EDO CORP - 10-K Annual Report

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K

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

FOR THE FISCAL YEAR ENDED: DECEMBER 31, 2004

OR

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

FOR THE TRANSITION PERIOD FROM TO

COMMISSION FILE NUMBER 1-3985

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

NEW YORK 11-0707740
(State of Incorporation) (IRS Employer Identification No.)

60 EAST 42ND STREET, 42ND FLOOR 10165
NEW YORK, NEW YORK (Zip Code)
(Address of principal executive offices)

REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (212) 716-2000

SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:

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 for 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]

Indicate by checkmark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes [X] No [ ]

The aggregate market value of the registrant's common stock held by
non-affiliates was $368,483,523 based on the reported last sale price of common
stock on June 26, 2004 which is the last business day of the registrant's most
recently completed second fiscal quarter.

The number of shares of EDO common stock outstanding as of February 25,
2005 was 20,137,611 shares.

DOCUMENTS INCORPORATED BY REFERENCE:

Certain portions of the Registrant's definitive proxy statement (filed
pursuant to Reg. 14A) relating to its 2005 Annual Meeting of Shareholders are
incorporated by reference in Part III of this Report.
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EDO CORPORATION

TABLE OF CONTENTS

1

PART I

ITEM 1. BUSINESS

INTRODUCTION

EDO Corporation was incorporated in New York in 1925 by Earl Dodge Osborn,
from whose initials "EDO" is derived.

EDO Corporation designs and manufactures a diverse range of products for
the defense industry and commercial markets, and provides related engineering
and professional services. Major product groups include: aircraft armament,
defense electronics, communications, undersea warfare, and integrated
structures. EDO's advanced systems are at the core of the transformation to
lighter, faster, and smarter defense capabilities.

The Company's Annual Report on Form 10-K, quarterly reports on Form 10-Q,
current reports on Form 8-K and all amendments to those reports, and the Proxy
Statement for its Annual Meeting of Shareholders are made available, free of
charge, on its Web site www.edocorp.com, as soon as reasonably practicable after
such reports have been filed with or furnished to the Securities and Exchange
Commission.

ACQUISITIONS

Acquisitions have been a primary driver of our growth in recent years. EDO
has completed ten acquisitions since 1998, all of which have been disclosed in
our prior reports on form 10-K, including the following:

In April 2000, we acquired AIL Technologies, Inc. (AIL), a privately-held
defense electronics company based in Deer Park, New York. In the transaction, a
merger of AIL with a wholly-owned EDO subsidiary accounted for as a tax-free
reorganization, each share of AIL common stock was exchanged for 1.3296 EDO
common shares (equivalent to 6,553,194 EDO common shares valued at $39.4
million). In addition, AIL stockholders received a cash payment of $13.3
million. The merged company also assumed AIL debt of $29.7 million. AIL added
extensive capabilities in defense electronics, such as aircraft electronic
warfare systems in use on the B-1B bomber and the EA-6B Prowler radar-jamming
aircraft.

In October 2001, we acquired Dynamic Systems, Inc., a privately-held
company based in Alexandria, Virginia, for $13.6 million in cash. Dynamic
Systems added to our range of professional and information technology services
that are provided primarily to the U.S. Department of Defense (DoD) and other
government agencies.

In July 2002, we acquired, in an auction under section 363 of the U.S.
Bankruptcy Code, substantially all of the assets of Condor Systems, Inc., a
privately-held defense-electronics company and its subsidiary (together,
"Condor") based in Morgan Hill and Simi Valley, California for $62.5 million in
cash, plus transaction costs of $5.0 million. We also assumed $28.0 million in
outstanding standby letters of credit. The acquisition of Condor's business has
significantly expanded our defense-electronics capabilities in the areas of
reconnaissance and surveillance systems and communications and countermeasures.

In February 2003, we acquired all of the stock of Advanced Engineering &
Research Associates, Inc. (AERA), a privately-held company located in
Alexandria, Virginia, for $38.1 million in cash, plus transaction costs of $0.3
million. In addition, we acquired and immediately paid off debt of $3.8 million.
AERA strengthened and expanded our range of professional services. AERA was
merged with our Professional Services business unit.

In March 2003, we acquired all of the stock of Darlington, Inc., a
privately-held defense-communications company based in Alexandria, Virginia, for
$25.6 million in cash, plus transaction costs of approximately $0.3 million. In
addition, we acquired and immediately paid off debt of $4.9 million. The
Darlington acquisition significantly expanded our capabilities in defense
communications and related professional services. Darlington operates within our
Combat Systems business unit.

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In June 2003, we acquired all of the stock of Emblem Group Ltd., a
privately-held company based in Brighton, England, for $27.3 million plus
transaction costs of approximately $1.9 million. Emblem, which has been renamed
EDO (UK) Ltd., operated through its MBM Technology unit in England and Artisan
Technologies Inc. subsidiary in the United States. EDO (UK) reinforces our
position as a global leader in aircraft armament-release systems and broadens
our customer base in Europe. The acquisition also added a product line of rugged
computers and related devices.

SEGMENTS

We have historically reported our results in three reporting segments:
Defense, Communications and Space Products, and Engineered Materials. Because
the Company continues to grow organically and through acquisitions primarily
related to defense products, the Defense segment has become the dominant segment
of our business. We set forth certain business segment information including
information on revenues from external customers, operating earnings, assets and
capital expenditures in Note 18 on pages 63 through 66 of this Report.

Our reporting segments currently consist of the following business units:

Each segment's percent of our consolidated net sales for the past three
fiscal years was:

DEFENSE SEGMENT

The Defense segment includes electronic warfare systems, reconnaissance and
surveillance systems, aircraft armament systems, C4I (Command, Control,
Communications, Computers, and Intelligence) products and services,
undersea-warfare systems and professional and engineering services.

ELECTRONIC WARFARE SYSTEMS

Electronic warfare systems sales accounted for 12% of consolidated net
sales in 2004, 14% in 2003 and 28% in 2002.

Our AN/ALQ-161 is the defensive avionics system that protects the U.S. Air
Force's (USAF) B-1B bomber from radar-guided and infrared-guided missile
threats. Designed in the early 1980's, specifically for the B-1B aircraft, we
delivered the AN/ALQ-161 system with a full complement of logistics and spares
support for the USAF fleet of 100 aircraft. Currently, we provide continued
logistics support, sustaining engineering support and capability upgrades to the
AN/ALQ-161 systems. This support includes software

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enhancements and hardware improvements to increase situation awareness and
jamming effectiveness while decreasing costs. In 2003, the USAF made the
strategic decision to maintain the AN/ALQ-161 as the defensive suite on the B-1B
bomber until at least 2015 and has begun a structured series of enhancements
required to maintain the AN/ALQ-161 system and allow the B-1B bomber to perform
its mission against ever changing threats. In 2004, EDO received numerous
awards, totaling $40.7 million, in support of the AN/ALQ-161 system.

We were the original designer and integrator of the AN/ALQ-99 Tactical
Support Jamming System for the EA-6B aircraft in the 1960s. We have been under
contract for support and modifications for this aircraft's systems and
subsystems since then. In 2003, we completed a substantial contract with the
U.S. Navy to upgrade the Universal Exciter on the EA-6B aircraft. The Universal
Exciter is the unit in the AN/ALQ-99 that provides the specific
electronic-jamming-technique waveforms and modulations that defeat enemy air-
defense systems. We continue to maintain and support the AN/ALQ-99 system,
including the current on-board system hardware and the Universal Exciter Upgrade
(UEU) tactical jamming pod. The DoD currently expects EA-6B aircraft to be in
operation through 2015 as the UEU pod migrates to the EA-18G Growler aircraft.

EDO provides a broad range of electronic warfare related engineering
services to the USAF, as well as aerospace and commercial businesses, to produce
and support complex, high-technology solutions. Engineering specialties include
software, radio-frequency, computer-aided design, and mechanical engineering.

The provision of engineering services to the Air Force led to the
development of portable radar-signal simulators designed to test the
radar-warning receivers. Our first sale of this equipment was made in June 1998.
The first significant contract was awarded by the Air Force in 2001 for 70
units. The primary product is the AN/PLM-4.

The AN/PLM-4 tests the radar-warning systems onboard fighter jets and other
military aircraft before takeoff, as well as during routine maintenance. In
addition to the flight-line version, the radar-signal simulator is available in
configurations for laboratory, shipboard and vehicle testing.

In 2004, we received orders for 118 AN/PLM-4 radar signal simulators from
the USAF and international customers. This brought the total number of systems
ordered to 622, of which more than 555 have been delivered to customers.

RECONNAISSANCE AND SURVEILLANCE SYSTEMS

Sales of our reconnaissance and surveillance systems accounted for 16% of
consolidated net sales in 2004, 17% in 2003 and 9% in 2002.

Our reconnaissance and surveillance systems include state-of-the-art
electronic systems, used primarily for Electronic Intelligence (ELINT) and
Electronic Support Measure (ESM) systems. The primary purpose of an ELINT system
is to determine what electronic signals are in the mission environment and then
to very accurately collect data. The analyzed data is stored in collection
libraries for subsequent use in ESM systems that provide both situational
awareness and self-protection against enemy threats.

Our base of products are sold in both domestic and international markets.
Specifically, the ALR-95, ES-3701, CS-5060, CS-5500 and CS-3000 systems provide
a core product baseline, and also provide opportunities to introduce new
products.

The ES-3701 is a leading international ESM system for naval applications.
More than 50 systems have been sold, many of which are already in operation
providing effective at-sea performance. A key feature is the system's precision
direction-finding at long range, even in difficult electromagnetic environments.
It can be integrated into any type of combat-system multi-function console and
enables the interception of radar threats.

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C4I PRODUCTS AND SERVICES

Sales of our C4I products and services accounted for 12% of consolidated
net sales in 2004, 10% in 2003 and 1% in 2002.

We act as a systems integrator for naval C4I (Command, Control,
Communications, Computers, and Intelligence) systems. In this role, we integrate
a ship's sensor systems, including radar and sonar, communications systems,
navigation and integrated bridge systems, and aircraft control systems to
provide situational awareness in a common display format for a ship's commander.
Our contracts typically provide for the development of integration software that
allows the various subsystems to communicate and produce common information
displays.

We have completed integration and testing of a Command, Control and
Information System (CCIS) on board three Norwegian Coast Guard vessels. A fourth
Norwegian Coast Guard vessel under contract for CCIS installation is scheduled
to begin modernization in 2005. We will include integration of a new type of
search radar for all four ships as part of our 2005 activities in support of the
Norwegian Coast Guard.

EDO's CCIS is an open-architecture system that enhances maritime operations
in both the littoral and open-ocean environments. It is designed for modular
integration of sensor and weapons systems including surface-search radar,
electro-optic fire-control system, hull-mounted sonar, integrated-bridge system,
navigation system and helicopter-control system and complies with U.S. Navy Open
Architecture Computing Environment (NOACE) standards. CCIS provides automated
decision aids for on-scene command, real-time tactical display management,
aircraft control, search and rescue, and weapon engagement.

In related communications projects, we have installed tactical data links
on the first two of six Royal Norwegian Navy ULA-class submarines. Under this
contract, which was awarded at the end of 2003, EDO is providing engineering,
manufacturing, and integration services to deliver tactical-data-link systems
fully compliant with open systems architecture standards. EDO is also upgrading
the existing submarine communications systems to provide new line-of-sight,
over-the-horizon, and satellite-data-communications capabilities, allowing
interoperability with all NATO forces. Information from EDO's data-link system
will be fully integrated with the submarine's on-board command and control
system to give the crew a common operational picture that will be distributed
throughout the submarine.

Also in 2004, we received a follow-on contract award to produce a total of
11 additional AN/TSQ-231 Joint Enhanced Core Communication Systems (JECCS) for
the U.S Marine Corps. Three units completed production in 2003, two of which
were deployed to Iraq. JECCS provides the Marine Corps with a mobile, first-in
system for network management, data and voice transmission, and switching
services.

EDO continued to serve as the "Signal Corps" for USAID's Office of Foreign
Disaster Assistance (OFDA) supporting the US response to worldwide disasters. We
provide OFDA headquarters with network administration, communications field
support, integrated logistics services, training, and equipment procurement,
inventory and maintenance. Our participation in Disaster Assistance Response
Teams (DARTs) has taken us to Indonesia and Sri Lanka in response to the tsunami
disaster, as well as Haiti, Grenada, Senegal and Sudan over the course of 2004.

EDO experienced significant growth as well as an increasing range of
engineering and field services to U.S. Navy ships, shore sites and critical
programs, through our Fleet Systems Engineering Teams (FSET) contract. FSETs are
provided on a continuous basis to Carrier Strike Groups (CSGs), Expeditionary
Strike Groups (ESGs), Network Operating Centers (NOCs) and Naval Computer and
Telecommunications Area Master Stations (NCTAMS). Our technicians keep
communications networks up, optimize the networks to meet changing mission
requirements, and ensure connectivity between systems and across networks.
Ancillary to our FSET activities, we also provided services to Coalition
Networking (CENTRIX) programs and the Base Level Information Infrastructure
(BLII) programs for the Navy. EDO also provides design, development,
installation and training services to General Dynamics' Electric Boat business
unit for the Virginia-class submarine Exterior Communications System (ECS).

5

RUGGED COMPUTERS AND ELECTRONICS

EDO produces rugged computers and related electronic devices in the UK.
This product line is designed to balance exceptional performance with user
friendliness and the rugged protection to withstand rough treatment on the
battlefield. Unlike many competing products that are modified commercial
equipment, EDO's rugged devices are designed specifically for the military
market. These devices meet the highest standards (Land Class A) for resistance
to electro-magnetic interference and low signal emission, allowing them to
perform safely alongside other electronic systems. The flagship "Termite"
product is the only UK-designed and developed rugged, handheld computer.

In 2004, EDO continued to invest in new rugged products including computer
tablets and a highly innovative wearable computer, known as the "Soldier Digital
Assistant" (SDA).

AIRCRAFT ARMAMENT

Aircraft armament sales accounted for 13% of our consolidated net sales in
2004, 12% in 2003 and 13% in 2002.

Aircraft armament equipment includes a broad range of sophisticated devices
that allow for the storage and release of bombs and missiles carried on military
aircraft. This includes electronic interfaces between the weapon and the
aircraft that allow for targeting and release.

Over the past two decades, EDO has made significant investments in aircraft
armament technology to meet the worldwide demand for smart, lightweight,
high-performance weapons-interface systems. We have developed and manufactured
bomb release units (BRU) for the F-15E aircraft, ejection release units (ERU)
for the Tornado multi-role combat aircraft, jettison release mechanisms for the
F-14, pneumatic missile-eject launchers for the F/A-22, and smart-weapon,
multiple-carriage systems for the F-18 and domestic and foreign F-16s. In 2004,
EDO was awarded a development contract for the Army/Navy/Marine Joint Common
Missile Program.

In 2004, we:

- continued production of F-15E BRUs for the USAF and international
customers and provided spare-parts support for Tornado ERUs and F-15 BRUs
worldwide.

- received production orders for 144 additional LAU-142/A missile launchers
for the F/A-22 aircraft. Known as AVEL, for AMRAAM (Advanced Medium Range
Air to Air Missile) Vertical Ejection Launcher, the LAU-142/A carries and
ejects missiles from internal bays. During in-flight launch, the AVEL
system ejects missiles through the jet fighter's air-flow-boundary layer
very rapidly, assuring safe aircraft separation at supersonic speeds. The
AVEL employs a highly reliable pneumatic-ejection system controlled by
the aircraft's stores-management system. We are under contract for
depot-support and anticipate we will provide depot support through the
life of the F/A-22.

- continued development and testing of the pneumatic suspension-and-release
system for the F-35 Joint Strike Fighter program. We also began
development of a lighter weight pneumatic ERU for the STOVL (Short
Takeoff Vertical Landing) version of the F-35.

- continued development and testing of a new electronic assembly for the
LAU-117 Maverick launcher for Raytheon Missile Systems. This assembly
will allow the analog-controlled Maverick missile to be carried on the
F-16, F-35 and other aircraft with digital-controlled stores.

- received additional production orders for the BRU-57 smart-weapon
carriage and electronics system as well as continued the integration of
the BRU-55 onto the F-18 aircraft.

- successfully flight tested a new generation pneumatic BRU on the B-1B
platform, increasing the aircraft's ability to carry and eject 500, 1000,
and 2000-pound class weapons at a significant operations cost savings.

6

- delivered initial orders of Modular Advanced Lightweight Training System
(MALTS) to an international customer.

- received an initial order for interface components for the UK Precision
Guided Bomb (Paveway IV).

UNDERSEA WARFARE

Undersea warfare sales accounted for 6% of our consolidated net sales in
2004, 7% in 2003 and 10% in 2002.

AIRBORNE MINE COUNTERMEASURES SYSTEMS

We are the preeminent supplier of airborne naval-minesweeping equipment in
the world. The principal system of this type used by the U.S. Navy, the MK105
helicopter-towed system, was designed and developed by us starting in 1967. In
the early 1990s, we developed a significant upgrade under contract, followed by
an initial production contract in 1996. We continue to provide spares and
logistics support for these systems to the Navy and an international customer,
and we continue to function as the Navy maintenance depot for the MK105 systems.

In 1994, we began work under contract with the Navy to develop a
lightweight, helicopter-towed minesweeper for shallow water applications. We
received a production contract for these systems in 1999 with delivery completed
in 2002. Furthermore, we won the competitive contract from the Navy for the next
generation minesweeping system, called the Organic Airborne/Surface Influence
Sweep (OASIS). Development work will continue through 2005 with expected
production starting in 2007 and continuing through 2015.

We continued work on the Navy contract to demonstrate the feasibility of
unmanned-surface-vessel mine-warfare technology and the application of this
technology for fleet integration. The Navy has selected EDO's Unmanned Surface
Sweep System, named US3, and OASIS, as baseline sweep mission packages for the
Littoral Combat Ship (LCS).

In 2004, EDO entered into an agreement with ATLAS ELEKRONIK GmbH, a
wholly-owned subsidiary of BAE SYSTEMS, to cooperate in the field of maritime
mine counter measures.

SONAR SYSTEMS

We have been a supplier of undersea systems including sonar sensors,
underwater-communication systems, depth-sounding, and speed-measuring equipment
for more than 50 years. During 2004, our newest and most capable towed sonar
system, the EDO Model 980 ALOFTS, which is designed to detect quiet submarines
in littoral waters, was installed for an international customer. Five more
systems will be installed through 2008.

Development continued in cooperation with Ultra Electronics, the UK-based
aerospace and defense-electronics group, on our newest hull mounted sonar, the
MFS 7000, which will be installed on the United Kingdom's new anti-air warfare
destroyers, the Daring class, beginning in 2005.

Installation of two EDO Model 997 hull mounted sonars to replace the
earlier EDO Model 610 was also completed in 2004 -- bringing the total number of
these new systems operating in the Brazilian Navy to four. Installation of two
more systems will be completed in 2005.

We continued to support our legacy SQR-18 and SQS-35 towed sonars in their
role as primary undersea warfare systems for several international navies, most
notably the Taiwanese Navy.

PROFESSIONAL AND ENGINEERING SERVICES

Professional services accounted for 17% of consolidated net sales in 2004,
19% in 2003 and 13% in 2002.

Our professional services include acquisition and logistics management,
training and performance support systems, information technology services,
systems engineering, operation analysis, and program management. We provide
these services to the US defense, federal-services, and information-technology
markets.
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- Acquisition Logistics and Management

We support several of the Navy's program executive offices by providing
logisticians, acquisition specialists, engineers and financial analysts. These
professionals perform functions such as configuration management, budget
analysis, analysis of ship casualty reports, ship-manning assessments, and
review of training requirements. We also provide acquisition and logistics
support to the Marine Corps, including several logistic bases and
systems-command centers. We have provided acquisition support to the Coast
Guard's Deepwater program office as they create a transformational fleet of
vessels.

In 2004, we increased our support to the Commander of Naval Installations
providing a broad range of operational and analytical support.

- Training & Performance Systems

Our curriculum and courseware developers continued their work for the
Virginia-class submarine platforms. We are a prime contractor on the Naval Air
Systems Command "Training Systems Contract II" to develop courseware for many of
the Navy and Marine Corps air platforms over the next eight years.

We are also applying this skill internally to develop automated training
and interactive technical manuals for new EDO platforms, such as the OASIS
mine-sweeping system.

Our analysts and subject matter experts support the Marine Corps'
Warfighting Laboratory with concept-based experimentation and design, technology
evaluation, and identification of improved procedures. Similar support is also
provided to the Joint Forces Command's "Joint Concept Development and
Experimentation Process."

- Systems Engineering

We perform engineering services under contracts to the Navy for
threat-simulator-validation support at China Lake Naval Air Warfare Center, to
the Air Force electronic warfare Directorate at Edwards Air Force Base for
F/A-22 and various other aircraft platforms, and provide technical and
engineering support to various Boeing Satellite Systems programs.

In 2004 we were awarded a multi-year contract to continue our in-service
engineering support for the Navy's marine propulsion gas turbine systems. We
also provide systems engineering services in areas such as test and evaluation,
systems integration, performance modeling and computer-aided design to a number
of Navy, Coast Guard, and commercial clients.

- Operation Analysis and Program Management

In 2004, we were awarded a multi-year contract from the Department of the
Navy for in-service engineering and depot support for a mine countermeasure
program based in San Diego. This contract complements our continued support for
the Explosive Ordnance Disposal Program Management Office (PMS-EOD), a contract
we have successfully maintained since 1984.

COMMUNICATIONS AND SPACE PRODUCTS SEGMENT

The Communications and Space Products segment includes antenna products,
electronic force-protection products, interference-cancellation systems, and
space products.

ANTENNA PRODUCTS

We design and produce antenna systems for a wide variety of military and
commercial applications including communications, electronic warfare,
navigation, radar and wireless Local Area Networks. Our antenna business is
approximately 60% military and 40% commercial. Our military antennas are
deployed on many different types of platforms and vehicles including fixed wing
and rotary aircraft, unmanned aerial vehicles (UAVs), satellites, surface ships,
submarines, and ground vehicles. Our commercial antennas are used on commercial
airliners as well as general-aviation aircraft.

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We have a broad customer and product base in this business. In 2004, we
sold more than 35,000 antennas of 200 different types to more than 350 different
original-equipment manufacturers and after-market customers. A large portion of
our revenue results from spare part sales and repair services for an installed
base of antennas in excess of 500,000 units.

We continually work on the development of new antenna products via
internally funded and customer-sponsored research and development. For example,
in 2004, we were awarded a design contract for an anti-jam GPS antenna as part
of the Advanced Digital Antenna Production (ADAP) program. This USAF program is
estimated to provide $6 million in future antenna production for EDO.

Other major platform contracts include a specialized, multi-function
antenna for use on the F/A-18 E/F Super Hornet strike fighter, antennas
pertaining to the instrument landing sensors for the F-35 aircraft, and ground
mobile communications antennas for the Joint Tactical Radio System. We
anticipate many years of production for all three of these platforms.

We also provide critical aerospace antennas for the Ground-Based Midcourse
Defense System. These antenna types have passed rugged electrical and
environmental missile-qualification requirements.

ELECTRONIC FORCE PROTECTION

EDO's highest priority in 2004 was to quickly fill the U.S. Army's orders
for our electronic force protection equipment. Although we have been developing
various versions of this technology, known as the Shortstop Electronic
Protection System, for more than 14 years, the Army's primary emphasis has
shifted to increasing production of the newest version, and substantial
additional orders have been received for delivery in 2005. We believe that EDO
is the only supplier that can currently meet the Army's specifications. However,
we believe that other companies are attempting to develop competing
technologies.

Our Shortstop program was initiated in 1990 by the U.S. Central Command as
a quick-reaction response capability for Operation Desert Storm. The current
production system is a modified version that, as described by the Army, provides
a protective "electronic bubble for vehicles, dismounted operations in
conjunction with vehicles, and for fixed sites."

INTERFERENCE CANCELLATION

EDO has been a world leader in interference cancellation technology for
more than 25 years. Our technology is used to eliminate interference in dense
electromagnetic environments that can degrade the effectiveness of radios and
other electronic equipment. Our systems allow full operational capability,
mitigating both friendly and intentional sources of interference.

In 2004, EDO was awarded a three-year system design and development
contract from The Boeing Company for an interference cancellation system on the
EA-18G aircraft. The EA-18G has been selected by the U.S. Navy to replace the
EA-6B Prowler aircraft, which provides an umbrella of protection for strike
aircraft, ground troops and ships by jamming enemy radar, electronic data links
and communications. EDO's interference-cancellation equipment will allow clear
communications during all mission scenarios.

In addition, EDO is providing the interference-cancellation subsystem to
Boeing for the Air Force CV-22 Osprey tilt-rotor aircraft and is working with
Boeing to maximize synergies between the two programs. EDO is also providing
interference-cancellation technology for both of the Coast Guard's two major
modernization projects, known as Rescue 21 and Deepwater.

SPACE PRODUCTS

We manufacture products for space payloads that meet the high reliability
standards required by the industry, including components, subassemblies and
major subsystems that are sold directly to the government for military and civil
systems, or to prime contractors for both government and commercial
applications. Our sensors and subsystems include larger subsystems, up to full
satellite payloads, for remote sensing instruments employing microwave
measurements of the earth and its atmosphere, and classified government
programs. Sales of these products have been impacted by the downturn in
commercial space launches by the Boeing company.

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ENGINEERED MATERIALS SEGMENT

The Engineered Materials segment includes electro-ceramic products and
advanced fiber-composite structural products.

ELECTRO-CERAMIC PRODUCTS

Piezoelectric-ceramic elements convert acoustic energy to electrical energy
and vice versa, and form the basis of many defense and commercial products
ranging from military sonar to commercial fish finders. We are one of North
America's leading manufacturers of piezoelectric-ceramic components for defense
applications, and we also provide material and related transducers to several
commercial markets. More than 50% of our piezoelectric-ceramic sales are for
defense applications.

Our business is vertically integrated with in-house manufacturing and
development of piezoelectric and dielectric ceramic materials, coupled with
state-of-practice mixed analog and digital electronics and software engineering.
We believe this combination of engineered active materials and electronics
capabilities makes us competitive in several niche markets. Examples of our
products include underwater acoustic transducers for use in all areas of
undersea warfare and piezoelectric shapes for a variety of industries.

In 2004, the Naval Sea System Command (NAVSEA) awarded us contract options
worth $5.8 million for additional production of SQS-53C sonar arrays for the
Arleigh Burke-class of guided-missile destroyer. The sonar is used for
detection, classification, and localization of submarines. This latest order
covers production of three shipsets of sonar arrays, bringing the total number
of shipsets ordered under this contract to twelve. If all options are exercised,
deliveries will extend to approximately 2010. In addition to supplying these
arrays for U.S. Navy ships, EDO also provides them to NAVSEA for supply to
allied navies under the foreign military sales program.

INTEGRATED COMPOSITE STRUCTURES

Our capabilities in the area of fiber-reinforced advanced composite
structures include product and system design, engineering analysis, process
development, tooling design and fabrication, qualification testing and
validation, production, and after-market support. The primary focus of our
business-development effort is advanced composite structures for all types of
platforms including manned and unmanned aircraft, missiles, ships and ground
vehicles.

In 2004, we secured a number of contracts for composite structures on the
next generation Boeing J-UCAS (Joint Unmanned Combat Air Systems) aircraft. The
J-UCAS program combines the efforts that were previously known as the Air Force
Unmanned Combat Air Vehicle (UCAV) and the Naval Unmanned Combat Air Vehicle
(UCAV-N) programs.

In 2004, we continued delivery of production filament-wound launch
canisters for the new Thales VT-1 missile program. This contract extends into
2005. We also continued production of composite tanks for the Boeing C-17
aircraft. We have been the sole supplier of these tanks since production began,
more than 11 years ago. We also signed new contracts with Northrop Grumman for
design and fabrication of composite structures on military aircraft modification
programs. It is anticipated that this type of work will continue forward based
upon our success in 2004.

In commercial markets, 2004 marked the 37th year in which we have been a
provider to Boeing for composite tanks on commercial airliners. Our aftermarket
support for these tanks to the commercial airlines remains strong.

We produce our trademark "Fiberbond" line of composite piping for water and
fire systems on oil rigs. In 2004, the fabrication and installation of topside
piping systems for offshore oil platforms continued strong with Gulf of Mexico
deep-water oil platforms. We continue to invest in introducing our Fiberbond
piping to the U.S. Navy due to its non-corrosive, lightweight and non-magnetic
properties. We believe that this technology is applicable to the LCS and Avenger
Upgrade programs.

10

RESEARCH AND DEVELOPMENT

Research and development is important to the success of our business,
because we focus on niche markets where we have leading-edge technology. While
research and development efforts are facilitated by a large portion of our
staff, our research and development efforts involved the primary efforts of
about 180 employees in 2004. Most of our research and development is funded by
long-term development contracts with customers, with the remainder funded at our
own expense. Expenditures under development contracts with customers vary in
amount from year to year because of the timing of contract funding and other
factors.

Customer-funded research and development is principally related to military
programs. Major customer-sponsored programs include the development of:
mine-countermeasures systems; aircraft weapons-carriage technology;
command-and-control software for combat-systems integration; shallow-water
sonar; low-observable, anti-jam, GPS antennas; mobile-communications and data
systems; and underwater-communications transducer products.

Company-funded research and development is intended primarily to develop
new products and extend the capabilities of existing products. Principal current
company-funded research and development includes: digital signal-processing
technology for electronic intelligence and support systems; image and signal
processing, computer software, and other improvements for combat systems;
minesweeping technology; aircraft weapons-carriage systems; application of
composites for structural uses; various types of communication equipment;
electronic countermeasures; advanced antennas; sonar systems, including
processing and detection enhancements; noise reduction and interference
cancellation; piezoelectric and composite materials; and new capabilities for
our radar-signal simulator products.

The following table sets forth research and development expenditures for
the years presented.

MARKETING AND INTERNATIONAL SALES

We sell defense products as a prime contractor and through subcontracts
with other prime contractors. In addition to defense sales to the U.S. DoD, we
also sell defense equipment to the U.S. Government on behalf of foreign
governments under the Foreign Military Sales program. Subject to approval by the
U.S. Department of State, we sell to foreign governments both directly and
through Foreign Military Funded programs and commercial sales.

Sales of our defense products are usually made under long-term contracts or
subcontracts covering one or more years of production. These contracts are
obtained either through competitive bidding or contract negotiation. We believe
that our long history of association with our military customers is an important
factor in our overall business, and that the experience gained through this
history has enhanced our ability to anticipate our customers' needs. Our
approach to defense business is to anticipate specific customer needs and to
develop systems to meet those needs either at our own expense or pursuant to
research and development contracts. Many of our employees, including our chief
executive officer and our vice president of Washington operations, are actively
involved in the marketing of our defense products in the U.S. and abroad. We
also have about 50 independent international sales representatives concentrating
on the marketing of our defense products in foreign countries.

Commercial products are sold in industrial and commercial markets. In
foreign markets, piezoelectrics, antennas and electronic products are generally
sold commercially through a network of sales representatives. Fiber-reinforced
composite products are sold directly and through sales representatives.

11

It is generally the policy of our U.S. business units to denominate all
foreign contracts in U.S. dollars and seek not to incur significant costs in
connection with long-term foreign contracts until we have received advance
payments or letters-of-credit on amounts due under the contracts. EDO (UK) Ltd.
generally denominates its contracts in British Pounds Sterling.

International sales comprised 14% of consolidated net sales in 2004, 18% in
2003, and 15% in 2002.

BACKLOG

We define backlog as the funded value of contracts and orders that has not
been recognized as sales. As of December 31, 2004 our total backlog was $474.6
million compared with $462.3 million as of December 31, 2003. Approximately 72%
of the total backlog at December 31, 2004 is scheduled for delivery in 2005. Our
backlog consists primarily of current orders under long-lived, mission-critical
programs of key defense platforms on which we have a strong strategic position.
A significant portion of our sales is to prime contractors, the U.S. DoD and
foreign governments pursuant to long-term contracts. Accordingly, our backlog
consists in large part of orders under these contracts.

Backlog does not include portions of contracts for which the U.S.
Government has not appropriated funds, nor does it include unexercised options
in any contract. There is about $535 million in unfunded contracts and
unexercised options at the end of 2004.

GOVERNMENT CONTRACTS

Net sales to the U.S. Government, as a prime contractor and through
subcontracts with other prime contractors, accounted for $333.9 million or 62%
of our 2004 consolidated net sales compared with $348.3 million or 76% in 2003
and $245.5 million or 75% in 2002, and consisted primarily of sales to the DoD.
Such sales include sales of military equipment to the U.S. Government for resale
to foreign governments under the Foreign Military Sales program. Our business is
not substantially dependent on any contract.

Our defense business can be and has been significantly affected by changes
in national-defense policy and spending. Our U.S. Government contracts and
subcontracts and certain foreign-government contracts contain the usual required
provisions permitting termination at any time for the convenience of the
government with payment for work completed and committed along with associated
profit at the time of termination.

Our contracts with the DoD are made on either a fixed-price or
cost-reimbursable basis. Both types may include incentive provisions.
Fixed-price contracts provide fixed compensation for specified work. Cost-
reimbursable contracts require us to perform specified work in return for
reimbursement of costs (to the extent allowable under U.S. Government
regulations) plus a specified fee. Under both contract types, an incentive
adjustment may be made to our fee based on attainment of performance,
scheduling, cost, quality or other goals. In general, with fixed-price contracts
we assume a greater risk of loss, but also have the potential for higher profit
margins, compared to cost-reimbursable contracts. The distribution of our
government contracts between fixed-price and cost-reimbursable contracts varies
from time to time.

COMPETITION AND OTHER FACTORS

Some of our products are sold in markets containing a number of competitors
substantially larger than us and with greater financial resources. Direct sales
of military products to the U.S. and foreign governments are based principally
on product performance, cost and reliability. Such products are generally sold
in competition with products of other manufacturers that may fulfill an
equivalent function, but which are not direct substitutes.

We purchase some materials and components used in our systems and equipment
from independent suppliers. These materials and components are normally not
purchased under long-term contracts unless a long-term sales contract with one
of our customers so requires. We believe that most of the items we purchase are
obtainable from a variety of suppliers. We normally seek to have alternative
sources for major items, although we are sometimes dependent on a single
supplier or a few suppliers for some items.

12

It is difficult to state precisely our market position in all of our
product lines because information as to the volume of sales of similar products
by our competitors is not generally available and the relevant markets are often
not precisely defined. However, we believe that we are a significant factor in
the markets for stores-release mechanisms for military aircraft, military sonar
systems, military data-links, helicopter-towed mine-countermeasures systems,
piezoelectric ceramics, electronic-countermeasures systems, and antennas.

Although we own a significant number of patents and have filed applications
for additional patents, we do not believe that our businesses depend heavily
upon our patents. In addition, most of our U.S. Government contracts license us
to use patents owned by others. Similar provisions in the U.S. government
contracts awarded to other companies make it impossible for us to prevent the
use by other companies of our patents in most domestic defense work.

ENVIRONMENTAL

Refer to Note 17 on page 63 of this Report for information regarding the
cost of compliance with environmental regulations.

EMPLOYEES

As of December 31, 2004, we employed 2,546 persons.

RISK FACTORS

REDUCTIONS IN GOVERNMENT SPENDING WOULD ADVERSELY AFFECT OUR RESULTS OF
OPERATIONS.

A reduction in purchases of our products by domestic and foreign government
agencies would have a material adverse effect on our business because a
significant portion of our net sales are derived from contracts directly or
indirectly with government agencies. In 2004, 2003 and 2002, we derived about
62%, 76% and 75%, respectively, of net sales from direct and indirect contracts
with the U.S. Government and derived about 14%, 18% and 15%, respectively, of
net sales from international sales to foreign governments. The development of
our business will depend upon the continued willingness of the U.S. and foreign
governments to fund existing and new defense programs and, in particular, to
continue to purchase our products and services. Although defense spending in the
United States has recently increased, further increases may not continue and any
proposed budget or supplemental budget request may not be approved. In addition,
the U.S. Department of Defense may not continue to focus its spending on
technologies that we incorporate in our products.

THE U.S. GOVERNMENT MAY TERMINATE OR MODIFY OUR EXISTING CONTRACTS OR ITS
CONTRACTS WITH THE PRIME CONTRACTORS FOR WHICH WE ARE A SUBCONTRACTOR, WHICH
WOULD ADVERSELY AFFECT OUR REVENUE.

A significant portion of our revenues are derived from U.S. Government
contracts, directly or indirectly. There are inherent risks in contracting with
the U.S. Government, including risks peculiar to the defense industry, which
could have a material adverse effect on our business, financial condition or
results of operations. Laws and regulations permit the U.S. Government to:

- terminate contracts for its convenience;

- reduce or modify contracts or subcontracts if its requirements or
budgetary constraints change;

- cancel multi-year contracts and related orders if funds for contract
performance for any subsequent year become unavailable;

- adjust contract costs and fees on the basis of audits done by its
agencies; and

- control or prohibit the export of our products.

If the U.S. Government terminates our contracts for convenience, we may
only recover our costs incurred or committed for settlement expenses and profit
on work completed before the termination. Additionally, most of our backlog
could be adversely affected by any modification or termination of contracts with
the U.S. Government or contracts the prime contractors have with the U.S.
Government. The U.S. Government
13

regularly reviews our costs and performance on its contracts, as well as our
accounting and general business practices. The U.S. Government may reduce the
reimbursement for our fees and contract-related costs as a result of an audit.

OUR BUSINESS IS SUBJECT TO VARIOUS RESTRICTIVE LAWS AND REGULATIONS BECAUSE WE
ARE A CONTRACTOR AND SUBCONTRACTOR TO THE U.S. GOVERNMENT AND BECAUSE WE
PROVIDE MILITARY PRODUCTS TO FOREIGN GOVERNMENTS.

As a contractor and subcontractor to the U.S. Government, we are subject to
various laws and regulations that are more restrictive than those applicable to
non-government contractors. We are required to obtain and maintain material
governmental authorizations and approvals to run our business as it is currently
conducted.

For example, we need a license to operate an FAA repair station. In
addition, because we provide defense equipment and related services to foreign
governments, we must obtain licenses from the U.S. State Department for our
foreign exports. Our failure or inability to obtain these licenses could have a
material adverse effect on our business. New or more stringent laws or
government regulations concerning government contracts and defense exports, if
adopted and enacted, could have a material adverse effect on our business.
Responding to governmental audits, inquiries or investigations may involve
significant expense and divert management attention from regular operations.
Also, an adverse finding in any such audit, inquiry or investigation could
involve debarment, fines, injunctions or other sanctions.

IF WE FAIL TO WIN COMPETITIVELY AWARDED CONTRACTS IN THE FUTURE, WE MAY
EXPERIENCE A REDUCTION IN OUR SALES, WHICH COULD NEGATIVELY AFFECT OUR
PROFITABILITY.

We obtain many of our U.S. Government contracts through a competitive
bidding process. We cannot assure you that we will continue to win competitively
awarded contracts or that awarded contracts will generate sales sufficient to
result in our profitability. We are also subject to risks associated with the
following:

- the frequent need to bid on programs in advance of the completion of
their design (which may result in unforeseen technological difficulties
and cost overruns);

- the substantial time and effort, including the relatively unproductive
design and development required to prepare bids and proposals, spent for
competitively awarded contracts that may not be awarded to us;

- design complexity and rapid technological obsolescence; and

- the constant need for design improvement.

Our government contracts may be subject to protest or challenge by
unsuccessful bidders or to termination, reduction or modification in the event
of changes in government requirements, reductions in federal spending or other
factors. In addition, failure to obtain a renewal or follow-on contract with
respect to any significant contract or a number of lesser contracts with the
U.S. Government or foreign governments would result in a loss of revenues. If
revenues from the award of new contracts fail to offset this loss, it could have
a material adverse effect on our results of operations and financial position.

A LARGE MAJORITY OF OUR CONTRACTS ARE FIXED-PRICE, AND WE MAY FACE INCREASED
RISKS OF COST OVERRUNS OR LOSSES ON OUR CONTRACTS.

The majority of our government contracts and subcontracts are firm,
fixed-price contracts providing for a predetermined fixed price for the products
we make regardless of the costs we incur. At times, we must therefore make
pricing commitments to our customers based on our expectation that we will
achieve more cost-effective product designs and automate more of our
manufacturing operations. The manufacture of our products requires a complex
integration of demanding processes involving unique technical skill sets. In
addition, the expense of producing products can rise due to increased costs of
materials, components, labor, capital equipment or other factors. As a result,
we face risks of cost overruns or order cancellations if we fail to achieve
forecasted product design and manufacturing efficiencies or if products cost
more to produce than expected.

14

WE MAY BE REQUIRED TO REDUCE OUR PROFIT MARGINS ON CONTRACTS ON WHICH WE USE
THE PERCENTAGE-OF-COMPLETION ACCOUNTING METHOD.

We record sales and profits on many of our contracts using
percentage-of-completion methods of accounting. As a result, revisions made to
our estimates of sales and profits are recorded in the period in which the
conditions that require such revisions become known and can be estimated.
Although we believe that our profit margins are fairly stated and that adequate
provisions for losses for our fixed price contracts are recorded in our
financial statements, as required under U.S. generally accepted accounting
principles, we cannot assure you that our contract profit margins will not
decrease or our loss provisions will not increase materially in the future.

OUR PRODUCTS AND SYSTEMS MAY BE RENDERED OBSOLETE BY OUR INABILITY TO ADAPT TO
TECHNOLOGICAL CHANGE.

The rapid change of technology continually affects our product applications
and may directly impact the performance of our products. For our electronic
warfare products, we are required to improve reliability and maintainability,
extend frequency ranges and provide advanced jamming techniques. We can give you
no assurances that we will successfully maintain or improve the effectiveness of
our existing products, nor can we assure you that we will successfully identify
new opportunities and continue to have the needed financial resources to develop
new products in a timely or cost-effective manner. In addition, products
manufactured by others may render our products and systems obsolete or
non-competitive. If any of these events occur, our results of operations would
be adversely affected.

THE UNSUCCESSFUL INTEGRATION OF A BUSINESS OR BUSINESS SEGMENT WE ACQUIRE
COULD HAVE A MATERIAL ADVERSE EFFECT ON OUR OPERATING RESULTS.

One of our key operating strategies is to pursue selective acquisitions. We
review and actively pursue possible acquisitions on a continuous basis. Except
as previously disclosed in our public filings, we do not currently have any
commitments, agreements or understandings to acquire any specific businesses or
other material assets. Our acquisition strategy may require additional debt or
equity financing, resulting in additional leverage or dilution of ownership. We
cannot assure you that any future acquisition will be consummated, or that if
consummated, we will be able to integrate such acquisition successfully without
a material adverse effect on our financial condition or results of operations.
Moreover, any acquisition could involve other risks, including:

- diversion of management's attention from existing operations;

- potential loss of key employees or customers of acquired companies; and

- exposure to unforeseen liabilities of acquired companies.

WE ARE DEPENDENT IN PART UPON OUR RELATIONSHIPS AND ALLIANCES WITH INDUSTRY
PARTICIPANTS IN ORDER TO GENERATE REVENUE.

We rely on the strength of our relationships with other contractors to form
strategic alliances. Some of our partners assist us in the development of some
of our products through teaming arrangements. Under these teaming arrangements,
our partners usually have borne a portion of the expenses associated with our
research and development of new and existing products that are the subject of
such agreements. We cannot assure you that our partners will continue to bear
these expenses in the future. If any of our existing relationships with our
partners were impaired or terminated, we could experience significant delays in
the development of our new products ourselves, and we would incur additional
development costs. We would need to fund these costs internally or identify new
partners.

Some of our partners are also potential competitors, which may impair the
viability of new strategic relationships. While we must compete effectively in
the marketplace, our future alliances may depend on our partners' perception of
us. Our ability to win new and/or follow-on contracts may be dependent upon our
relationships within the military industry.

15

WE HAVE DEVELOPED OUTSOURCING ARRANGEMENTS FOR THE MANUFACTURE OF MANY OF THE
COMPONENTS AND SUB-ASSEMBLIES OF OUR PRODUCTS. IF THIRD PARTIES FAIL TO
DELIVER QUALITY PRODUCTS AND COMPONENTS AT REASONABLE PRICES ON A TIMELY
BASIS, WE MAY ALIENATE SOME OF OUR CUSTOMERS AND OUR REVENUES, PROFITABILITY
AND CASH FLOW MAY DECLINE.

We use contract manufacturers as an alternative to our own manufacture of
the components and sub-assemblies of our products. If these contract
manufacturers are not willing to contract with us on competitive terms or devote
adequate resources to fulfill their obligations to us, or we do not properly
manage these relationships, our existing customer relationships may suffer. In
addition, by undertaking these activities, we run the risks that

- the reputation and competitiveness of our products and services may
deteriorate as a result of the reduction of our control and quality and
delivery schedules and the consequent risk that we will experience supply
interruptions and be subject to escalating costs; and

- our competitiveness may be harmed by the failure of our contract
manufacturers to develop, implement or maintain manufacturing methods
appropriate for our products and customers.

WE MAY BE REQUIRED TO DEFEND LAWSUITS OR PAY DAMAGES IN CONNECTION WITH THE
ALLEGED OR ACTUAL HARM CAUSED BY OUR PRODUCTS.

We face an inherent business risk of exposure to product liability claims
in the event that the use of some of our products is alleged to have resulted in
unintended harm to others or to property. Although we maintain general liability
and product liability insurance, we may incur significant liability if product
liability lawsuits against us are successful. We cannot assure you that such
coverage will be adequate to cover all claims that may arise or that it will
continue to be available to us on acceptable terms.

WE MAY INCUR SUBSTANTIAL ENVIRONMENTAL LIABILITY ARISING FROM OUR ACTIVITIES
INVOLVING THE USE OF HAZARDOUS MATERIALS.

Our business is subject to federal, state, local and foreign laws,
regulations and ordinances governing the use, manufacture, storage, handling and
disposal of hazardous materials and waste products. From time to time, our
operations have resulted or may result in noncompliance with environmental laws
or liability for the costs of investigating and cleaning up, and certain damages
resulting from, sites of past spills, disposals or other releases of hazardous
materials. In addition, we have been identified as a potentially responsible
party pursuant to the federal Comprehensive Environmental Response,
Compensation, and Liability Act of 1980, as amended, or corresponding state
environmental laws, for the cleanup of contamination resulting from past
disposals of hazardous materials at some sites where we, along with others, sent
waste in the past. We are a party to consent decrees as a result of our
potential responsibility for contamination caused by the disposal of hazardous
materials. We cannot assure you that such matters, or any similar liabilities
that arise in the future, will not exceed our resources, nor can we completely
eliminate the risk of accidental contamination or injury from these materials.

POLITICAL AND ECONOMIC INSTABILITY IN FOREIGN MARKETS MAY HAVE A MATERIAL
ADVERSE EFFECT ON OUR OPERATING RESULTS.

Foreign sales represented about 14% our total sales in 2004 and we intend
to increase the amount of foreign sales we make in the future. Foreign sales are
subject to numerous risks, including political and economic instability in
foreign markets, restrictive trade policies of foreign governments, economic
conditions in local markets, inconsistent product regulation by foreign agencies
or governments, the imposition of product tariffs and the burdens of complying
with a wide variety of international and U.S. export laws and differing
regulatory requirements. If we fail to increase our foreign sales it could have
a material adverse effect on our results of operations.

16

CONCENTRATION OF VOTING POWER AND CERTAIN PROVISIONS IN OUR CHARTER DOCUMENTS
COULD MAKE A MERGER, TENDER OFFER OR PROXY CONTEST DIFFICULT AND MAY ADVERSELY
AFFECT THE PRICE OF OUR COMMON SHARES.

At December 31, 2004, the EDO Employee Stock Ownership Trust, or ESOT,
owned 3,918,176 common shares (or about 20% of the outstanding common shares).
The trustee of the plan has obligations under the trust agreement and its
fiduciary duties when voting allocated shares under the plan. The procedure the
trustee generally follows is to receive direction from each of the plan
participants with respect to his or her allocated shares, and then to vote all
shares in accordance with the direction received. The market may perceive that
the concentration of voting power in the hands of a single employee stock
ownership plan creates a potential barrier against another party acquiring us.
This perception could result in lower market prices for our common shares. In
addition, certain agreements to which we are a party, including loan and
executive officer agreements, contain provisions that impose increased costs in
the event of a change of control.

IF WE ARE UNABLE TO PROTECT OUR INTELLECTUAL PROPERTY RIGHTS ADEQUATELY, THE
VALUE OF OUR COMMERCIAL PRODUCTS COULD BE DIMINISHED.

The value of our commercial products is increased, in part, by obtaining,
maintaining and enforcing our patents and other proprietary rights. While we
take precautionary steps to protect our technological advantages and
intellectual property and rely in part on patent, trademark, trade secret and
copyright laws, we cannot assure you that the precautionary steps we have taken
will completely protect our intellectual property rights. In the event a
competitor successfully challenges our patents or licenses, we could incur
substantial litigation costs that could have a material adverse effect on our
operating results and financial condition.

THE U.S. GOVERNMENT'S RIGHT TO USE TECHNOLOGY DEVELOPED BY US LIMITS OUR
INTELLECTUAL PROPERTY RIGHTS.

We seek to protect the competitive benefits we derive from our patents,
proprietary information and other intellectual property. However, we do not have
the right to prohibit the U.S. Government from using certain technologies
developed or acquired by us or to prohibit third party companies, including our
competitors, from using those technologies in providing products and services to
the U.S. Government. The U.S. Government has the right to royalty-free use of
technologies that we have developed under U.S. Government contracts. We are free
to commercially exploit those government-funded technologies and may assert our
intellectual property rights to seek to block other non-government users
thereof, but we cannot assure you we could successfully do so.

A FAILURE TO ATTRACT AND RETAIN TECHNICAL PERSONNEL COULD REDUCE OUR REVENUES
AND OUR OPERATIONAL EFFECTIVENESS.

There is a continuing demand for qualified technical personnel, and we
believe that our future growth and success will depend upon our ability to
attract, train and retain such personnel. Competition for personnel in the
military industry is intense, and there are a limited number of persons with
knowledge of, and experience in, this industry. Although we currently experience
relatively low rates of turnover for our technical personnel, the rate of
turnover may increase in the future. An inability to attract or maintain a
sufficient number of technical personnel could have a material adverse effect on
our contract performance or on our ability to capitalize on market
opportunities.

INCREASED SCRUTINY OF FINANCIAL DISCLOSURE COULD ADVERSELY AFFECT INVESTOR
CONFIDENCE, AND ANY RESTATEMENT OF EARNINGS COULD INCREASE LITIGATION RISKS
AND LIMIT OUR ABILITY TO ACCESS THE CAPITAL MARKETS.

Congress, the SEC, other regulatory authorities and the media are intensely
scrutinizing a number of financial reporting issues and practices. Although all
businesses face uncertainty with respect to how the U.S. financial disclosure
regime may be affected by this process, particular attention has been focused
recently on companies' interpretations of generally accepted accounting
principles.

If we are required to restate our financial statements as a result of a
determination that we had incorrectly applied generally accepted accounting
principles, that restatement could adversely affect our ability to access the
capital markets or the trading price of our securities. The recent scrutiny
regarding financial reporting may
17

also result in an increase in litigation involving companies with publicly
traded securities, such as us. There can be no assurance that any such
litigation against us would not materially adversely affect our business or the
trading price of our securities.

IF WE ARE UNABLE TO COMPLY WITH THE RESTRICTIONS AND COVENANTS IN OUR DEBT
AGREEMENTS, THERE WOULD BE A DEFAULT UNDER THE TERMS OF THOSE AGREEMENTS, AND
THIS COULD RESULT IN AN ACCELERATION OF PAYMENT OF FUNDS THAT HAVE BEEN
BORROWED.

If we are unable to comply with the restrictions and covenants in our debt
agreements, there would be a default under the terms of these agreements. Some
of the debt agreements also require us to maintain specified financial ratios
and satisfy financial tests. Our ability to meet these financial ratios and
tests may be affected by events beyond our control, including, without
limitation, sales levels, contract terminations and potential acquisitions. As a
result, there can be no assurance that we will be able to meet these tests. In
the event of a default under these agreements, the lenders could terminate their
commitments to lend or accelerate the loans and declare all amounts borrowed due
and payable.

Borrowings under other debt instruments that contain cross-acceleration or
cross-default provisions may also be accelerated and become due and payable. If
any of these events occur, there can be no assurance that we would be able to
make necessary payments to the lenders or that we would be able to find
alternative financing. Even if we are able to obtain alternative financing, it
may not be on terms that are acceptable to us.

RESTRICTIONS AND COVENANTS IN OUR DEBT AGREEMENTS LIMIT OUR ABILITY TO CONDUCT
OUR BUSINESS AND COULD PREVENT US FROM OBTAINING NEEDED FUNDS IN THE FUTURE.

Our debt and financing arrangements contain a number of significant
limitations that restrict our ability to, among other things:

- borrow additional money or issue guarantees;

- pay dividends or other distributions to shareholders;

- make investments;

- create liens on assets;

- sell assets;

- enter into transactions with affiliates; and

- engage in mergers or consolidations.

These restrictions may limit our ability to obtain future financing, fund
needed capital expenditures or withstand a future downturn in business or the
economy.

ITEM 2. PROPERTIES

All of our operating facilities are leased except a Charleston, SC facility
obtained in the Darlington acquisition. In 2003, we sold our facility in Deer
Park, NY. As part of the sale agreement, we are leasing the facility through
October 10, 2005, with the option to terminate before October 10 without
penalty. We believe our facilities are adequate for our present purposes. All
facilities in the following listing are suitable for expansion by using
available but unused space, leasing additional available space, or by physical
expansion of leased buildings. We believe that, with respect to leases which
expire during 2005 and 2006 we will be able to either extend the lease or lease
other facilities on reasonable terms. Our obligations under the various leases
are set forth in Note 16 on pages 62 and 63 of this Report.

18

Set forth below is a listing of our principal plants and other materially
important physical properties.

ITEM 3. LEGAL PROCEEDINGS

The Company and/or its subsidiaries are parties to various legal
proceedings arising in the normal course of business, including various
environmental actions described in Note 17 on page 63 of this Report. While
litigation is subject to inherent uncertainties, management currently believes
that the ultimate outcome of these proceedings, individually and in the
aggregate, will not have a material adverse effect on the Company's consolidated
financial position, cash flow or overall results of operations. The following is
a description of certain proceedings:

U.S. v. EDO Corporation et al.; EDO Corporation et al. v. Elinco Associates
L.P. et al. (United States District Court, District of Connecticut). The
Company and three other companies entered into a consent decree in 1990 with the
Federal government for the remediation of a Superfund site in Norwalk, CT. The
Superfund site has been divided into three operable units. The consent decree
relates to two of the operable units. The third operable unit has not been
formally studied and the Company is unable to determine whether the EPA will
address the third operable unit or, if it does, whether it will conclude that
specific remedial response action will be required for it, and in such event,
what the costs, if any, or the Company's degree of responsibility will be. As of
December 31, 2004 the Company estimates that its discounted liability over the
remainder of the twenty-one years related to the two operable units is
approximately $1.9 million. See also Note 17 on page 63 of this Report.

19

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

None.

PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

The information responsive to this item is set forth under the headings
"Common Share Prices" on pages 34 and 35 and "Dividends" on page 35, together
with dividend information contained in the "Consolidated Statements of
Shareholders' Equity" on pages 38 and 39 and Note 8 on pages 50 and 51 of this
Report. The information regarding equity compensation plans can be found in Note
1(k) on pages 45 and 46 and Note 13 on pages 54 and 55 of this Report.

20

ITEM 6. SELECTED FINANCIAL DATA

SELECTED FINANCIAL DATA

EDO CORPORATION AND SUBSIDIARIES
(NOT COVERED BY INDEPENDENT AUDITOR'S REPORTS)

- ---------------

(a) Reflects $0.9 million in 2003 and $0.6 million in 2002 for the write-off of
purchased in-process research and development ("IPR&D") and other
merger-related costs, respectively, associated with our acquisition of the
assets of Condor Systems, Inc., as well as a $0.9 million curtailment loss
in 2003 and a $2.0 million curtailment loss in 2002 associated with our
benefit plans; a $0.9 million post-retirement curtailment gain in 2001; $1.3
million and $11.5 million in the years 2001 and 2000, respectively, for the
write-off of IPR&D (in 2000); and other EDO-AIL merger-related costs (in
2001 and 2000).

(b) Upon adoption of Statement of Financial Accounting Standard No. 142,
"Goodwill and Other Intangible Assets," we recorded a cumulative effect of a
change in accounting principle effective January 1, 2002. See Note 1(f) to
the consolidated financial statements.

(c) ESOP Convertible Cumulative Preferred Shares, Series A. On March 8, 2001,
all outstanding preferred shares were converted into common shares. No
preferred dividends were paid after March 8, 2001.

(d) In 2004, the 5.25% Convertible Subordinated Notes had a dilutive effect on
the earnings per share calculation. Consequently, 4.4 million shares are
included in the diluted shares outstanding in 2004.

(e) Includes note payable, Employee Stock Ownership Trust loan obligation and
current portions of long-term debt.

ITEMS 7. AND 7A. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS AND QUANTITATIVE AND QUALITATIVE
DISCLOSURE ABOUT MARKET RISK

MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

OVERVIEW

EDO Corporation (the "Company") provides military and commercial products
and professional services, with core competencies in a wide range of critical
defense areas, including:

- Defense Electronics

- Aircraft Armament

- Undersea Warfare

- Professional Services

- C4I -- Command, Control, Communications, Computers, and Intelligence

- Integrated Composite Structures

We are a leading supplier of sophisticated, highly engineered products and
systems for defense, aerospace and industrial applications. We believe our
advanced electronic, electromechanical systems, information systems and
engineered materials are mission-critical on a wide range of military programs.
We have three reporting segments: Defense, Communications and Space Products,
and Engineered Materials. Our Defense

22

segment provides integrated front-line warfighting systems and components
including electronic-warfare systems, reconnaissance and surveillance systems,
aircraft weapons suspension and release systems, integrated combat systems,
command, control, communications, computers, and intelligence (C4I) products and
systems, undersea-warfare systems and professional and engineering services for
military forces and friendly governments worldwide. Our Communications and Space
Products segment supplies antenna products and ultra-miniature electronics and
systems for the remote sensing and electronic warfare industries. Our Engineered
Materials segment supplies commercial and military piezo-electric ceramic
products and integrated composite structures for the aircraft and oil
industries. The Company has a disciplined acquisition program which is
diversifying the base of major platforms and customers.

The Company's Annual Report on Form 10-K, quarterly reports on Form 10-Q,
current reports on Form 8-K and all amendments to those reports, and the Proxy
Statement for its Annual Meeting of Shareholders are made available, free of
charge, on its Web site www.edocorp.com, as soon as reasonably practicable after
such reports have been filed with or furnished to the Securities and Exchange
Commission.

ACQUISITIONS

On June 16, 2003, the Company acquired for cash all of the stock of Emblem
Group Ltd. ("Emblem"), a privately-held company based in Brighton, England.
Emblem, now known as EDO (UK) Ltd., is a supplier of aerospace and defense
products and services, primarily through its MBM Technology Ltd. unit in
England, now known as EDO MBM Technology Ltd., and Artisan Technologies, Inc.
subsidiary in the United States, now known as EDO Artisan. Emblem has a core
competency in aircraft weapons-carriage and interfacing systems that reinforces
EDO's position as a global leader in aircraft armament release systems. Emblem
is expected to broaden the Company's customer base in Europe. The purchase price
was L16.1 million ($27.0 million), excluding transaction costs of approximately
$1.9 million. In the second quarter of 2004 we received $0.3 million from an
escrow account resulting in a decrease in purchase price and, therefore,
goodwill. Emblem became part of the Company's Defense segment. The excess of the
purchase price over the net assets acquired recorded as goodwill and other
intangibles related to Emblem's units located in England is deductible for U.S.
income tax purposes over 15 years. The excess of the purchase price over the net
assets acquired related to Artisan Technologies, Inc. is not deductible for
income tax purposes.

On March 10, 2003, the Company acquired for cash all of the stock of
Darlington, Inc. ("Darlington"), a privately-held defense communications company
based in Alexandria,Virginia. Darlington designs, manufactures and supports
military communications equipment and information networking systems. The
acquisition has enhanced the Company's existing positions on long-range
platforms and programs across the U.S. military services and in particular the
U.S. Marine Corps. The purchase price was $25.6 million, excluding transaction
costs of approximately $0.3 million. In addition, the Company acquired and
immediately paid off debt of $4.9 million. Darlington became part of the
Company's Defense segment. The excess of the purchase price over the net assets
acquired recorded as goodwill and other intangible assets is deductible for
income tax purposes over 15 years.

On February 5, 2003, a wholly-owned subsidiary of the Company acquired for
cash all of the stock of Advanced Engineering & Research Associates,
Inc.("AERA"), a privately-held company located in Alexandria, Virginia. AERA,
which was merged with another EDO subsidiary and renamed EDO Professional
Services Inc., provides professional and information technology services
primarily to the Department of Defense and other government agencies. The
acquisition expanded the range of such services that the Company offers. The
purchase price was $38.1 million, excluding transaction costs of $0.3 million.
In addition, the Company acquired and immediately paid off debt of $3.8 million.
AERA became part of the Company's Defense segment. The excess of the purchase
price over the net assets acquired recorded as goodwill and other intangible
assets is deductible for income tax purposes over 15 years.

On July 26, 2002, a wholly-owned subsidiary of the Company acquired
substantially all of the assets and assumed certain liabilities of Condor
Systems, Inc., a privately-held defense electronics company and its domestic
subsidiary (together, "Condor") for $62.5 million in cash, in addition to
transaction costs of $5.0 million. The acquisition expanded the Company's
electronic warfare business in the areas of reconnais-

23

sance and surveillance systems. The assets became part of the Company's Defense
and Communications and Space Products segments. The excess of the purchase price
over the net assets acquired recorded as goodwill, IPR&D and other intangible
assets is deductible for income tax purposes over 15 years.

Associated with the acquisition and included in operating earnings for 2003
and 2002 is $0.9 million and $0.6 million, respectively, of acquisition-related
costs, of which $0.2 million in 2002 represents the write-off of purchased
in-process research and development ("IPR&D"). This IPR&D was determined to not
have reached technological feasibility and to not have alternative future use.
The development project related to detecting and locating weak modulated
continuous wave signals.

These acquisitions were accounted for as purchases and, accordingly, their
operating results are included in the Company's consolidated financial
statements since their respective acquisition dates.

SALE OF PROPERTY

On June 24, 2003, the Board of Directors of the Company approved the
decision to sell our 726,000 square foot facility in Deer Park, NY. This
decision was based on a company-wide facility plan that evaluated potential uses
for the property. We concluded that the Deer Park facility would not meet future
requirements, and thus an outright sale was completed, freeing assets for more
productive use, including acquisitions. A pre-tax impairment loss of $9.2
million was recorded in the second quarter of 2003, as the net book value of the
assets exceeded the fair value less the costs to sell. The fair value was based
on a $29.0 million sales price per the sales agreement entered into in July
2003. This impairment charge represents the entire loss we expect to incur.

Of the $29.0 million sales price, $22.0 million is in cash and $7.0 million
is in the form of a purchase money mortgage and note. We closed on the sale in
October 2003 and received the cash less closing payments. The note receivable is
due when we vacate the facility. As part of the agreement, we will lease the
facility through October 10, 2005, with the option to terminate before such
date. The lease agreement does not have any renewal or buyout options.

DISCUSSION OF CRITICAL ACCOUNTING POLICIES

We make estimates and assumptions in the preparation of our consolidated
financial statements in conformity with accounting principles generally accepted
in the United States. Actual results could differ significantly from those
estimates under different assumptions and conditions. We believe that the
following discussion addresses our critical accounting policies, which are those
that are most important to the portrayal of our consolidated financial condition
and results of operations and which require our most difficult and subjective
judgments, often as a result of the need to make estimates about the effect of
matters that are inherently uncertain. The following is a brief discussion of
the critical accounting policies employed by us.

REVENUE RECOGNITION

Sales under long-term, fixed-price contracts, including pro-rata profits,
are generally recorded based on the relationship of costs incurred to date to
total projected final costs or, alternatively, as deliveries and other
milestones are achieved or services are provided. These projections are revised
throughout the lives of the contracts. Adjustments to profits resulting from
such revisions are made cumulative to the date of change and may affect current
period earnings. Sales on other than long-term contract orders (principally
commercial products) are recorded as shipments are made. Our gross profit is
affected by a variety of factors, including the mix of products, systems and
services sold, production efficiencies, price competition and general economic
conditions. Estimated losses on long-term contracts are recorded when
identified.

INVENTORIES

Inventories under long-term contracts and programs reflect all accumulated
production costs, including factory overhead, initial tooling and other related
costs (including general and administrative expenses relating to certain of our
defense contracts), less the portion of such costs charged to cost of sales. All
other inventories

24

are stated at the lower of cost (principally first-in, first-out method) or
market. Inventory costs in excess of amounts recoverable under contracts and
which relate to a specific technology or application and which may not have
alternative uses are charged to cost of sales when such circumstances are
identified.

From time to time, we manufacture certain products prior to receiving firm
contracts in anticipation of future demand. Such costs are inventoried and are
incurred to help maintain stable and efficient production schedules.

Several factors may influence the sale and use of our inventories,
including our decision to exit a product line, technological change, new product
development and/or revised estimates of future product demand. If inventory is
determined to be overvalued due to one or more of the above factors, we would be
required to recognize such loss in value at the time of such determination.

Under the contractual arrangements by which progress payments are received,
the United States Government has a title to or a security interest in the
inventories identified with related contracts.

PROPERTY, PLANT AND EQUIPMENT AND OTHER LONG-LIVED ASSETS

Property, plant and equipment is recorded at cost and is depreciated on a
straight-line basis over the estimated useful lives of such assets. Leasehold
improvements are amortized over the shorter of their estimated useful lives or
their respective lease periods.

In those cases where we determine that the useful life of property, plant
and equipment should be shortened, we depreciate the net book value in excess of
salvage value over its revised remaining useful life thereby increasing
depreciation expense. Factors such as technological advances, changes to our
business model, changes in our capital strategy, changes in the planned use of
equipment, fixtures, software or changes in the planned use of facilities could
result in shortened useful lives. Long-lived assets, other than goodwill, are
reviewed by us for impairment whenever events or changes in circumstances
indicate that the carrying amount of any such asset may not be recoverable. The
estimate of cash flow, which is used to determine recoverability, is based upon,
among other things, certain assumptions about future operating performance.

Our estimates of undiscounted cash flow may differ from actual cash flow
due to such factors including technological advances, changes to our business
model, or changes in our capital strategy or planned use of long-lived assets.
If the sum of the undiscounted cash flows, excluding interest, is less than the
carrying value, we would recognize an impairment loss, measured as the amount by
which the carrying value exceeds the fair value of the asset.

In accordance with Statement of Financial Accounting Standards ("SFAS") No.
142, "Goodwill and Other Intangible Assets" goodwill must be tested at least
annually for impairment at the reporting unit level. If an indication of
impairment exists, we are required to determine if such goodwill's implied fair
value is less than the unit carrying value in order to determine the amount, if
any, of the impairment loss required to be recorded. Impairment indicators
include, among other conditions, cash flow deficits, an historic or anticipated
decline in revenue or operating profits, adverse legal or regulatory
developments, accumulation of costs significantly in excess of amounts
originally expected to acquire the asset and/or a material decrease in the fair
value of some or all of the assets.

To determine the fair value of our reporting units, we generally use a
present value technique (discounted cash flow) corroborated by market multiples
when available and as appropriate, for all of the reporting units. The
discounted cash flow method measures intrinsic value by reference to an
enterprise's or an asset's expected annual free cash flows. We applied what we
believe to be the most appropriate valuation methodology for each of the
reporting units. If we had established different reporting units or utilized
different valuation methodologies, the impairment test results could differ.

PENSION AND POST-RETIREMENT BENEFITS OBLIGATIONS

We sponsor defined benefit pension and other retirement plans in various
forms covering all eligible employees. Several statistical and other factors
which attempt to anticipate future events are used in

25

calculating the expense and liability related to the plans. These factors
include assumptions about the discount rate and expected return on plan assets
within certain guidelines and in conjunction with our actuarial consultants. In
addition, our actuarial consultants also use subjective factors such as
withdrawal and mortality rates to estimate the expense and liability related to
these plans. The actuarial assumptions used by us may differ significantly,
either favorably or unfavorably, from actual results due to changing market,
economic or regulatory conditions, higher or lower withdrawal rates or longer or
shorter life spans of participants.

In 2004, 2003 and 2002 we used the building block approach to the
estimation of the long-term rate of return on assets. Under this approach, we
reviewed the publicly available common source data for the range of returns on
basic types of equity and fixed income instruments and the differential to those
rates provided by active investment management. In consultation with our
actuarial and active asset management consultants and taking into account the
funds' actual performance and expected asset allocation going forward, we
selected an overall return rate within the resulting range.

FINANCIAL HIGHLIGHTS

Net sales for 2004 increased 16.4% to $536.2 million from $460.7 million
for 2003 and included a full year of sales from the acquisitions of Emblem UK,
Ltd., Darlington and AERA compared to approximately 6.5 months, 9.5 months and
11 months, respectively in 2003. For 2004, net earnings were $29.1 million or
$1.49 per diluted share on 22.4 million shares compared to net earnings of $14.8
million or $0.84 per diluted share on 17.6 million shares in 2003. The 2003
results included a pre-tax impairment loss on the sale of the Deer Park facility
of $9.2 million. Also included in 2003 is $1.4 million net of tax earnings from
discontinued operations. In 2004 the convertible notes had a dilutive effect,
which added approximately 4.4 million shares to the calculation.

RECENT ACCOUNTING PRONOUNCEMENTS

On December 16, 2004, the Financial Accounting Standards Board ("FASB")
issued SFAS No. 123 (revised 2004), "Share-Based Payment," which is a revision
of SFAS No. 123, "Accounting for Stock-Based Compensation." SFAS 123(R)
supersedes Accounting Principles Board ("APB") Opinion No. 25, "Accounting for
Stock Issued to Employees," and amends SFAS No. 95, "Statement of Cash Flows."
Generally, the approach in SFAS 123(R) is similar to the approach described in
SFAS 123. However, SFAS 123(R) requires all share-based payments to employees,
including grants of employee stock options, to be recognized in the income
statement based on their fair values. Pro forma disclosure is no longer an
alternative. SFAS 123(R) must be adopted in the first interim or annual period
beginning after June 15, 2005. We expect to adopt Statement 123(R) on July 1,
2005.

As permitted by SFAS 123, we currently account for share-based payments to
employees using APB No. 25's intrinsic value method and generally recognize no
compensation cost for employee stock options. Accordingly, the adoption of SFAS
123(R)'s fair value method will have a significant impact on our result of
operations, although it will have no impact on our overall financial position.
The impact of the adoption of SFAS 123(R) cannot be predicted at this time
because it will depend on levels of share-based payments granted in the future.
However, had we adopted Statement 123(R) in prior periods, the impact of that
standard would have approximated the impact of SFAS 123 as described in the
disclosure of pro forma net income and earnings per share in Note 1(k) to our
consolidated financial statements. SFAS 123(R) also requires the benefits of tax
deductions in excess of recognized compensation cost to be reported as a
financing cash flow, rather than as an operating cash flow as required under
current literature.

26

RESULTS OF OPERATIONS

COMPARISON OF 2004 TO 2003

Net sales by segment were as follows:

In the Defense segment, approximately $12.7 million of the increase in
sales was attributable to a full year of sales of Emblem Group Ltd. ("Emblem")
which was acquired on June 16, 2003. There were increases in sales of
reconnaissance and surveillance systems, professional services and command,
control, communications, computers and intelligence ("C4I") systems. These
increases were partially offset by decreases in sales of electronic warfare
equipment due to the completion of the UEU production program in 2003. In
addition there was a decrease in sales of $2.7 million in 2004 to reflect an
increase to the estimate-to-complete of an undersea warfare systems program
accounted for under the percentage of completion method. The increase in the
estimate resulted in a decrease to the percent complete and therefore the
decrease to sales. The revision to the estimate resulted from performance issues
discovered during testing phases. There was a comparable reduction to operating
earnings as discussed below.

In the Communications and Space Products segment, the increase in sales was
attributable to deliveries on our contract with the U.S. Army for the new force
protection systems. This "rapid response" program was a significant contributor
to sales and margin in this segment for the year. In addition, there was an
increase in sales of antenna products. These increases in sales were partially
offset by a decrease due to completion of production deliveries of interference
cancellation systems and the basic shortstop electronic protection systems
("SEPS") in the first quarter of 2003.

In addition, in 2004 there were no sales of our space products related to
commercial communication satellites due to a significant downturn in market
demand. Entering into 2004 there was a forecast from our primary customer that
indicated a demand for our product. As the year progressed, and as late as
October, there was market potential, including our pursuit of secondary
customers. However, as we continued to evaluate the market for our inventory of
Ku-band products, we concluded that the market was shifting to Ka-band systems
and that there was no potential sale of our product for the foreseeable future.
Consequently, we wrote-off our remaining $2.6 million of inventory in the fourth
quarter.

In the Engineered Materials segment, there were increases in sales of
electro-ceramic products utilized in sonar transducers and in sales of
integrated composite structures including production and installation of our
composite pipe for water and fire systems on offshore oil platforms.

27

Operating earnings were as follows:

Items of note affecting operating earnings are summarized here to clarify
the comparison of results.

The lower pension expense in 2004 compared to 2003 is attributable to the
cash contribution we made to our defined benefit plan in 2003. The higher ESOP
compensation expense in 2004 is attributable to our higher average stock price
compared to 2003. Pension and ESOP compensation expense are allocated between
cost of sales and selling, general and administrative expense. The intangible
asset amortization expense is associated with the acquisitions made in 2002 and
2003 and affects primarily the Defense segment. The $9.2 million impairment
charge in 2003 related to our Deer Park facility which was sold. Operating
earnings for 2004 were also affected by several contract-related items which are
described in further detail below in the discussion of segment operating
earnings.

The Defense segment's operating earnings for the year ended December 31,
2004 were $43.1 million or 10.6% of this segment's net sales compared to $35.0
million or 9.7% of this segment's net sales for the year ended December 31,
2003. This increase in operating earnings was attributable to continuing
higher-margin sales of reconnaissance and surveillance systems and radar signal
simulators. In addition, there was a positive impact to operating earnings of
approximately $3.4 million resulting from the release of a reserve which had
been previously established for a potential issue on MK105-related contracts.
The release of the reserve was triggered by final closeout of MK105 programs and
proven performance resulting from system utilization over the course of the
year. These increases were partially offset by the effect of increasing the
estimate-to-complete on an aircraft armament program resulting in a $1.6 million
negative impact to operating earnings and the aforementioned $3.0 million impact
on an undersea warfare systems program. We believe that our current estimates
accurately reflect the total potential impacts.

The Communications and Space Products segment's operating earnings for the
year ended December 31, 2004 were $4.3 million or 5.3% of this segment's net
sales compared to operating earnings of $3.6 million or 6.5% of this segment's
net sales for the year ended December 31, 2003. In the first quarter of 2004,
there were operating losses related to adjustments to estimates-to-complete on
development and start-up production phases on certain interference cancellation
programs resulting from issues discovered in the first quarter during testing.
In addition, there were losses in the antenna product line, primarily in the
second quarter, due to production inefficiencies that resulted in inventory
adjustments as well as increases in estimates-to-complete. In the fourth
quarter, there was the aforementioned write-off of space-products related
inventory of $2.6 million. This segment's operating results were positively
affected by sales associated with the force

28

protection systems program which was a significant contributor to operating
earnings in this segment for the year.

The Engineered Materials segment's operating earnings for the year ended
December 31, 2004 were $5.4 million or 11.3% of this segment's net sales
compared to operating earnings of $2.4 million or 5.3% of this segment's net
sales for the year ended December 31, 2003. Strong margins on spares primarily
contributed to the increase in operating earnings. In the second quarter of
2004,