[ ] 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 1-5109

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

Registrant's telephone number (206) 623-1635

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

Securities registered pursuant to Section 12(b) of the Act: Common Stock

Name of each exchange on which registered: New York Stock Exchange

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. [X] Yes [ ] 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. []

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

The aggregate market value of voting stock held by non-affiliates of the registrant was approximately $78.4 million as of October 1, 2004.

There were 5,423,156 shares of the corporation's $.01 par value common stock outstanding at June 9, 2005.

Documents Incorporated by Reference

Portions of the Proxy Statement to be delivered to shareholders in connection with the Annual Meeting of Shareholders to be held September 9, 2005 are incorporated by reference into Part III of the Annual Report on Form 10-K.

Todd Shipyards Corporation (the "Company") was organized in 1916 and has operated a shipyard in Seattle, Washington (the "Shipyard") since incorporation. The Company is incorporated under the laws of the State of Delaware and operates the Shipyard through a wholly owned subsidiary, Todd Pacific Shipyards Corporation ("Todd Pacific"). Todd Pacific has historically been engaged in the repair/overhaul, conversion and construction of commercial and military ships. Today, Todd is the largest private shipyard in the Pacific Northwest and its clients include the United States ("US") Government ("Government"), Department of the Navy ("Navy"), the US Coast Guard ("Coast Guard"), the Washington State Ferry System, fishing fleets, cargo shippers, tug and barge operators and cruise lines. The Company's general offices are located at 1801 16th Avenue S.W., Seattle, Washington 98134-1089, and its telephone number is (206) 623-1635.

The Company will make available its annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) of the Exchange Act free of charge through the Company's internet web site at www.toddpacific.com as soon as reasonably practicable after the Company electronically files such material with, or furnishes it to, the Securities and Exchange Commission.

The Company's repair and overhaul work ranges from relatively minor repairs to major overhauls and often involves the dry-docking of the vessel under repair. Since the late 1980's, repair and overhaul opportunities available to domestic, private-sector shipyards have been impacted by the downsizing and relocation of the active Navy fleet. The impact has had both positive and negative effects on domestic shipyards depending on their proximity to the affected Navy fleet operations. Also affecting private shipyards is the impact of stationing vessels at Navy home ports, the availability and scheduling of maintenance and overhauls, the location of marine accidents and conditions within the maritime industry as a whole.

Commercial repair and overhaul contracts are obtained by competitive bidding, awarded by negotiation or assigned by customers who have a preference for a specific shipyard. On jobs that are advertised for competitive bids, owners usually furnish specifications and plans that become the basis for an agreed upon contract. Repair and overhaul jobs are usually contracted on a fixed-price or time and material basis.

The majority of the Company's Government ship repair and overhaul work is awarded on an option basis under one of the Company's four cost-type contracts with the Navy and the Coast Guard. These contracts provide for reimbursement of costs, to the extent allocable and allowable under applicable Government regulations, and payment of an incentive or award fee based on the Company's performance with respect to certain pre-established criteria. The Company also performs repair and overhaul work for the Navy and the Coast Guard on a fixed price basis through a formal bidding process.

The Company's commercial and Government ship repair and overhaul contracts contain customer payment terms that are determined by mutual agreement. Typically, the Company is periodically reimbursed through progress payments based on the achievement of certain agreed to milestones. In some cases, the customer retains an agreed portion of the contract price during the warranty period. Some vessel owners contracting for repair, maintenance, or conversion work also require some form and amount of performance and payment bonding, particularly state agencies. Because of these requirements the Company is bonded for certain projects in the cumulative amount of $0.8 million at April 3, 2005.

On February 11, 2005, Washington State Ferries ("WSF") announced that Todd Pacific is the only shipyard in the competition to build four new auto ferries for the State of Washington that met all of the pre-qualification requirements to develop a proposal for the detailed design and construction of the four vessels. On June 2, 2005 WSF advised the Company that another shipyard's protest of their disqualification had been upheld by an administrative law judge. The Company does not currently know the impact of the judge's decision.

During the third quarter of fiscal year 2003, the Company began work on a $5.2 million new construction project to build two large steel structures called "cutting edges." The cutting edges are barge like structures used as floating work platforms for the construction of the caissons, which will eventually support the new Tacoma Narrows Bridge. The first cutting edge was delivered in March 2003 and the second was delivered in April 2003.

Prior to the Tacoma Narrows project, the Company's last new construction project was completed during the first quarter of fiscal year 2000, with the delivery of the Margarita II, a floating electrical power plant.

While the Company may selectively pursue new construction opportunities in the future, its primary focus will remain on repair, maintenance and overhaul business opportunities.

The approximate distribution of the Company's Shipyard revenues for each of the last three fiscal years is summarized as follows:

The distribution of the Company's revenues from Government sources increased 7% in fiscal year 2005 over fiscal year 2004. This increase is driven for the most part by submarine work carried out for Electric Boat. Revenue continues to be strongly influenced by the amount and timing of repair, maintenance and overhaul work awarded under each the two remaining Navy cost-type contracts.

The Company plans to continue to actively pursue Government and commercial repair, maintenance and overhaul opportunities. International opportunities are limited because shipyards in foreign countries are often subsidized by their governments and in some cases enjoy significantly lower labor costs. Subsidies can allow foreign shipyards to enter into production contracts at prices below their actual production costs. Competition for domestic construction and repair opportunities will continue to be intense as certain of the Company's larger competitors have more modern facilities, lower labor cost structures, or access to greater financial resources. The Company intends to capitalize on the advantages of its geographic location, the skills of its experienced workforce and production efficiencies developed over the past several years as it competes for repair, maintenance and overhaul opportunities.

The number of persons employed by the Company varies considerably depending primarily on the level of Shipyard activity. Employment averaged approximately 750 during fiscal year 2005 and totaled approximately 1200 employees on April 3, 2005.

During fiscal year 2005, an average of approximately 600 of the Company's Shipyard employees were covered by a union contract that became effective during the third quarter of fiscal year 2003. At April 3, 2005, approximately 1000 Company employees were covered under this contract.

During the third quarter of fiscal year 2003, the Puget Sound Metal Trades Council (the bargaining umbrella for all unions at Todd Pacific Shipyards) and Todd Pacific Shipyards reached an agreement on a new collective bargaining agreement. The Todd Pacific Shipyards eligible workforce ratified the agreement on October 22, 2002. The parties had been operating under an extension of the old agreement, which expired on July 31, 2002. The three-year agreement, which was effective retroactively to August 1, 2002 and expires on July 31, 2005, includes an annual 3.5% wage and fringe benefit increase. Management considers its relations with the various unions to be stable.

The principal materials used by the Company in its Shipyard are steel and aluminum plates and shapes, pipe and fittings, paint and electrical cable and associated fittings. Management believes that each of these items can presently be obtained in the domestic market from a number of different suppliers. In addition, the Company maintains a small on-site inventory of various materials that are available for emergency ship repairs.

Competition in the domestic ship repair and overhaul industry is intense. The reduced size of the Government's active duty fleet has resulted in a significant decline in the total amount of Government business available to private sector shipyards, creating excess shipyard capacity and acute price competition. The Company competes for commercial and Government work with a number of other shipyards, some of which have more advantageous cost structures. The Company's competitors for repair, maintenance and overhaul work include non-union shipyards, shipyards with excess capacity and foreign government subsidized facilities. The Company's competitors for new construction work, in addition to West Coast competitors, include Gulf Coast and East Coast shipyards with lower wage structures, substantial financial resources or significant investments in productivity enhancing facilities.

The Company is subject to federal, state and local environmental laws and regulations that impose limitations on the discharge of pollutants into the environment and establish standards for the treatment, storage and disposal of toxic and hazardous wastes. Fines and penalties may be imposed for non-compliance with these laws. Such laws and regulations may expose the Company to liability for its acts, which are or were in compliance with all applicable laws at the time such acts were performed.

Recurring costs associated with the Company's environmental compliance program are expensed as incurred. Capital expenditures in connection with environmental compliance include the development of a storm water system for approximately $4.0 million.

The Company has an accrued liability of $26.7 million as of April 3, 2005 for environmental and bodily injury matters. As assessments of environmental matters and remediation activities progress, these liabilities are reviewed periodically and adjusted to reflect additional technical, engineering and legal information that becomes available. The Company's estimate of its environmental liabilities is affected by several uncertainties such as, but not limited to, the method and extent of remediation of contaminated sites, the percentage of material attributable to the Company at the sites relative to that attributable to other parties, and the financial capabilities of the other Potentially Responsible Parties ("PRP") at most sites. The Company's estimate of its bodily injury liabilities is also affected as additional information becomes known regarding alleged damages from past exposure to asbestos at Company facilities. The Company is covered under its various insurance policies for some, but not all, potential environmental and bodily injury liabilities.

As of April 3, 2005, the Company has recorded an insurance receivable of $23.7 million, which mitigates a major portion of its accrued environmental and bodily injury liability. See Item 3. Legal Proceedings, Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations, and Note 11 of the Notes to Consolidated Financial Statements for further information regarding the Company's environmental and bodily injury matters.

The Company is also subject to the federal Occupational Safety and Health Act ("OSHA") and similar state statutes. The Company has an extensive health and safety program and employs a staff of safety inspectors whose primary functions are to develop Company policies that meet or exceed the safety standards set by OSHA, train production supervisors and make periodic inspections of safety procedures to insure compliance with Company policies on safety and industrial hygiene. All Shipyard employees are required to attend regularly scheduled safety training meetings.

At April 3, 2005 the Company's backlog consisted of approximately $53 million of repair, maintenance, and conversion work. This compares with backlogs of approximately $19 million and $22 million at March 28, 2004 and March 30, 2003, respectively. The Company's current backlog is primarily attributable to firm repair, maintenance and conversion work scheduled for completion during fiscal year 2006.

Since work under the Company's Navy and Coast Guard phased maintenance contracts is at the option of the Navy and the US Coast Guard, the Company cannot provide assurance as to the timing or level of work that may be performed under these contracts. Therefore, the increase in the backlog is primarily due to the timing of the availabilities for the phased maintenance contracts. Projected revenues from these contracts are not included in the Company's backlog until contract options are exercised by these customers.

The Company is required to maintain Navy certification on its drydocks and cranes in order to be eligible to bid on and perform work under certain Navy and Coast Guard contracts. Throughout fiscal year 2005, the Company maintained all required certifications.

The design capacities of the Company's two drydocks, both of which are located at the Shipyard, are as follows:

*The Company has communicated to the Navy its intention to exercise its lease option for an additional five years ending April 15, 2011.

In October 2003, the smaller of the two dry docks that the Company leased from the Navy sustained damage during a windstorm. The Company was reimbursed by the insurance carrier for the majority of the costs incurred to recover the dry dock. The dock was declared a total constructive loss and was demolished in October 2004. The Company's repair and maintenance operations have not been materially affected by the loss of this dock.

The Company evaluates its plans for future operations of its remaining leased dry dock when the lease expiration date falls within the next operating cycle. The lease terms on drydock YFD-70 provide for a nominal annual lease payment and a minimum amount of annual maintenance that the Company must perform. The lease also includes minimum levels of maintenance that the Company must perform during the life of the lease. The Company has included the nominal annual lease payment and the average annual maintenance cost that must be performed over the life of the lease on drydock YFD-70 in Note 9 of the Notes to the Consolidated Financial Statements (Item 8).

The Company's current Navy drydock certifications are for amounts that are less than the drydocks' maximum design capacity, however they are sufficient to allow the Company to perform work on all non-nuclear Navy vessels homeported in Puget Sound, as well as on all Coast Guard and Washington State Ferry vessels.

On December 16, 2004 the Company announced that it had been awarded a five-year lease with the Navy for the use of the AFDM-10 Drydock, "Resolute." The Navy plans to move the Resolute from its current location in Virginia to Puget Sound during the summer or early fall of 2005 where Todd will take possession.

The Resolute is 522 feet in length, 124 feet wide and has a design capacity of 18,000 tons. Once in place at Todd, the Resolute will be used to dock a variety of commercial and government ships.

The Company believes that its owned and leased properties at the Shipyard are in reasonable operating condition given their age and usage, although from time to time the Company has been required to incur substantial expenditures to ensure the continuing serviceability of certain owned and leased machinery and equipment.

Towards the end of fiscal year 2001, the Company determined that such serviceability repairs would be required on the Emerald Sea to maintain Navy certification on a long-term basis. Certain time sensitive repairs began early in fiscal year 2002, while the Company evaluated several alternative repair scenarios and management's plans for future operations.

Once the Company completed its evaluation in fiscal year 2002, a comprehensive, multi-year refurbishment plan was approved by management that would allow the Company to maintain Navy certification into the future. This multi-year plan included scheduled refurbishment periods so repairs did not interfere with the on-going shipyard operations. With the de-commissioning and/or transfer of the "AOE" class vessels to the Military Sealift Command, the Company is re-evaluating its Emerald Sea refurbishment plan. The Company will continue to assess the plan in light of its future drydock requirements and will make appropriate changes as needed to support Shipyard operations.

During fiscal year 2005, the Company spent approximately $3.3 million on Shipyard capital expenditures.

The Company is subject to federal, state and local environmental laws and regulations that impose limitations on the discharge of pollutants into the environment and establish standards for the treatment, storage and disposal of toxic and hazardous wastes. Fines and penalties may be imposed for non-compliance with these laws. Such laws and regulations may expose the Company to liability for acts of the Company, which are or were in compliance with all applicable laws at the time such acts were performed. The Company faces potential liabilities in connection with the alleged presence of hazardous waste materials at its Seattle shipyard and at several sites used by the Company for disposal of alleged hazardous waste.

The Company is identified as a potentially responsible party ("PRP") by the Environmental Protection Agency ("EPA") under the Comprehensive Environmental Response, Compensation and Liability Act ("CERCLA," commonly known as the "Superfund") in connection with matters pending at three Superfund sites. Additionally, the Company has received information requests in two Superfund cases where the Company has asserted that its liability was discharged when it emerged from bankruptcy in 1990.

Generally these environmental claims relate to sites used by the Company for disposal of alleged hazardous waste. The Company has also been named as a defendant in a number of civil actions alleging damages from past exposure to toxic substances, generally asbestos, at closed former Company facilities.

At April 3, 2005, the Company maintained aggregate reserves of $26.7 million for pending claims and assessments relating to environmental matters, including $18.5 million associated with the Harbor Island Superfund Site (the "Harbor Island Site") and $7.3 million for asbestos related claims.

Funding for costs and payments of claims represented by such reserves is expected to be provided to a significant extent by receivables due from insurance companies under policies and insurance in place agreements described below. At April 3, 2005, such receivables aggregated $23.7 million.

Included in the reserves are sediment remediation costs for Harbor Island of $14.3 million that are expected to occur in fiscal year 2006. These costs are reflected in the Company's balance sheet under current liabilities. Likewise, the insurance receivable of $14.3 million relating to these reserves is reflected in the Company's balance sheet under current assets.

For more information, see Note 11 of the Notes to the Consolidated Financial Statements (Item 8.) below and the discussion under the heading "Environmental Matters and Contingencies" in Management's Discussion and Analysis of Financial Condition and Results of Operations (Item 7.) below.

The Company and several other parties have been named as potentially responsible parties ("PRPs") by the Environmental Protection Agency (the "EPA") pursuant to the Comprehensive Environmental Response, Compensation, and Liability Act ("CERCLA" also known as "Superfund") in connection with the documented release or threatened release of hazardous substances, pollutants and contaminants at the Harbor Island Superfund Site (the "Harbor Island Site"), upon which the Shipyard is located.

In the fourth quarter of fiscal year 2001, the Company entered into a 30-year agreement with an insurance company that provides the Company with broad-based insurance coverage for the remediation of all of the Company's operable units at the Harbor Island Superfund Site.

The agreement provides coverage for the known liabilities in an amount exceeding the Company's current booked reserves of $18.5 million. Additionally, the Company entered into a 15-year agreement for coverage of any new environmental conditions discovered at the Seattle shipyard property that would require environmental remediation.

To date, the EPA has separated the Harbor Island Site into three operable units that affect the Company: the Soil and Groundwater Unit (the "Soil Unit"), the Shipyard Sediments Operable Unit (the "SSOU") and the Sediments Operable Unit (the "SOU"). The Company, along with a number of other Harbor Island PRPs, received a Special Notice Letter from the EPA on May 4, 1994 pursuant to section 122 (e) of CERCLA. The Company entered into a Consent Decree for the Soil Unit in September 1994 under which the Company has agreed to remediate the designated contamination on its property. Removal of floating petroleum product from the water table began in October 1998 and is anticipated to continue through fiscal year 2009. The Company and the EPA are currently negotiating the extent and methodology of the soil remediation.

During the third quarter of fiscal year 1997, the EPA issued its Record of Decision ("ROD") for the SSOU. The ROD identifies four alternative solutions for the SSOU remediation and identifies the EPA's selected remedy. During the third quarter of fiscal year 2000, the EPA expanded the boundaries of the SSOU issuing their Phase 1B Data Report and resulting Explanation of Significant Differences outlining the changes to the ROD. During the fourth quarter of fiscal year 2000, the Company and the EPA entered into an Administrative Order of Consent for the development of the remedial design for the SSOU.

During the fourth quarter of fiscal year 2003, the company and the EPA entered into a Consent Decree for the cleanup of the SSOU, which, along with the associated Remedial Design Statement of Work for Remedial Action ("SOW"), was subsequently approved by the Department of Justice. The Consent Decree provides for the submittal of the Remedial Action Work Plan to the EPA subsequent to the approval by the EPA of the final design. The Remedial Action Work Plan provides for construction and implementation of the remedy set forth in the ROD, the two Explanation of Significant Differences (issued in fiscal years 2000 and 2003), the SOW, and the design plans and specifications developed in accordance with the Remedial Action Work Plan and approved by the EPA. During the fourth quarter of fiscal year 2004 the Company submitted its Final Design Report to the EPA for the SSOU. The Final Design Report provides for the following actions to take place at the SSOU:

Pursuant to the current schedule, remediation of the SSOU began in the second quarter of fiscal 2005. Current environmental regulations limit the period of time during the year that dredging may occur. Given these limits, dredging in the SSOU will require several years to accomplish. The Company completed its first year of dredging during the fourth quarter of fiscal 2005. The Consent Decree requires that the Company be finished with the pier demolition and dredging in its entirety in fiscal year 2006. The current estimated cost of the SSOU cleanup is included in the environmental reserve.

During January 1998, the Company was notified by the EPA that testing would be required in the West Waterway of the Duwamish River outside the borders of the SSOU as part of the SOU. During May 1998, the Company entered into an Administrative Order on Consent to perform certain limited testing as part of the SOU investigation. After an evaluation of the results, the EPA issued a draft "no action" ROD on the SOU for public comment which if issued in final form would end the investigation of the SOU, requiring no remedial action. The public comment period closed during the Company's fourth quarter of fiscal year 2000. In September 2003, the EPA issued the final "no action" ROD on the SOU. Given the EPA's issuance of the draft "no action" ROD in fiscal year 2000, the Company had not established a reserve for any remediation on the SOU.

Under the Federal Superfund law, potentially responsible parties may have liability for damages to natural resources in addition to liability for remediation. During the second quarter of fiscal year 2003, the Company began discussions with the natural resource trustees ("Trustees") for the Harbor Island Superfund Site ("Site") and continued these discussions during the remainder of fiscal year 2003. The Company anticipates that the Trustees will file a claim against the Company at some future date alleging damages to the natural resources at the Site caused by the release of hazardous substances. The best estimate of a potential natural resource damage claim has been included in the environmental reserve. The payment of any eventual claim is covered by the aforementioned insurance policy, except for the policy deductible, provided that aggregate policy limits have not been exceeded. The amount of the policy deductible payment is reflected in the Company's environmental reserve at April 3, 2005.

In January 2001, the EPA issued Special Notice letters naming the PRPs on the Hylebos Waterway Operable Unit of the Commencement Bay Superfund Site in Tacoma, Washington. The Company was not included on the EPA's list. Todd has been notified by other PRPs of their intent to bring a contribution action against the Company. Subsidiaries of the Company had a presence on the site from 1917-1925 and again from 1939-1946, for the most part, coinciding with World Wars I and II when the Company built war ships at the direction of the United States government. Several parties in 2000 hired an allocator to assign percentages of responsibility to all parties, historical and present, notwithstanding potential defenses or contractual claims. While the Company did not participate in the allocation process, the allocator's findings were taken into account in including an estimate of potential liability in the Company's reserve discussed below.

The Company has further been notified by the Commencement Bay Natural Resource Trustees ("Trustees") that the parties occupying the aforementioned property subsequent to 1946 have been allocated liability for natural resource damages. While the Trustees have not submitted a claim against the Company for natural resource damages, they invited the Company to participate in a mediation with the PRPs to resolve intra-facility allocation issues. The Company declined the invitation to participate in the mediation.

The Company entered into a Consent Decree with the EPA for the clean up of the Casmalia Resources Hazardous Waste Management Facility in Santa Barbara County, California under the Resource Conservation and Recovery Act. The Company has included an estimate of the potential liability for this site in environmental reserves as discussed below. Immaterial payments began in fiscal year 1997 and will extend for up to ten years.

During the third quarter of fiscal year 2005, the Company, along with 55 other companies and organizations, was notified that it is a potentially responsible party at the BKK Landfill Facility in West Covina, California. The site is the subject of an investigation and remedial order from the California Department of Toxic Substances Control. It is alleged that the Company's San Pedro shipyard (closed in 1990) caused shipyard waste to be sent to the BKK Facility during the 1970s and 1980s. The Company is investigating these allegations.

The Company has been named as a defendant in civil actions by parties alleging damages from past exposure to toxic substances, generally asbestos, at closed former Company facilities.

The cases generally include as defendants, in addition to the Company, other ship builders and repairers, ship owners, asbestos manufacturers, distributors and installers, and equipment manufacturers and arise from injuries or illnesses allegedly caused by exposure to asbestos or other toxic substances. The Company assesses claims as they are filed and as the cases develop, dividing them into two different categories based on severity of illness. Based on current fact patterns, certain diseases including mesothelioma, lung cancer and fully developed asbestosis are categorized by the Company as "malignant" claims. All other claims of a less medically serious nature are categorized as "non-malignant." The Company is currently defending approximately 27 "malignant" claims and approximately 531 "non-malignant" claims.

The relief sought in all cases varies greatly by jurisdiction and claimant. Included in the approximate 356 cases open as of April 3, 2005 are approximately 558 claimants. The exact number of claimants is not determinable as approximately 94 of the open cases include multiple claimant filings against 20-100 defendants. The filings do not indicate which claimants allege liability against the Company. The previously stated 558 claimants is the Company's best estimate taking known facts into consideration.

As a result of claims resolution during fiscal year 2005, bodily injury reserves declined from $8.1 million at March 28, 2004 to $7.3 million at April 3, 2005. Likewise, bodily injury insurance receivables declined from $5.8 million to $5.3 million. These bodily injury liabilities and receivables are classified within the Company's Consolidated balance sheets as environmental and other reserves, and insurance receivables, respectively.

The Company has entered into agreements with several of its insurers to provide coverage for a significant portion of settlements and awards related to these bodily injury claims. These agreements have aggregate limits on amounts to be paid overall and formulas for amounts of payment on individual claims. In addition to providing coverage for assessments or settlements of claims, the agreements also provide for costs of defending and processing such claims. The two most significant agreements provide coverage applicable to claims of exposure to asbestos occurring between 1949 and 1976 and occurring between 1976 through 1987. Insurance coverage for exposures to asbestos was no longer available from the insurance industry after 1987. Due to changes in federal regulations in the 1970's that resulted in the swift decline in commercial and military application of asbestos and increased regulation over the handling and removal of asbestos, there exists minimal risk of claims arising from exposur e after 1987. Contractual formulas are utilized to determine the amount of coverage from each agreement on each claim settled or litigated. Once the initial date of alleged exposure to asbestos is determined, all contractual years subsequent to that date participate in the settlement. Since all known claims involve alleged exposure prior to 1976, the 1976 through 1987 agreement will participate in the settlement or judgment of all outstanding claims that are settled or litigated. As a result, and as the years remaining calculation set forth below indicates, the 1976 through 1987 agreement will exhaust prior to the 1949 through 1976 agreement. Based on historical claims settlement data only, the Company projects that at April 3, 2005, the 1949 through 1976 agreement will provide coverage for an additional 22.3 years and the 1976 through 1987 agreement will provide coverage for an additional 4.2 years. At March 28, 2004, the Company projected that these agreements would provide coverage for an additional 21.6 years and 5.4 years, respectively. The Company resolved 11 malignant claims in 2005 compared with 15 in 2004 and 13 in 2003. If historical settlement patterns or the rate of filing for new cases change in future periods, these estimated coverage periods could be shorter or longer than anticipated. Moreover, if one or both of these coverages are exhausted at some future date, the Company's costs related to subsequent claims and for legal expenses previously covered by these insurance agreements may increase.

The following chart indicates the number of claims filed and resolved in the past three fiscal years, including the number of claims yet to be resolved at the end of each fiscal year. (Resolution includes settlements, adjudications and dismissals). The claims are further categorized as either malignant or non-malignant.

Due to uncertainties of the number of cases, the extent of alleged damages, the population of claimants and size of any awards and/or settlements, there can be no assurance that the current reserves will be adequate to cover the costs of resolving the existing cases. Additionally, the Company cannot predict the eventual number of cases to be filed against it or their eventual resolution and does not include in its reserve amounts for cases that may be filed in the future. However, it is probable that if future cases are filed against the Company it will result in additional costs arising either from its share of costs under current insurance in place arrangements or due to the exhaustion of such coverage. The Company reviews the adequacy of existing reserves periodically based upon developments affecting these claims, including new filings and resolutions, and makes adjustments to the reserve and related insurance receivable as appropriate.

As the Company is not able to estimate its potential ultimate exposure for filed and unfiled claims against the Company, it cannot predict whether the ultimate resolution of the bodily injury cases will have a material effect on the Company's results of operations or stockholders' equity.

No matters were submitted to a vote of security holders, through solicitation of proxies or otherwise during the fourth quarter of the fiscal year ended April 3, 2005.

The Company's stock is listed on the New York Stock Exchange (NYSE:TOD). The following table sets forth, by quarter, the high and low composite sales prices of the stock as reported by the NYSE.

On June 9, 2005, the high and low prices of the Company's common stock on the NYSE were $18.85 and $18.85, respectively.

At June 7, 2005, there were 1,623 holders of record of 5,423,156 outstanding shares of common stock.

See Note 18 of the consolidated financial statements for information on dividends declared over the past two fiscal years. It is the intent of the Company to consider and act upon the payment of future dividends on a regular quarterly basis. Future dividend declarations will depend on, among other factors, the Company's earnings and prospects, its cash position and investment needs.

During the third quarter of fiscal year 2003, the Board of Directors approved the repurchase of up to 500,000 shares of the Company's common stock from time to time in open market or negotiated transactions.

The following table summarizes the purchases of the Company's common stock to be held in treasury for the past three fiscal years.

ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
(In thousands of dollars, except for share data)

The following table summarizes certain selected consolidated financial data of the Company, which should be read in conjunction with the accompanying Consolidated Financial Statements of the Company included in Item 8.

The Notes to the Consolidated Financial Statements are an integral part of Management's Discussion and Analysis of Financial Condition and Results of Operations and should be read in conjunction herewith. The following discussion and analysis of financial condition and results of operations contain forward-looking statements, which involve risks and uncertainties. The Company's actual results in future periods may differ significantly from the results discussed in or anticipated by such forward looking statements. Certain factors, which may impact results for future periods, are discussed below under the captions "Overview - Profitability," and "Environmental Matters." Readers should also consider the statements and factors discussed under the caption "Operations Overview" in Item 1 and the discussion of environmental matters and related bodily injury claims set forth in Item 3 of this Annual Report on Form 10-K filed with the Securities and Exchange Commission for the fiscal year ende d April 3, 2005, together with the Notes to the Company's Consolidated Financial Statements for the fiscal year then ended.

Volumes and revenue in 2005 were favorably impacted at the beginning of the year by jobs commenced in fiscal year 2004, including submarine work the Company performed for Electric Boat Corporation. The commencement of work on the John C. Stennis in January of 2005 also provided a boost to both volumes and revenue in the fourth quarter.

During the first half of fiscal year 2005, the Company recorded $68.7 million, or 51.3% of its full year revenue. Revenues in the first half of the year were higher than the second half due to higher volumes of cost-type work in the first half versus the second half of the year. However, the Company's operating and net income during the first six month period were lower than those in the second six month period because of high performance incentive fees awarded in the last half of the year.

Revenues for the third and fourth quarters of the year were $65.3 million. In spite of the modest decline in revenue, operating income and net income were stronger in the second half of the year due, as mentioned above, to the high performance incentive fees and the higher volume of Navy and submarine work, which was offset by reduced commercial work.

For the full year ended April 3, 2005, the Company recorded revenue of $134.0 million, a decrease of $13.8 million, or approximately 9%, from fiscal year 2004 revenue of $147.8 million. This revenue decrease is primarily attributable to reduced commercial and other non-Navy work volumes partially offset by new submarine work.

During fiscal year 2005, the Company recorded operating income of $11.9 million on revenue of $134.0 million, or approximately 9% of revenue. This represents an increase in operating income of $9.7 million from fiscal year 2004 operating income of $2.2 million. The increase is a result of two factors. First, the higher volume of Government work, including cost-type submarine work, and improved performance on fixed cost projects. Second, a $2.5 million increase over the prior year related to the 2004 charge arising from the provision for anticipated workers compensation claims costs due to the bankruptcy of one of the Company's previous insurance carriers.

In addition, the Company recognized $1.0 million in non-operating investment income for the year ended April 3, 2005. This amount, in addition to the operating income reported, resulted in fiscal year 2005 income before income tax expense of $12.9 million.

During the first quarter of fiscal year 2005, the Company submitted a claim to the Navy to settle all outstanding issues related to its Emerald Sea dry dock, which includes the Navy's share of the un-recovered repair, maintenance and operating costs of the dry dock.  These are costs that the Company believes it is owed under the AOE contract.  On May 31, 2005, The Navy denied the Company's claim in its entirety. The Company has the right to appeal this decision and is considering its options. As a result the Company has not recorded any recovery in the financial results for the current fiscal year.

During the first quarter of fiscal year 2001, the Company was awarded, by the Department of the Navy on a sole source basis, a five year, cost-type contract for the repair and maintenance of all Puget Sound based frigates and destroyers, which at the time included six surface combatant class vessels. Although the Navy has not released a notional value of the maintenance work, the Company believes that the value may be approximately $60 million to $75 million if all options are exercised. Work on this contract is being performed primarily in the Company's Seattle shipyard, as well as at Naval Station Everett, depending on the type of work to be performed.

During the first quarter of fiscal year 2005, the Department of the Navy awarded the Company a five-year, cost-type contract for the long-term overhaul and maintenance to the NIMITZ CLASS aircraft carriers (CVN) home ported in Puget Sound.  The contract consists of multiple contract options for planned incremental availabilities (PIA's), docking planned incremental availabilities (DPIA's) and continuous maintenance and upkeep for the USS LINCOLN (CVN-72), USS STENNIS (CVN-74), USS NIMITZ (CVN-68) and USS VINSON (CVN-70) when they are in Puget Sound. The work includes all types of non-nuclear ship repair, alterations and maintenance. All on-board work is accomplished by the Company's workforce at Puget Sound Naval Shipyard in Bremerton, Washington, or at Naval Station Everett.

The work is performed under a cost plus award fee with performance incentive fee contract and represents the second long term contract for aircraft carrier maintenance awarded to the Company. The first such contract was awarded in 1999. The Company is supported in this effort by various regional suppliers and subcontractors. Significant support is provided by the Company's two teaming partners for this contract, Pacific Ship Repair and Fabrication ("PacShip") and AMSEC LLC ("AMSEC"). The notional value for this five-year contract is approximately $133 million if all options are exercised.

In October 2004, the Company was awarded, by the Department of the Navy, a contract to accomplish preservation work on the USS COLUMBUS, a Los Angeles Class nuclear submarine (SSN-762). The Company's work on this contract is being performed under a firm fixed price contract for approximately $9 million with the Navy. The work is being accomplished in drydock at the Puget Sound Naval Shipyard in Bremerton, Washington. This availability commenced on October 15, 2004 and is scheduled to be completed by May 31, 2005. The Company is supported in this effort by its subcontractor, IMIA, LLC, a division of Earl Industries of Portsmouth, Virginia.

During the fourth quarter of fiscal year 2004, the United States Coast Guard awarded the Company a contract to provide maintenance of two Polar Class icebreakers. The contract consists of multiple contract options for planned maintenance availabilities (PMA's) and docking planned maintenance availabilities (DPMA's) for the POLAR STAR (WAGB-10) and POLAR SEA (WAGB-11). The availabilities, and their companion planning options, extend through the last DPMA ending August 2008, and the last PMA ending in September 2008. The work to be performed includes availability planning and generalized ship maintenance and repairs as needed, with emphasis on propulsion and deck machinery work. The Company is teaming with the Coast Guard to identify the appropriate best value work scope and technical solutions for support of the two icebreakers. The Company is supported in this effort by various regional suppliers and subcontractors.

The work is performed under a cost plus incentive fee contract. The Company has performed similar work for the Coast Guard over the past several years under individual, competitively bid, firm fixed priced contracts. This current award marks the first time the Coast Guard has used a long term phased-maintenance approach on any Coast Guard vessels. The notional value of the contract, if all options are exercised by the Coast Guard, is approximately $50.0 million. Under this contract, the expected repair availability on the Polar Sea in the second quarter of fiscal year 2005 was delayed due to the lack of government funding for the major overhaul requirements on this vessel. There is no assurance that all options will be exercised, in whole or in part.

During the fourth quarter of fiscal year 2004, the Company entered into a contract with Electric Boat Corporation of Groton, Connecticut ("Electric Boat") to support Electric Boat's work on Trident submarines. During the period from May to September 2003, the Company completed planning and preparation work for Electric Boat. During fiscal year 2004, the Company also began work on a follow-on contract to fabricate components and to accomplish associated steel outfitting, project management and quality assurance functions. This contract is associated with the structural retrofit work being accomplished by Electric Boat on the USS OHIO (SSBN 726) and USS MICHIGAN (SSBN 727) at the Puget Sound Naval Shipyard ("PSNS").

The Company's fabrication work on the USS OHIO was performed under a cost plus incentive fee contract with Electric Boat, and under a firm fixed price contract for the associated project management and quality assurance work. The total value of this contract was approximately $5.2 million. Work on this contract was completed in the second quarter of fiscal year 2005. The Company's work on the USS MICHIGAN is being performed under a firm fixed price contract of approximately $4.9 million.

In addition to Electric Boat's contract for the Trident's structural retrofit at PSNS, the Company has entered into a contract to provide a number of repair and alteration services aboard the USS OHIO and USS MICHIGAN at PSNS.

During the fourth quarter of fiscal year 2004, the Company confirmed its expected participation, along with Southwest Marine, Inc., San Diego Division, on the team lead by Bath Iron Works, a subsidiary of General Dynamics (NYSE:GD), to perform Post Shakedown Availability work ("PSA") on DDG-51 Aegis Destroyers ("Destroyers"). The Navy contract for this work, which was awarded to Bath Iron Works, includes options for PSA work to be accomplished in Navy homeports of Everett, Washington and Pearl Harbor, HI.

The Company's expected participation will include the performance of the PSA work on between one and three Destroyers that are expected to be home ported in Everett, Washington. Work on the first option, as exercised by the Navy, began in the first quarter of fiscal year 2006 and has a value of approximately $9.6 million. Any work that the Company performs for Bath Iron Works will be accomplished under a cost plus award fee subcontract. If the Navy stations the second and third Destroyers at Everett, Washington and exercises options for PSA work on those ships, the anticipated contract value to the Company for its expected work on all three ships will be approximately $30 million between 2005 and 2007. The PSA work primarily involves the installation of system and equipment upgrades and/or ship alterations as required.

At April 3, 2005 the Company's backlog consisted of approximately $53 million of repair, maintenance, and conversion work. This compares with backlogs of approximately $19 million and $22 million at March 28, 2004 and March 30, 2003, respectively. The Company's current backlog is primarily attributable to firm repair, maintenance and conversion work scheduled for completion during fiscal year 2006.

Since work under the Company's Navy and Coast Guard phased maintenance contracts is at the option of the Navy and the Coast Guard, the Company cannot provide assurance as to the timing or level of work that may be performed under these contracts. Therefore, the increase in the backlog is primarily due to the timing of the availabilities for the phased maintenance contracts. Projected revenues from these contracts are not included in the Company's backlog until these customers exercise contract options.

The Company's future profitability depends largely on the ability of the Shipyard to maintain an adequate volume of ship repair, overhaul and conversion business to augment its longer-term contracts. The variables affecting the Company's business volume include public support provided to competing Northwest shipyards, excess west coast and industry-wide shipyard capacity, foreign competition, governmental legislation and regulatory issues, activity levels of the US Navy, competitors' pricing behavior, and Company labor efficiencies, work practices and estimating abilities. Other factors that can contribute to future profitability include the amounts of annual expenditures needed to ensure continuing serviceability of the Company's owned and leased machinery and equipment.

The Company continues to respond aggressively to the increasingly competitive shipbuilding and repair industry. In addition to management's focus on the profitability of existing Shipyard operations through reduced operating costs, improved production efficiencies, increased customer service and the pursuit of new business volume, management continues to evaluate options for deployment of assets with a view to improving the Company's return on investment.

The Company's established accounting policies are outlined in the footnotes to the Consolidated Financial Statements (contained in Part II, Item 8. of this Form 10-K) entitled "Principal Accounting Policies." As part of its reporting responsibilities, management continually evaluates and reviews the adequacy of its accounting policies and methods as new events occur. Management believes that its policies are applied in a consistent manner that provides the user of the Company's financial statements with a current, accurate and complete presentation of information in accordance with US generally accepted accounting principles.

The preparation of financial statements requires the use of judgments and estimates. The Company's critical accounting policies are described below to provide a better understanding of how these judgments and estimates can impact the Company's financial statements. A critical accounting policy is one that management believes may contain difficult, subjective or complex estimates and assessments and is fundamental to the Company's results of operation. The Company has identified its most critical accounting policies as those which relate to: 1) Revenue Recognition, 2) Environmental Remediation, Bodily Injury, Other Reserves, and Insurance Receivable and 3) Deferred Pension Asset and Accrued Post Retirement Health Benefits. This discussion and analysis should be read in conjunction with the consolidated statements and related notes included elsewhere in this report.

The Company recognizes revenue, contract costs, and profit on the percentage-of completion method based upon direct labor hours incurred. Using the percentage-of-completion method requires the Company to make certain estimates of the total cost to complete a project, estimates of project schedule and completion dates, estimates of the percentage at which the project is complete, estimates of award fees earned, estimates of annual overhead rates and estimates of amounts of any probable unapproved claims and/or change orders. These estimates are continuously evaluated and updated by experienced project management and accounting personnel assigned to these activities, and senior management also reviews them on a periodic basis. When adjustments in contract value or estimated costs are determined, any changes from prior estimates are generally reflected in revenue in the current period.

The Company has considerable experience in managing multiple projects simultaneously and in preparing accurate cost estimates, schedules and project completion dates. However, many factors, including but not limited to weather, fluctuations in material prices, labor shortages, and timely availability of materials, can affect the accuracy of these estimates and may impact future revenues either favorably or unfavorably.

US Government procurement standards are followed to determine the allowability as well as the allocability of costs charged to Government contracts. Costs incurred and allocated to contracts with the Government are closely scrutinized for compliance with underlying regulatory standards by Company personnel, and are subject to audit by the Defense Contract Audit Agency ("DCAA"). Other than normal cost accounting issues raised by the DCAA as a result of their regular, ongoing reviews, the Company is not aware of any outstanding issues with the DCAA.

The Company faces potential liabilities in connection with the alleged presence of hazardous waste materials at its Seattle shipyard and at several sites used by the Company for disposal of alleged hazardous waste. The Company has also been named as a defendant in a number of civil actions alleging damages from past exposure to toxic substances, generally asbestos, at former Company facilities that are now closed. At April 3, 2005, the Company maintained aggregate reserves of $26.7 million for pending claims and assessments relating to these environmental matters, including $18.5 million associated with the Company's Seattle shipyard site and $7.3 million for asbestos or bodily injury related claims.

The Company has various insurance policies and agreements that provide coverage on the costs to remediate these environmental sites and for the defense and settlement of bodily injury claims. At April 3, 2005, the Company had recorded an insurance receivable of $23.7 million relating to these environmental and bodily injury matters, including $18.4 million associated with the Company's Seattle shipyard site and $5.3 million for bodily injury related claims.

Included in the reserves are sediment remediation costs for Harbor Island of $14.3 million that are expected to occur in fiscal year 2006. These costs are reflected in the Company's balance sheet under current liabilities. Likewise, the insurance receivable of $14.3 million relating to these reserves is reflected in the Company's balance sheet under current assets.

The Company reviews these matters on a continual basis and revises its estimates of known liabilities and insurance recoveries when appropriate. The Company follows guidance provided in Statement of Position 96-1, "Environmental Remediation Liabilities" for recording its environmental liabilities and recoveries. The Company accounts for bodily injury liabilities in accordance with Financial Accounting Standards Board No. 5, "Accounting for Contingencies."

Estimating environmental remediation liabilities requires judgments and assessments based upon independent professional knowledge, the experience of Company management and legal counsel. Environmental liabilities are based on judgments that include calculating the cost of alternative remediation methods and disposal sites, changes in the boundaries of the remediation areas, and the impact of regulatory changes. Bodily injury liabilities are based on judgments that include the number of outstanding claims, the expected outcome of claim litigation and anticipated settlement amounts for open claims based on historical experience. The Company does not accrue liabilities for unknown bodily injury claims that may be asserted in the future due to uncertainties of the number of cases that may be filed and the extent of damages that may be alleged.

The development of liability estimates that support both environmental remediation and bodily injury reserves involve complex matters that include the development of estimates and the use of judgments. The actual outcome of these matters may differ from Company estimates. To the extent not covered by insurance, increases to environmental remediation and bodily injury liabilities would unfavorably impact future earnings.

The Company's insurance recoveries for environmental remediation and bodily injury claims are estimated independently from the associated liabilities and are based on insurance coverage or contractual agreements negotiated with its former insurance companies. These policies and agreements are primarily with two insurance companies. Based upon the current credit rating of both of these companies, the Company anticipates that both insurance companies will be able to satisfy their respective obligations under the policy or agreement. However, if this assumption is incorrect and either of these companies is unable to meet its future financial commitments, the Company's financial condition and results of operation could be adversely affected.

The accounting for employee pension and other post retirement benefit costs and obligations require management to determine appropriate assumptions about the future, which are used by actuaries to estimate net costs and liabilities. These assumptions include discount rates, health care cost trends, inflation rates, long-term rates of return on plan assets, retirement rates, mortality rates and other factors. Management bases these assumptions on historical results, the current environment and reasonable expectations of future events. Actual results that differ from the assumptions are accumulated and amortized over future periods and, therefore, generally affect the recognized expense and recorded obligation in such future periods. While management believes the assumptions used are appropriate, significant differences in actual experience or significant changes in assumptions would affect pension and other post retirement benefits costs and obligations. See Note 7 to the Consolidated F inancial Statements for more information regarding costs and assumptions for employee pension and other post retirement benefits.

Net income for fiscal year 2005 was $9.0 million, an increase of $5.0 million, or 123% from fiscal year 2004. This increase was attributable to the increase in Government work, new submarine work and the contribution from higher than expected fees awarded and recognized this year for work mostly completed in fiscal year 2004.

The Company recorded revenue of $134.0 million during fiscal year 2005, which represents a decrease of $13.8 million, or approximately 9%, from fiscal year 2004 reported revenue of $147.8 million. This decrease is primarily attributable to reduced commercial work volumes partially offset by increased Government and new submarine work.

Cost of revenues for fiscal year 2005 decreased by $20.5 million, or approximately 19%, from fiscal year 2004. This decrease was primarily attributable to decreases in work volumes experienced in fiscal year 2005 when compared to fiscal year 2004. Cost of revenues as a percentage of revenues was 65% and 73% for fiscal years 2005 and 2004, respectively.

The decrease in cost of revenues as a percentage of revenue in fiscal year 2005 is primarily attributable to improved margins on both Government and commercial work, award fees recognized for costs incurred in 2004 and the $2.5 million charge recorded in the first quarter of fiscal year 2004 related to the unanticipated bankruptcy of one of the Company's previous insurance carriers.

Overhead costs for administrative and manufacturing activities decreased by $3.3 million, or 9% from fiscal year 2004. Administrative and manufacturing overhead as a percentage of revenue was approximately 26% for both fiscal years 2005 and 2004. The decrease in administrative and manufacturing overhead costs is attributable to the decrease in volume, management cost reduction initiatives and operational efficiencies.

During fiscal year 2005 and fiscal year 2004, the Company received partial reimbursement of $0.1 million and $0.2 million, respectively, from another Harbor Island potentially responsible party for certain past environmental costs incurred by the Company. This partial reimbursement is reflected in other insurance settlements in the Consolidated Statement of Income for the years ended April 3, 2005 and March 28, 2004.

Investment and other income in fiscal year 2005 decreased by $0.7 million, or approximately 44%, when compared to fiscal year 2004. The decrease in investment and other income reported during fiscal year 2005 is primarily attributable to lower rates of return on investments in 2005 as compared to 2004.

In fiscal year 2005 and fiscal year 2004, the Company's average funds available for investment purposes was $35.4 million and $36.6 million, respectively.

During fiscal year 2005, the Company reported a net loss of $8 thousand on the sale of available-for-sale securities, which is a decrease of $0.6 million from fiscal year 2004. The significant decrease in gains on the sale of available-for-sale securities reported in fiscal year 2005 is primarily attributable to market conditions that were less favorable during fiscal year 2005 as compared to fiscal year 2004.

In fiscal year 2005, the Company recognized federal income tax expense of $3.9 million. This represents an increase of $3.4 million in federal tax expense when compared to fiscal year 2004. The effective income tax rates recorded in fiscal years 2005 and 2004 were 30% and 10%, respectively. This increase is attributable to a $1.1 million reduction in income tax expense in fiscal year 2004 resulting from the resolution of certain income tax contingencies that were established in previous years.

Net income for fiscal year 2004 decreased by $0.1 million, or 2% from fiscal year 2003 levels. This decrease was attributable to the reduced volume of commercial and non-Navy work, higher overhead expenses, and the non-cash charge arising from the provision for anticipated workers compensations claims due to the bankruptcy of one of the Company's previous insurance carriers. This decrease was mostly offset by a decrease in federal income tax expense of $1.1 million resulting from the resolution in the fourth quarter of certain income tax contingencies that were established in previous years.

The Company recorded revenue of $147.8 million during fiscal year 2004, which represents a decrease of $4.0 million, or approximately 3%, from fiscal year 2003 reported revenue of $151.8 million. This decrease is primarily attributable to reduced commercial and other non-Navy work volumes in fiscal year 2004.

Cost of revenues for fiscal year 2004 decreased by $1.6 million, or approximately 2% from fiscal year 2003. The majority of this decrease was attributable to decreases in work volumes experienced in fiscal year 2004 when compared to fiscal year 2003. Cost of revenues as a percentage of revenues was 73% and 72% for fiscal years 2004 and 2003, respectively.

The increase in cost of revenues as a percentage of revenue in fiscal year 2004 is primarily attributable to a $2.5 million charge recorded in the first quarter related to the unanticipated bankruptcy of one of the Company's previous insurance carriers.

Overhead costs for administrative and manufacturing activities increased by $1.3 million, or 3% from fiscal year 2003. Administrative and manufacturing overhead as a percentage revenue was approximately 26% and 24% for fiscal years 2004 and 2003, respectively. The increase in administrative and manufacturing overhead costs as a percentage of revenue is attributable to increases in repair and maintenance expenses for the Company's dry docks, and expenses associated with the recovery and maintenance of the smaller leased Navy dry dock that sank during a storm in October 2003.

During fiscal year 2004 and fiscal year 2003, the Company received partial reimbursement of $0.2 million and $0.1 million, respectively from another Harbor Island potentially responsible party for certain past environmental costs incurred by the Company. This partial reimbursement is reflected in other insurance settlements in the Consolidated Statement of Income for the years ended March 28, 2004 and March 30, 2003.

During fiscal year 2003, the Company estimated that the expected remediation costs associated with the Company's operable units at the Harbor Island Superfund Site would increase by approximately $9.1 million. This increase in environmental reserves was offset by a $8.5 million increase in the Company's insurance receivable. The net amount of $0.6 million is reflected in the Company's operating results for fiscal year 2003 and is shown in the Consolidated Statements of Income under Provision for environmental and other reserves.

Investment and other income in fiscal year 2004 increased by $0.5 million or approximately 38% when compared to fiscal year 2003. The increase in investment and other income reported during fiscal year 2004 is primarily attributable to accelerated lease payments of $0.8 million received by the Company from one of its warehouse tenants under the terms of a negotiated lease buyout initiated by the tenant.

In both fiscal years 2004 and 2003, the Company's average funds available for investment purposes were $36.6 million.

During fiscal year 2004, the Company reported a net gain of $0.6 million on the sale of available-for-sale securities, which is an increase of $0.6 million compared to fiscal year 2003. The significant increase in gains on the sale of available-for-sale securities reported in fiscal year 2004 is primarily attributable to market conditions that were more favorable during fiscal year 2004 than during fiscal year 2003.

In fiscal year 2004, the Company recognized federal income tax expense of $0.5 million. This represents a decrease of $1.7 million in federal tax expense compared to fiscal year 2003. The effective income tax rates recorded in fiscal years 2004 and 2003 were 10% and 35%, respectively. This decrease is attributable to the decrease in income tax expense of $1.1 million resulting from the resolution in the fourth quarter of certain income tax contingencies that were established in previous years.

The Company has provided total aggregate reserves of $26.7 million as of April 3, 2005 for its contingent environmental and bodily injury liabilities. Due to the complexities and extensive history of the Company's environmental and bodily injury matters, the amounts and timing of future expenditures is uncertain. As a result, there can be no assurance that the ultimate resolution of these environmental and bodily injury matters will not have a material adverse effect on the Company's financial position, cash flows or results of operations.

The Company has various insurance policies and agreements that provide coverage of the costs to remediate environmental sites and for the defense and settlement of bodily injury cases. These policies and agreements are primarily with two insurance companies. Based upon the current credit rating of both of these companies, the Company anticipates that both parties will be able to perform under their respective policy or agreement. As of April 3, 2005, the Company has recorded an insurance receivable of $23.7 million to reflect the contractual arrangements with several insurance companies to share costs for certain environmental and other matters.

Included in the reserves are sediment remediation costs for Harbor Island of $14.3 million that are expected to occur in fiscal year 2006. These costs are reflected in the Company's balance sheet under current liabilities. Likewise, the insurance receivable of $14.3 million relating to these reserves is reflected in the Company's balance sheet under current assets.

The Company continues to negotiate with its insurance carriers and certain prior landowners and operators for past and future remediation costs. The Company has not recorded any receivables for any amounts that may be recoverable from such negotiations or other claims.

Recurring costs associated with the Company's environmental compliance program are not material and are expensed as incurred. Capital expenditures in connection with environmental compliance are not material to the Company's financial statements.

The Company faces significant potential liabilities in connection with the alleged presence of hazardous waste materials at its Seattle shipyard (the "Harbor Island Site") and at several sites used by the Company for disposal of alleged hazardous waste. The Company has also been named as a defendant in civil actions by parties alleging damages from past exposure to toxic substances at Company facilities. Information with respect to these contingencies and claims is provided in Item 3 in this report.

The Company's policy is to accrue costs for environmental matters in the accounting period in which the responsibility is established and the cost is estimable. The Company's estimates of its liabilities for environmental matters are based on evaluations of currently available facts with respect to each individual situation and take into consideration factors such as existing technology, presently enacted laws and regulations, and the results of negotiations with regulatory authorities. The Company does not discount these liabilities.

In fiscal year 2005, the Company spent $0.1 million for environmental site remediation. All of these costs are reimbursable to the Company through its insurance coverage. An additional $10.5 million in environmental site remediation was spent by third party vendors under the direction of the Company's management. These costs were paid directly to the third party vendors under the Company's insurance policies. Most of these expenditures were related to the Harbor Island Site.

The Company spent approximately $0.3 million and $0.5 million on environmental site remediation in fiscal years 2004 and 2003, respectively. All of these costs are reimbursable to the Company through its insurance coverage.

Actual costs to address the Harbor Island Site and other environmental sites and matters will depend upon numerous factors, including the number of parties found liable at each environmental site, the method of remediation, outcome of negotiations with regulatory authorities, outcome of litigation, technological developments and changes in environmental laws and regulations. The Company entered into a Consent Decree with the EPA during the fourth quarter of fiscal year 2003 with respect to its Harbor Island Site and, as a result, the Company increased its Harbor Island Site reserves by an additional $9.1 million.

In the fourth quarter of fiscal year 2001, the Company entered into a 30-year agreement with an insurance company that will provide the Company with broad-based insurance coverage for the remediation of the Company's operable units at the Harbor Island Superfund Site.

The agreement provides coverage for the known liabilities in an amount exceeding the Company's current booked reserves of $18.5 million. Additionally, the Company has entered into a 15-year agreement for coverage of any new environmental conditions discovered at the Seattle shipyard property that would require environmental remediation.

The Company has been named as a defendant in civil actions by parties alleging damages from past exposure to toxic substances, generally asbestos, at closed former Company facilities.

The cases generally include as defendants, in addition to the Company, other ship builders and repairers, ship owners, asbestos manufacturers, distributors and installers, and equipment manufacturers and arise from injuries or illnesses allegedly caused by exposure to asbestos or other toxic substances. The Company assesses claims as they are filed and as the cases develop, dividing them into two different categories based on severity of illness. Based on current fact patterns, certain diseases including mesothelioma, lung cancer and fully developed asbestosis are categorized by the Company as "malignant" claims. All other claims of a less medically serious nature are categorized as "non-malignant". The Company is currently defending approximately 27 "malignant" claims and approximately 531 "non-malignant" claims.

The relief sought in all cases varies greatly by jurisdiction and claimant. Included in the approximate 356 cases open as of April 3, 2005 are approximately 558 claimants. The exact number of claimants is not determinable as approximately 94 of the open cases include multiple claimant filings against 20-100 defendants. The filings do not indicate which claimants allege liability against the Company. The previously stated 558 claimants is the Company's best estimate taking known facts into consideration.

As a result of claims resolution during fiscal year 2005, bodily injury reserves declined from $8.1 million at March 28, 2004 to $7.3 million at April 3, 2005. Likewise, bodily injury insurance receivables declined from $5.8 million to $5.3 million. These bodily injury liabilities and receivables are classified within the Company's consolidated balance sheets as environmental and other reserves, and insurance receivables, respectively.

The Company has entered into agreements with several of its insurers to provide coverage for a significant portion of settlements and awards related to these bodily injury claims. These agreements have aggregate limits on amounts to be paid overall and formulas for amounts of payment on individual claims. In addition to providing coverage for assessments or settlements of claims, the agreements also provide for costs of defending and processing such claims. The two most significant agreements provide coverage applicable to claims of exposure to asbestos occurring between 1949 and 1976 and occurring between 1976 through 1987. Insurance coverage for exposures to asbestos was no longer available from the insurance industry after 1987. Due to changes in federal regulations in the 1970's that resulted in the swift decline in commercial and military application of asbestos and increased regulation over the handling and removal of asbestos, there exists minimal risk of claims arising from exposur e after 1987. Contractual formulas are utilized to determine the amount of coverage from each agreement on each claim settled or litigated. Once the initial date of alleged exposure to asbestos is determined, all contractual years subsequent to that date participate in the settlement. Since all known claims involve alleged exposure prior to 1976, the 1976 through 1987 agreement will participate in the settlement or judgement of all outstanding claims that are settled or litigated. As a result, and as the years remaining calculation set forth below indicates, the 1976 through 1987 agreement will exhaust prior to the 1949 through 1976 agreement. Based on historical claims settlement data only, the Company projects that at April 3, 2005, the 1949 through 1976 agreement will provide coverage for an additional 22.3 years and the 1976 through 1987 agreement will provide coverage for an additional 4.2 years. At March 28, 2004, the Company projected that these agreements would provide coverage for an additional 21.6 years and 5.4 years, respectively. The Company resolved 11 malignant claims in 2005 compared with 15 in 2004 and 13 in 2003. If historical settlement patterns or the rate of filing for new cases change in future periods, these estimated coverage periods could be shorter or longer than anticipated. Moreover, if one or both of these coverages are exhausted at some future date, the Company's share of responsibility will increase for any subsequent claims and for legal expenses previously covered by these insurance agreements.

Due to uncertainties of the number of cases, the extent of alleged damages, the population of claimants and size of any awards and/or settlements, there can be no assurance that the current reserves will be adequate to cover the costs of resolving the existing cases. Additionally, the Company cannot predict the eventual number of cases to be filed against it or their eventual resolution and does not include in its reserve amounts for cases that may be filed in the future. However, it is probable that if future cases are filed against the Company it will result in additional costs arising either from its share of costs under current insurance in place arrangements or due to the exhaustion of such coverage. The Company reviews the adequacy of existing reserves periodically based upon developments affecting these claims, including new filings and resolutions, and makes adjustments to the reserve and related insurance receivable as appropriate.

As the Company is not able to estimate its potential ultimate exposure for filed and unfiled claims against the Company, it cannot predict whether the ultimate resolution of the bodily injury cases will have a material effect on the Company's results of operations or stockholders' equity.

During the first quarter of fiscal year 2004, the Company recorded a reserve of $2.5 million related to the unanticipated bankruptcy of one of its previous insurance carriers. The reserve, which reflects the Company's best estimate of the known liabilities associated with unpaid workers compensation claims arising from the two-year coverage period commencing October 1, 1998, is subject to change as additional facts are uncovered. These claims have reverted to the Company due to the liquidation of the insurance carrier. Although the Company expects to recover at least a portion of these costs from the liquidation and other sources, the amount and the timing of any such recovery cannot be estimated currently and therefore no estimate of amounts recoverable is included in the current financial results.

Since establishing the reserve, the Company has paid approximately $0.3 and $0.2 million in claims in fiscal years 2005 and 2004, respectively, which have been charged against the reserve.

At April 3, 2005 the Company's cash and cash equivalents, and securities available-for-sale balances were $3.8 million and $35.0 million, respectively, for a total of $38.8 million. At March 28, 2004 the Company's cash and cash equivalents, and securities available for sale balances were $1.3 million and $30.7 million, respectively, for a total of $32.0 million.

The Company anticipates that its cash, cash equivalents and marketable securities position, anticipated fiscal year 2006 cash flow, access to credit facilities and capital markets, taken together, will provide sufficient liquidity to fund operations for fiscal year 2006. Accordingly, shipyard capital expenditures are expected to be financed from working capital. A change in the composition or timing of projected work could cause planned capital expenditures and repair and maintenance expenditures to change.

In the long-term, the Company's liquidity could be impacted by default of its insurers on environmental or bodily injury claims. The Company however anticipates that it will meet its long-term liquidity needs due to its available cash reserves, ability to generate profits and lack of debt.

Net cash provided by operating activities was $12.7 million for the year ended April 3, 2005. This amount was primarily attributable to fiscal year net income adjusted for depreciation, deferred taxes and changes in working capital.

Net cash provided by operating activities was $7.0 million for the year ended March 28, 2004. This amount was primarily attributable to fiscal year net income adjusted for depreciation and changes in working capital.

Net cash used in investing activities was $8.2 million for the year ended April 3, 2005 and consisted primarily of purchases of marketable securities and capital expenditures offset by sales and maturities of marketable securities.

Net cash used in investing activities was $13.2 million for the year ended March 28, 2004 and consisted primarily of purchases of marketable securities and capital expenditures offset by sales and maturities of marketable securities.

During fiscal year 2005, the Company spent approximately $3.3 million on new capital assets.

During fiscal year 2004, the Company spent approximately $10.0 million on a storm water collection and discharge system, pier modifications and significant upgrades to its electrical system, plus $4.6 million on other shipyard capital expenditures.

The capital expenditures for fiscal year 2005 are in addition to ongoing repair and maintenance expenditures in the shipyard of $2.4 million, $4.8 million, and $5.4 million in fiscal years 2005, 2004, and 2003, respectively. The decrease in fiscal year 2005 repair and maintenance costs compared to fiscal year 2004 is primarily attributable to a decrease in costs associated with the Company's multi-year refurbishment of its owned dry dock.

Net cash used in financing activities for fiscal year 2005 was $2.0 million. This consisted primarily of dividends paid on common stock of $2.2 million, offset by proceeds from the exercise of stock options.

On March 21, 2005, the Company declared a dividend of ten cents ($0.10) per share, payable on June 23, 2005, to shareholders of record as of June 8, 2005. Based on the current number of outstanding shares, the cash impact of this dividend will be approximately $0.5 million.

Net cash used in financing activities for fiscal year 2004 was $1.5 million. This consisted primarily of dividends paid on common stock of $2.1 million, offset by proceeds from the exercise of stock options.

Todd Pacific Shipyards Corporation, a wholly owned subsidiary of the Company has a $10.0 million revolving credit facility with interest payable at the prime rate. The credit facility, which is renewable on a bi-annual basis, provides Todd Pacific with greater flexibility in funding its operational cash flow needs. Todd Pacific had no outstanding borrowings as of April 3, 2005 and March 28, 2004, respectively.

During fiscal year 2005, 20,500 shares of treasury stock were reissued pursuant to the exercise of stock options held by two officers of the Company. 6,532,877 shares were held as treasury stock as of April 3, 2005.

During fiscal year 2004, 154,000 shares of treasury stock were reissued pursuant to the exercise of stock options held by four officers of the Company. 6,553,377 shares were held as treasury stock as of March 28, 2004.

During the third quarter of fiscal year 2003, the Board of Directors approved the repurchase of up to 500,000 shares of the Company's common stock from time to time in open market or negotiated transactions. Under this authorization, the Company repurchased an aggregate of 22,400 shares in open market transactions during the first quarter of fiscal year 2004 and 19,500 shares in fiscal year 2003. In fiscal year 2004 the shares were purchased at an average price of $12.94 per share for total consideration of $289,887. In fiscal year 2003 the shares were purchased at an average price of $12.44 per share for a total consideration of $242,592.

Todd Pacific Shipyards currently operates under the terms and conditions of a collective bargaining agreement with the Puget Sound Metal Trades Council (the bargaining umbrella for all unions at Todd Pacific Shipyards). The three-year agreement is in effect from August 1, 2002 to July 31, 2005. The Company believes its relationship with its labor unions to be stable.

As of April 3, 2005 the Company had no off-balance sheet arrangements.

The following table presents information about the Company's contractual obligations as of April 3, 2005.

* This represents environmental reserves on the balance sheet, which are discussed in Note 11.

The Company does not own any derivative financial instruments as of April 3, 2005 nor does it presently plan to in the future. However, the Company is exposed to interest rate risk. The Company's interest income is most sensitive to changes in the general level of US interest rates. In this regard, changes in US interest rates affect the interest earned on the Company's cash equivalents and certain marketable securities. The Company's marketable securities are also subject to the inherent market risks and exposures of the underlying debt and equity securities in both US and foreign markets. The Company employs established policies and procedures to manage its exposure to changes in the market risk of its marketable securities. The Company believes that the risk associated with interest rate and market fluctuations related to these marketable securities is not a material risk based on a 1% sensitivity analysis.

The Company is exposed to potential interest rate risk on its revolving credit facility. Interest charged on the Company's credit facility is based on the prime lending rate, which may fluctuate based on changes in market interest rates. Increases in the prime lending rate could increase the Company's borrowing costs under its existing credit facility. The Company believes that the risk associated with interest rate fluctuations related to its credit facility is not a material risk.

The Company is also exposed to potential increases in future health care cost trend rates. Increases in these trend rates could have a significant affect on the amounts reported by the Company for its health care plans. The Company reports in Note 7 to the Consolidated Financial Statements the effects of a 1% change in the health care cost trend rates.

Todd Shipyards Corporation

We have audited the accompanying consolidated balance sheets of Todd Shipyards Corporation as of April 3, 2005 and March 28, 2004, and the related consolidated statements of income, stockholders' equity and comprehensive income, and cash flows for each of the three years in the period ended April 3, 2005. Our audits also included the financial statement schedule listed in the Index at Item 15(a). These financial statements and schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits.

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

In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Todd Shipyards Corporation at April 3, 2005 and March 28, 2004 and the consolidated results of its operations and its cash flows for each of the three years in the period ended April 3, 2005, in conformity with U.S. generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of Todd Shipyards Corporation's internal control over financial reporting as of April 3, 2005, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated June 9, 2005 expressed an unqualified opinion thereon.

/s/ Ernst & Young LLP

Seattle, Washington

June 9, 2005

Todd Shipyards Corporation

We have audited management's assessment, included in the accompanying Management's Report on Internal Control over Financial Reporting, that Todd Shipyards Corporation maintained effective internal control over financial reporting as of April 3, 2005, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria). Todd Shipyard Corporation's management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express an opinion on management's assessment and an opinion on the effectiveness of the company's internal control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, evaluating management's assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In our opinion, management's assessment that Todd Shipyards Corporation maintained effective internal control over financial reporting as of April 3, 2005, is fairly stated, in all material respects, based on the COSO criteria. Also, in our opinion, Todd Shipyards Corporation maintained, in all material respects, effective internal control over financial reporting as of April 3, 2005, based on the COSO criteria.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Todd Shipyards Corporation as of April 3, 2005 and March 28, 2004, and the related consolidated statements of income, stockholders' equity and comprehensive income, and cash flows for each of the three years in the period ended April 3, 2005 and our report dated June 9, 2005 expressed an unqualified opinion thereon.

/s/ Ernst & Young LLP

Seattle, Washington

June 9, 2005

The management of Todd Shipyards Corporation is responsible for the preparation, fair presentation, and integrity of the information contained in the financial statements in this Annual Report on Form 10-K. These statements have been prepared in accordance with accounting principles generally accepted in the United States of America and include amounts determined using management's best estimates and judgments.

The Company maintains a system of internal controls to provide reasonable assurance that assets are safeguarded and that transactions are recorded properly to produce reliable financial records. The system of internal controls includes appropriate divisions of responsibility, established policies and procedures (including a code of conduct to promote strong ethics) that are communicated throughout the Company, and careful selection, training and development of our people. The Company conducts a corporate audit program to provide assurance that the system of internal controls is operating effectively.

Our independent registered public accounting firm has performed audit procedures deemed appropriate to obtain reasonable assurance that the financial statements are free of material misstatement.

The Board of Directors provides oversight to the financial reporting process through its Audit Committee, which meets regularly with management, corporate audit, and the independent registered public accounting firm to review the activities of each and to ensure that each is meeting its responsibilities with respect to financial reporting and internal controls.

Finally, each of the undersigned has personally certified that the information contained in this Annual Report on Form 10-K is accurate and complete in all material respects, and that there are in place sound disclosure controls designed to gather and communicate material information to appropriate personnel within the company.

/s/ Stephen G. Welch
Stephen G. Welch
President and Chief Executive Officer

/s/ Scott H. Wiscomb
Scott H. Wiscomb
Chief Financial Officer

TODD SHIPYARDS CORPORATION
CONSOLIDATED BALANCE SHEETS
April 3, 2005 and March 28, 2004
(In thousands of dollars)

The accompanying notes are an integral part of this statement.

TODD SHIPYARDS CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
Years Ended April 3, 2005, March 28, 2004 and March 30, 2003
(in thousands, except per share amounts)

The accompanying notes are an integral part of this statement.

TODD SHIPYARDS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended April 3, 2005, March 28, 2004 and March 30, 2003
(in thousands of dollars)

The accompanying notes are an integral part of this statement.

TODD SHIPYARDS CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY AND COMPREHENSIVE INCOME
Years Ended April 3, 2005, March 28, 2004 and March 30, 2003
(in thousands of dollars, except for shares)

The accompanying notes are an integral part of this statement.

TODD SHIPYARDS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended April 3, 2005, March 28, 2004 and March 30, 2003

(A) Business - The Company's primary business is ship overhaul, conversion and repair for the United States Government, state ferry systems, and domestic and international commercial customers. The majority of the Company's work is performed at either its Seattle, Washington facility (the "Shipyard") or at the Puget Sound Naval Shipyard in Bremerton, Washington, by a unionized production workforce.

(B) Basis of Presentation - The Consolidated Financial Statements include the accounts of Todd Shipyards Corporation (the "Company") and its wholly owned subsidiaries Todd Pacific Shipyards Corporation ("Todd Pacific") and TSI Management, Inc. ("TSI"). All inter-company transactions have been eliminated. In accordance with the Company's policy of ending its fiscal year on the Sunday nearest March 31, the Company's fiscal year 2005 ended on April 3, 2005 and included 53 weeks. Certain reclassifications have been made to the statement of cash flows for prior years shown to conform to the current year presentation.

(C) Estimates - The preparation of financial statements in US Generally Accepted Accounting Principals requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

(D) Revenue Recognition - The Company recognizes revenue, costs, and profit on construction contracts in accordance with Statement of Position No. 81-1 (SOP No. 81-1), "Accounting for Performance of Construction-Type and Certain Production-Type Contracts." The Company enters into government cost-type contracts, time and materials contracts and fixed price contracts. Revenue, costs, and profit, in the form of incentive or award fees, on government cost-type contracts are recognized on the percentage-of-completion method (determined based on costs incurred). Revenue, costs, and profits on time-and-material contracts are recorded based upon direct labor hours at fixed hourly rates and cost of materials as incurred. Revenue and profits on fixed price contracts are recognized on the percentage-of-completion method based on percentage of work completed to date compared to the estimate of total work at completion. Certain contracts provide for rights of audit of costs by the customer. Esti mated inputs of pending audits are included in the estimates of contract revenue and related fees. When the current estimates of total contract revenue and contract cost indicate a loss, a provision for the entire loss on the contract is recorded. Revisions to contract estimates are recorded as the estimating factors are refined. The effect of these revisions is included in income in the period the revisions are identified.

(E) Cash and Cash Equivalents - The Company considers all highly liquid debt instruments with a stated maturity at the date of purchase of three months or less to be cash equivalents. Cash equivalents consist primarily of money market instruments, investment grade commercial paper and US Government securities. The carrying amounts reported in the balance sheet are stated at cost, which approximates fair value.

(F) Securities Available-for-Sale - The Company includes all debt instruments purchased with a maturity of more than three months at the date of purchase as securities available-for-sale. Securities available-for-sale consist primarily of US Government securities, investment grade commercial paper and equities and are valued based upon market quotes.

Company management determines the appropriate classification of debt and equity securities at the time of purchase and reevaluates such designation as of each balance sheet date. All of the Company's investments are classified as available-for-sale as of the balance sheet date and are reported at fair value, with unrealized gains and losses excluded from earnings and presented as accumulated other comprehensive income or loss, net of related deferred income taxes. Net realized investment gains (losses) are accounted for by identifying the cost and calculating the gain or loss of each specific security sold.

The Company continually monitors its investment portfolio for other than temporary impairment of securities. When an other than temporary decline in the value below cost or amortized cost is identified, the investment is reduced to its fair value, which becomes the new cost basis of the investment. The amount of reduction is reported as a realized loss in the Consolidated Statements of Income. Any recovery of value in excess of the investment's new cost basis is recognized as a realized gain only on sale, maturity or other disposition of the investment.

Factors that the Company evaluates in determining the existence of an other than temporary decline in value include (1) the length of time and extent to which the fair value has been less than cost or carrying value, (2) the circumstances contributing to the decline in fair value (including a change in interest rates or spreads to benchmarks), (3) recent performance of the security, (4) the financial strength of the issuer, and (5) the intent and ability of the Company to retain the investment for a period of time sufficient to allow for anticipated recovery. Additionally, for asset-backed securities, the Company considers the security rating and the amount of credit support available for the security.

(G) Accounts Receivable and Costs in Excess of Billings - Accounts receivable represents primarily Government and to a lessor extent commercial receivables, net of allowances for doubtful accounts. The allowance for doubtful accounts reflects our best estimate of probable losses inherent in the accounts receivable balance. We determine the allowance based historical customer experience and other currently available evidence. When a specific account is deemed uncollectible, the account is written off against the allowance.

Costs in excess of billings on incomplete contracts represent recoverable costs and, where applicable, accrued profit related to government longer-term contracts on which revenue has been recognized, but for which the customer has not yet been billed (unbilled receivables).

(H) Inventory - Inventories, consisting of materials and supplies, are valued at the lower of cost (principally average) or market. The Company has many available sources of supply for its commonly used materials.

(I) Property, Plant and Equipment - Property, plant and equipment is carried at cost, net of accumulated depreciation. The Company capitalizes certain major overhaul activities when such activities are determined to increase the useful life or operating capacity of the asset. Depreciation and amortization are determined on the straight-line method based upon estimated useful lives (5-31 years) or lease periods.

(J) Long-lived Assets - The Company's policy is to recognize impairment losses relating to long-lived assets in accordance with Financial Accounting Standards Board No.144, "Accounting for the Impairment or Disposal of Long-Lived Assets" based on several factors, including, but not limited to, management's plans for future operations, recent operating results and projected cash flows. To date no such impairment has been indicated.

(K) Income Taxes - Income taxes are accounted for using the liability method in accordance with SFAS 109, "Accounting for Income Taxes." The provision for income taxes has two components, amounts currently payable or receivable and deferred amounts. Deferred income taxes are recognized for temporary differences - the differences between the GAAP financial statement carrying amounts of assets and liabilities and those required for use in the tax return. The tax effect of these temporary differences are reported as deferred income tax assets and liabilities on the balance sheet, measured using enacted laws and income tax rates that are currently in effect. A valuation allowance is recorded to reduce deferred tax assets when realization of the tax benefit is uncertain.

(L) Environmental Remediation, Bodily Injury, Other Reserves, and Insurance Receivable - The Company accounts for environmental remediation liabilities in accordance with Statement of Position 96-1, "Environmental Remediation Liabilities," which provides the accounting and reporting standards for the recognition and disclosure of environmental remediation liabilities.

For current operating activities, costs of complying with environmental regulations are immaterial and expensed as incurred. Environmental costs are capitalized if the costs extend the life of the property and/or increase its capacity.

For matters associated with past practices and closed operations, accruals for environmental matters are recorded when it is probable that a liability has been incurred and the amount of the liability can be reasonably estimated, based upon the projected scope of the remediation, current law and existing technologies. These accruals are adjusted periodically as assessments and remediation efforts progress, or as additional technical or legal information becomes available. As applicable, accruals include the Company's share of the following costs: engineering costs to determine the scope of the work and the remediation plan, testing costs, project management costs, removal of contaminated material, disposal of contaminated material, treatment of contaminated material, capping of affected areas and long term monitoring costs.

Accruals for environmental liabilities are not discounted and exclude legal costs to defend against claims of other parties. Insurance or other third party recoveries for environmental liabilities are recorded separately at undiscounted amounts in the financial statements as insurance receivables when it is probable that a claim will be realized.

The Company accounts for bodily injury liabilities and other reserves in accordance with Financial Accounting Standards Board No.5, "Accounting for Contingencies." Accruals for bodily injury liabilities are recorded when it is probable that a liability has been incurred and the amount of the liability can be reasonably estimated based on the known facts. Civil actions relating to toxic substances vary according to the case's fact patterns, jurisdiction and other factors. Accordingly, any potential expenses for claims that may be filed in the future related to alleged damages from past exposure to toxic substances are not estimable and as such are not included in the Company's reserves.

Accruals for bodily injury liabilities are adjusted periodically as new information becomes available. Such accruals are included in the environmental and other reserves at undiscounted amounts and exclude legal costs to defend against claims of other parties. Insurance or other third party recoveries for bodily injury liabilities are recorded undiscounted in the financials statements as insurance receivables when it is probable that a claim will be realized.

(M) Stock Based Compensation - Beginning in fiscal year 2003, the Company elected to apply the expense recognition provisions of FAS No. 123. The recognition provisions are applied to stock option grants awarded subsequent to March 31, 2002. The Company has adopted FAS No. 123 as it is designated as the preferred method of accounting for stock-based compensation.

Previously, the Company had applied the disclosure only provisions of FAS No. 123 and accounted for stock-based compensation using the intrinsic value method prescribed by Accounting Principles Board Opinion No. 25 (APB No. 25), "Accounting for Stock Issued to Employees" and related interpretations. Under APB No. 25, compensation cost for stock options is measured as the excess, if any, of the fair value of the Company's common stock at the date of grant over the stock option price.

If the Company had elected to apply the expense recognition provision of FAS No. 123 to options granted prior to March 31, 2002, then the Company's net income would have been adjusted as follows (the estimated fair value of the options is amortized to expense on a straight-line basis over the options' vesting period):