainties; actual outcomes are
dependent upon many factors, including, without limitation, the company's
successful performance of internal plans; government customers' budgetary
restraints; customer changes in short-range and long-range plans; domestic and
international competition in both the defense and commercial areas; product
performance; continued development and acceptance of new products; performance
issues with key suppliers and subcontractors; government import and export
policies; termination of government contracts; the outcome of political and
legal processes; legal, financial, and governmental risks related to
international transactions and global needs for military and commercial aircraft
and electronic systems and support; as well as other economic, political and
technological risks and uncertainties.

                                       28

<PAGE>
 
NORTHROP GRUMMAN CORPORATION

Selected Financial Data


<TABLE>
<CAPTION>
Year ended December 31, $ in millions,
 except per share                               1997        1996        1995        1994        1993
- ------------------------------------------------------------------------------------------------------
<S>                                           <C>         <C>         <C>         <C>         <C> 
Net sales to
 United States Government                     $ 7,210     $ 7,224     $ 6,148     $ 5,980     $ 4,800
 The Boeing Company                               858         569         569         483         531
 Other customers                                1,085         814         555         562          54
 Total net sales                                9,153       8,607       7,272       7,025       5,385

Net income                                        407         264         277          53         116
Basic earnings per share                         6.10        4.22        4.79         .92        2.04
Diluted earnings per share                       5.98        4.15        4.71         .91        2.01
Cash dividends per share                         1.60        1.60        1.60        1.60        1.60

Net working capital                               221         106         435         533         567
Current ratio                               1.08 to 1   1.04 to 1   1.25 to 1   1.27 to 1   1.51 to 1
Total assets                                  $ 9,667     $ 9,645     $ 5,642     $ 6,192     $ 3,063

Long-term debt                                  2,500       2,950       1,163       1,633         160
Total long-term obligations                     4,339       4,694       2,281       2,793         538
Long-term debt as a percentage of
 shareholders' equity                            95.3%      129.3%       73.3%      116.8%       11.3%

Operating margin as a percentage of
 Net sales                                        9.6         8.2         7.9         3.2         4.1
 Average operating assets                        10.7        10.3        10.8         5.5         8.8

Net income as a percentage of
 Net sales                                        4.5         3.1         3.8          .8         2.2
 Average assets                                   4.2         3.5         4.7         1.1         3.7
 Average shareholders' equity                    16.6        13.6        18.5         3.8         8.4

Research and development expenses
 Contract                                     $ 1,670     $ 1,632     $ 1,179     $ 1,480     $ 1,606
 Noncontract                                      256         255         164         121          97

Payroll and employee benefits                   3,504       3,378       2,883       2,827       2,058
Number of employees at year-end                52,000      51,600      42,300      46,900      32,830
Number of shareholders at year-end             10,683      17,136      17,834      18,241      13,118

Depreciation                                  $   232     $   210     $   231     $   231     $   217
Amortization of
 Goodwill                                          94          83          38          28               
 Other purchased intangibles                       92          82          21          15               
Maintenance and repairs                           107          93          80         105          87
Rent expense                                      108         110         106          99          64

Floor area (millions of square feet)
 Owned                                           20.5        22.5        20.1        21.3        12.9
 Commercially leased                             10.0         9.9         8.2         8.5         3.9
 Leased from United States Government             8.8         9.0        10.2         9.4         2.1
- ------------------------------------------------------------------------------------------------------
</TABLE>


                                       29

<PAGE>
 
NORTHROP GRUMMAN CORPORATION


I
tem 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

CONSOLIDATED STATEMENTS OF FINANCIAL POSITION


<TABLE>
<CAPTION>
December 31, $ in millions                                                 1997           1996
- ------------------------------------------------------------------------------------------------        
<S>                                                                      <C>            <C>
Assets:
Current assets
     Cash and cash equivalents                                           $    63        $   123
     Accounts receivable                                                   1,441          1,453
     Inventoried costs                                                     1,283          1,053
     Deferred income taxes                                                    82             78
     Prepaid expenses                                                         67             68
- ------------------------------------------------------------------------------------------------
     Total current assets                                                  2,936          2,775
- ------------------------------------------------------------------------------------------------        

Property, plant and equipment at cost
     Land and land improvements                                              201            207
     Buildings                                                               769            806
     Machinery and other equipment                                         2,063          2,114
     Leasehold improvements                                                   76             68
- ------------------------------------------------------------------------------------------------
                                                                           3,109          3,195
     Accumulated depreciation                                             (1,763)        (1,783)
- ------------------------------------------------------------------------------------------------       
                                                                           1,346          1,412
- ------------------------------------------------------------------------------------------------

Other assets
     Goodwill, net of accumulated amortization of $244 in 1997             3,421          3,470
       and $150 in 1996
     Other purchased intangibles, net of accumulated
       amortization of $208 in 1997 and $116 in 1996                         896            988
     Prepaid pension cost, intangible
       pension asset and benefit trust fund                                  452            229
     Deferred income taxes                                                   485            520
     Investments in and advances to
       affiliates and sundry assets                                          141            251
- ------------------------------------------------------------------------------------------------          
                                                                           5,395          5,458
- ------------------------------------------------------------------------------------------------      
                                                                         $ 9,677        $ 9,645
================================================================================================
</TABLE>


                                       30

<PAGE>
 
NORTHROP GRUMMAN CORPORATION


<TABLE>
<CAPTION>
December 31, $ in millions                                       1997         1996
- ------------------------------------------------------------------------------------     
<S>                                                            <C>           <C>
Liabilities and Shareholders' Equity:
Current liabilities
   Notes payable to banks                                      $   91        $  228

   Current portion of long-term debt                              200           200
   Trade accounts payable                                         463           477
   Accrued employees' compensation                                366           357
   Advances on contracts                                          410           230
   Income taxes payable                                            16            25
   Deferred income taxes                                          717           621
   Other current liabilities                                      452           531
- ------------------------------------------------------------------------------------
   Total current liabilities                                    2,715         2,669
- ------------------------------------------------------------------------------------

Long-term debt                                                  2,500         2,950
Accrued retiree benefits                                        1,716         1,624
Other long-term liabilities                                        48            59
Deferred income taxes                                              75            61

Shareholders' equity
   Paid-in capital
     Preferred stock, 10,000,000 shares authorized;
               none issued
     Common stock, 200,000,000 shares authorized;
               issued and outstanding
               1997 - 67,278,876
               1996 - 66,527,262                                  838           784
   Retained earnings                                            1,807         1,502
   Unfunded pension losses, net of taxes                          (22)           (4)
- ------------------------------------------------------------------------------------
                                                                2,623         2,282
- ------------------------------------------------------------------------------------
                                                               $9,677        $9,645
====================================================================================
</TABLE>



The accompanying notes are an integral part of these consolidated financial
statements.

                                       31

<PAGE>
 
NORTHROP GRUMMAN CORPORATION

CONSOLIDATED STATEMENTS OF INCOME


<TABLE>
<CAPTION>

Year ended December 31, $ in millions, except per share          1997           1996           1995
- -----------------------------------------------------------------------------------------------------
<S>                                                             <C>            <C>            <C>
Net sales                                                       $9,153         $8,607         $7,272
Cost of sales
    Operating costs                                              7,040          6,658          5,697
    Administrative and general expenses                          1,233          1,246          1,003
- -----------------------------------------------------------------------------------------------------
Operating margin                                                   880            703            572
Other income(deductions)
    Interest income                                                 17             12              4
    Other, net                                                      11            (13)             9
    Interest expense                                              (257)          (270)          (137)
- -----------------------------------------------------------------------------------------------------
Income before income taxes                                         651            432            448
Federal and foreign income taxes                                   244            168            171
- -----------------------------------------------------------------------------------------------------
Net income                                                      $  407         $  264         $  277
=====================================================================================================

Weighted average common shares
    outstanding, in millions                                      66.7           62.6           57.8
=====================================================================================================

Basic earnings per share                                        $ 6.10         $ 4.22         $ 4.79
Diluted earnings per share                                        5.98           4.15           4.71
=====================================================================================================
</TABLE>


The accompanying notes are an integral part of these consolidated financial
statements.

                                       32

<PAGE>
 
NORTHROP GRUMMAN CORPORATION

CONSOLIDATED STATEMENTS OF CHANGES
IN SHAREHOLDERS' EQUITY


<TABLE>
<CAPTION>
Year ended December 31, $ in millions, except per share                         1997       1996       1995
- -----------------------------------------------------------------------------------------------------------       
<S>                                                                           <C>        <C>        <C>
Paid-in Capital
     At beginning of year                                                     $  784     $  273     $  261
     Stock issuance                                                                         493
     Employee stock awards and options
       exercised, net of forfeitures                                              60         23         12
     Treasury stock transactions                                                  (6)        (5)
- -----------------------------------------------------------------------------------------------------------
     At end of year                                                              838        784        273
- -----------------------------------------------------------------------------------------------------------      

Retained Earnings
     At beginning of year                                                      1,502      1,325      1,130
     Net income                                                                  407        264        277
     Cash dividends                                                             (102)       (87)       (82)
- -----------------------------------------------------------------------------------------------------------         
     At end of year                                                            1,807      1,502      1,325
- -----------------------------------------------------------------------------------------------------------

Unfunded Pension Losses, Net of Taxes
     At beginning of year                                                         (4)       (12)
     Change in excess of additional minimum 
       liability over unrecognized prior service costs                           (18)         8        (12)
- -----------------------------------------------------------------------------------------------------------      
     At end of year                                                              (22)        (4)       (12)
- -----------------------------------------------------------------------------------------------------------       
Total shareholders' equity                                                    $2,623     $2,282     $1,586
===========================================================================================================     

Book value per share                                                          $38.99     $34.30     $27.34
===========================================================================================================     
Cash dividends per share                                                      $ 1.60     $ 1.60     $ 1.60
===========================================================================================================       
</TABLE>



  The accompanying notes are an integral part of these financial statements.

                                      33

<PAGE>
 
NORTHROP GRUMMAN CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS


<TABLE>
<CAPTION>
Year ended December 31, $ in millions                                          1997            1996            1995
- ---------------------------------------------------------------------------------------------------------------------
<S>                                                                           <C>              <C>             <C>
Operating Activities
     Sources of Cash
        Cash received from customers
          Progress payments                                                 $ 2,264         $ 2,226          $ 2,289
          Other collections                                                   7,050           6,372            4,818
        Interest received                                                        17              13                3
        Income tax refunds received                                              13              12               48
        Other cash receipts                                                       7               8                7
- ---------------------------------------------------------------------------------------------------------------------             
        Cash provided by operating activities                                 9,351           8,631            7,165
- ---------------------------------------------------------------------------------------------------------------------   
     Uses of Cash
        Cash paid to suppliers and employees                                  8,280           7,528            6,168
        Interest paid                                                           251             219              144
        Income taxes paid                                                        64             141               73
        Other cash payments                                                      26                                3
- ---------------------------------------------------------------------------------------------------------------------   
        Cash used in operating activities                                     8,621           7,888            6,388
- ---------------------------------------------------------------------------------------------------------------------     
     Net cash provided by operating activities                                  730             743              777
- ---------------------------------------------------------------------------------------------------------------------   
Investing Activities
     Payment for businesses purchased, net of cash acquired                                  (2,886)             (23)
     Additions to property, plant and equipment                                (238)           (198)            (140)
     Proceeds from sale of property, plant and equipment                        106              58               34
     Proceeds from sale of affiliates/operations                                 19              45                5
     Proceeds from sale of marketable securities, net of purchases                                9                1
     Funding of retiree benefit trust                                                           (25)
     Other investing activities                                                                   4              (21)
- ---------------------------------------------------------------------------------------------------------------------    
     Net cash used in investing activities                                     (113)         (2,993)            (144)
- ---------------------------------------------------------------------------------------------------------------------   
Financing Activities
     Borrowings under lines of credit                                           422           2,734              153
     Repayment of borrowings under lines of credit                             (808)           (635)            (259)
     Proceeds from issuance of long-term debt                                                 1,000
     Principal payments of long-term debt/capital leases                       (200)         (1,090)            (446)
     Proceeds from issuance of stock                                             17             502                8
     Dividends paid                                                            (102)            (87)             (82)
     Other financing activities                                                  (6)           (107)
- ---------------------------------------------------------------------------------------------------------------------   
     Net cash provided by (used in) financing activities                       (677)          2,317             (626)
- ---------------------------------------------------------------------------------------------------------------------   
Increase(decrease) in cash and cash equivalents                                 (60)             67                7
Cash and cash equivalents balance at beginning of year                          123              56               49
- ---------------------------------------------------------------------------------------------------------------------   
Cash and cash equivalents balance at end of year                            $    63         $   123          $    56
=====================================================================================================================   
</TABLE>


                                       34

<PAGE>
 
NORTHROP GRUMMAN CORPORATION


<TABLE>
<CAPTION>
Year ended December 31, $ in millions                                         1997         1996         1995
- -------------------------------------------------------------------------------------------------------------
<S>                                                                        <C>          <C>          <C>
Reconciliation of Net Income to Net Cash
Provided by Operating Activities:
Net income                                                                 $   407      $   264      $   277
Adjustments to reconcile net income to net cash provided
      Depreciation                                                             232          210          231
      Amortization of intangible assets                                        186          165           59
      Common stock issued to employees                                          23           10
      Loss(gain) on disposals of property, plant and equipment                  (6)          32           34
      Retiree benefits (income)cost                                            (44)          52           64
      Decrease(increase) in
              Accounts receivable                                              (81)        (111)         186
              Inventoried costs                                               (147)           7          426
              Prepaid expenses                                                   2           13          (14)
              Refundable income taxes                                                                     84
      Increase(decrease) in
              Progress payments                                                 66           84         (282)
              Accounts payable and accruals                                     91           36         (102)
              Provisions for contract losses                                   (30)           2         (143)
              Provisions for disposal of real estate and other assets           16           50           (8)
              Deferred income taxes                                            188          126           86
              Income taxes payable                                              (9)         (33)           1
              Retiree benefits                                                (180)        (170)        (114)
      Other noncash transactions                                                16            6           (8)
- -------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities                                  $   730      $   743      $   777
=============================================================================================================

Noncash Investing and Financing Activities:
Purchase of businesses
      Fair value of assets acquired                                                     $ 4,003      $    35
      Cash paid                                                                          (2,888)         (31)
- -------------------------------------------------------------------------------------------------------------
      Liabilities assumed                                                               $ 1,115      $     4
=============================================================================================================
</TABLE>



The accompanying notes are an integral part of these consolidated financial
statements.


                                       35

<PAGE>
 
NORTHROP GRUMMAN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES


PRINCIPLES OF CONSOLIDATION

The consolidated financial statements include the accounts of the corporation
and its subsidiaries. All material intercompany accounts, transactions and
profits are eliminated in consolidation.

     The company's financial statements are in conformity with generally
accepted accounting principles.  The preparation thereof requires management to
make estimates and assumptions that affect the reported amounts of assets and
liabilities and the disclosure of contingencies at the date of the financial
statements as well as the reported amounts of revenues and expenses during the
reporting period.  Estimates have been prepared on the basis of the most current
and best available information and actual results could differ from those
estimates.


NATURE OF OPERATIONS

Northrop Grumman is a major producer of military and commercial aircraft
subassemblies and defense electronics and is the prime contractor on the U.S.
Air Force B-2 Stealth Bomber.  The company operates in the aircraft, electronics
and information technology and services industry segments within the broadly
defined aerospace industry.  The majority of the company's products and services
are ultimately sold to the U.S. Government and the company is therefore affected
by, among other things, the federal budget process.

     Sales to the U.S. Government (including foreign military sales) are
reported within each industry segment and in total in the Selected Financial
Data. The company does not conduct a significant volume of activity through
foreign operations or in foreign currencies.

     Descriptions of the company's principal products and services along with
industry segment data, which is considered to be an integral part of these
financial statements, can be found in the Management's Discussion and Analysis
section of this report. Intersegment sales are transacted at cost incurred with
no profit added. Operating profit is defined to include the Other Income earned
by each industry segment, but to exclude costs allocated to

                                       36

<PAGE>
 
NORTHROP GRUMMAN CORPORATION

segments for General Corporate Expenses and State and Local Income Taxes.
General corporate assets include cash and cash equivalents, corporate office
furnishings and equipment, other unallocable property, investments in
affiliates, prepaid pension cost, intangible pension asset, benefit trust fund
assets, deferred tax assets and certain assets held for sale.


SALES

Sales under cost-reimbursement, service, research and development, and
construction-type contracts are recorded as costs are incurred and include
estimated earned fees or profits calculated on the basis of the relationship
between costs incurred and total estimated costs (cost-to-cost type of
percentage-of-completion method of accounting). Construction-type contracts
embrace those fixed-price type contracts that provide for the delivery at a low
volume per year or a small number of units after a lengthy period of time over
which a significant amount of costs have been incurred. Sales under other types
of contracts are recorded as deliveries are made and are computed on the basis
of the estimated final average unit cost plus profit (units-of-delivery type of
percentage-of-completion method of accounting).

     Certain contracts contain provisions for price redetermination or for cost
and/or performance incentives. Such redetermined amounts or incentives are
included in sales when the amounts can reasonably be determined. In the case of
the B-2 bomber production contract, future changes in operating margin will be
recognized on a units-of-delivery basis and recorded as each equivalent
production unit is delivered.  Amounts representing contract change orders,
claims or limitations in funding are included in sales only when they can be
reliably estimated and realization is probable. In the period in which it is
determined that a loss will result from the performance of a contract, the
entire amount of the estimated ultimate loss is charged against income. Loss
provisions are first offset against costs that are included in assets, with any
remaining amount reflected in Other Current Liabilities. Other changes in
estimates of sales, costs, and profits are recognized using the cumulative
catch-up method of accounting. This method recognizes in the current period the
cumulative effect of the changes on current and prior periods. Hence, the effect
of the changes on future periods of contract performance is recognized as if the
revised estimates had been the original estimates.


CONTRACT RESEARCH AND DEVELOPMENT

Customer-sponsored research and development costs (direct and indirect costs
incurred pursuant to contractual arrangements) are accounted for like other
contracts.

                                       37

<PAGE>
 
NORTHROP GRUMMAN CORPORATION


NONCONTRACT RESEARCH AND DEVELOPMENT

This category includes independent research and development costs and 
company-sponsored research and development costs (direct and indirect costs not
recoverable under contractual arrangements). Independent research and
development (IR&D) costs are included in administrative and general expenses
(indirect costs allocable to U.S. Government contracts) whereas company-
sponsored research and development costs are charged against income as incurred.


ENVIRONMENTAL COSTS

Environmental liabilities are accrued when the company determines it is
responsible for remediation costs and such amounts are reasonably estimable.
When only a range of amounts is established and no amount within the range is
better than another, the minimum amount in the range is recorded.  The company
does not anticipate and record insurance recoveries before collection is
probable.


INTEREST RATE SWAP AGREEMENTS

The company may enter into interest rate swap agreements to offset the 
variable-rate characteristic of certain variable-rate term loans outstanding
under the company's Credit Agreement. Interest on these interest rate swap
agreements is recognized as an adjustment to interest expense in the period
incurred.


INCOME TAXES

Provisions for federal, state and local income taxes are calculated on reported
financial statement pretax income based on current tax law and also include, in
the current period, the cumulative effect of any changes in tax rates from those
used previously in determining deferred tax assets and liabilities. Such
provisions differ from the amounts currently payable because certain items of
income and expense are recognized in different time periods for financial
reporting purposes than for income tax purposes.

     The company accounts for certain contracts in process using different
methods of accounting for financial statements and tax reporting and thus
provides deferred taxes on the difference between the financial and taxable
income reported during the performance of such contracts.

     In accordance with industry practice, state and local income and franchise
tax provisions are included in administrative and general expenses.

                                       38

<PAGE>
 
NORTHROP GRUMMAN CORPORATION


EARNINGS PER SHARE

Effective December 31, 1997, the company adopted Statement of Financial
Accounting Standards No. 128 - Earnings per Share.  This standard establishes
new standards for computing and disclosing earnings per share. Dual presentation
of "basic" and "diluted" earning per share for all periods presented is
required. Accordingly, earnings per share amounts have been restated to conform
with the provisions of the new standard.

   Basic earnings per share are calculated using the weighted average number of
shares of common stock outstanding during each period, after giving recognition
to stock splits and stock dividends. Diluted earnings per share reflect the
dilutive effect of stock options and other stock awards granted to employees
under stock-based compensation plans.

   Basic and diluted earnings per share are calculated as follows:


<TABLE>
<CAPTION>
                                                                               Earnings
                                                     Net Income     Shares     per share
                                                     ----------    --------    ---------
                                                     (millions)   (millions)
<S>                                                     <C>         <C>          <C>
1997
    Basic EPS                                           $407        66.72        $6.10
                                                        ====                     =====
    Dilutive effect of stock options and awards                      1.32
                                                                    -----
    Diluted EPS                                         $407        68.04        $5.98
                                                        ====        =====        =====

1996
    Basic EPS                                           $264        62.60        $4.22
                                                        ====                     =====
    Dilutive effect of stock options and awards                      1.09
                                                                    -----
    Diluted EPS                                         $264        63.69        $4.15
                                                        ====        =====        =====

1995
    Basic EPS                                           $277        57.77        $4.79
                                                        ====                     =====
    Dilutive effect of stock options and awards                      0.89
                                                                    -----
    Diluted EPS                                         $277        58.66        $4.71
                                                        ====        =====        =====
</TABLE>



CASH AND CASH EQUIVALENTS

Cash and cash equivalents include interest-earning debt instruments that mature
in three months or less from the date purchased.

                                       39

<PAGE>
 
NORTHROP GRUMMAN CORPORATION


ACCOUNTS RECEIVABLE

Accounts receivable include amounts billed and currently due from customers,
amounts currently due but unbilled (primarily related to contracts accounted for
under the cost-to-cost type of percentage-of-completion method of accounting),
certain estimated contract changes, claims in negotiation and amounts retained
by the customer pending contract completion.


INVENTORIED COSTS

Inventoried costs primarily relate to work in process under fixed-price type
contracts (excluding those included in unbilled accounts receivable as
previously described). They represent accumulated contract costs less the
portion of such costs allocated to delivered items. Accumulated contract costs
include direct production costs, factory and engineering overhead, production
tooling costs, and allowable administrative and general expenses (except for
general corporate expenses and IR&D allocable to commercial contracts, which are
charged against income as incurred).

     In accordance with industry practice, inventoried costs are classified as a
current asset and include amounts related to contracts having production cycles
longer than one year.


DEPRECIABLE PROPERTIES

Property, plant and equipment owned by the company are depreciated over the
estimated useful lives of individual assets. Capital leases providing for the
transfer of ownership upon their expiration or containing bargain purchase
options are amortized over the estimated useful lives of individual assets. Most
of these assets are depreciated using declining-balance methods, with the
remainder using the straight-line method, with the following lives:


<TABLE>
<CAPTION>
                                                                               Years
- -------------------------------------------------------------------------------------
<S>                                                                  <C>
Land improvements                                                               5-20
Buildings                                                                       5-45
Machinery and other equipment                                                   1-18
Leasehold improvements                                               Length of lease
- -------------------------------------------------------------------------------------
</TABLE>


GOODWILL AND OTHER PURCHASED INTANGIBLE ASSETS

Goodwill and other purchased intangible assets are amortized on a straight-line
basis over periods of 40 years and a weighted average 15 years, respectively.
Goodwill and other purchased intangibles balances are included in the
identifiable assets of the industry segment to which they have been assigned and
amortization is charged against the respective industry segment operating
profit.  The recoverability of goodwill and other purchased intangibles is
evaluated at least annually considering the projected future profitability and
cash flow at the operations to which they relate.  When it is determined that an
impairment has occurred, an appropriate charge to operations is recorded.

                                       40

<PAGE>
 
NORTHROP GRUMMAN CORPORATION


BUSINESS COMBINATIONS

Effective August 1, 1997, the company consummated the merger of its wholly owned
acquisition subsidiary with and into Logicon, Inc., a leading defense
information technology and services company.  Each share of Logicon's common
stock was converted to .6161 of a share of the company's common stock.
Approximately 8.6 million shares of the company's common stock were issued for
Logicon's common stock.  The merger is accounted for as a pooling of interests.


ACQUISITIONS

On March 28, 1996, Logicon acquired Geodynamics Corporation (Geodynamics) for a
cash purchase price of $32 million. Geodynamics specializes in remote sensing,
geographic information systems, modeling and simulation, software development,
and systems engineering and integration for the Department of Defense and other
government agencies.  The operations of Geodynamics since the acquisition date
are included in the information technology and services segment.

     On March 1, 1996 the company purchased substantially all of the defense and
electronics systems business (ESG) of Westinghouse Electric Corporation at a
cost of $2.9 billion and financed the transaction with new borrowings. The
operations of ESG have been consolidated with Northrop Grumman effective March
1, 1996 and are included in the electronics industry segment.

     On February 16, 1995, Logicon acquired Syscon Corporation (Syscon), which
operated as an indirectly wholly owned subsidiary of Harnischfeger Industries,
Inc., for a cash purchase price of $45 million.  Syscon is engaged principally
in the business of providing systems development, systems integration and
systems services to the U.S. government and commercial enterprises. The
operations of Syscon since the acquisition date are included in the information
technology and services segment.

     The purchase method of accounting was used to record all three acquisitions
with estimated fair values being assigned to assets and liabilities.  The excess
of the purchase price over the net tangible assets acquired was assigned to
identifiable intangible assets and the remaining balance to goodwill.

     The following unaudited pro forma financial information combines Northrop
Grumman's, ESG's, Geodynamics' and Syscon's results of operations, as if the
acquisitions had taken place on January 1, 1995, and is not necessarily
indicative of future operating results of Northrop Grumman.


<TABLE>
<CAPTION>
Year ended December 31, $ in millions except per share                    1996      1995
- ------------------------------------------------------------------------------------------
<S>                                                                      <C>       <C>
Sales                                                                    $8,907    $9,777
Net income                                                                  244       160
Basic earnings per share                                                   3.90      2.77
Diluted earnings per share                                                 3.82      2.73
- ------------------------------------------------------------------------------------------
</TABLE>


                                       41

<PAGE>
 
NORTHROP GRUMMAN CORPORATION


MERGER AGREEMENT

On July 3, 1997, the company announced that it had entered into a definitive
agreement with Lockheed Martin Corporation to combine the companies.  Under the
terms of the agreement, 1.1923 shares of Lockheed Martin common stock would be
exchanged for each share of Northrop Grumman common stock.  On February 26,
1998, shareholders of Northrop Grumman approved the merger.  Subsequently, the
Department of Justice filed suit to block the combination.  The outcome cannot
be predicted at this time.

     The Company will record a charge of $180 million in the first quarter of
1998 for costs related to the proposed combination.   The charge will cover
vesting of restricted stock which became issuable following shareholder
approval of the merger and other costs associated with the pending
combination, such as investment banking fees, legal and accounting fees, and
costs related to responding to the Government's request for information.



ACCOUNTS RECEIVABLE

Unbilled amounts represent sales for which billings have not been presented to
customers at year end, including differences between actual and estimated
overhead and margin rates. These amounts are usually billed and collected within
one year.  Progress payments are, however, received on a number of fixed-price
contracts accounted for using the cost-to-cost type percentage-of-completion
method.

     Accounts receivable at December 31, 1997, are expected to be collected in
1998 except for approximately $127 million due in 1999 and $38 million due in
2000 and later. These amounts principally relate to long-term contracts with the
U.S. Government.

     Allowances for doubtful amounts represent mainly estimates of overhead type
costs which may not be successfully negotiated and collected.

                                       42

<PAGE>
 
NORTHROP GRUMMAN CORPORATION

   Accounts receivable were comprised of the following:


<TABLE>
<CAPTION>
$ in millions                                                          1997            1996
- ---------------------------------------------------------------------------------------------
<S>                                                                 <C>              <C>
Due from U.S. Government, long-term contracts
   Current accounts
       Billed                                                       $   408          $   460
       Unbilled                                                       3,481            3,493
       Progress payments received                                    (2,772)          (2,721)
- ---------------------------------------------------------------------------------------------
                                                                      1,117            1,232
- ---------------------------------------------------------------------------------------------
Due from other customers, long-term contracts
   Current accounts
       Billed                                                            87               78
       Unbilled                                                         133               47
- ---------------------------------------------------------------------------------------------   
                                                                        220              125
- ---------------------------------------------------------------------------------------------   
   Total due, long-term contracts                                     1,337            1,357
- ---------------------------------------------------------------------------------------------

Trade and other accounts receivable
   Due from U.S. Government                                              87               75
   Due from other customers                                              72               76
- ---------------------------------------------------------------------------------------------
   Total due, trade and other                                           159              151
- ---------------------------------------------------------------------------------------------
                                                                      1,496            1,508
Allowances for doubtful amounts                                         (55)             (55)
- ---------------------------------------------------------------------------------------------
                                                                    $ 1,441          $ 1,453
=============================================================================================
</TABLE>



                                       43

<PAGE>
 
NORTHROP GRUMMAN CORPORATION


INVENTORIED COSTS

Inventoried costs were comprised of the following:


<TABLE>
<CAPTION>
$ in millions                                                          1997         1996
- ------------------------------------------------------------------------------------------   
<S>                                                                   <C>          <C>
Production costs of contracts in process                              $1,396       $1,169
Excess of production cost of delivered items
    over the estimated average unit cost                                 141          105
Administrative and general expenses                                      222          199
- ------------------------------------------------------------------------------------------   
                                                                       1,759        1,473
Progress payments received                                              (495)        (533)
- ------------------------------------------------------------------------------------------    
                                                                       1,264          940
Product inventories - at the lower of
    average cost or market                                                19          113
- ------------------------------------------------------------------------------------------
                                                                      $1,283       $1,053
==========================================================================================
</TABLE>


     Inventoried costs relate to long-term contracts in process and include
expenditures for raw materials and work in process beyond what is required for
recorded orders. These expenditures are incurred to help maintain stable and
efficient production schedules.  The excess of production costs of delivered and
in process items over the estimated average costs is carried in inventory under
the learning curve concept.  Under this concept, production costs per unit are
expected to decrease over time due to efficiencies arising from continuous
improvement in the performance of repetitive tasks.  However, no material amount
representing claims, unamortized tooling or other deferred costs is included in
inventoried costs.

     The ratio of inventoried administrative and general expenses to total
inventoried costs is estimated to be the same as the ratio of total
administrative and general expenses incurred to total contract costs incurred.

     According to the provisions of U.S. Government contracts, the customer has
title to, or a security interest in, substantially all inventories related to
such contracts.

                                       44

<PAGE>
 
NORTHROP GRUMMAN CORPORATION


INCOME TAXES

Income tax expense, both federal and foreign (which arises primarily from work
performed abroad by domestic operations), was comprised of the following:


<TABLE>
<CAPTION>
$ in millions                                                    1997      1996      1995
- ------------------------------------------------------------------------------------------        
<S>                                                              <C>       <C>       <C>
Currently payable
    Federal income taxes                                         $ 26      $ 60      $ 89
    Foreign income taxes                                            3         2         1
- ------------------------------------------------------------------------------------------     
                                                                   29        62        90
Change in deferred federal income taxes                           215       106        81
- ------------------------------------------------------------------------------------------   
                                                                 $244      $168      $171
==========================================================================================   
</TABLE>


     Income tax expense differs from the amount computed by multiplying the
statutory federal income tax rate times the income before income taxes due to
the following:


<TABLE>
<CAPTION>
$ in millions                                                    1997      1996      1995
- ------------------------------------------------------------------------------------------
<S>                                                              <C>       <C>       <C>
Income tax expense at statutory rate                             $228      $151      $157
Goodwill amortization                                              17        16        13
Provision for nondeductible expenses                                2         4         4
Benefit from ESOP dividends                                        (3)       (3)       (3)
- ------------------------------------------------------------------------------------------   
                                                                 $244      $168      $171
==========================================================================================
</TABLE>


    Deferred income taxes arise because of differences in the treatment of
income and expense items for financial reporting and income tax purposes. The
principal type of temporary difference stems from the recognition of income on
contracts being reported under different methods for tax purposes than for
financial reporting.

                                       45

<PAGE>
 
NORTHROP GRUMMAN CORPORATION

     The tax effects of significant temporary differences and carryforwards that
gave rise to year-end deferred federal and state tax balances, as categorized in
the Consolidated Statements of Financial Position, were as follows:


<TABLE>
<CAPTION>
$ in millions                                                                     1997         1996
- -----------------------------------------------------------------------------------------------------
<S>                                                                               <C>          <C>
Deferred tax assets
    Deductible temporary differences
         Retiree benefit plan expense                                            $  558       $  602
         Provision for estimated expenses                                            60           79
         Income on contracts                                                         41           49
         Other                                                                       37           41
- -----------------------------------------------------------------------------------------------------   
                                                                                    696          771
- -----------------------------------------------------------------------------------------------------
    Taxable temporary differences
         Purchased intangibles                                                     (152)        (110)
         Excess tax over book depreciation                                          (53)         (64)
- -----------------------------------------------------------------------------------------------------   
                                                                                   (205)        (174)
- -----------------------------------------------------------------------------------------------------
                                                                                 $  491       $  597
=====================================================================================================
Deferred tax liabilities
    Taxable temporary differences
         Income on contracts                                                     $  771       $  873
         Administrative and general expenses
           period costed for tax purposes                                             8            1
         Retiree benefit plan income                                                 28            1
         Excess tax over book depreciation                                           14            9
         Other                                                                       22           14
- -----------------------------------------------------------------------------------------------------
                                                                                    843          898
- -----------------------------------------------------------------------------------------------------
    Deductible temporary differences
         Provision for estimated expenses                                            (3)         (86)
         Retiree benefit plan expense                                               (12)          (1)
- -----------------------------------------------------------------------------------------------------
                                                                                    (15)         (87)
- -----------------------------------------------------------------------------------------------------
    Tax carryforwards
         Tax credits                                                                (22)         (39)
         Alternative minimum tax credit                                             (90)         (90)
- -----------------------------------------------------------------------------------------------------
                                                                                   (112)        (129)
- -----------------------------------------------------------------------------------------------------
                                                                                 $  716       $  682
=====================================================================================================
Net deferred tax liability
    Total deferred tax liabilities (taxable
      temporary differences above)                                               $1,048       $1,072
    Less total deferred tax assets (deductible
      temporary differences and tax carryforwards above)                            823          987
- -----------------------------------------------------------------------------------------------------
                                                                                 $  225       $   85
=====================================================================================================
</TABLE>



                                       46

<PAGE>
 
NORTHROP GRUMMAN CORPORATION

     The tax carryforward benefits are expected to be used in the periods in
which net deferred tax liabilities mature.  These tax credit carryforwards are
in various amounts and expire over the years 1998 through 2007.  The alternative
minimum tax credit can be carried forward indefinitely.


NOTES PAYABLE TO BANKS AND LONG-TERM DEBT

The company has available short-term credit lines in the form of money market
facilities with several banks. The amount and conditions for borrowing under
these credit lines depend on the availability and terms prevailing in the
marketplace. No fees or compensating balances are required for these credit
facilities.  At December 31, 1997, $87 million was outstanding at a weighted
average interest rate of 6.51 percent.  At December 31, 1996, $226 million was
outstanding at a weighted average interest rate of 6.44 percent.

     Additionally, the company has a credit agreement with a group of domestic
and foreign banks to provide for three credit facilities:  $1.8 billion
available on a revolving credit basis through March 2002; a variable interest
rate $500 million two-year term loan due March 1, 1998, that was repaid in July
1996; and a variable interest rate $1.5 billion six-year term loan due in 24
quarterly installments of $62.5 million plus interest beginning June 1996.
Effective November 1, 1996, the Credit Agreement was further amended to reduce
the $1.5 billion term loan to $1.05 billion payable in 21 quarterly installments
of $50 million plus interest beginning March 1, 1997.  The company pays, at
least quarterly, interest on the outstanding debt under the Credit Agreement at
rates that vary based in part on the company's credit rating and leverage ratio.
At December 31, 1997, $850 million under the term loan was outstanding at a
weighted average interest rate of 6.24 percent.  At December 31, 1996, $1.05
billion was outstanding at a weighted average interest rate of 5.97 percent.
Principal payments permanently reduce the amount available under this agreement
as well as the debt outstanding.

     At December 31, 1997, $250 million at a weighted average interest rate of
6.17 percent was outstanding under the company's revolving credit facility.  At
December 31, 1996, $500 million at a weighted average interest rate of 5.79
percent was outstanding.  Under these agreements, in the event of a "change in
control," the banks are relieved of their commitments.  Compensating balances
are not required under these agreements.

     The company's credit agreements contain restrictions relating to the
payment of dividends, acquisition of the company's stock, aggregate 
indebtedness for borrowed money and interest coverage. At December 31, 1997,
$572 million of retained earnings were unrestricted as to the payment of
dividends. Total indebtedness for all types of borrowed money is limited under
the company's credit agreement covenants. At December 31, 1997, indebtedness was
limited to $6.6 billion.

                                       47

<PAGE>
 
NORTHROP GRUMMAN CORPORATION

    Long-term debt consisted of the following:


<TABLE>
<CAPTION>
$ in millions                                                                      1997        1996
- -----------------------------------------------------------------------------------------------------
<S>                                                                                <C>          <C>
Notes due 2004, 8.625%                                                             $350         $350
Notes due 2006, 7%                                                                  400          400
Debentures due 2016, 7.75%                                                          300          300
Debentures due 2024, 9.375%                                                         250          250
Debentures due 2026, 7.875%                                                         300          300
Revolving credit facility                                                           250          500
Term loans payable to banks due in quarterly
  installments through 2002 at floating rates                                       850        1,050
- -----------------------------------------------------------------------------------------------------   
                                                                                  2,700        3,150
Less current portion                                                                200          200
- -----------------------------------------------------------------------------------------------------
                                                                                 $2,500       $2,950
=====================================================================================================
</TABLE>


     During the first quarter of 1996, the company sold to institutional
investors $400 million of 7 percent notes due in 2006, $300 million of 
7 3/4 percent debentures due in 2016 and $300 million of 7 7/8 percent
debentures due in 2026. The proceeds from these issuances were used to finance a
portion of the purchase price of ESG. The debt indenture contains restrictions
relating to limitations on liens, sale and leaseback arrangements and funded
debt of subsidiaries.

     The principal amount of long-term debt outstanding at December 31, 1997,
due in each of the years 1998 through 2001 is $200 million with $50 million due
in 2002 and $1,850 million due thereafter.

                                       48

<PAGE>
 
NORTHROP GRUMMAN CORPORATION


FAIR VALUE OF FINANCIAL INSTRUMENTS

The following methods and assumptions were used by the company in estimating its
fair value disclosures for financial instruments:


   The carrying amount reported in the Consolidated Statements of Financial
   Position for Cash and Cash Equivalents, Accounts Receivable and amounts
   borrowed under the company's short-term credit lines approximate their fair
   value.

   The fair value of the long-term debt at the respective yearends was
   calculated based on interest rates available for debt with terms and due
   dates similar to the company's existing debt arrangements.


     The company has limited involvement with derivative financial instruments
and does not use them for trading purposes.  To mitigate the variable rate
characteristic of its term loans, the company has from time to time entered into
interest rate swap agreements.  At December 31, 1997, no interest rate swap
agreements were in effect.   At December 31, 1996, interest rate swap agreements
resulted in a fixed interest rate of 6.23 percent on a notional amount of $425
million.  Unrealized gains (losses) on interest rate swap agreements are
calculated based upon the amounts at which they could have been settled at then
current interest rates.  The market loss on interest rate swaps was $1 million
at December 31, 1996.

     Carrying amounts and the related estimated fair values of the company's
financial instruments at December 31 of each year are as follows:
 


<TABLE>
<CAPTION>
$ in millions                                                            1997          1996
- ---------------------------------------------------------------------------------------------    
<S>                                                                     <C>           <C>
Long-term debt
     Carrying amount                                                    $2,700        $3,150
     Fair value                                                          2,856         3,221

Interest rate swap agreements
     Notional amount                                                                     425
     Losses                                                                               (1)
=============================================================================================     
</TABLE>



                                       49

<PAGE>
 
NORTHROP GRUMMAN CORPORATION


RETIREMENT BENEFITS

The company sponsors several defined-benefit pension plans covering
substantially all employees. Pension benefits for most employees are based on
the employee's years of service and compensation during the last ten years
before retirement. It is the policy of the company to fund at least the minimum
amount required for all qualified plans, using actuarial cost methods and
assumptions acceptable under U.S. Government regulations, by making payments
into a trust separate from the company.  Five of the company's fifteen qualified
plans which cover more than 65 percent of all employees, were in a legally
defined full-funding limitation status at December 31, 1997.

     The company and subsidiaries also sponsor defined-contribution plans in
which most employees are eligible to participate. Company contributions, up to 
4 percent of compensation, are based on a matching of employee contributions.

     In addition, the company and its subsidiaries provide certain health care
and life insurance benefits for retired employees.  Employees achieve
eligibility to participate in these contributory plans upon retirement from
active service and if they meet specified age and years of service requirements.
Election to participate must be made at the date of retirement. Qualifying
dependents are also eligible for medical coverage. Approximately 70 percent of
the company's current retirees participate in the medical plans.  The cost and
funded status for the medical and life benefits are combined in the tables that
follow because (1) life benefits constitute an insignificant amount of the
combined cost, and (2) for those plans with assets, the assets in trust for each
plan can be used to pay benefits under either plan. Plan documents reserve the
company's right to amend or terminate the plans at any time. Premiums charged
retirees for medical coverage are based on years of service and are adjusted
annually for changes in the cost of the plans as determined by an independent
actuary.  In addition to this medical inflation cost-sharing feature, the plans
also have provisions for deductibles, copayments, coinsurance percentages, 
out-of-pocket limits, schedule of reasonable fees, managed care providers,
maintenance of benefits with other plans, Medicare carve-out and a maximum
lifetime benefit of from $250,000 to $1,000,000 per covered individual. It is
the policy of the company to fund the maximum amount deductible for income taxes
into the VEBA trust established for the Northrop Retiree Health Care Plan for
Retired Employees for payment of benefits.

                                       50

<PAGE>
 
NORTHROP GRUMMAN CORPORATION

     The cost to the company of these plans in each of the last three years is
shown in the following table.


<TABLE>
<CAPTION>
$ in millions                                                    1997       1996       1995
- ---------------------------------------------------------------------------------------------
<S>                                                            <C>        <C>        <C>
Defined benefit pension plans
    Actual return on assets                                    $(1,804)   $(1,379)   $(1,856)
    Deferral of actual return on assets                            970        618      1,233
- ---------------------------------------------------------------------------------------------
    Expected return on assets                                     (834)      (761)      (623)
    Service cost                                                   162        174        125
    Interest cost                                                  618        570        520
    Amortization of unrecognized items
        Transition asset, net                                      (42)       (42)       (42)
        Prior service costs                                         34         41         31
        Net gain from previous years                               (71)       (21)       (34)
- ---------------------------------------------------------------------------------------------
    Net periodic pension income                                $  (133)   $   (39)   $   (23)
=============================================================================================

Defined contribution plans                                     $    84    $    84    $    63
=============================================================================================

Retiree health care and life insurance benefit plans
    Actual return on assets                                    $   (68)   $   (60)   $   (95)
    Deferral of actual return on assets                             42         38         76
- ---------------------------------------------------------------------------------------------
    Expected return on assets                                      (26)       (22)       (19)
    Service cost                                                    27         27         20
    Interest cost                                                   98         91         89
    Amortization of unrecognized gain from
      previous years                                               (10)        (5)        (3)
- ---------------------------------------------------------------------------------------------
    Net periodic postretirement benefit cost                   $    89    $    91    $    87
=============================================================================================
</TABLE>


     Major assumptions as of each year-end used in the accounting for the
defined-benefit plans are shown in the following table. Pension cost is
determined using all three factors as of the end of the preceding year, whereas
the funded status of the plans, shown later, uses only the first two factors as
of the end of each year.


<TABLE>
<CAPTION>
                                                           1997      1996      1995
- -------------------------------------------------------------------------------------
<S>                                                        <C>       <C>       <C>
Discount rate for obligations                              7.00%     7.50%     7.00%
Rate of increase for compensation                          4.50      4.50      5.00
Expected long-term rate of return on plan assets           9.50      9.00      9.00
- -------------------------------------------------------------------------------------
</TABLE>


                                       51

<PAGE>
 
NORTHROP GRUMMAN CORPORATION

     These assumptions also were used in retiree health care and life insurance
benefit calculations with one modification. Since, unlike the pension trust, the
earnings of the VEBA trust are taxable, the above 9 percent expected rate of
return on plan assets was reduced accordingly to 5.25 percent after taxes.  A
significant factor used in estimating future per capita cost of covered health
care benefits for the company and its retirees is the health care cost trend
rate assumption. The rate used was 7 percent for 1997 and is assumed to decrease
gradually to 6 percent for 2006 and remain at that level thereafter. An
additional one-percentage-point of increase each year in that rate would result
in a $14 million annual increase in the aggregate of the service and interest
cost components of net periodic postretirement benefit cost and a $121 million
increase in the accumulated postretirement benefit obligation at December 31,
1997.

     The following tables set forth the funded status and amounts recognized in
the Consolidated Statements of Financial Position at each year-end for the
company's defined-benefit pension and retiree health care and life insurance
benefit plans. The summary showing pension plans whose accumulated benefits are
in excess of assets at December 31, 1997, is comprised of seven qualified plans
along with twelve unfunded nonqualified plans for benefits provided to
directors, officers and employees either beyond those provided by, or payable
under, the company's main plans.

     The company revised its estimate of the discount rate for obligations and
rate of increase for compensation assumptions in calculating the funded status
of the plans at December 31, 1997.  The changes resulted in a $498 million
increase in the projected benefit obligation for pension plans and a $74 million
increase in the accumulated postretirement benefit obligation.

                                       52

<PAGE>
 
NORTHROP GRUMMAN CORPORATION



<TABLE>
<CAPTION>
$ in millions                                                       1997          1996
- -----------------------------------------------------------------------------------------
<S>                                                              <C>           <C>
Pension plans whose assets exceed accumulated benefits
Actuarial present value of benefit obligations
   Vested benefits                                               $ 6,932       $ 6,255
   Nonvested benefits                                                381           328
- -----------------------------------------------------------------------------------------
   Accumulated benefit obligations                                 7,313         6,583
   Effect of assumed salary rate increases                           459           391
- -----------------------------------------------------------------------------------------
   Projected benefit obligations                                   7,772         6,974
Less market value of plan assets                                  10,246         9,184
- -----------------------------------------------------------------------------------------
Excess of assets over projected benefit obligations               (2,474)       (2,210)
Unrecognized items
   Net transition asset                                              205           247
   Prior service costs                                              (217)         (248)
   Net gain                                                        2,120         2,067
- -----------------------------------------------------------------------------------------
Accrued retiree benefits pension asset included in
  Consolidated Statements of Financial Position                  $  (366)      $  (144)
=========================================================================================

Pension plans whose accumulated benefits exceed assets
Actuarial present value of benefit obligations
   Vested benefits                                               $ 1,002       $   839
   Nonvested benefits                                                120            51
- -----------------------------------------------------------------------------------------
   Accumulated benefit obligations                                 1,122           890
   Effect of assumed salary rate increases                           162           145
- -----------------------------------------------------------------------------------------
   Projected benefit obligations                                   1,284         1,035
Less market value of plan assets                                     586           436
- -----------------------------------------------------------------------------------------
Excess of projected benefit obligations over assets                  698           599
Unrecognized items
   Net transition obligation                                          (2)           (3)
   Prior service costs                                               (14)          (16)
   Net gain(loss)                                                   (109)          (10)
Additional minimum liability                                          54            22
- -----------------------------------------------------------------------------------------
Accrued retiree benefits liability included in
Consolidated Statements of Financial Position                    $   627       $   592
=========================================================================================
</TABLE>


                                       53

<PAGE>
 
NORTHROP GRUMMAN CORPORATION

     Pension plan assets at December 31, 1997, comprised 51 percent domestic
equity type investments in listed companies (including 4 percent in Northrop
Grumman common stock); 16 percent equity investments listed on international
exchanges; 26 percent in fixed income type investments; principally U.S.
Government securities; 3 percent in venture capital and real estate investments;
and 4 percent in cash.  The investment in Northrop Grumman represents 
4,125,187 shares, or 6 percent of the company's total shares outstanding.



<TABLE>
<CAPTION>
$ in millions                                                1997          1996
- --------------------------------------------------------------------------------
<S>                                                        <C>          <C>
Retiree health care and life insurance benefit plans
Accumulated postretirement benefit obligation (APBO)
   Retirees                                                $  870       $   841
   Fully eligible active employees                            163            81
   Active employees not yet eligible                          410           383
- --------------------------------------------------------------------------------
                                                            1,443         1,305
Less market value of plan assets                              538           468
- --------------------------------------------------------------------------------
Excess of APBO over assets                                    905           837
Unrecognized items
   Prior service cost                                          (2)           (2)
   Net gain(loss)                                             181           191
- --------------------------------------------------------------------------------
Accrued retiree benefits liability included in
   Consolidated Statements of Financial Position           $1,084       $ 1,026
================================================================================
</TABLE>



     Retiree health care and life insurance plan assets at December 31, 1997,
comprised 72 percent equity type investments in listed companies and 28 percent
in cash and equivalents.

                                       54

<PAGE>
 
NORTHROP GRUMMAN CORPORATION


CONTINGENCIES

The corporation and its subsidiaries have been named as defendants in various
legal actions. Based upon available information, it is the company's expectation
that those actions are either without merit or will have no material adverse
effect on the company's results of operations or financial position.

     In accordance with company policy on environmental remediation, the
estimated cost to complete remediation has been accrued where it is probable
that the company will incur such costs in the future, including those for which
it has been named a Potentially Responsible Party by the Environmental
Protection Agency or similarly designated by other environmental agencies.  To
assess the potential impact on the company's financial statements, management
estimates the total reasonably possible remediation costs that could be incurred
by the company, taking into account currently available facts on each site as
well as the current state of technology and prior experience in remediating
contaminated sites.  These estimates are reviewed periodically and adjusted to
reflect changes in facts and technical and legal circumstances.  Management
estimates that at December 31, 1997, the reasonable range of future costs for
environmental remediation, including those sites acquired in the purchase of
ESG, is $51 million to $86 million, of which $61 million has been accrued.
Although management cannot predict whether new information gained as projects
progress will materially affect the estimated liability accrued, management does
not anticipate that future remediation expenditures will have a material adverse
effect on the company's results of operations, financial position, or cash
flows.

     Minimum rental commitments under long-term noncancellable operating leases
total $366 million which is payable as follows:  1998 - $82 million, 
1999 - $66 million, 2000 - $53 million, 2001 - $41 million, 2002 - $34 million, 
and 2003 and thereafter - $90 million.


STOCK RIGHTS

The company has a Common Stock Purchase Rights plan with one right issued in
tandem with each share of common stock.  The rights will become exercisable on
the tenth business day after a person or group has acquired 15 percent or more
of the general voting power of the company, or announces an intention to make a
tender offer for 30 percent or more of such voting power, without the prior
consent of the Board of Directors. If the rights become exercisable, a holder
will be entitled to purchase one share of common stock from the company at an
initial exercise price of $105.

     If a person acquires more than 15 percent of the then outstanding voting
power of the company or if the company is combined with an acquiror, each right
will entitle its holder to receive, upon exercise, shares of the company's or
the acquiror's (depending upon which is the surviving company) common stock
having a value equal to two times the exercise price of the right.

                                       55

<PAGE>
 
NORTHROP GRUMMAN CORPORATION

     The company will be entitled to redeem the rights at $.02 per right at any
time prior to the earlier of the date that a person has acquired or obtained the
right to acquire 15 percent of the general voting power of the company or the
expiration of the rights in October 1998. The rights are not exercisable until
after the date on which the company's prerogative to redeem the rights has
expired. The rights do not have voting or dividend privilege and cannot be
traded independently from the company's common stock until such time as they
become exercisable.  The rights do not and will not become exercisable because
of the pending Lockheed Martin transaction.


STOCK COMPENSATION PLANS

At December 31, 1997, Northrop Grumman had two stock-based compensation plans
the 1993 Long-Term Incentive Stock Plan (LTISP) applicable to employees and the
1995 Stock Option Plan for Non-Employee Directors (SOPND), and Logicon had two
stock-based compensation plans  the 1992 Employee Incentive Stock Option Plan
(LEISOP) and the 1991 Stock Option Plan for Non-Employee Directors (LSOPND).
Each unexercised option granted under the Logicon stock-based compensation plans
was converted to .6161 options for the company's common stock and the option
price was adjusted accordingly.  Under terms of the merger agreement between the
company and Logicon, substantially all of the approximately 300,000 unexercised
options (in Northrop Grumman shares) granted under the Logicon plans became
vested and exercisable upon consummation of the merger.

     The LTISP permits grants to key employees of three general types of stock
incentive awards:  stock options, stock appreciation rights (SARs) and stock
awards.  Under the LTISP each grant of a stock option is made at the closing
market price on the date of grant.  Options generally vest in 25 percent
increments, two, three, four and five years from the grant date and expire ten
years after the grant date.  No SARs have been granted under the LTISP.  Stock
awards, in the form of restricted performance stock rights, are granted to key
employees without payment to the company.  Recipients of the rights earn shares
of stock based on a total-shareholder-return measure of performance over a 
five-year period with interim distributions three and four years after grant.
If at the end of the five-year period the performance objectives have not been
met, up to 70 percent of the original grant will be forfeited. Termination of
employment can result in forfeiture of some or all of the benefits extended
under the plan. At December 31, 1997, 1,245,016 shares remained available for
future grants under the LTISP.

     The SOPND permits grants of stock options to nonemployee directors.  Each
grant of a stock option is made at the closing market price on the date of the
grant, is immediately exercisable and expires ten years after the grant date.
At December 31, 1997, 274,500 shares were available for future grants under the
SOPND.

                                       56

<PAGE>
 
NORTHROP GRUMMAN CORPORATION

     The LEISOP provided for grants of options to key employees to purchase
shares of the company's common stock at prices not less than market value at
date of grant.  The exercise period is 10 years or less from the date of the
grant of the option.

     The LSOPND provided the ability to grant non-employee directors options to
purchase common stock of the company. Options were granted according to a
formula contained in the LSOPND at prices not less than the fair market value at
date of grant and expire five years from the date of grant.

     The company applies Accounting Principles Board Opinion 25 - Accounting for
Stock Issued to Employees and related Interpretations in accounting for awards
made under the plans.  When stock options are exercised, the amount of the cash
proceeds to the company is recorded as an increase to paid-in capital.  No
compensation expense is recognized in connection with stock options.
Compensation expense for restricted performance stock rights is estimated and
accrued over the vesting period.  The fixed 30 percent minimum distribution
portion is recorded at grant value and the variable portion is recorded at
market value.  Compensation expense recognized for stock awards was $57 million
in 1997, $25 million in 1996, and $4 million in 1995.

     Stock option activity for the last three years is summarized below:


<TABLE>
<CAPTION>
                                                                                     Weighted-
                                                                                       Average
                                                                        Shares        Exercise            Shares
                                                                  Under Option          Prices       Exercisable
- -------------------------------------------------------------------------------------------------------------------
<S>                                                               <C>                <C>             <C>
Outstanding at January 1, 1995                                       3,128,538       $      27         1,114,703
    Granted                                                            899,757              53
    Cancelled                                                         (418,365)             15
    Exercised                                                         (180,249)             22
- -------------------------------------------------------------------------------------------------------------------
Outstanding at December 31, 1995                                     3,429,681              35         1,212,290
    Granted                                                          1,048,640              76
    Cancelled                                                         (190,041)             31
    Exercised                                                         (261,008)             28
- -------------------------------------------------------------------------------------------------------------------
Outstanding at December 31, 1996                                     4,027,272              47         1,384,026
    Granted                                                             15,000              85
    Cancelled                                                         (100,932)             58
    Exercised                                                         (570,182)             34
- -------------------------------------------------------------------------------------------------------------------
Outstanding at December 31, 1997                                     3,371,158              49         1,556,475
===================================================================================================================
</TABLE>


     Had compensation expense been determined based on the fair value at the
grant dates for stock option awards granted in 1997, 1996 and 1995, consistent
with the method of  Financial Accounting Standards Board Statement 123 -
Accounting for Stock Based Compensation, net income, basic earnings per share,
and diluted earnings per share in 1997 would have been lower by $5 million,
eight cents and eight cents, respectively.  For 1996 net income, basic earnings
per share and diluted earnings per share would have been lower by $2 million,

                                       57

<PAGE>
 
NORTHROP GRUMMAN CORPORATION

three cents, and four cents, respectively.  For 1995 net income would have been
unchanged, basic earnings per share would have been lower by one cent, and
diluted earnings per share would have been unchanged.  These amounts were
determined using weighted-average per share fair values of options granted in
1997, 1996 and 1995 of $25, $24 and $17, respectively.  The fair value of each
option grant was estimated on the date of grant using the Black-Scholes 
option-pricing model based on an expected life of six years and for 1997, 1996,
and 1995, respectively, the following additional assumptions:  dividend yield - 
1.9 percent, 2.1 percent and 2.8 percent; expected volatility - 22 percent, 
28 percent and 31 percent; and risk-free interest rate - 6.7 percent, 
6.2 percent and 5.8 percent.


<TABLE>
<CAPTION>

     At December 31, 1997, the following stock options were outstanding:
                              Options Outstanding                      Options Exercisable
                ----------------------------------------------      -------------------------
                                        Weighted-    Weighted-                      Weighted-
 Range of             Number              Average      Average           Number       Average
 Exercise        Outstanding            Remaining     Exercise      Exercisable      Exercise
   Prices        at 12/31/97     Contractual Life       Prices      at 12/31/97        Prices
- ---------       ----------------------------------------------      -------------------------
<S>             <C>              <C>                <C>             <C>            <C>
$16 to 25            694,926            2.8 years   $       19          694,926    $       19
 26 to 40            549,760            5.8 years           33          437,628            32
 41 to 55            569,578            7.1 years           43          269,053            44
 56 to 70            703,144            7.9 years           58          133,218            56
 71 to 86            853,750            9.0 years           81           21,650            84
                  ----------                                        -----------
                   3,371,158                                          1,556,475
                  ==========                                        ===========
</TABLE>


     Restricted performance stock rights were granted with weighted-average
grant-date fair values per share as follows:  1997 - 7,700 at $80; 1996 -
802,800 at $81; and 1995 - 22,660 at $53.

                                       58

<PAGE>
 
NORTHROP GRUMMAN CORPORATION

UNAUDITED SELECTED QUARTERLY DATA

Quarterly financial results are set forth in the following tables together with
dividend and common stock price data.



<TABLE>
<CAPTION>
1997 Quarters
$ in millions, except per share                       4          3          2        1
- ------------------------------------------------------------------------------------------
<S>                                              <C>        <C>       <C>       <C>
Net sales                                        $  2,510   $  2,297  $  2,228  $  2,118
Operating margin                                      246        205       233       196
Net income                                            117         98       108        84
Basic earnings per share                             1.75       1.46      1.62      1.27
Diluted earnings per share                           1.71       1.44      1.59      1.25
Dividend per share                                    .40        .40       .40       .40
Stock price:
High                                            123 13/16    127 7/8    89 3/4    82 5/8
Low                                               100 7/8     87 1/2    71 7/8    71 3/8
- ------------------------------------------------------------------------------------------
</TABLE>


     Operating margin in the fourth quarter of 1997 includes a $55 million
positive cumulative margin rate adjustment on the B-2 production contract and a
$27 million mark-to-market charge for restricted performance stock rights.
Charges of $20 million and $13 million were recorded in the fourth and first
quarters, respectively, related to increases in the cost estimate to complete
the company's work on the Directional Infrared Countermeasures (DIRCM) program.
In the third quarter, operating margin was reduced by a $53 million cumulative
margin rate adjustment on the E-8 Joint STARS program.


<TABLE>
<CAPTION>
1996 Quarters
$ in millions, except per share                       4          3         2         1
- ------------------------------------------------------------------------------------------
<S>                                              <C>        <C>       <C>       <C>
Net sales                                        $  2,413   $  2,172  $  2,291  $  1,731
Operating margin                                      159        176       219       149
Net income                                             24         78        94        68
Basic earnings per share                              .38       1.18      1.58      1.17
Diluted earnings per share                            .38       1.14      1.55      1.15
Dividend per share                                    .40        .40       .40       .40
Stock price:
High                                              84 1/4      80 1/4    69 1/4    67 3/8
Low                                               76 3/8      63 3/4    57 3/4    58 3/8
- ------------------------------------------------------------------------------------------
</TABLE>


                                       59

<PAGE>
 
NORTHROP GRUMMAN CORPORATION

     The fourth quarter of 1996 includes a $90 million pretax charge related to
the closure of four plants.  The charge included $30 million for costs related
to the reduction of personnel and other closure activities and $60 million for
the write-down of facilities.  The sale of shares owned by the company in ETEC
Systems, Inc.  generated pretax gains of $10 million, $6 million and $12 million
in the fourth, third and second quarters, respectively.  The first quarter
includes a $25 million charge related to nacelles work the company performed for
Fokker Aircraft N.V., which declared bankruptcy in March 1996.

     The sum of quarterly earnings per share for 1996 does not equal earnings
per share for the year because the average number of common shares outstanding
for the second half of 1996 was disproportionately higher than the full year
average due to the issuance in June of approximately 8 million shares of common
stock in a public stock offering.

    The corporation's common stock is traded on the New York and Pacific Stock
Exchanges (trading symbol NOC). The approximate number of holders of record of
the corporation's common stock at January 31, 1998, was 10,736.

                                       60

<PAGE>
 
NORTHROP GRUMMAN CORPORATION



INDEPENDENT AUDITORS' REPORT


Board of Directors and Shareholders
Northrop Grumman Corporation
Los Angeles, California


     We have audited the accompanying consolidated statements of financial
position of Northrop Grumman Corporation and Subsidiaries as of December 31,
1997 and 1996, and the related consolidated statements of income, changes in
shareholders' equity, and cash flows for each of the three years in the period
ended December 31, 1997.  Our audit also included the financial statement
s
chedule listed in the Index at Item 14. These financial statements and
financial statement schedule are the responsibility of the company's management.
Our responsibility is to express an opinion on these financial statements and
financial statement schedule based on our audits.

     We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

     In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of Northrop Grumman Corporation
and Subsidiaries at December 31, 1997 and 1996, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1997 in conformity with generally accepted accounting principles.
Also, in our opinion, such financial statement schedule, when considered in
relation to the basic consolidated financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.



Deloitte & Touche LLP
Los Angeles, California
January 21, 1998


(except for the information described in the note to the consolidated financial
statements captioned "Merger Agreement" as to which the date is March 25, 1998)

                                       61

<PAGE>
 
NORTHROP GRUMMAN CORPORATION



ITEM 9.   CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
No information is required in response to this Item.


                                    PART III
                                        

ITEM 10.  DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

          The information as to Directors will be incorporated herein by
reference to the Proxy Statement for the 1998 Annual Meeting of Stockholders to
be filed within 120 days after the end of the company's fiscal year.


ITEM 11.  EXECUTIVE COMPENSATION

          The information as to Executive Compensation will be incorporated
herein by reference to the Proxy Statement for the 1998 Annual Meeting of
Stockholders to be filed within 120 days after the end of the company's fiscal
year.


ITEM 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

          The information as to Security Ownership of Certain Beneficial Owners
and Management will be incorporated herein by reference to the Proxy Statement
for the 1998 Annual Meeting of Stockholders to be filed within 120 days after
the end of the company's fiscal year.


ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

          The information as to Certain Relationships and Related Transactions
will be incorporated herein by reference to the Proxy Statement for the 1998
Annual Meeting of Stockholders to be filed within 120 days after the end of the
company's fiscal year.


Item 14.  EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K

(a)  1.  Financial Statements
         Consolidated Statements of Financial Position
         Consolidated Statements of Income
         Consolidated Statements of Changes in Shareholders' Equity
         Consolidated Statements of Cash Flows

         Notes to Consolidated Financial Statements

         Independent Auditors' Report

     2.  Financial Statement Schedule
 
             Schedule II -  Valuation and Qualifying Accounts

         All other schedules are omitted either because they are not applicable
or not required or because the required information is included in the financial
statements or notes thereto.
         Separate financial statements of the parent company are omitted since
it is primarily an operating company and minority equity interests in and/or
nonguaranteed long-term debt of subsidiaries held by others than the company are
in amounts which together do not exceed 5 percent of the total consolidated
assets at December 31, 1997.

(b)  A report on Form 8-K was filed with the Securities and Exchange Commission
     on November 14, 1997, regarding the acquisition of Logicon, Inc.

     A report on Form 8-K was filed with the Securities and Exchange Commission
     on January 21, 1998, regarding the press release on results of operations
     for the fourth quarter and the year ended December 31, 1997.


                                       62

<PAGE>
 
NORTHROP GRUMMAN CORPORATION


Exhibits
  2(a)  Agreement and Plan of Merger among Northrop Grumman Corporation, NG
        Acquisition, Inc. and Logicon, Inc., dated as of May 4, 1997
        (incorporated by reference to Form 8-K filed August 29, 1997)

  2(b)  Agreement and Plan of Merger, dated as of July 2, 1997, as amended
        and restated as of September 29, 1997, by and among Northrop Grumman
        Corporation, Lockheed Martin Corporation and Hurricane Sub, Inc.
        (incorporated by reference to Report on Form 10-Q, filed
        November 7, 1997)


  3(a)  Certificate of Incorporation, as amended (incorporated by reference to
        Form S-3 Registration Statement, filed August 18, 1994)

  3(b)  Northrop Grumman Corporation Bylaws, amended and restated as of July 30,
        1997

  4(a)  Common Stock Purchase Rights Agreement (incorporated by reference to
        Form 8-A filed September 22, 1988), amended on August 2, 1991
        (incorporated by reference to Form 8 filed August 2, 1991) and amended
        on September 28, 1994 (incorporated by reference to Form 8/A-A filed
        October 7, 1994)

  4(b)  Indenture Agreement dated as of October 15, 1994 (incorporated by
        reference to Form 8-K filed October 25, 1994)

  4(c)  Form of Officer's Certificate (without exhibits) establishing the terms
        of Northrop Grumman Corporation's 7% Notes Due 2006, 7 3/4% Debentures
        Due 2016 and 7 7/8% Debentures Due 2026 (incorporated by reference to
        Form S-4 Registration Statement, filed April 19, 1996)

  4(d)  Form of Northrop Grumman Corporation's 7% Notes Due 2006 (incorporated
        by reference to Form S-4 Registration Statement, filed April 19, 1996)

  4(e)  Form of Northrop Grumman Corporation's 7 3/4% Debentures Due 2016
        (incorporated by reference to Form S-4 Registration Statement, filed
        April 19, 1996)

  4(f)  Form of Northrop Grumman Corporation's 7 7/8% Debentures Due 2026
        (incorporated by reference to Form S-4 Registration Statement, filed
        April 19, 1996)

 10(a)  Second Amended and Restated Credit Agreement dated as of April 15, 1994,
        Amended and Restated as of March 1, 1996 among Northrop Grumman
        Corporation, Bank of American National Trust and Savings Association, as
        Documentation Agent, Chemical Securities, Inc., as Syndication Agent,
        The Chase Manhattan Bank (National Association), as Administrative
        Agent, and the Banks Signatories thereto (incorporated by reference to
        Form 8-K, filed March 18, 1996), and amended as of November 1, 1996
        (incorporated by reference to Form 10-K filed February 25, 1997)

 10(b)  Uncommitted Credit Facility dated October 10, 1994, between Northrop
        Grumman Corporation and Wachovia Bank of Georgia, N.A., which is
        substantially identical to facilities between Northrop Grumman
        Corporation and certain banks some of which are parties to the Credit
        Agreement filed as Exhibit 10(a) hereto (incorporated by reference to
        Form 10-K filed February 22, 1996)

*10(c)  1973 Incentive Compensation Plan (incorporated by reference to Form 8-B
        filed June 21, 1985)

*10(d)  1973 Performance Achievement Plan (incorporated by reference to Form 8-B
        filed June 21, 1985)

                                       63

<PAGE>
 
NORTHROP GRUMMAN CORPORATION


*10(e)  Northrop Supplemental Plan 2 (incorporated by reference to Form 10-K
        filed February 22, 1996), and amended as of June 19, 1996

*10(f)  Northrop Grumman Corporation ERISA Supplemental Plan 1 (incorporated by
        reference to Form 10-K filed February 28, 1994)

*10(g)  Retirement Plan for Independent Outside Directors (incorporated by
        reference to Form SE filed March 29, 1991), amended September 21, 1994
        (incorporated by reference to Form 10-K filed March 21, 1995)

*10(h)  1987 Long-Term Incentive Plan, as amended (incorporated by reference to
        Form SE filed March 30, 1989)

*10(i)  Executive Life Insurance Policy (incorporated by reference to Form 10-K
        filed February 22, 1996)

*10(j)  Executive Accidental Death, Dismemberment and Plegia Insurance Policy
        (incorporated by reference to Form 10-K filed February 22, 1996)

*10(k)  Executive Long-Term Disability Insurance Policy (incorporated by
        reference to Form 10-K filed February 22, 1996)

*10(l)  Key Executive Medical Plan Benefit Matrix (incorporated by reference to
        Form 10-K filed February 22, 1996)

*10(m)  Executive Dental Insurance Policy Group Numbers 5134 and 5135
        (incorporated by reference to Form 10-K filed February 22, 1996)

*10(n)  Group Excess Liability Policy (incorporated by reference to Form 10-K
        filed February 22, 1996)

*10(o)  Northrop Grumman 1993 Long-Term Incentive Stock Plan, as amended and
        restated (incorporated by reference to Northrop Grumman Corporation
        Proxy Statement filed April 3, 1997) and amended on August 20, 1997

*10(p)  Northrop Corporation 1993 Stock Plan for Non-Employee Directors
        (incorporated by reference to Northrop Corporation 1993 Proxy Statement
        filed March 30, 1993), amended as of September 21, 1994 (incorporated by
        reference to Form 10-K filed March 21, 1995)

*10(q)  Northrop Grumman Corporation 1995 Stock Option Plan for Non-Employee
        Directors (incorporated by reference to 1995 Proxy Statement filed March
        30, 1995)

*10(r)  Form of Northrop Grumman Corporation Special Agreement (incorporated by
        reference to Form 10-K filed February 25, 1997), as amended August 1997,
        December 1997 (with respect to Richard B. Waugh, Jr.) and February 1998

                                       64

<PAGE>
 
NORTHROP GRUMMAN CORPORATION


*10(s)  Executive Deferred Compensation Plan (effective December 29, 1994)
        (incorporated by reference to Form 10-K filed February 25, 1997)

 10(t)  Memorandum of Agreement dated December 16, 1996 (W. C. Solberg
        Retirement Arrangements) and Release Agreement between Northrop Grumman
        Corporation and W. C. Solberg (incorporated by reference to Form 10-K
        filed February 25, 1997)

 10(u)  CPC Supplemental Executive Retirement Program

 23     Independent Auditors' Consent
 24     Power of Attorney
 27     Financial Data Schedule



________________
* Listed as Exhibits pursuant to Item 601(b)(10) of Regulation S-K

                                       65

<PAGE>
 
NORTHROP GRUMMAN CORPORATION



                                  SIGNATURES
                                        
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized, on the 25th day of March
1998.


                                    NORTHROP GRUMMAN CORPORATION

                       By:          Nelson F. Gibbs
                           --------------------------------------
                                    Nelson F. Gibbs
                         Corporate Vice President and Controller
                              (Principal Accounting Officer)

Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed on behalf of the registrant this 25th day of March 1998, by the
following persons and in the capacities indicated.

       Signature                      Title
       ---------                      -----
Kent Kresa*                    Chairman of the Board, President and Chief
                                Executive Officer and Director (Principal
                                Executive Officer)

Jack R. Borsting*              Director
John T. Chain, Jr.*            Director
Jack Edwards*                  Director
Phillip Frost*                 Director
Robert A. Lutz*                Director
Aulana L. Peters*              Director
John E. Robson*                Director
Richard R. Rosenberg*          Director
John Brooks Slaughter*         Director
Richard J. Stegemeier*         Director
Richard B. Waugh, Jr.*         Corporate Vice President and Chief
                                Financial Officer


*By           James C. Johnson
     ----------------------------------
              James C. Johnson,
              Attorney-in-Fact
     pursuant to a power of attorney

                                       66

<PAGE>
 
NORTHROP GRUMMAN CORPORATION

                SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
                            (DOLLARS IN THOUSANDS)



<TABLE>
<CAPTION>

                  COL. A                                          COL. B           COL. C            COL. D           COL. E
                ----------                                      ----------       ----------        -----------      ----------
                                                                                                     Other
                                                                Balance at                         Changes--          Balance
              Classification                                    Beginning        Additions            Add              at End
              --------------                                    of Period        At Cost(2)        (Deduct)(1)       of Period
                                                                ----------       ----------        -----------      ----------
<S>                                                             <C>              <C>               <C>              <C>
Description:

Year ended December 31, 1995
  Reserves and allowances deducted
   from asset accounts:
    Allowances for doubtful amounts.........................      $66,913         $ 9,892           $ (2,231)        $74,574

Year ended December 31, 1996
  Reserves and allowances deducted
   from asset accounts:
    Allowances for doubtful amounts.........................      $74,574         $21,929           $(41,058)        $55,445

Year ended December 31, 1997
  Reserves and allowances deducted
   from asset accounts:
    Allowances for doubtful amounts.........................      $55,445         $17,279           $(17,746)        $54,978
</TABLE>

___________
(1)  Uncollectible amounts written off, net of recoveries.
(2)  Additions include allowances for bad debts from acquired companies - $2,163
     in 1995 and $5,951 in 1996.

                                       67






<PAGE>
 

                                 EXHIBIT 3(b)
                                        

                                    BYLAWS
                                      OF
                         NORTHROP GRUMMAN CORPORATION
                           (A Delaware Corporation)


                                   ARTICLE I

                                    OFFICES

     Section 1.01.  REGISTERED OFFICE.  The registered office of Northrop
Grumman Corporation (the "Corporation") in the State of Delaware shall be at
Corporation Trust Center, 1209 Orange Street, City of Wilmington, County of New
Castle, and the name of the registered agent at that address shall be The
Corporation Trust Company.

     Section 1.02.  PRINCIPAL EXECUTIVE OFFICE.  The principal executive office
of the Corporation shall be located at 1840 Century Park East, Los Angeles,
California 90067.  The Board of Directors of the Corporation (the "Board of
Directors") may change the location of said principal executive office.

     Section 1.03.  OTHER OFFICES.  The Corporation may also have an office or
offices at such other place or places, either within or without the State of
Delaware, as the Board of Directors may from time to time determine or as the
business of the Corporation may require.


                                  ARTICLE II

                           MEETINGS OF STOCKHOLDERS

     Section 2.01.  ANNUAL MEETINGS.  The annual meeting of stockholders of the
Corporation shall be held between May 1 and July 1 of each year on such date and
at such time as the Board of Directors shall determine.
  At each annual meeting
of stockholders, directors shall be elected in accordance with the provisions of
Section 3.04 hereof and any other proper business may be transacted.

     Section 2.02.  SPECIAL MEETINGS.  Special meetings of stockholders for any
purpose or purposes may be called at any time by a majority of the Board of
Directors, the Chairman of the Board, or by the President and Chief Executive
Officer.  Special meetings may not be called by any other person or persons.
Each special meeting shall be held at such date and time as is requested by the
person or persons calling the meeting, within the limits fixed by law.

     Section 2.03.  PLACE OF MEETINGS.  Each annual or special meeting of
stockholders shall be held at such location as may be determined by the Board of
Directors or, if no such determination is made, at such place as may be
determined by the Chairman of the Board.  If no location is so determined, any
annual or special meeting shall be held at the principal executive office of the
Corporation.

     Section 2.04.  NOTICE OF MEETINGS.  Written notice of each annual or
special meeting of stockholders stating the date and time when, and the place
where, it is to be held shall be delivered either personally or by mail to
stockholders entitled to vote at such meeting not less than ten (10) nor more
than sixty (60) days before the date of the meeting.  The 

<PAGE>
 
purpose or purposes for which the meeting is called may, in the case of an
annual meeting, and shall, in the case of a special meeting, also be stated. If
mailed, such notice shall be directed to a stockholder at his address as it
shall appear on the stock books of the Corporation, unless he shall have filed
with the Secretary of the Corporation a written request that notices intended
for him be mailed to some other address, in which case such notice shall be
mailed to the address designated in such request.

     Section 2.05.  CONDUCT OF MEETINGS.  All annual and special meetings of
stockholders shall be conducted in accordance with such rules and procedures as
the Board of Directors may determine subject to the requirements of applicable
law and, as to matters not governed by such rules and procedures, as the
chairman of such meeting shall determine.  The chairman of any annual or special
meeting of stockholders shall be the Chairman of the Board.  The Secretary, or
in the absence of the Secretary, a person designated by the Chairman of the
Board, shall act as secretary of the meeting.

     Section 2.06.  NOTICE OF BUSINESS.  At any meeting of stockholders, only
such business shall be conducted as shall be a proper matter for stockholder
action under the laws of the State of Delaware and as shall have been brought
before the meeting (a) by or at the direction of the Board of Directors or 
(b) by any stockholder of the Corporation who is a stockholder of record at the
time of giving of the notice provided for in this Section 2.06 who shall be
entitled to vote at such meeting and who complies with the notice procedures set
forth in this Section 2.06. For business to be properly brought before a meeting
of stockholders by a stockholder, the stockholder shall have given timely notice
thereof in writing to the Secretary. To be timely, a stockholder's notice shall
be delivered to or mailed and received at the principal executive office of the
Corporation not less than sixty (60) days nor more than ninety (90) days prior
to the meeting: provided, however, that in the event that less than seventy (70)
days' notice or prior public disclosure of the date of the meeting is given or
made to stockholders, notice by the stockholder to be timely must be so received
not later than the close of business on the 10th day following the date on which
such notice of the date of the meeting was mailed or such public disclosure was
made, whichever first occurs. Such stockholder's notice to the Secretary shall
set forth as to each matter the stockholder proposes to bring before the meeting
(a) a brief description of the business desired to be brought before the
meeting, the reasons for conducting such business at the meeting, and, in the
event that such business includes a proposal to amend either the Certificate of
Incorporation or these Bylaws, the language of the proposed amendment, (b) the
name and address as they appear on the Corporation's books of the stockholder
proposing such business, (c) the class and number of shares of capital stock of
the Corporation which are beneficially owned by such stockholder and (d) any
material interest of such stockholder in such business. Notwithstanding anything
in these Bylaws to the contrary, no business shall be conducted at a stockholder
meeting except in accordance with the procedures set forth in this Section 2.06.
The chairman of the meeting shall, if the facts warrant, determine and declare
to the meeting that business was not properly brought before the meeting and in
accordance with the provisions of these Bylaws and if he should so determine, he
shall so declare to the meeting and any such business not properly brought
before the meeting shall not be transacted. Notwithstanding the foregoing
provisions of this Section 2.06, a stockholder shall also comply with all
applicable requirements of the Securities Exchange Act of 1934 as amended and
the rules and regulations thereunder with respect to the matters set forth in
this Section 2.06. Nothing in this Bylaw shall be deemed to affect any rights of
stockholders or the Corporation under Rule 14a-8 of the Securities Exchange Act
of 1934 with respect to proposals which are requested to be included in the
Corporation's proxy statement.

     Section 2.07.  QUORUM.  At any meeting of stockholders, the presence, in
person or by proxy, of the holders of record of a majority of shares then issued
and outstanding and entitled to vote at the meeting shall constitute a quorum
for the transaction of business; provided, 

<PAGE>
 
however, that this Section 2.07 shall not affect any different requirement which
may exist under statute, pursuant to the rights of any authorized class or
series of stock, or under the Certificate of Incorporation of the Corporation
(the "Certificate") for the vote necessary for the adoption of any measure
governed thereby. In the absence of a quorum, the stockholders present in person
or by proxy, by majority vote and without further notice, may adjourn the
meeting from time to time until a quorum is attained. At any reconvened meeting
following such an adjournment at which a quorum shall be present, any business
may be transacted which might have been transacted at the meeting as originally
notified.

     Section 2.08.  VOTES REQUIRED.  A majority of the votes cast at a duly
called meeting of stockholders, at which a quorum is present, shall be
sufficient to take or authorize action upon any matter which may properly come
before the meeting, unless the vote of a greater or different number thereof is
required by statute, by the rights of any authorized class of stock or by the
Certificate.  Unless the Certificate or a resolution of the Board of Directors
adopted in connection with the issuance of shares of any class or series of
stock provides for a greater or lesser number of votes per share, or limits or
denies voting rights, each outstanding share of stock, regardless of class,
shall be entitled to one vote on each matter submitted to a vote at a meeting of
stockholders.

     Section 2.09.  PROXIES.  A stockholder may vote the shares owned of record
by him either in person or by proxy executed in writing (which shall include
writings sent by telex, telegraph, cable or facsimile transmission) by the
stockholder himself or by his duly authorized attorney-in-fact.  No proxy shall
be valid after three (3) years from its date, unless the proxy provides for a
longer period.  Each proxy shall be in writing, subscribed by the stockholder or
his duly authorized attorney-in-fact, and dated, but it need not be sealed,
witnessed or acknowledged.

     Section 2.10.  STOCKHOLDER ACTION.  Any action required or permitted to be
taken by the stockholders of the Corporation must be effected at a duly called
annual meeting or special meeting of stockholders of the Corporation, unless
such action requiring or permitting shareholder approval is approved by a
majority of the Continuing Directors (as defined in the Certificate), in which
case such action may be authorized or taken by the written consent of the
holders of outstanding shares of stock having not less than the minimum voting
power that would be necessary to authorize or take such action at a meeting of
stockholders at which all shares entitled to vote thereon were present and
voted, provided all other requirements of applicable law and the Certificate
have been satisfied.

     Section 2.11.  LIST OF STOCKHOLDERS.  The Secretary of the Corporation
shall prepare and make (or cause to be prepared and made), at least ten (10)
days before every meeting of stockholders, a complete list of the stockholders
entitled to vote at the meeting, arranged in alphabetical order and showing the
address of, and the number of shares registered in the name of, each
stockholder.  Such list shall be open to the examination of any stockholder, for
any purpose germane to the meeting, during ordinary business hours, for a period
of at least ten (10) days prior to the meeting, either at a place within the
city where the meeting is to be held, which place shall be specified in the
notice of the meeting, or, if not so specified, at the place where the meeting
is to be held.  The list shall also be produced and kept at the time and place
of the meeting during the duration thereof, and may be inspected by any
stockholder who is present.

     Section 2.12.  INSPECTORS OF ELECTION.  In advance of any meeting of
stockholders, the Board of Directors may appoint Inspectors of Election to act
at such meeting or at any adjournment or adjournments thereof.  If such
Inspectors are not so appointed or fail or refuse to act, the chairman of any
such meeting may (and, upon the demand of any stockholder or stockholder's
proxy, shall) make such an appointment.

<PAGE>
 
     The number of Inspectors of Election shall be one (1) or three (3).  If
there are three (3) Inspectors of Election, the decision, act or certificate of
a majority shall be effective and shall represent the decision, act or
certificate of all.  No such Inspector need be a stockholder of the Corporation.

     The Inspectors of Election shall determine the number of shares
outstanding, the voting power of each, the shares represented at the meeting,
the existence of a quorum and the authenticity, validity and effect of proxies;
they shall receive votes, ballots or consents, hear and determine all challenges
and questions in any way arising in connection with the right to vote, count and
tabulate all votes or consents, determine when the polls shall close and
determine the result; and finally, they shall do such acts as may be proper to
conduct the election or vote with fairness to all stockholders.  On request, the
Inspectors shall make a report in writing to the secretary of the meeting
concerning any challenge, question or other matter as may have been determined
by them and shall execute and deliver to such secretary a certificate of any
fact found by them.

                                  ARTICLE III

                                   DIRECTORS

     Section 3.01.  POWERS.  The business and affairs of the Corporation shall
be managed by and be under the direction of the Board of Directors.  The Board
of Directors shall exercise all the powers of the Corporation, except those that
are conferred upon or reserved to the stockholders by statute, the Certificate
or these Bylaws.

     Section 3.02.  NUMBER.  Except as otherwise fixed pursuant to the
provisions of Section 2 of Article Fourth of the Certificate in connection with
rights to elect additional directors under specified circumstances which may be
granted to the holders of any class or series of Preferred Stock, par value One
Dollar ($1.00) per share of the Corporation ("Preferred Stock"), the number of
directors shall be fixed from time to time by resolution of the Board of
Directors but shall not be less than three (3).  The Board of Directors, as of
May 17, 1989, and thereafter, shall consist of fourteen (14) directors until
changed as herein provided.

     Section 3.03.  INDEPENDENT OUTSIDE DIRECTORS.  At least sixty percent (60%)
of the members of the Board of Directors of the Corporation shall at all times
be "Independent Outside Directors", which term is hereby defined to mean any
director who:

          1. has not in the last five (5) years been an officer or employee of
     the Corporation or any of its subsidiaries or affiliates; and

          2. is not related to an officer of the Corporation (or an officer of
     any of the Corporation's parents, subsidiaries or affiliates) by blood,
     marriage or adoption (except relationships more remote than first cousin);
     and

          3. is not, and has not within the last two (2) years been, an 
     officer, director or employee of, and does not own, and has not within the
     last two (2) years owned, directly or indirectly, in excess of one percent
     (1%) of any firm, corporation or other business or professional entity
     which has made or proposes to make during either the Corporation's or such
     entity's last or next fiscal year payments for property or services in
     excess of one percent (1%) of the gross revenues either of the Corporation
     for its last fiscal year or of such entity for its last fiscal year, but
     excluding payments determined by competitive bids, public utility services
     at rates set by law or government authority, or payments arising solely
     from the ownership of securities, or to which the Corporation was indebted
     at any time

<PAGE>
 
     during the Corporation's last fiscal year in an aggregate amount in excess
     of one percent (1%) of the Corporation's total assets at the end of such
     fiscal year or Five Million Dollars ($5,000,000), whichever is less, but
     excluding debt securities which have been publicly offered or which are
     publicly traded; and

          4. is not a director, partner, officer or employee of an investment
     banking firm which has performed services for the Corporation in the last
     two (2) years or which the Corporation proposes to have perform services in
     the next year other than as a participating underwriter in a syndicate; and

          5. is not a control person of the Corporation (other than as a
     director of the Corporation) as defined by the regulations of the
     Securities and Exchange Commission.

     Section 3.04.  ELECTION AND TERM OF OFFICE.  Except as provided in Section
3.07 hereof and subject to the right to elect additional directors under
specified circumstances which may be granted, pursuant to the provisions of
Section 2 of Article Fourth of the Certificate, to the holders of any class or
series of Preferred Stock, directors shall be elected by the stockholders of the
Corporation.  The Board of Directors shall be and is divided into three classes:
Class I, Class II and Class III.  The number of directors in each class shall be
the whole number contained in the quotient obtained by dividing the authorized
number of directors (fixed pursuant to Section 3.02 hereof) by three.  If a
fraction is also contained in such quotient, then additional directors shall be
apportioned as follows:  if such fraction is one-third, the additional director
shall be a member of Class I; and if such fraction is two-thirds, one of the
additional directors shall be a member of Class I and the other shall be a
member of Class II.  Each director shall serve for a term ending on the date of
the third annual meeting of stockholders of the Corporation following the annual
meeting at which such director was elected; provided, however, that the
directors first elected to Class I shall serve for a term ending on the date of
the annual meeting next following the end of the calendar year 1985, the
directors first elected to Class II shall serve for a term ending on the date of
the second annual meeting next following the end of the calendar year 1985 and
the directors first elected to Class III shall serve for a term ending on the
date of the third annual meeting next following the end of the calendar year
1985.

     Notwithstanding the foregoing provisions of this Section 3.04: each
director shall serve until his successor is elected and qualified or until his
death, resignation or removal; no decrease in the authorized number of directors
shall shorten the term of any incumbent director; and additional directors,
elected pursuant to Section 2 of Article Fourth of the Certificate in connection
with rights to elect such additional directors under specified circumstances
which may be granted to the holders of any class or series of Preferred Stock,
shall not be included in any class, but shall serve for such term or terms and
pursuant to such other provisions as are specified in the resolution of the
Board of Directors establishing such class or series.

     Nominations for the election of directors may be made by the Board or a
committee thereof or by any stockholder entitled to vote in the election of
directors; provided, however, that a stockholder may nominate a person for
election as a director at a meeting only if written notice of such stockholder's
intent to make such nomination has been given by such stockholder to, and
received by, the Secretary of the Corporation at the principal executive offices
of the Corporation not less than sixty (60) days nor more than ninety (90) days
prior to the meeting; provided, however, that (a) in the event that less than
seventy (70) days' notice or prior public disclosure of the date of the meeting
is given or made to stockholders, notice by the stockholder to be timely must be
so received not later than the close of business on the 10th day following the
date on which such notice of the date of the meeting was mailed or such public
disclosure was made, whichever first occurs; and (b) in the event that less than
seventy

<PAGE>
 
(70) days shall remain from the date of public disclosure of the adoption of
this bylaw provision to the date of any meeting, notice by the stockholder to be
timely with respect to such meeting must be so received not later than the close
of business on the 10th day following the date on which such public disclosure
was made. Each such notice shall set forth: (a) the name and address of the
stockholder who intends to make the nomination and of the person or persons to
be nominated; (b) the name and address as they appear on the Corporation's books
of the stockholder intending to make such nomination; (c) the class and number
of shares of capital stock of the Corporation which are beneficially owned by
such stockholder (d) a description of all arrangements or understandings between
the stockholder and each nominee and any other person or persons (naming such
person or persons) pursuant to which the nomination or nominations are to be
made by the stockholder; (e) the occupations and business history for the
previous five years, other directorships, names of business entities of which
the proposed nominee owns a 10 percent or more equity interest, a list of any
criminal convictions, including federal and state securities violations and such
other information regarding each proposed nominee as may be required by the
federal proxy rules in effect at the time the notice is submitted and (f) the
consent of each nominee to serve as a director of the Corporation if so elected.
No person shall be eligible for election as a director of the Corporation unless
nominated in accordance with the procedures set forth in this Section 3.04. The
Chairman of any meeting of stockholders shall direct that any nomination not
made in accordance with these procedures be disregarded.

     Section 3.05.  ELECTION OF CHAIRMAN OF THE BOARD.  At the organizational
meeting immediately following the annual meeting of stockholders, the directors
shall elect a Chairman of the Board from among the directors who shall hold
office until the corresponding meeting of the Board of Directors in the next
year and until his successor shall have been elected or until his earlier
resignation or removal.  Any vacancy in such office may be filled for the
unexpired portion of the term in the same manner by the Board of Directors at
any regular or special meeting.

     Section 3.06.  REMOVAL.  Subject to the right to elect directors under
specified circumstances which may be granted pursuant to Section 2 of Article
Fourth of the Certificate to the holders of any class or series of Preferred
Stock, any director may be removed from office only as provided in Article Tenth
of the Certificate.

     Section 3.07.  VACANCIES AND ADDITIONAL DIRECTORSHIPS.  Except as otherwise
provided pursuant to Section 2 of Article Fourth of the Certificate in
connection with rights to elect additional directors under specified
circumstances which may be granted to the holders of any class or series of
Preferred Stock, newly created directorships resulting from any increase in the
number of directors and any vacancies on the Board of Directors resulting from
death, resignation, disqualification, removal or other cause shall be filled
solely by the affirmative vote of a majority of the remaining directors then in
office, even though less than a quorum of the Board of Directors.  Any director
elected in accordance with the preceding sentence shall hold office for the
remainder of the full term of the class of directors in which the new
directorship was created or the vacancy occurred and until such director's
successor shall have been elected and qualified.  No decrease in the number of
directors constituting the Board of Directors shall shorten the term of any
incumbent director.

     Section 3.08.  REGULAR AND SPECIAL MEETINGS.  Promptly after, and on the
same day as, each annual election of directors by the shareholders, the Board
shall, if a quorum be present, meet in an organizational meeting to elect a
chairman, appoint members of the standing committees of the Board, elect
officers of the Corporation and conduct other business as appropriate.
Additional notice of such meeting need not be given if such meeting is conducted
promptly after the annual meeting to elect directors and if the meeting is held
in the same location where the election of directors was conducted. Regular
meetings of the Board

<PAGE>
 
shall be held at such times and places as the Board shall determine. Notice of
regular meetings shall be mailed to each director at least five days before the
meeting, addressed to the director's usual place of business or to his or her
residence address or to an address specifically designated by the director.

     Section 3.09.  QUORUM.  At all meetings of the Board of Directors, a
majority of the fixed number of directors shall constitute a quorum for the
transaction of business, except that when the Board of Directors consists of one
director, then the one director shall constitute a quorum.  In the absence of a
quorum, the directors present, by majority vote and without notice other than by
announcement, may adjourn the meeting from time to time until a quorum shall be
present.  At any reconvened meeting following such an adjournment at which a
quorum shall be present, any business may be transacted which might have been
transacted at the meeting as originally notified.

     Section 3.10.  VOTES REQUIRED.  Except as otherwise provided by applicable
law or by the Certificate, the vote of a majority of the directors present at a
meeting duly held at which a quorum is present shall be sufficient to pass any
measure.

     Section 3.11.  PLACE AND CONDUCT OF MEETINGS.  Each regular meeting and
special meeting of the Board of Directors shall be held at a location determined
as follows:  The Board of Directors may designate any place, within or without
the State of Delaware, for the holding of any meeting.  If no such designation
is made:  (i) any meeting called by a majority of the directors shall be held at
such location, within the county of the Corporation's principal executive
office, as the directors calling the meeting shall designate; and (ii) any other
meeting shall be held at such location, within the county of the Corporation's
principal executive office, as the Chairman of the Board may designate or, in
the absence of such designation, at the Corporation's principal executive
office.  Subject to the requirements of applicable law, all regular and special
meetings of the Board of Directors shall be conducted in accordance with such
rules and procedures as the Board of Directors may approve and, as to matters
not governed by such rules and procedures, as the chairman of such meeting shall
determine.  The chairman of any regular or special meeting shall be the Chairman
of the Board, or in his absence a person designated by the Board of Directors.
The Secretary, or in the absence of the Secretary a person designated by the
chairman of the meeting, shall act as secretary of the meeting.

     Section 3.12.  FEES AND COMPENSATION.  Directors shall be paid such
compensation as may be fixed from time to time by resolutions of the Board of
Directors (a) for their usual and contemplated services as directors, (b) for
their services as members of committees appointed by the Board of Directors,
including attendance at committee meetings as well as services which may be
required when committee members must consult with management staff, and (c) for
extraordinary services as directors or as members of committees appointed by the
Board of Directors, over and above those services for which compensation is
fixed pursuant to items (a) and (b) in this Section 3.12.  Compensation may be
in the form of an annual retainer fee or a fee for attendance at meetings, or
both, or in such other form or on such basis as the resolutions of the Board of
Directors shall fix.  Directors shall be reimbursed for all reasonable expenses
incurred by them in attending meetings of the Board of Directors and committees
appointed by the Board of Directors and in performing compensable extraordinary
services. Nothing contained herein shall be construed to preclude any director
from serving the Corporation in any other capacity, such as an officer, agent,
employee, consultant or otherwise, and receiving compensation therefor.

     Section 3.13.  COMMITTEES OF THE BOARD OF DIRECTORS.  Subject to the
requirements of applicable law, the Board of Directors may from time to time
establish committees, including standing or special committees, which shall have
such duties and

<PAGE>
 
powers as are authorized by these Bylaws or by the Board of Directors. Committee
members, and the chairman of each committee, shall be appointed by the Board of
Directors. The Chairman of the Board, in conjunction with the several committee
chairmen, shall make recommendations to the Board of Directors for its final
action concerning members to be appointed to the several committees of the Board
of Directors. Any member of any committee may be removed at any time with or
without cause by the Board of Directors. Vacancies which occur in any committee
shall be filled by a resolution of the Board of Directors. If any vacancy shall
occur in any committee by reason of death, resignation, disqualification,
removal or otherwise, the remaining members of such committee, so long as a
quorum is present, may continue to act until such vacancy is filled by the Board
of Directors. The Board of Directors may, by resolution, at any time deemed
desirable, discontinue any standing or special committee. Members of standing
committees, and their chairmen, shall be elected yearly at the organizational
meeting of the Board of Directors which is held immediately following the annual
meeting of stockholders.

     Section 3.14.  AUDIT COMMITTEE.  There shall be an Audit Committee of the
Board of Directors which shall serve at the pleasure of the Board of Directors
and be subject to its control.  The Committee shall have the following
membership and powers:

          1. The Committee shall have at least three (3) members.  All members
     of the Committee shall be Independent Outside Directors.

          2. The Committee shall recommend to the Board of Directors for its
     action the appointment or discharge of the Corporation's independent
     auditors, based upon the Committee's judgment of the independence of the
     auditors (taking into account the fees charged both for audit and non-audit
     services) and the quality of its audit work.  Ratification by the
     stockholders of the Board of Directors' appointment of the Corporation's
     independent auditors may be sought in conjunction with management's
     solicitation of proxies for the annual meeting of stockholders, if so
     determined by the Board of Directors.  If the auditors must be replaced,
     the Committee shall recommend to the Board of Directors for its action the
     appointment of new auditors until the next annual meeting of stockholders.

          3. The Committee shall review and approve the scope and plan of the
     audit.

          4. The Committee shall meet with the independent auditors at
     appropriate times to review, among other things, the results of the audit
     and any certification, report or opinion which the auditors propose to
     render in connection with the Corporation's financial statements.

          5. The Committee shall review and approve each professional service of
     a non-audit nature to be provided by the auditors.

          6. The Committee shall meet with the Corporation's chief internal
     auditor at least once a year to review his comments concerning the adequacy
     of the Corporation's system of internal accounting controls and such other
     matters as the Committee may deem appropriate.

          7. The Committee shall have the power to direct the auditors and the
     internal audit staff to inquire into and report to it with respect to any
     of the Corporation's contracts, transactions or procedures, or the conduct
     of the Corporate Office, or any division, profit center, subsidiary or
     other unit, or any other matter having to do with the Corporation's
     business and affairs.  If authorized by the Board of Directors, the
     Committee may initiate special investigations in these regards.

<PAGE>
 
          8. The Committee shall have such other duties as may be lawfully
     delegated to it from time to time by the Board of Directors.

     Section 3.15.  COMPENSATION AND MANAGEMENT DEVELOPMENT COMMITTEE.  There
shall be a Compensation and Management Development Committee of the Board of
Directors which shall serve at the pleasure of the Board of Directors and be
subject to its control.  The Committee shall have the following membership and
powers:

          1. The Committee shall be composed of at least three (3) members.  All
     members of the Committee shall be Independent Outside Directors.  The
     principal Human Resources officer of the Corporation shall be a non-voting
     member of the Committee.

          2. The Committee shall recommend to the Board of Directors for its
     action the amount to be appropriated for awards to be made each year to
     elected officers under the Corporation's incentive compensation plan.

          3. The Committee shall establish the Corporation's annual performance
     objectives under the Corporation's incentive compensation plans.

          4. The Committee shall make recommendations to the Board of Directors
     with respect to the base salary and incentive compensation of the elected
     officers.  The Committee shall take final action with respect to the base
     salary and incentive compensation of all other officers and employees
     receiving a base salary over an amount as shall be determined from time to
     time either by the Committee or the Board of Directors.

          5. The Committee shall review management's recommendations and take
     final action with respect to all awards to be made under the Corporation's
     long-term incentive plans or other similar benefit plans which may be
     adopted by the Board of Directors or the stockholders and in which
     corporate officers or directors are eligible to participate, provided
     however that all such awards relative to the five (5) most highly
     compensated officers must be reported to the Board of Directors.

          6. The Committee shall review on a continuing basis the Corporation's
     general compensation policies and practices, fringe benefits and the
     Corporation's compliance with its various affirmative action plans and
     programs.  The committee shall also review and recommend to the Board of
     Directors for its final action all compensation plans in which  elected
     officers or directors are eligible to participate.

          7. The Committee shall review from time to time and report to the
     Board of Directors actions taken by management concerning the Corporation's
     overall executive structure and the steps being taken to assure the
     succession of qualified management.

          8. The Committee shall have such other duties as may be lawfully
     delegated to it from time to time by the Board of Directors.
 
     Section 3.16.  EXECUTIVE AND PUBLIC POLICY COMMITTEE.  There shall be an
Executive and Public Policy Committee of the Board of Directors which shall
serve at the pleasure of the Board of Directors and be subject to its control.
The Committee shall have the following membership and powers:

          1. The Committee shall have at least five (5) members.  At least sixty
     percent (60%) of the members shall be Independent Outside Directors.

<PAGE>
 
          2. The Committee shall review, approve and monitor the policy,
     organization, charter and implementation of the Northrop Grumman Employees
     Political Action Committee.

          3. The Committee shall review and approve the policy of the
     Corporation for engaging the services of Consultants and Commission Agents.

          4. The Committee shall review and report to the Board of Directors
     from time to time concerning the Corporation's compliance with the
     Corporation's policies, practices and procedures with respect to
     consultants and commission agents.

          5. The Committee shall review and make policy and budget
     recommendations to the Board of Directors for its actions concerning
     proposed charitable contributions and aid to higher education to be given
     by the Corporation each year.

          6. The Committee shall have such other duties as lawfully may be
     delegated to it from time to time by the Board of Directors.

     Section 3.17.  FINANCE COMMITTEE.  There shall be a Finance Committee of
the Board of Directors which shall serve at the pleasure of the Board of
Directors and be subject to its control.  The Committee shall have the following
membership and powers:

          1. The Committee shall have at least five (5) members.  At least fifty
     percent (50%) of the members of the Committee shall be Independent Outside
     Directors.  The chief financial officer of the Corporation shall be a non-
     voting member of the Committee.

          2. The Committee shall review and give consideration to management
     requests for required specific new financing of a long-term nature, whether
     debt or equity, and make recommendations to the Board of Directors for its
     final action.

          3. The Committee shall review the current financial condition of the
     Company and planned financial requirements.

          4. The Committee shall review periodically the Corporation's dividend
     policy in connection with dividend declarations and make recommendations to
     the Board of Directors for its final action.

          5. The Committee shall consider management's recommendations
     concerning acquisitions, mergers or divestments which management has
     determined to be of an unusual or material nature and shall make
     recommendations to the Board of Directors for its final action.

          6. The Committee shall consider management's recommendations
     concerning contracts or programs which management has determined to be of
     an unusual or material nature and shall make recommendations to the Board
     of Directors for its final action.

          7. The Committee shall periodically review the investment performance
     of the employee benefit plans, capital asset requirements and short-term
     investment policy when appropriate.

<PAGE>
 
          8. The Committee shall have such other duties as lawfully may be
     delegated to it from time to time by the Board of Directors.

     Section 3.18.  NOMINATING COMMITTEE.  There shall be a Nominating Committee
of the Board of Directors which shall serve at the pleasure of the Board of
Directors and be subject to its control.  The Committee shall have the following
membership and powers:

          1. The Committee shall have at least three (3) members.  All members
     of the Committee shall be Independent Outside Directors.

          2. The Committee shall review candidates to serve as directors and
     shall recommend nominees to the Board of Directors for election at each
     annual meeting of stockholders or other special meetings where directors
     are to be elected and shall recommend persons to serve as proxies to vote
     proxies solicited by management in connection with such meetings.

          3. The Committee shall cause the names of all director candidates that
     are approved by the Board of Directors to be listed in the Corporation's
     proxy materials and shall support the election of all candidates so
     nominated by the Board of Directors to the extent permitted by law.

          4. The Committee shall review and make recommendations to the Board of
     Directors for its final action concerning the composition and size of the
     Board of Directors, its evaluation of the performance of incumbent
     directors, its recommendations concerning the compensation of the
     Directors, its recommendations concerning directors to fill vacancies and
     its evaluation and recommendations concerning potential candidates to serve
     in the future on the Board of Directors to assure the Board's continuity
     and succession.

          5. The Committee shall have such other duties as lawfully may be
     delegated to it from time to time by the Board of Directors.

     Section 3.19.  MEETINGS OF COMMITTEES.  Each committee of the Board of
Directors shall fix its own rules of procedure consistent with the provisions of
applicable law and of any resolutions of the Board of Directors governing such
committee.  Each committee shall meet as provided by such rules or such
resolution of the Board of Directors, and shall also meet at the call of its
chairman or any two (2) members of such committee.  Unless otherwise provided by
such rules or by such resolution, the provisions of these Bylaws under Article
III entitled "Directors" relating to the place of holding meetings and the
notice required for meetings of the Board of Directors shall govern the place
of meetings and notice of meetings for committees of the Board of Directors. A
majority of the members of each committee shall constitute a quorum thereof,
except that when a committee consists of one (1) member, then the one (1) member
shall constitute a quorum. In the absence of a quorum, a majority of the members
present at the time and place of any meeting may adjourn the meeting from time
to time until a quorum shall be present and the meeting may be held as adjourned
without further notice or waiver. Except in cases where it is otherwise provided
by the rules of such committee or by a resolution of the Board of Directors, the
vote of a majority of the members present at a duly constituted meeting at which
a quorum is present shall be sufficient to pass any measure by the committee.

                                  ARTICLE IV

                                   OFFICERS

<PAGE>
 
     Section 4.01.  DESIGNATION, ELECTION AND TERM OF OFFICE.  The Corporation
shall have a Chairman of the Board and/or a President either of whom may be
designated Chief Executive Officer by the Board of Directors, such Vice
Presidents (each of whom may be assigned by the Board of Directors or the Chief
Executive Officer an additional title descriptive of the functions assigned to
him and one or more of whom may be designated Executive, Group or Senior Vice
President) as the Board of Directors deems appropriate, a Secretary and a
Treasurer.  These officers shall be elected annually by the Board of Directors
at the organizational meeting immediately following the annual meeting of
stockholders, and each such officer shall hold office until the corresponding
meeting of the Board of Directors in the next year or until his earlier
resignation, death or removal.  Any vacancy in any of the above offices may be
filled for an unexpired portion of the term by the Board of Directors at any
regular special meeting.  The Chief Executive Officer may, by a writing filed
with the Secretary, designate titles for employees and agents, as, from time to
time, may appear necessary or advisable in the conduct of the affairs of the
Corporation and, in the same manner, terminate or change such titles.

     Section 4.02.  CHAIRMAN OF THE BOARD.  The Board of Directors shall
designate the Chairman of the Board from among its members.  The Chairman of the
Board of Directors shall preside at all meetings of the Board and the
Shareholders, and shall perform such other duties as shall be delegated to him
by the Board or the officer designated as chief executive.

     Section 4.03.  PRESIDENT.  The President shall perform such duties and have
such responsibilities as may from time to time be delegated or assigned to him
by the Board of Directors or the officer designated as chief executive.

     Section 4.04.  CHIEF EXECUTIVE.  The Board of Directors shall designate
either the Chairman of the Board or the President to be the chief executive of
the Corporation.  The officer so designated shall be responsible for the general
supervision, direction and control of the business and affairs of the
Corporation.

     Section 4.05.  CHIEF FINANCIAL OFFICER.  The Chief Financial Officer of the
Corporation shall be responsible to the Chief Executive Officer for the
management and supervision of all financial matters and to provide for the
financial growth and stability of the Corporation.  He shall attend all regular
meetings of the Board of Directors and keep the Directors currently informed
concerning all significant financial matters that could impact upon the business
or affairs of the Corporation.  He shall also perform such additional duties as
may be assigned to him from time to time by the Board of Directors or the Chief
Executive Officer.

     Section 4.06.  EXECUTIVE VICE PRESIDENTS, SENIOR VICE PRESIDENTS AND VICE
PRESIDENTS.  Executive vice presidents, senior vice presidents and vice
presidents of the Corporation that are elected by the Board of Directors shall
perform such duties as may be assigned to them from time to time by the Chief
Executive Officer.

     Section 4.07.  CHIEF LEGAL OFFICER.  The chief legal officer of the
Corporation shall be the General Counsel who shall be responsible to the Chief
Executive Officer for the management and supervision of all legal matters.  The
General Counsel shall attend all regular meetings of the Board of Directors and
shall keep the Directors currently informed concerning all significant legal
matters, particularly those involving important business, legal, moral or
ethical issues that could impact upon the business or affairs of the
Corporation.

     Section 4.08.  SECRETARY.  The Secretary shall keep the minutes of the
meetings of the stockholders, the Board of Directors and all committee meetings.
The Secretary shall be the custodian of the corporate seal and shall affix it to
all documents which he is authorized by

<PAGE>
 
law or the Board of Directors to sign and seal. The Secretary also shall perform
such other duties as may be assigned from time to time by the Chief Executive
Officer.

     Section 4.09.  TREASURER.  The Treasurer shall be accountable to the Senior
Vice President, Finance, and shall perform such duties as may be assigned to the
Treasurer from time to time by the Senior Vice President, Finance.

     Section 4.10.  APPOINTED OFFICERS.  The Chief Executive Officer may appoint
one or more Corporate Staff Vice Presidents, officers of groups or divisions or
assistant secretaries, assistant treasurers and such other assistant officers as
the business of the Corporation may require, each of whom shall hold office for
such period, have such authority and perform such duties as may be specified
from time to time by the Chief Executive Officer.

     Section 4.11.  ABSENCE OR DISABILITY OF AN OFFICER.  In the case of the
absence or disability of an officer of the Corporation the Board of Directors,
or any officer designated by it, or the Chief Executive Officer may, for the
time of the absence or disability, delegate such officer's duties and powers to
any other officer of the Corporation.

     Section 4.12.  OFFICERS HOLDING TWO OR MORE OFFICES.  The same person may
hold any two or more of the above-mentioned offices.  However, no officer shall
execute, acknowledge or verify any instrument in more than one capacity, if such
instrument is required by law, by the Certificate or by these Bylaws, to be
executed, acknowledged or verified by any two or more officers.

     Section 4.13.  COMPENSATION.  The Board of Directors shall have the power
to fix the compensation of all officers and employees of the Corporation.

     Section 4.14.  RESIGNATIONS.  Any officer may resign at any time by giving
written notice to the Board of Directors, to the Chief Executive Officer, or to
the Secretary of the Corporation.  Any such resignation shall take effect at the
time specified therein unless otherwise determined by the Board of Directors.
The acceptance of a resignation by the Corporation shall not be necessary to
make it effective.

     Section 4.15.  REMOVAL.  Any officer of the Corporation may be removed,
with or without cause, by the affirmative vote of a majority of the entire Board
of Directors.  Any assistant officer of the Corporation may be removed, with or
without cause, by the Chief Executive Officer, or by the Board of Directors.


                                   ARTICLE V

         INDEMNIFICATION OF DIRECTORS, OFFICERS, EMPLOYEES AND AGENTS

     Section 5.01.  RIGHT TO INDEMNIFICATION.  Each person who was or is made a
party, or is threatened to be made a party, to any actual or threatened action,
suit, or proceeding, whether civil, criminal, administrative, or investigative
(hereinafter a "proceeding"), by reason of the fact that he or she is or was a
director, officer, employee, or agent of the Corporation (hereinafter an
"indemnitee") shall be indemnified and held harmless by the Corporation to the
fullest extent authorized by the Delaware General Corporation Law, as the same
exists or may hereafter be amended, or by other applicable law as then in
effect, against all expense, liability, and loss (including attorneys' fees,
judgments, fines, ERISA excise taxes or penalties, and amounts paid in
settlement) actually and reasonably incurred or suffered by such indemnitee in
connection therewith.  Any person who was or is made a party, or is threatened
to be made a party, to any proceeding by reason of the fact that he or she is or
was serving at the request of

<PAGE>
 
an executive officer of the Corporation as a director, officer, employee or
agent of another corporation or of a partnership, joint venture, trust or other
enterprise, including service with respect to an employee benefit plan, shall
also be considered an indemnitee for the purposes of this Article. The right to
indemnification provided by this Article shall apply whether or not the basis of
such proceeding is alleged action in an official capacity as such director,
officer, employee or agent or in any other capacity while serving as such
director, officer, employee or agent. Notwithstanding anything in this Section
5.01 to the contrary, except as provided in Section 5.03 of this Article with
respect to proceedings to enforce rights to indemnification, the Corporation
shall indemnify any such indemnitee in connection with a proceeding (or part
thereof) initiated by such indemnitee only if such proceeding (or part thereof)
was authorized by the Corporation.

     Section 5.02.  ADVANCEMENT OF EXPENSES.  (a)  The right to indemnification
conferred in Section 5.01 shall include the right to have the expenses incurred
in defending or preparing for any such proceeding in advance of its final
disposition (hereinafter an "advancement of expenses") paid by the Corporation;
provided, however, that an advancement of expenses incurred by an indemnitee in
his or her capacity as a director or officer (and not in any other capacity in
which service was or is to be rendered by such indemnitee, including, without
limitation, service to an employee benefit plan) shall be made only upon
delivery to the Corporation of an undertaking containing such terms and
conditions, including the requirement of security, as the Board of Directors
deems appropriate (hereinafter an "undertaking"), by or on behalf of such
indemnitee, to repay all amounts so advanced if it shall ultimately be
determined by final judicial decision from which there is no further right to
appeal that such indemnitee is not entitled to be indemnified for such expenses
under this Article or otherwise; and provided, further, that an advancement of
expenses shall not be made if the Corporation's Board of Directors makes a good
faith determination that such payment would violate any applicable law.  The
Corporation shall not be obligated to advance fees and expenses to a director,
officer, employee or agent in connection with a proceeding instituted by the
Corporation against such person.  (b)  Notwithstanding anything in Section
5.02(a) to the contrary, the right of employees or agents to advancement of
expenses shall be at the discretion of the Board of Directors and on such terms
and conditions, including the requirement of security, as the Board of Directors
deems appropriate.  The Corporation may, by action of its Board of Directors,
authorize one or more executive officers to grant rights for the advancement of
expenses to employees and agents of the Corporation on such terms and conditions
as such officers deem appropriate.

     Section 5.03.  RIGHT OF INDEMNITEE TO BRING SUIT.  If a claim under Section
5.01 is not paid in full by the Corporation within sixty (60) calendar days
after a written claim has been received by the Corporation, except in the case
of a claim for an advancement of expenses under Section 5.02 in which case the
applicable period shall be thirty (30) calendar days, the indemnitee may at any
time thereafter bring suit against the Corporation to recover the unpaid amount
of the claim.  If the indemnitee is successful in whole or in part in any such
suit, the indemnitee shall also be entitled to be paid the expense of
prosecuting or defending such suit.

     Section 5.04.  NONEXCLUSIVITY OF RIGHTS.  (a)  The rights to
indemnification and to the advancement of expenses conferred in this Article
shall not be exclusive of any other right which any person may have or hereafter
acquire under any statute, provisions of the Certificate of Incorporation,
Bylaw, agreement, vote of stockholders or disinterested directors, or otherwise.
Notwithstanding any amendment to or repeal of this Article, any indemnitee shall
be entitled to indemnification in accordance with the provisions hereof with
respect to any acts or omissions of such indemnitee occurring prior to such
amendment or repeal.  (b)  The Corporation may maintain insurance, at its
expense, to protect itself and any past or present director, officer, employee,
or agent of the Corporation or another corporation, partnership, joint venture,
trust, or other enterprise against any expense, liability, or loss, whether or
not

<PAGE>
 
the Corporation would have the power to indemnify such person against such
expense, liability, or loss under the Delaware General Corporation Law.  The
Corporation may enter into contracts with any indemnitee in furtherance of the
provisions of this Article and may create a trust fund, grant a security
interest or use other means (including, without limitation, a letter of credit)
to ensure the payment of such amounts as may be necessary to effect
indemnification as provided in this Article.  (c)  The Corporation may without
reference to Sections 5.01 through 5.04 (a) and (b) hereof, pay the expenses,
including attorneys fees, incurred by any director, officer, employee or agent
of the Corporation who is subpoenaed, interviewed or deposed as a witness or
otherwise incurs expenses in connection with any civil, arbitration, criminal,
or administrative proceeding or governmental or internal investigation to which
the Corporation is a party, target, or potentially a party or target, or of any
such individual who appears as a witness at any trial, proceeding or hearing to
which the Corporation is a party, if the Corporation determines that such
payments will benefit the Corporation and if, at the time such expenses are
incurred by such individual and paid by the Corporation, such individual is not
a party, and is not threatened to be made a party, to such proceeding or
investigation.


                                  ARTICLE VI

                                     STOCK

     Section 6.01.  CERTIFICATES.  Except as otherwise provided by law, each
stockholder shall be entitled to a certificate or certificates which shall
represent and certify the number and class (and series, if appropriate) of
shares of stock owned by him in the Corporation.  Each certificate shall be
signed in the name of the Corporation by the Chairman of the Board, or the
President, or a Vice President, together with the Secretary, or an Assistant
Secretary, or the Treasurer or Assistant Treasurer.  Any or all of the
signatures on any certificate may be facsimile.  In case any officer, transfer
agent or registrar who has signed or whose facsimile signature has been placed
upon a certificate shall have ceased to be such officer, transfer agent or
registrar before such certificate is issued, it may be issued by the Corporation
with the same effect as if such person were an officer, transfer agent or
registrar at the date of issue.

     Section 6.02.  TRANSFER OF SHARES.  Shares of stock shall be transferable
on the books of the Corporation only by the holder thereof, in person or by his
duly authorized attorney, upon the surrender of the certificate representing the
shares to be transferred, properly endorsed, to the Corporation's registrar if
the Corporation has a registrar. The Board of Directors shall have power and
authority to make such other rules and regulations concerning the issue,
transfer and registration of certificates of the Corporation's stock as it may
deem expedient.

     Section 6.03.  TRANSFER AGENTS AND REGISTRARS.  The Corporation may have
one or more transfer agents and one or more registrars of its stock whose
respective duties the Board of Directors or the Secretary may, from time to
time, define.  No certificate of stock shall be valid until countersigned by a
transfer agent, if the Corporation has a transfer agent, or until registered by
a registrar, if the Corporation has a registrar.  The duties of transfer agent
and registrar may be combined.

     Section 6.04.  STOCK LEDGERS.  Original or duplicate stock ledgers,
containing the names and addresses of the stockholders of the Corporation and
the number of shares of each class of stock held by them, shall be kept at the
principal executive office of the Corporation or at the office of its transfer
agent or registrar.

     Section 6.05.  RECORD DATES.  The Board of Directors shall fix, in advance,
a date as the record date for the purpose of determining stockholders entitled
to notice of, or to vote at, 

<PAGE>
 
any meeting of stockholders or any adjournment thereof, or stockholders entitled
to receive payment of any dividend or other distribution or allotment of any
rights, or entitled to exercise any rights in respect of any change, conversion
or exchange of stock, or in order to make a determination of stockholders for
any other proper purpose. Such date in any case shall be not more than sixty
(60) days, and in case of a meeting of stockholders, not less than ten (10)
days, prior to the date on which the particular action, requiring such
determination of stockholders is to be taken. Only those stockholders of record
on the date so fixed shall be entitled to any of the foregoing rights,
notwithstanding the transfer of any such stock on the books of the Corporation
after any such record date fixed by the Board of Directors.

     Section 6.06.  NEW CERTIFICATES.  In case any certificate of stock is lost,
stolen, mutilated or destroyed, the Board of Directors may authorize the
issuance of a new certificate in place thereof upon such terms and conditions as
it may deem advisable; or the Board of Directors may delegate such power to any
officer or officers or agents of the Corporation; but the Board of Directors or
such officer or officers or agents, in their discretion, may refuse to issue
such a new certificate unless the Corporation is ordered to do so by a court of
competent jurisdiction.


                                  ARTICLE VII

                    RESTRICTIONS ON SECURITIES REPURCHASES

     Section 7.01.  RESTRICTIONS ON SECURITIES REPURCHASES.

     1.   Vote required for certain acquisition of securities.  Except as set
forth in Subsection 2 of this Section 7.01, in addition to any affirmative vote
of stockholders required by any provision of law, the Certificate of
Incorporation or Bylaws of this Corporation, or any policy adopted by the Board
of Directors, neither the Corporation nor any Subsidiary shall knowingly effect
any direct or indirect purchase or other acquisition of any equity security of a
class of securities which is registered pursuant to Section 12 of the
/Securities Exchange Act of 1934, as amended (the "Exchange Act"), issued by the
Corporation at a price which is in excess of the highest Market Price of such
equity security on the largest principal national securities exchange in the
United States on which such security is listed for trading on the date that the
understanding to effect such transaction is entered into by the Corporation
(whether or not such transaction is concluded or a written agreement relating to
such transaction is executed on such date, and such date to be conclusively
established by determination of the Board of Directors), from any Interested
Person, without the affirmative vote of the holders of the Voting Shares
representing at least a majority of the aggregate voting power of all
outstanding voting shares, excluding Voting Shares beneficially owned by such
Interested Person, voting together as a single class.  Such affirmative vote
shall be required notwithstanding the fact that no vote may be required, or that
a lesser percentage may be specified, by law or any agreement with any national
securities exchange, or otherwise.

     2.   When A Vote Is Not Required.  The provisions of Subsection 1 of this
Section 7.01 shall not be applicable with respect to:

          a.  any purchase, acquisition, redemption or exchange of such equity
     securities, the purchase, acquisition, redemption or exchange of which is
     provided for in the Corporation's Certificate of Incorporation;

          b.  any purchase or other acquisition of equity securities made as
     part of a tender or exchange offer by the Corporation to purchase
     securities of the same class made on the same terms to all holders of such
     securities and complying with the 

<PAGE>
 
     applicable requirements of the Exchange Act of 1934, as amended and the
     rules and regulations thereunder (or any successor provisions to such Act,
     rules or regulations);

          c.  any purchase or acquisition of equity securities made pursuant to
     an open market purchase program which has been approved by the Board of
     Directors.

     3.   Certain definitions.  For the purpose of this Section:

          a.   "Affiliate" and "Associate" shall have their respective meanings
ascribed to such terms in Rule 12b-2 of the General Rules and Regulations
under the Exchange Act, as in effect on January 1, 1991.

          b.   "Beneficial Owner" and "Beneficial Ownership" shall have the
meanings ascribed to such terms in Rule 13d-3 and Rule 13d-5 of the General
Rules and Regulations under the Exchange Act, as in effect on January 1, 1991.

          c.   "Interested person" shall mean any person (other than the
     Corporation or any subsidiary) that is the direct or indirect Beneficial
     Owner of five percent (5%) or more of the aggregate voting power of the
     Voting Shares, and any Affiliate or Associate of any such person.  For the
     purpose of determining whether a person is an Interested Person, the
     outstanding Voting Shares include unissued shares of voting stock of the
     Corporation of which the Interested Person is the Beneficial Owner, but
     shall not include any other shares of voting stock of the Corporation which
     may be issuable pursuant to any agreement, arrangement or understanding, or
     upon exercise or conversion of rights, warrants or options, or otherwise to
     any person who is not the Interested Person.

          d.  "Market Price" of shares of the class of equity security of the
     Corporation on any day shall mean the highest sale price (regular way) of
     shares of such class of such equity security on such day, or, if that day
     is not a trading day, on the trading day immediately preceding such day, on
     the largest principal national securities exchange on which such class of
     stock is then listed or admitted to trading, or if not listed or admitted
     to trading on any national securities exchange, then the highest reported
     sale price for such shares in the over-the-counter market as reported on
     the NASDAQ National Market System, or if such sale price shall not be
     reported thereon, the highest bid price so reported, or, of such price
     shall not be reported thereon, as the same shall be reported by the
     National Quotation Bureau, Incorporated, or if the price is not
     determinable as set forth above, as determined in good faith by the Board
     of Directors.

          e.  "Person" shall mean any individual, partnership, firm,
     corporation, association, trust, unincorporated organization or other
     entity, as well as any syndicate or group deemed to be a person pursuant to
     Section 13(d)(3) of the Exchange Act, as in effect on January 1, 1991.

          f.   "Subsidiary" shall mean any company or entity of which the
     Corporation owns, directly or indirectly, (i) a majority of the outstanding
     shares of equity securities, or (ii) shares having a majority of the voting
     power represented by all of the outstanding Voting Stock of such company
     entitled to vote generally in the election of directors.  For the purpose
     of determining whether a company is a Subsidiary, the outstanding voting
     stock and shares of equity securities thereof shall include unissued shares
     of which The Corporation is the beneficial owner but, except for the
     purpose of determining whether a company is a Subsidiary for the purpose of
     Subsection 3(c) hereof shall not include any shares which may be issuable
     pursuant to any agreement, arrangement, or 

<PAGE>
 
     understanding, or upon the exercise of conversion rights, warrants or
     options, or otherwise to any Person who is not the Corporation.

          g.  "Voting shares" shall mean the outstanding shares of capital stock
     of the Corporation entitled to vote generally in the election of directors.


                                 ARTICLE VIII

                               SUNDRY PROVISIONS

     Section 8.01.  FISCAL YEAR.  The fiscal year of the Corporation shall end
on the 31st day of December of each year.

     Section 8.02.  SEAL.  The seal of the Corporation shall bear the name of
the Corporation and the words "Delaware" and "Incorporated March 12, 1985."

     Section 8.03.  VOTING OF STOCK IN OTHER CORPORATIONS.  Any shares of stock
in other corporations or associations, which may from time to time be held by
the Corporation, may be represented and voted at any of the stockholders'
meetings thereof by the Chief Executive Officer or his designee.  The Board of
Directors, however, may by resolution appoint some other person or persons to
vote such shares, in which case such person or persons shall be entitled to vote
such shares upon the production of a certified copy of such resolution.

     Section 8.04.  AMENDMENTS.  These Bylaws may be adopted, repealed,
rescinded, altered or amended only as provided in Articles Fifth and Sixth of
the Certificate.



July 30, 1997



                           EXHIBIT 10(o)


AMENDMENT TO NORTHROP GRUMMAN 1993 LONG-TERM INCENTIVE SOTCK
PLAN (THE "PLAN")
                              
                              
This amendment to the Northrop Grumman 1993 Long-Term
Incentive Stock Plan (the "Plan"), as described below, is
intended to supply a clause inadvertently omitted with
respect to the designation of Peer Companies:

The last sentence of Section 8 will be revised to read as
follows:

     Peer Companies shall consist of a group of companies
     designated by the Committee within the first 90 days of
     the Performance Period with respect to a grant.





                        EXHIBIT 10(r)

                     FIRST AMENDMENT TO
                NORTHROP GRUMMAN CORPORATION
                      SPECIAL AGREEMENT


     THIS FIRST AMENDMENT  to the Northrop Grumman
Corporation Special Agreement is made and entered into by
and between Northrop Grumman Corporation, a Delaware
corporation (hereinafter, the "Company"), and [insert name],
(hereinafter, the "Executive").

     Pursuant to Section 9.6 of the Special Agreement, which
allows modification of the Agreement as agreed to in writing
and signed by the Executive and by an authorized member of
the Committee, and pursuant to delegation of the Committee's
authority to Messrs. Kresa and Elkin by the Board of
Directors of the Company at its meeting on July 2, 1997, the
Company and the Executive agree to amend the Special
Agreement as follows:

Section 2.4(e) shall be amended in its entirety to state as
follows:
     
     A lump-sum cash payment of the actuarial present value
     equivalent of the aggregate benefits accrued by the
     Participant as of the Effective Date of Termination
     under the qualified defined benefit pension plan or
     plans in which the Participant participates (the
     "qualified plan"), and under any and all supplemental
     retirement plans in which the Participant participates.
     For this purpose, such benefits
 shall be calculated as
     if the Participant's employment continued for three
     full years following the Effective Date of Termination
     (i.e., the Participant receives three additional years
     of vesting and benefit accruals, and his age is also
     increased three years from his age as of the Effective
     Date of Termination for all purposes under such plans,
     including any and all early retirement subsidies);
     provided, however, that for purposes of determining
     "Final Average Pay" under such plans, the Participant's
     actual pay history as of the Effective Date of
     Termination shall be used, except that such pay shall
     include the higher of (x) the average of the last three
     bonuses received by the Executive, or (y) the
     Executive's target bonus for the year in which the
     Effective Date of Termination occurs.  In addition, for
     this purpose there shall be offset from the lump sum
     payment the actuarial present value equivalent of
     benefits payable to the Participant from the qualified
     plan as actually accrued by the Participant through the
     Effective Date of Termination under the qualified plan
     (or such other date as determined under the terms of
     the qualified plan); the intent of this provision being
     that the qualified plan benefits will be paid in the
     normal course under the terms of the qualified plan or
     plans, with additional benefits payable as a result of
     the imputation of age and service under this provision
     being paid from this Plan.
     


A new second paragraph of Section 2.4(d) shall be
substituted for the existing second paragraph of that
Section, as follows:

     The welfare benefits described in this Subsection
     2.4(d) shall continue for three years following the
     Effective Date of Termination for the Executive and his
     spouse; provided, however, that such welfare benefits
     that are medical benefits shall be continued for the
     life of the Executive and the life of his spouse, and
     may be coordinated with and paid secondary to any
     benefits that the Executive or his spouse receives from
     another employer or from Medicare (following the
     Executive and/or his spouse's entitlement to Medicare
     benefits).



IN WITNESS WHEREOF, the parties have executed this First
Amendment to the Special Agreement on the ______ day of
August, 1997.


Northrop Grumman Corporation            Executive



____________________________            ____________________
Marvin Elkin,                           [insert name]
Corporate Vice President and
Chief Human Resources Officer


                              
                              
                     SECOND AMENDMENT TO
                NORTHROP GRUMMAN CORPORATION
                      SPECIAL AGREEMENT
                              
                              
     THIS SECOND AMENDMENT to the Northrop Grumman
Corporation Special Agreement is made by Northrop Grumman
Corporation, a Delaware corporation (hereinafter, the
"Company").

     WHEREAS, Northrop Grumman Corporation (the "Company")
and Richard B. Waugh, Jr. (the "Executive") have previously
entered into an agreement known as the Northrop Grumman
Corporation Special Agreement dated
, 1997 and subsequently amended (the "Agreement"), and

     WHEREAS, pursuant to Section 9.6 of the Agreement, the
Company may modify the Agreement with the written consent of
the Executive, and

     WHEREAS, the Executive has given the Company written
consent to amend the Agreement with respect to certain
payout provisions and such consent is attached hereto, and

     WHEREAS, the Company now wishes to amend such payout
provisions,

     NOW THEREFORE, the Agreement shall be amended as
follows:


Section 2.4(e) shall be amended to replace the "A" at the
beginning with the following:

     "Except as provided in Appendix A, a"


A new Appendix A shall be added as follows:

                         APPENDIX A
                              
                Manner of Payment of Benefits
                              
     1. Coverage: This Appendix applies only to the payment
of benefits under the Executive's nonqualified supplemental
retirement plans. It does not cover "3+3" benefits under
this Special Agreement. The covered benefits are referred to
for purposes of this Appendix as the "Supplemental
Retirement Benefits".

     2. Override: The provisions of this Appendix override
any inconsistent provisions in Section 2.4(e) of this
Special Agreement with respect to the manner of payment of
Supplemental Retirement Benefits.

     3. Basic Form Of Payment: The Supplemental Retirement
Benefits will be paid to the Executive in the form of a 100%
contingent annuitant annuity, except as provided below.

     (a) Payment will be made to the Executive with his
spouse as the contingent annuitant.

     (b) The Executive's spouse will be his spouse at the
date of the adoption of this Appendix ("Spouse").

     4. Calculation Of Annuity: The calculation of the 100%
contingent annuitant option will be made using the factors
applicable for that payment form under the Northrop Grumman
Retirement Plan.

     5. Commencement Of Annuity: The effective annuity
starting date will be the first of the month following the
Executive's termination of employment with the Company's
affiliated group (which may include Lockheed Martin
Corporation and its affiliates if Lockheed Martin
Corporation has merged with or acquired Northrop Grumman
Corporation at the time of the Executive's termination).
Actual payment will commence as soon as practicable on or
after the annuity starting date, but no more than 30 days
after the Executive's Effective Date of Termination.

     6. Lump Sum In Certain Cases: If the Executive's Spouse
should die prior to the annuity starting date described in
paragraph 5, or if the Spouse's life expectancy should
become shortened as a result of illness diagnosed or an
injury occurring after the date of adoption of this
Appendix, payment will be made to the Executive in a single
lump sum.

     (a) The payment will be the present value of the
Executive's entire accrued benefit (but only with respect to
the Supplemental Retirement Benefits).

     (b) The procedure for calculating the lump sum,
including the applicable actuarial factors, will be the same
as that used by the Company for making lump sum payments of
Supplemental Retirement Benefits under the Northrop Grumman
Corporation change-in-control Special Agreements with its
elected officers.

     (c) Payment will be made as soon as practicable
following the Executive's termination of employment as
described in paragraph 5, but no more than 30 days after the
Executive's Effective Date of Termination.

     (d) If the Company and the Executive cannot agree as to
whether the life expectancy of the Spouse has become
shortened as a result of an illness diagnosed or an injury
occurring after the date of adoption of this Appendix, the
issue will be determined by two doctors designated by the
Executive. If the designated doctors cannot agree, payment
will be made in annuity form under paragraph 3.

     7. No Vesting: This Appendix is intended only to
describe the manner of payment of benefits to which the
Executive may become entitled under other provisions of this
Special Agreement. This Appendix is not intended to confer
any additional right to benefits not derived from such other
provisions.


IN WITNESS WHEREOF, the Company has executed this Second
Amendment to the Special Agreement on the     day of
December, 1997.


NORTHROP GRUMMAN CORPORATION




By:




Attest:
                        Waiver Under
                Northrop Grumman Corporation
                      Special Agreement
                              
                              
     1. This constitutes a waiver of any right the
undersigned Executive may have to object to a modification
(as described in paragraph 3 below) of the Northrop Grumman
Corporation Special Agreement (the "Agreement") between the
undersigned Executive and Northrop Grumman Corporation (the
"Company") entered into on                        .

     2. This waiver is only effective until the date that is
10 days before the date of the vote by Northrop Grumman
shareholders on the proposed merger with Lockheed Martin
("Final Date").

     3. This waiver permits only the following modification
to the Agreement: in lieu of the lump sum payout described
in Section 2.4(e) of the Agreement of supplemental
retirement benefits, such benefits would be paid in the form
of an annuity (or installments), assuming such an option is
available to the Executive in the underlying plan or
agreement on which the supplemental benefits are based (such
as the Northrop Corporation ERISA Supplemental Plan 1, ERISA
Supplemental Program 2, etc.) This will not apply to 3+3
benefits provided under the Agreement or benefits under the
CPC Supplemental Executive Retirement Program.

     The Company will determine the form of annuity (or
installments) in its sole discretion. With respect to an
amount attributable to a particular plan or agreement (such
as the Northrop Corporation ERISA Supplemental Plan 1, ERISA
Supplemental Program 2, etc.), the Company will only select
among the options available under that particular plan or
agreement, as to both form and timing of payment.

     4. The Company does not promise to make the foregoing
amendment, but may do so at its option during the period of
the waiver.

     5. The undersigned Executive understands that the
Company will incur expenses in reliance upon this waiver and
the Executive therefore agrees that this waiver cannot be
revoked before the Final Date except as provided in 6.

     6. This waiver may be revoked before the Company amends
the Agreement if the Executive suffers from (a) an
unanticipated emergency that is caused by an event beyond
the control of the Executive and that would result in severe
financial hardship to the Executive if revocation were not
permitted, or (b) an illness or injury which severely
reduces the Executive's life expectancy.

     Executed this   day of December, 1997.


Northrop Grumman Corporation       Executive




By:



Attest:

                                                            
                        AMENDMENT TO
              THE NORTHROP GRUMMAN CORPORATION
                     SPECIAL AGREEMENTS
                              
                              
     WHEREAS, Northrop Grumman Corporation (the "Company")
and its elected officers have previously entered into a
series of agreements known as the Northrop Grumman
Corporation Special Agreements which provide change in
control benefits (the "Agreements"), and

     WHEREAS, pursuant to Section 9.6 of those Agreements,
the Company may modify the Agreements with the written
consent of the officers, and

     WHEREAS, the officers listed in Exhibit A hereto (the
"Waiving Officers") have given the Company written consent
to amend the Agreement with respect to certain payout
provisions, and

     WHEREAS, the Company now wishes to amend such payout
provisions,

     NOW THEREFORE, the Agreements of the Waiving Officers
shall be amended as follows:



1.   Section 2.4(e) shall be amended to replace the "A" at
the beginning with the following:

     "Except as provided in Appendix A, a"


2.   A new Appendix A shall be added as follows:

                         APPENDIX A
                              
                Manner of Payment of Benefits
                              
                              
     1. Rescission of Lump Sum Payout: Section 2.4(e) of
this Agreement contains a provision for a lump sum cash
payout of the actuarial present value equivalent of the
aggregate benefits accrued by the Executive under
supplemental nonqualified retirement plans. That lump sum
override of the form of payment provisions of other plans is
rescinded. Accordingly, the form of payment of benefits
under those plans will be determined in accordance with the
provisions of those plans.

     2. 3+3 Benefits: The rescission in paragraph 1 is not
meant to have any effect on the lump sum payout provision in
Section 2.4(e) with respect to the 3+3 benefits (i.e., the
imputed three additional years of vesting and benefit
accruals and three years of age).

     3. Coordination of Benefits: If the payout provisions
in other supplemental nonqualified retirement plans made
operative by the rescission in paragraph 1 contain reduction
in benefit provisions (such as forfeitures or penalties
attached to a lump sum election), the reduced amounts will
not be restored by this Plan.


     Adopted this 13th day of February, 1998.


                    NORTHROP GRUMMAN CORPORATION




                    By:
                                 Marvin Elkin


Attest:





                          Exhibit A
                              
                      Waiving Officers
                              

 Anderson          Herbert W.
 Crosby, Jr.       Ralph D.
 Elkin             Marvin
 Harrison          John E.
 Helm              Robert
 Jones, Jr.        Charles L.
 Kresa             Kent
 Lawler            William H.
 Molleur           Richard R.
 Myers             Albert F.
 Roche             James G.






<PAGE>
 
                                 EXHIBIT 10(u)
                                        



                           CPC SUPPLEMENTAL EXECUTIVE
                               RETIREMENT PROGRAM

<PAGE>
 
                                                         2/25/98

                               TABLE OF CONTENTS


<TABLE>
<S>       <C>                                       <C>
F.01      Purpose.................................   1
F.02      Definitions and Construction............   1
F.03      Eligibility.............................   3
F.04      Benefit Amount..........................   3
F.05      Benefit Limit...........................   8
F.06      Payment of Benefits.....................  13
F.07      Preretirement Death Benefits............  13
F.08      Individual Arrangements.................  15
F.09      Actuarial Assumptions...................  17
EXHIBIT A.........................................  20
</TABLE>

                                       2

<PAGE>
 
                                   APPENDIX F

                 CPC Supplemental Executive Retirement Program
                 ---------------------------------------------
  F.01           Purpose.  The purpose of this Program is to give enhanced
                 -------
                 retirement benefits to eligible elected officers of the
                 Company's Corporate Policy Council.

  F.02           Definitions and Construction.
                 ----------------------------   
                 (a)    Capitalized terms used in this Appendix which are not
                        defined in this Appendix or Article 1 of the Plan are
                        taken from the Northrop Grumman Retirement Plan, the
                        Northrop Grumman Retirement Plan--Rolling Meadows Site,
                        and the Grumman Pension Plan (collectively, the
                        "Qualified Plans") and are intended to have the same
                        meaning as under the Qualified Plans.

                 (b)    The benefits under this Program are designed to mimic
                        and supplement the post-1994 benefits under the 
                        Qualified Plans and are therefore to be construed
                        

<PAGE>
 
                         utilizing the same principles and benefit calculation
                         methodologies applicable
 under the Qualified Plans
                         except where expressly modified below.

                  (c)    Benefits under this Program will be determined with
                         reference to the terms of the Qualified Plans
                         (including Final Average Salary and Months of Benefit
                         Service) even if Participants are transferred to
                         positions with the Affiliated Companies in which they
                         are no longer covered by the Qualified Plans.

                         (1)  That is, if such a transfer occurs, for purposes
                              of the formula under this Program, Participants
                              will continue to earn deemed compensation and
                              service credits as if they were still
                              participating under the Qualified Plans.
                        
                         (2)  Notwithstanding (1), such deemed compensation and
                              service credits will not be considered as earned
                              under the Qualified Plans for purposes of
                              determining:

                                       2

<PAGE>
 
                    (A)  benefits under the Qualified Plans or supplements to
                         the Qualified Plans other than this Program, or

                    (B)  the offset under Section F.05(a)(2)(A) below.


          (d)  Affiliated Companies: If Northrop Grumman Corporation is merged
               --------------------                                           
               into the Lockheed Martin affiliated group, "Affiliated Companies"
               will be determined after that point by reference to Lockheed
               Martin Corporation and entities affiliated with it under the
               rules of sections 414(b), (c), (m) and (o) of the Code.


  F.03    Eligibility. Eligibility for benefits under this Program will be
          -----------                                                       
          limited to those elected officers of the Company's Corporate Policy
          Council listed in Exhibit A. Officers may be added or removed from
          Exhibit A in accordance with the amendment provisions of the Plan.

  F.04    Benefit Amount.
          --------------   
                                       3

<PAGE>
 
          (a)  The benefit formula under this Program with respect to a
               Participant equals 1-2/3% x his Final Average Salary x his Months
               of Benefit Service / 12.

          (b)  The benefit payable is the present value of a single, straight
               life annuity benefit for the Participant commencing on his Normal
               Retirement Date (except as provided in (g)), assuming an annual
               benefit equal to the benefit formula amount in (a).

          (c)  Only Months of Benefit Service after the commencement of a
               Participant's tenure on the Corporate Policy Council will be
               counted, as set forth in Exhibit A.

          (d)  Months of Benefit Service will continue to be counted for a
               Participant until the earlier of (1) and (2):

               (1)  The date the Participant ceases to earn benefit accrual
                    service under either the Qualified Plans or some other
                    defined benefit plan of the Affiliated Companies which is
                    qualified under section 401(a) of the Code.

               (2)  The later of:

                                       4

<PAGE>
 
                    (A)  cessation of the officer's membership on the Corporate
                         Policy Council (whether because of termination of his
                         membership or dissolution of the Council), and

                    (B)  two years from the effective date of the merger of
                         Northrop Grumman Corporation into the Lockheed Martin
                         Corporation affiliated companies, pursuant to the
                         Merger Agreement dated July 2, 1997.

               (3)  Examples: The following examples assume that the effective
                    --------                                                  
                    date of the merger (i.e., the closing) is March 10, 1998 and
                    that the Participant continues to earn Months of Benefit
                    Service under the Qualified Plans or a Successor Qualified
                    Plan until termination of employment with the Affiliated
                    Companies.

                    Example 1: Officer A terminates employment with the
                    ---------                                          
                    Affiliated Companies on March 31, 1998. At that time, he is
                    still a member of the CPC. His

                                       5

<PAGE>
 
                    service under this Program ceases to accrue on March 31.

                    Example 2: The CPC is never dissolved after the merger, and
                    ---------                                                  
                    Officer B continues to be a member of the CPC until December
                    31, 2005, though continuing to work for the Affiliated
                    Companies. His service under this Program ceases to accrue
                    on December 31, 2005.

                    Example 3: The CPC is dissolved by order of an authorized
                    ---------                                                
                    officer on March 11, 1998. Officer C continues to work for
                    the Affiliated Companies until December 31, 2005. His
                    service under this Program ceases to accrue on March 10,
                    2000, two years after the closing.

          (e)  Months of Benefit Service will be determined under the rules of
               the Qualified Plans for determining service after 1994, even with
               respect to pre-1995 periods of service counted under this
               Program.

                                       6

<PAGE>
 
          (f)  Benefits will be calculated without regard to the limits in
               sections 401(a)(17) and 415 of the Code.

                                       
          (g)  If a Participant's benefit is paid under this Program before his
               Normal Retirement Date, the benefit will be adjusted for early
               commencement as if it were a post-1994 benefit under the
               Qualified Plans.

               (1)  To determine whether the Early Retirement Benefit provisions
                    apply and to calculate the early retirement reduction, the
                    Participant's Vesting Service and Months of Points Service
                    earned under the Qualified Plans (or deemed earned under
                    F.02(c)) will be utilized.

               (2)  For purposes of calculating present value and the
                    appropriate early retirement subsidy, the assumed annuity
                    benefit will be deemed to commence as of the first of the
                    month following Termination of Employment or, if later, the
                    earliest date payment could be made for benefits after 1994
                    under the Qualified Plans.

                                       7

<PAGE>
 
  F.05         Benefit Limit.  Accruals under Section F.04 will be limited as
               -------------
               provided in this Section.

               (a)  Accruals for a Participant under this Program may not exceed
                    the greater of:

               (1)  10% of Final Average Salary, or

               (2)  50% of Final Average Salary minus the Participant's combined
                    accrued benefits under the following:

                    (A)  the Qualified Plans and any other defined benefit plan
                         qualified under section 401(a) of the Code which is
                         maintained by the Affiliated Companies;

                    (B)  the Northrop Corporation ERISA Supplemental Plan 1;

                    (C)  the ERISA Supplemental Program 2 under the Northrop
                         Supplemental Plan 2;

                    (D)  the Grumman Corporation Supplemental Retirement Plan;


                                       8

<PAGE>
 
                    (E)  the "3+3" benefit under the change-in-control Special
                         Agreements that Participants have entered into with the
                         Company ("Special Agreements") for those entitled to
                         it; and

                    (F)  any other Company plan, program, arrangement or
                         individual contract which provides a nonqualified,
                         defined benefit pension supplement.

          (b)  The limits in (a) may not be exceeded even after the benefits
               under this Program have been enhanced by the "3+3" benefit under
               the Special Agreements. See the examples in (c).

          (c)  Examples of the effect of the 3+3 benefit for those Participants
               who receive that benefit: 

               Example 1: A Participant has a 33% of Final Average Salary
               ---------
               accrued benefit under one of the Qualified Plans (including the
               supplemental plans under (a)(2)(B) and (C) above) and a 9% of
               Final Average Salary accrued


                                       9

<PAGE>
               benefit under this Program before the application of the limits
               of this Section or the 3+3 benefit. The Participant's final
               benefit, including the 3+3, would be calculated as follows:

               (1)  The 33% benefit would be enhanced by the effect of the 3+3
                    benefit (adding 5%) giving a total of 38%.

               (2)  The benefit under this Program would also be enhanced by the
                    effect of the 3+3 benefit, giving 9% + 5% = 14%.

               (3)  The initial benefit calculation would then be 38% + 14% =
                    52%.

               (4)  The 50% limit would be applied to the enhanced Qualified
                    Plan benefit as follows: 50% - 38% = 12%.

               (5)  Since the limit in #4 is greater than the 10% limit of
                    (a)(1), the benefit under this Program (enhanced by the 3+3
                    benefit) would be limited to 12%. The 

                                      10

<PAGE>
 
                    Participant would have a combined benefit from the Qualified
                    Plan, this Program and 3+3 of 50%.


               Example 2: A Participant has a 37% of Final Average Salary
               ---------                                                 
               accrued benefit under one of the Qualified Plans (including the
               supplemental plans under (a)(2)(B) and (C) above) and a 9% of
               Final Average Salary accrued benefit under this Program before
               the application of the limits of this Section or the 3+3 benefit.
               The Participant's final benefit, including the 3+3, would be
               calculated as follows:

               (1)  The 37% benefit would be enhanced by the effect of the 3+3
                    benefit (adding 5%) giving a total of 42%.

               (2)  The benefit under this Program would also be enhanced by the
                    effect of the 3+3 benefit, giving 9% + 5% = 14%.

               (3)  The initial benefit calculation would then be 42% + 14% =
                    56%.

                                      11

<PAGE>
 
               (4)  The 50% limit would be applied to the enhanced Qualified
                    Plan benefit as follows: 50% - 42% = 8%.

               (5)  Since the limit in #4 is less than the 10% limit of (a)(1),
                    the benefit under this Program (enhanced by the 3+3 benefit)
                    would be limited to 10%. The Participant would have a
                    combined benefit from the Qualified Plan, this Program and
                    3+3 of 52%.


          (d)  For purposes of the offset in (a)(2):

               (1)  benefits under all the plans will be compared on the basis
                    of a single, straight life annuity commencing at Normal
                    Retirement Date;

               (2)  accrued benefits under (A)-(E) and (F), both past and
                    present, will be counted (i.e., prior accruals which may
                    have been paid out previously will be counted);

               (3)  benefits accrued under (A)-(E) and (F) will be counted for
                    purposes of the offset even if they are forfeited for any
                    reason.
                                      12

<PAGE>
 
          (e)  For purposes of this Section, Final Average Salary will be
               calculated without regard to the limits in section 401(a)(17) of
               the Code.


  F.06    Payment of Benefits.
          -------------------   

          (a)  Benefits will be paid in a lump sum as soon as practicable
               following Termination of Employment.

          (b)  If a Participant dies after Termination of Employment but before
               receipt of payment, payment will be made to
               his estate. If a Participant dies prior to Termination of
               Employment, payment will be made under Section F.07.

  F.07  Preretirement Death Benefits: If a Participant dies before Termination
        ----------------------------                                            
        of Employment, preretirement surviving spouse benefits will be payable
        under this Program on behalf of the Participant if his surviving spouse
        is eligible for a qualified preretirement survivor annuity (as required
        under section 401(a)(11) of the Code) from a Qualified Plan.


                                      13

<PAGE>
 
          (a)  A preretirement death benefit will be calculated for a
               Participant's surviving spouse in the same manner as if the
               benefits earned under this Program were benefits under the
               Qualified Plan from which the Participant retired. In the usual
               case, therefore, the death benefit will be the survivor benefit
               portion of a 50% joint-and-survivor annuity based on the benefit
               in F.04 (as limited by F.05).

          (b)  The present value of the amount in (a) will be paid to the
               surviving spouse in a single lump sum as soon as practicable
               after the Company is properly notified of the Participant's
               death.

               (1)  For purposes of calculating present value and the
                    appropriate early retirement subsidy, the assumed spousal
                    annuity benefit will be deemed to commence as of the first
                    of the month following the Participant's death or, if later,
                    the earliest date payment could be made for qualified
                    preretirement survivor benefits under the Qualified Plans.

                                      14

<PAGE>
 
               (2)  The Company may delay payment in the event there is a
                    dispute as to whom payment is due until the dispute is
                    settled.

          (c)  The calculations in (a) will be made without regard to the limits
               in sections 401(a)(17) and 415 of the Code.

          (d)  No benefit will be payable under this Program with respect to a
               spouse after the death of that spouse.


  F.08    Individual Arrangements: This Section applies to a Participant who
          -----------------------
          has an individually-negotiated arrangement with the Company for
          supplemental retirement benefits.

          (a)  Intent: It is the intent of this Section to coordinate the
               ------                                                    
               benefits under this Program with those of any individually-
               negotiated arrangement. Participants with such arrangements will
               be paid the better of the benefits under the arrangement or under
               Sections F.04 or F.07 (as limited by F.05).
         
         (b)   No duplication of benefits: In no case will duplicate benefits be
               --------------------------                                       
               paid under this Program and such an 


                                      15

<PAGE>
 
               individual arrangement. Any payments under this Program will be
               counted toward the Company's obligations under an individual
               arrangement, and vice-versa.

          (c)  If the individually-negotiated arrangement provides a benefit in
               excess of the one payable under this Program, then the individual
               benefit will be substituted as the benefit payable under this
               Program (even if it exceeds the limit under F.05).

          (d)  In order to determine which benefit is greater, all benefits will
               be compared on the basis of an actuarial equivalent single,
               straight life annuity commencing at the Participant's Normal
               Retirement Date.

          (e)  For purposes of (d), the individually-negotiated benefit will be
               determined in accordance with all of its terms and conditions.
               Nothing in this Section is meant to alter any of those terms and
               conditions.

          (f)  This Section does not apply to the Special Agreements.


                                      16

<PAGE>
 
  F.09    Actuarial Assumptions: The following defined terms and actuarial
          ---------------------                                             
          assumptions will be used in calculating and comparing benefits under
          this Program:

          Defined Terms:
          ------------- 

               Earliest Starting Date: The earliest date payment could be made
               ----------------------                                         
               to the Participant for benefits accrued after 1994 under the
               Qualified Plans.

               Deferral Period: The period between the Date Payable and the
               ---------------                                             
               Earliest Starting Date.

               Date Payable: A lump sum to a Participant is payable for
               ------------                                            
               calculation purposes as of the first of the month following his
               date of Termination of Employment. A lump sum is payable to a
               surviving spouse for calculation purposes as of the first of the
               month following the Participant's death.

          Actuarial Assumptions:
          --------------------- 

               Interest: The Pension Benefit Guaranty Corporation (PBGC)
               --------                                                 
               interest rate (or rates) that would be used to 

                                      17

<PAGE>
 
               calculate a lump sum value for an immediate annuity under the
               Northrop Grumman Retirement Plan--

                    (A)  using 120% of the PBGC immediate annuity rate for both
                         the Deferral Period and after the Earliest Starting
                         Date, and

                    (B)  substituting that PBGC rate (or rates) in effect for
                         the month preceding the Date Payable (even if actual
                         payment is delayed for some reason) instead of the rate
                         for the first day of the calendar year of distribution.

               Mortality: (A) During the Deferral Period, none; (B) after the
               ---------                                                     
               Earliest Starting Date, UP-1984 Unisex.

               Increase in Code Section 415 Limit: 2.8% per year.
               ----------------------------------                
               Age: Age rounded to the nearest month on the date of Termination
               ---                                                             
               of Employment.

               Variable Unit Values: Variable Unit Values are presumed not to
               --------------------                                          
               increase for future periods after the Date Payable.

                                      18

<PAGE>


 
                                   EXHIBIT A


<TABLE>
<CAPTION>


         Eligible Officer            Election Date
         ----------------            -------------
         <S>                         <C>
            R. Molleur                   2/4/91
            M. Elkin                    5/20/92
            C. Jones                    5/20/92
            J. Roche                    5/20/92
            R. Waugh                   11/18/92
            R. Helm                    12/15/93
            R. Crosby                   6/15/94
            J. Harrison                 6/15/94
            H. Anderson                12/21/94
            W. Lawler                  12/17/96



</TABLE.

                                      19


</TABLE>




<PAGE>
 
NORTHROP GRUMMAN CORPORATION



                                  EXHIBIT 23

                         INDEPENDENT AUDITORS' CONSENT
                                        


We consent to the incorporation by reference in Registration Statements Nos.
33-15764, 33-49667, 33-55141, 33-59815, 33-59853, 333-03959, 333-02653,
333-02453, and 333-34717 of Northrop Grumman Corporation on Form S-8 of our
report dated January 21, 1998 (except for the information described in the note
to the consolidated financial statements captioned "Merger Agreement" as to
which the date is March 25, 1998) appearing in this Annual Report on Form 10-K
of Northrop Grumman Corporation for the year ended December 31, 1997.



DELOITTE & TOUCHE LLP
Los Angeles, California
March 25, 1998






                           EXHIBIT 24

            POWER OF ATTORNEY IN CONNECTION WITH THE

                1997 ANNUAL REPORT ON FORM 10-K


KNOW ALL MEN BY THESE PRESENTS, that each of the undersigned
directors and officers of  NORTHROP GRUMMAN CORPORATION, a
Delaware corporation, does hereby appoint RICHARD R. MOLLEUR and
JAMES C. JOHNSON, and each of them as his agents and attorneys-in-
fact (the "Agents"), in his or her respective name and in the
capacity or capacities indicated below to execute and/or file the
Annual Report on Form 10-K for the fiscal year ended December 31,
1997 (the "Report") under the Securities Exchange Act of 1934, as
amended (the "Act"), and any one or more amendments to any part
of the Report that may be required to be filed under the Act
(including the financial statements, schedules and all exhibits
and other documents filed therewith or constituting a part
thereof) and to any part or all of any amendment(s) to the
Report, whether executed and filed by the undersigned or by any
of the Agents.  Further, each of the undersigned does hereby
authorize and direct the Agents to take any and all actions and
execute and file any and all documents with the Securities and
Exchange Commission (the "Commission"), which they deem necessary
or advisable to comply with the Act
 and the rules and regulations
or orders of the Commission adopted or issued pursuant thereto,
to the end that the Report shall be properly filed under the Act.
Finally, each of the undersigned does hereby ratify each and
every act and documents which the Agents may take, execute or
file pursuant thereto with the same force and effect as though
such action had been taken or such document had been executed or
filed by the undersigned, respectively.

This Power of Attorney shall remain in full force and effect
until revoked or superseded by written notice filed with the
Commission.

IN WITNESS THEREOF, each of the undersigned has subscribed these
presents this 18th day of March, 1998.


__________________________    Chairman of the Board, President
and Chief Executive
Kent Kresa                    Officer and Director (Principal
Executive Officer)

__________________________    Director
Jack R. Borsting

__________________________    Director
John T. Chain, Jr.

__________________________    Director
Jack Edwards

__________________________    Director
Phillip Frost

__________________________    Director
Robert A. Lutz

__________________________    Director
Aulana L. Peters

__________________________    Director
John E. Robson

__________________________    Director
Richard M. Rosenberg

__________________________    Director
John Brooks Slaughter

__________________________    Director
Richard J. Stegemeier

__________________________    Corporate Vice President
Richard B. Waugh, Jr.              and Chief Financial Officer
                         (Principal Financial Officer)

__________________________    Corporate Vice President
Nelson F. Gibbs               and Controller
                         (Principal Accounting Officer)




<TABLE> <S> <C>

<ARTICLE> 5
       
<S>                             <C>
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</TABLE>