EDO CORP - 10-K Annual Report

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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

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FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE FISCAL YEAR ENDED DECEMBER 31, 2002
COMMISSION FILE NUMBER 1-3985

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

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

60 EAST 42ND STREET, SUITE 5010, 10165
NEW YORK, NEW YORK (Zip Code)
(Address of principal executive offices)

(212) 716-2000
(Telephone No.)

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

Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]

Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of the 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 Rule 12b-2 of the Securities Exchange Act of 1934). Yes [X] No [
]

State the aggregate market value of the voting stock held by non-affiliates
of the Registrant as of June 28, 2002...............................$414,963,677

Indicate the number of shares outstanding of each of the Registrant's
classes of common stock as of February 27, 2003.......................19,709,704

DOCUMENTS INCORPORATED BY REFERENCE

Certain portions of the Registrant's definitive proxy statement (to be
filed pursuant to Reg. 14A) relating to the Annual Meeting of Shareholders
anticipated to be held on April 22, 2003 are incorporated herein by reference in
Part III of this Report.

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EDO CORPORATION

TABLE OF CONTENTS

PART I
ITEM 1 BUSINESS.................................................... 1
DEFENSE..................................................... 2
Electronic Warfare........................................ 2
Reconnaissance and Surveillance Systems................... 3
Aircraft Weapons Suspension and Release Systems........... 3
Airborne Mine Countermeasures Systems..................... 4
Integrated Combat Systems................................. 4
Undersea Systems.......................................... 4
Professional and Engineering Services..................... 5
COMMUNICATIONS AND SPACE PRODUCTS........................... 5
Antenna Products.......................................... 5
Communications and Countermeasures Products............... 6
Space Products............................................ 6
ENGINEERED MATERIALS........................................ 6
Electro-Ceramic Products.................................. 6
Advanced Fiber Composite Structural Products.............. 7
DISCONTINUED OPERATIONS..................................... 7
RESEARCH AND DEVELOPMENT.................................... 7
MARKETING AND INTERNATIONAL SALES........................... 8
BACKLOG..................................................... 8
GOVERNMENT CONTRACTS........................................ 9
COMPETITION AND OTHER FACTORS............................... 9
ENVIRONMENTAL............................................... 9
EMPLOYEES................................................... 10
ITEM 2 PROPERTIES.................................................. 10
ITEM 3 LEGAL PROCEEDINGS........................................... 10
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS......... 11
PART II
ITEM 5 MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS......................................... 11
ITEM 6 SELECTED FINANCIAL DATA..................................... 11
ITEM 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS................................... 14
ITEM 7A QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK... 14
ITEM 8 FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA................. 27
ITEM 9 CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE.................................... 61

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PART III
ITEM 10 DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.............................. 61
ITEM 11 EXECUTIVE COMPENSATION.......................................................... 62
ITEM 12 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
STOCKHOLDER MATTERS............................................................. 62
ITEM 13 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.................................. 62
ITEM 14 CONTROLS AND PROCEDURES......................................................... 62
PART IV
ITEM 15 EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K................ 62
(a) Financial Statements and Financial Statement Schedules and Exhibits......... 62
1. Financial Statements.................................................... 62
2. Financial Statement Schedules........................................... 63
3. Exhibits................................................................ 64
(b) Reports on Form 8-K......................................................... 66
CERTIFICATIONS OF THE CHIEF EXECUTIVE OFFICER............................................................... 67
CERTIFICATIONS OF THE CHIEF FINANCIAL OFFICER............................................................... 68
SIGNATURES.................................................................................................. 69

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PART I

ITEM 1. BUSINESS

In this Annual Report on Form 10-K (Report), the term "Registrant" refers
to EDO Corporation. The terms "EDO", "we", "us", "our" and "Company" as used in
this Report, also refer to EDO Corporation and its subsidiaries, except where
the context otherwise requires.

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

We are a leading supplier of sophisticated, highly engineered products and
systems for defense, aerospace and industrial applications. We believe our
advanced electronic, electromechanical systems, information systems and
engineered materials are mission-critical, standard equipment on a wide range of
military programs. In 2002, sales of defense-related products and services to
the U.S. Government, including sales to prime contractors were 75% of total
sales.

Our Internet address is www.edocorp.com. We make available free of charge,
on or through the investor relations section of our web site, annual reports on
Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K and
amendments to those reports filed or furnished pursuant to Section 13(a) or
15(d) of the Securities Exchange Act of 1934 as soon as reasonably practicable
after we electronically file such material with, or furnish it to, the
Securities and Exchange Commission.

ACQUISITIONS

On April 28, 2000, we completed the merger of our wholly-owned subsidiary
with AIL Technologies, Inc. (AIL). In the transaction, each share of AIL common
stock was exchanged for 1.3296 EDO common shares (equivalent to 6,553,194 EDO
common shares valued at $39.4 million). In addition, AIL stockholders received a
cash payment of $13.3 million. The merged company also assumed AIL debt of $29.7
million. AIL became our wholly-owned subsidiary effective upon the merger, and
the transaction has been accounted for as a tax-free reorganization.

In October 2001, we acquired Dynamic Systems, Inc., a privately-held
company based in Alexandria, Virginia. Dynamic Systems, Inc. provides
professional and information technology services primarily to the U.S.
Department of Defense (DoD) and other government agencies.

On July 26, 2002, we acquired substantially all of the assets of Condor
Systems, Inc., a privately-held defense electronics company and its subsidiary
(together, "Condor") based in Morgan Hill and Simi Valley, California for $61.9
million in cash (excluding transaction costs of $4.1 million) and the assumption
of certain normal employee benefit obligations, certain trade and supplier
payables and certain other accrued liabilities, primarily related to contract
loss reserves. We also assumed $28.0 million in outstanding standby letters of
credit. Condor had been operating under the protection of Chapter 11 of the U.S.
Bankruptcy Code. We expect the acquisition of Condor's business to expand our
electronic warfare business in the areas of reconnaissance and surveillance
systems as well as our communications and countermeasures business.

In February 2003, we acquired all of the stock of Advanced Engineering &
Research Associates, Inc. (AERA), a privately-held company located in
Alexandria, Virginia, which provides professional and information technology
services primarily to the U.S. DoD and other government agencies. The
acquisition is expected to strengthen and expand the range of such services the
Company offers. The preliminary purchase price was $38.0 million and is subject
to adjustment based on changes in AERA's balance sheet as of the closing date.
The acquisition will be accounted for as a purchase, and the operating results
of AERA will be included in our consolidated financial statements from the date
of the acquisition.

In March 2003, we acquired all of the stock of Darlington, Inc., a
privately-held defense communications company based in Alexandria, Virginia,
which designs, manufactures and supports military communications equipment and
information networking systems. The acquisition is expected to enhance our
existing positions on long-range platforms and programs across the U.S. military
services and in particular the U.S. Marine

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Corps. The preliminary purchase price was $28.5 million and is subject to
adjustment based on changes in Darlington's balance sheet as of the closing
date. The acquisition will be accounted for as a purchase, and the operating
results of Darlington will be included in our consolidated financial statements
from the date of the acquisition.

In addition we have completed four other acquisitions since 1998 which have
been disclosed in our prior Annual Reports on Form 10-K.

SEGMENTS

We have three reporting segments: Defense, Communications and Space
Products, and Engineered Materials. Our Defense segment provides integrated
front-line warfighting systems and components including electronic warfare
systems, reconnaissance and surveillance systems, aircraft weapons suspension
and release systems, airborne mine countermeasures systems, integrated combat
systems, command, control and communications systems, undersea systems and
professional, operational, technical and information technology services for
military forces and governments worldwide. Our Communications and Space Products
segment supplies antenna products and ultra-miniature electronics and systems
for the remote sensing, communications and electronic warfare industries. Our
Engineered Materials segment supplies piezo-electric ceramic products for
commercial and military markets and advanced fiber composite structural products
for the aircraft, communication, navigation, chemical, petrochemical, paper and
oil industries.

We set forth certain business segment information in Note 19 on pages 55
through 58 of this Report.

A description of our principal products within the three segments is set
forth below.

DEFENSE

Our Defense segment designs, develops and manufactures sophisticated
electronic, mechanical, electro-mechanical, structural, pneumatic, hydrodynamic
and aerodynamic systems for military use. Additionally, we provide logistics
support for such products, including spare parts and repairs, hardware and
software upgrades and modifications, training and technical services. The
revenue from these support functions is a significant portion of our total
sales.

Our Defense segment, which accounted for 74% of consolidated net sales in
2002, 71% in 2001 and 69% in 2000, includes electronic warfare systems,
reconnaissance and surveillance systems, aircraft weapons suspension and release
systems, airborne mine countermeasures systems, integrated combat systems,
command, control and communications systems, undersea warfare sonar systems and
professional and engineering services.

ELECTRONIC WARFARE

Our electronic warfare products include defensive electronic countermeasure
systems for the U.S. Air Force and tactical support jamming exciter subsystems
for the U.S. Navy. Electronic warfare products also include airborne, battle
field and ground surveillance radars and monolithic microwave integrated circuit
(MMIC) receiver downconverters for the airborne and shipboard electronic support
measures market.

Our AN/ALQ-161 is the defensive avionics system that protects the U.S. Air
Force B-1B bomber from radar guided and infrared guided missile threats.
Designed in the early 1980's specifically for the B-1B aircraft, we delivered
the AN/ALQ-161 system and spares to all 100 aircraft in the B-1B fleet.
Currently we provide logistic support and capability upgrades to the AN/ALQ-161
systems, including software upgrades that have occurred every 12-24 months, as
well as hardware improvements to address both situation awareness and jamming
effectiveness. The U.S. DoD currently expects B-1B aircraft to be in operation
through 2040.

We were the original designer and integrator of the AN/ALQ-99 Tactical
Support Jamming System for the EA-6B aircraft in the 1960s. We have been under
contract for support and modifications for this aircraft's systems and
subsystems since then. We are currently under contract with the U.S. Navy to
upgrade the

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Universal Exciter on the EA-6B aircraft. The Universal Exciter is the
electronics unit in the AN/ALQ-99 support jamming subsystem that provides the
specific electronic jamming technique waveforms and modulations that defeat
enemy air defense systems. In the 1980s, we produced and delivered 579 Universal
Exciters to the U.S. Navy. Under the current upgrade program, we retrofit these
units with modifications that improve reliability and maintainability, extend
frequency range and provide advanced jamming techniques. The period of
performance of the production contract is through August 2003. The U.S. DoD
currently expects EA-6B aircraft to be in operation through 2015.

Net sales of electronic warfare products represented 23% of consolidated
net sales in 2002, 24% in 2001 and 23% in 2000.

RECONNAISSANCE AND SURVEILLANCE SYSTEMS

Our reconnaissance and surveillance systems, acquired from Condor Systems,
Inc. in July 2002, include the AN/USQ-149 Radar Narrow Band (RNB) Subsystem, the
AN/ALR-95 automatic Electronic Support Measures (ESM) system and variants of the
CS-3701 ESM system which intercept, analyze and identify radar emissions and
provide situational awareness to military personnel.

The U.S. Navy's AN/BLQ-10 Sea Sentry multi-channel Electronic Intelligence
(ELINT) system is used aboard Virginia class submarines to provide improved
intelligence collection and analysis capabilities. The AN/USQ-149 RNB Subsystem
is part of the AN/BLQ-10 and is also used on airborne platforms. In 2002, we
received an award from Lockheed Martin for three RNB systems plus spares. We
received an additional contract in 2002 from the U.S. Navy for a submarine
carry-on version of this system, potentially worth approximately $50 million in
revenue over five years, and we received orders for more than $25 million for
seventeen systems plus spares.

Developed under the Antisurface Warfare Improvement Program (AIP), our
AN/ALR-95 automatic ESM system provides threat warning and situational
awareness, including signal exploitation through Specific Emitter Identification
(SEI) technology, aboard U.S. Navy P-3 aircraft. The system is a hybrid ESM that
combines a wide bandwidth (WB) high probability of intercept subsystem with a
narrowband (NB) subsystem for manual analysis. We received awards from Lockheed
Martin and the U.S. Navy totaling more than $8 million in 2002 for continued
improvements to the system and for the production of eight additional AN/ALR-95
systems.

The CS-3701 is a combined precision ESM system and radar warning receiver
(RWR) system developed to provide an improved performance replacement for all of
the lower performance, simple design amplitude monopulse systems currently used
on ships and submarines. Unlike amplitude monopulse systems, the CS-3701 ESM
system provides all of the capabilities required of a modern ESM system for
operation in today's difficult electromagnetic environment against complex radar
threats. It uses the latest phase measurement technology for high-precision,
monopulse direction-finding, combined with a patented "autohet" receiver to
achieve 100% probability of intercept. This system is currently in production
and use with several international navies. In 2002, we delivered nine CS-3701
systems.

AIRCRAFT WEAPONS SUSPENSION AND RELEASE SYSTEMS

Over the last two decades, we have developed and manufactured bomb release
units (BRU) for the F-15 aircraft, ejection release units (ERU) for the Tornado
Multi-Role Combat Aircraft, jettison release mechanisms for the F-14 aircraft,
pneumatic missile eject launchers for the F-22, and smart weapon multiple
carriage systems for the F-16 and F-18. In 2002:

- we continued production of F-15 BRUs for the U.S. Air Force and
international customers and provided spare parts support for Tornado
ERUs.

- we continued production of the Advanced Medium Range Air to Air Missile
launcher for the F-22 aircraft and we are now under contract to support
long term depot services for this equipment.

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- we continued the development and test of the pneumatic suspension and
release equipment system for the F-35 Joint Strike Fighter program.

- we continued the design of a demonstration carriage system for Lockheed
Martin Missiles and Fire Control as part of the small diameter bomb
development program.

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

Net sales of aircraft weapons suspension and release systems represented
13% of consolidated net sales in 2002, 13% in 2001 and 13% in 2000.

AIRBORNE MINE COUNTERMEASURES SYSTEMS

We believe we are the only manufacturer of airborne naval minesweeping
equipment in the world. The principal system of this type used by the U.S. Navy,
the MK-105 helicopter towed system, was designed and developed by us starting in
1967. In the early 1990s, we developed a significant upgrade under contract,
followed by an initial production contract in 1996. We continue to provide
spares and logistics support for these systems to the U.S. Navy and an
international customer, and we continue to function as the U.S. Navy maintenance
depot for the MK-105 systems.

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

Net sales of airborne mine countermeasures systems represented 5% of
consolidated net sales in 2002, 8% in 2001 and 11% in 2000.

INTEGRATED COMBAT SYSTEMS

We act as a systems integrator for naval C(4)I systems. In this role, we
integrate all of a ship's sensor systems, including radar and sonar,
communications systems, navigation and integrated bridge systems, and aircraft
control systems to provide situational awareness in a common data and display
format for a ship's commander. Integration contracts typically provide for the
development of integration software that allows the various subsystems to
intercommunicate and produce common information displays. In 1998, we began
integration of a combat system for the upgrade of a major class of ship for the
Norwegian Coast Guard. The integrated system includes radars, sonars, internal
and external communications and navigation subsystems, fire control subsystems,
helicopter control subsystems, display equipment and integration software to
produce common tactical displays. This program is expected to be completed in
2003.

Command, control and communications systems include integrated command
systems, tactical data links, display consoles and communication control and
monitoring systems for domestic and international customers. In 2002, work
continued on NATO Ship-Shore-Ship Buffer systems deliverable to several
international customers.

UNDERSEA SYSTEMS

We have been a supplier of undersea systems including sonar sensors,
underwater communication systems, and depth sounding and speed measuring
equipment for over 40 years. During 2002, work continued on a contract for the
Brazilian Navy to deliver a major upgrade to the EDO Model 610E sonar system.
Deliveries under this contract are expected to continue into 2003. In addition
to the upgrade, we delivered a new Model 610E sonar system for the Brazilian
Navy's new Corvette class ship. Work continued in 2002 on a contract awarded in
2000 by a new international customer to deliver the recently developed EDO Model
980 sonar system for installation in a new class of naval ship under
construction by the customer. Development and delivery of the systems will
extend into 2006. Work continued in 2002 on a contract awarded in 2000 by the

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Naval Undersea Warfare Center to develop and produce a new depth sounding
system, AN/BQN-17, for U.S. Navy attack submarines. Deliveries of thirty
AN/BQN-17 units will continue into 2003. In 2002, we were awarded a contract as
part of a team headed by Ultra Electronics, the UK-based aerospace and defense
electronics group, to provide bow-mounted Medium Frequency Sonar -- 7000
(MFS-7000) systems to the United Kingdom's Type 45 naval destroyer program. Our
contract, valued at approximately $11 million, will provide systems for six
ships. EDO Combat Systems in Chesapeake, VA will develop the systems and
transfer the technology to Ultra Electronics for final assembly integration in
the UK. EDO Electro-Ceramic Products in Salt Lake City, UT will provide ceramic
and transducer elements. Deliveries under the contract will extend through 2006.

PROFESSIONAL AND ENGINEERING SERVICES

We are a supplier of professional services consisting of information
technology, engineering, analytical, operation and program management services
along with electronic warfare test and evaluation equipment to the U.S. defense
and Federal services and information technology markets.

In 2002, we were awarded follow-on orders for core services contracts in
this business area that include: the Naval Sea Systems Command, the U.S. Marine
Corps Warfighting Lab, the Strategic Sourcing Initiatives of the Chief of Naval
Operations Office for Ashore Readiness, and the Acquisition Center for
Excellence of the Acquisition Reform Office in the Office of the Assistant
Secretary of the Navy for Research, Development and Acquisition.

In 2002, we continued to perform services under contracts for design,
planning, execution, analysis and reporting for the AN/ALQ-161A preprocessor
flight software for Warner Robins Air Logistics Center, navy threat validation
support for China Lake Naval Air Warfare Center, and technical and engineering
support to various Boeing Satellite Systems programs.

We designed and produced a line of electronic test equipment for electronic
warfare testing, data acquisition, and radar simulation. In 2002, we continued
to receive orders for our AN/PLM-4 Radar Signal Simulators from the U.S. Air
Force and international customers.

Net sales of professional and engineering services represented 18% of
consolidated net sales in 2002, 16% in 2001 and 13% in 2000.

COMMUNICATIONS AND SPACE PRODUCTS

Our Communications and Space Products segment, which accounted for 14% of
consolidated net sales in 2002, 15% in 2001 and 14% in 2000, includes antenna
products, communications products and space sensor products.

ANTENNA PRODUCTS

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

We have a broad customer and product base in this business. In 2002, we
sold more than 50,000 antennas of 200 different types to more than 350 different
original equipment manufacturers and after-market customers. A large portion of
our revenue results from spare part sales and repair services for an installed
base of antennas in excess of 500,000 units.

In 2002, we made substantial progress toward developing new antenna
products via internally funded and customer sponsored research and development.
During this period, we entered into major contracts for

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development of low observable, anti-jam global positioning satellite (GPS) and
extremely wide bandwidth electronic warfare and communication antenna systems.

COMMUNICATIONS AND COUNTERMEASURES PRODUCTS

We design and manufacture interference cancellation and mitigation systems
as well as a secure voice system for a variety of platforms. Both domestic and
international customers use these products to enhance or protect the
communications of their air, land, and sea forces from unintentional radio
interference. This technology can also be applied to defend certain navigation
systems from intentional interference or jamming. We also design and manufacture
countermeasures systems to defend troops and high value assets from proximity
fused munitions. This same jamming technology can be used against several new or
existing communications media. This capability is being exploited for
counter-terrorism and homeland defense purposes.

SPACE PRODUCTS

We manufacture a wide array of products for space payloads that meet the
high reliability standards required by the industry, including components,
subassemblies and major subsystems that are sold directly to the government for
military and civil systems, or to prime contractors for both government and
commercial applications. Our sensors and subsystems include larger subsystems,
up to full satellite payloads, for remote sensing instruments employing
microwave measurements of the earth and its atmosphere, and classified
government programs. Our commercial communication products include a line of
OC-192 compatible microwave devices for the ultra long-haul fiber optic market.
Our space products include numerous high-performance microwave subsystems for
both civil and commercial communication satellite systems, including the Fixed
Satellite Service market. We also participate in multiple aspects of the overall
NASA communications network linking the space shuttle and geo-synchronous and
low earth orbit satellites with ground stations.

ENGINEERED MATERIALS

Our Engineered Materials segment, which accounted for 12% of consolidated
net sales in 2002, 14% in 2001 and 17% in 2000, includes electro-ceramic
products and advanced fiber composite structural products.

ELECTRO-CERAMIC PRODUCTS

Piezoelectric ceramic elements convert acoustic energy to electrical energy
and vice versa, and form the basis of many defense and commercial products
ranging from military sonars to ink jet printers. We are one of North America's
leading manufacturers of piezoelectric ceramic components for defense
applications and we also provide material and related transducers to several
commercial markets. While more than 50% of our piezoelectric ceramic sales are
for defense applications, we are increasing our efforts to expand our industrial
business, while maintaining our position in the defense market.

Our business is vertically integrated with in-house manufacturing and
development of piezoelectric, dielectric and ferrite ceramic materials, coupled
with state-of-practice mixed analog and digital electronics and software
engineering. We believe this combination of engineered active materials and
electronics capabilities makes us competitive in several niche markets.

Examples of our products include underwater acoustic transducers for use in
all areas of undersea warfare, piezoelectric shapes for a variety of industries,
as well as microwave ceramics for the wireless communication industry.

Work continued in 2002 on a contract awarded from the U.S. Navy in 1999 for
development and production of a new underwater communications transducer, called
the TR232. Deliveries under this contract are expected to extend into 2004.
Additionally, we were awarded a contract by the U.S. Navy for initial production
of hydrophone stave assemblies used in the Wide Aperture Array sonar systems
installed in Los Angeles and Seawolf class attack submarines. Initial deliveries
under this contract commenced in 2001 and extend through 2004.

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Additionally in 2002 we were awarded a contract to provide AN/SQS-53 C
sonar arrays to the Naval Sea Systems Command for use by U.S. Navy warships,
including the Arleigh Burke class guided missile destroyers. Our initial
contract is valued at approximately $6.3 million. The SQS-53C sonar array is
part of the AN/SQQ-89 undersea warfare combat system. We will provide the
complete sonar array including piezoelectric ceramic materials, transducers,
array frames and associated cable assemblies. Our high power transducers form
the key active sensor used to detect, classify and localize underwater threats
to U.S. naval forces. Initial deliveries are scheduled into 2005. If all options
are exercised, deliveries will extend to approximately 2010.

ADVANCED FIBER COMPOSITE STRUCTURAL PRODUCTS

Our fiber-reinforced advanced structural product capabilities include
design, development, qualification, production and after-market support. Our
primary focus includes commercial and military aviation, defense systems,
specialty medical products and offshore oil-drilling markets. We remain the
exclusive supplier of vacuum waste tanks for all of Boeing Seattle's commercial
aircraft. In 2002, we successfully transitioned medical tanks, which are part of
portable dialysis filtration systems, from design and development to a
production product.

In 2002, we received contracts from Sikorsky Helicopter to produce
composite structures for the new Comanche helicopter. Also in 2002, we completed
the fabrication and installation of topside piping systems for one Korean and
one Malaysian offshore oil platform. Production contracts for composite piping
on three large Gulf of Mexico deep-water oil platforms also started in 2002.

DISCONTINUED OPERATIONS

In January 2000, we sold our satellite orientation sensor products
business, Barnes Engineering Company. See Note 3 on pages 41 and 42 of this
Report.

RESEARCH AND DEVELOPMENT

Research and development, performed under development contracts with
customers and at our own expense, is an important element to the success of our
business. Research and development programs are intended to develop new products
and assess their market potential, and to extend the capability of existing
products. Our research and development efforts involve about 139 employees in
the fields of communications and space, antennas, electronic warfare, combat
systems, and acoustic, electronic, hydrodynamic, aerodynamic, structural and
material engineering.

Customer-sponsored research and development programs are principally
related to military programs. Major customer-sponsored research and development
programs include: improvements to the MK-105 mine countermeasures system;
development of OASIS; development of new aircraft weapons carriage technology;
development in combat systems integration including command and control software
development; development of a new shallow-water sonar; development of low
observable anti-jam GPS antennas; and development of new underwater
communications transducer products.

Expenditures under development contracts with customers vary in amount from
year to year because of the timing of contract funding and other factors.

Principal current company-funded research and development includes: digital
signal processing technology suitable for improved performance and functionality
for ELINT and ESM systems; image and signal processing and other improvements
for combat systems; improvements to minesweeping technology; new techniques for
aircraft weapons carriage systems; application of composites for structural
uses; development of communication equipment, including fiber optic equipment;
electronic countermeasures and low observable and advanced antennas, including
anti-jam GPS variants; improvements to sonar systems, including processing and
detection enhancements; improvements for noise reduction and interference
cancellation; modifications to our base of combat systems software products to
allow seamless migration of these products to the

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latest generation of computer hardware architectures; development of new
piezoelectric and composite materials; and development of new capabilities for
our Field Test Simulator product to increase the functionality and flexibility
of operation.

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

MARKETING AND INTERNATIONAL SALES

Sales of our defense products to both the U.S. and foreign governments are
usually made under negotiated long-term contracts or subcontracts covering one
or more years of production. We believe that our long history of association
with our military customers is an important factor in our overall business, and
that the experience gained through this history has enhanced our ability to
anticipate our customers' needs. Our approach to our defense business is to
anticipate specific customer needs and to develop systems to meet those needs
either at our own expense or pursuant to research and development contracts.
Many of our employees, including our Chief Executive Officer and our Vice
President -- Washington Operations, are actively involved in the marketing of
our defense products in the U.S. and abroad. We also have about 50 international
sales representatives concentrating on the marketing of our defense products in
foreign countries.

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

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

It is generally our policy to denominate all foreign contracts in U.S.
dollars and seek not to incur significant costs in connection with long-term
foreign contracts until we have received advance payments or letters of credit
on amounts due under the contracts.

Export sales comprised 15% of consolidated net sales in 2002, 15% in 2001
and 18% in 2000.

BACKLOG

We define backlog as the funded value of contract awards and orders
received from customers, which have not been recognized as sales. Backlog does
not include contract awards received from the U.S. Government for which the U.S.
Government has not appropriated funds, nor does it include unexercised options
in any contract. A significant portion of our sales is to prime contractors, the
U.S. DoD and foreign governments pursuant to long-term contracts. Accordingly,
our backlog consists in large part of orders under these contracts. As of
December 31, 2002 our total backlog was about $375.0 million as compared with
$294.8 million as of December 31, 2001. Approximately 71% of the total backlog
at December 31, 2002 is scheduled for delivery in 2003. Our backlog consists
primarily of current orders under long-lived, mission-critical programs of key
defense platforms on which we have a strong strategic position.

8

GOVERNMENT CONTRACTS

Net sales to the U.S. Government, as a prime contractor and through
subcontracts with other prime contractors, accounted for 75% of our 2002
consolidated net sales compared with 69% in 2001 and 63% in 2000, and consisted
primarily of sales to the U.S. DoD. Such sales do not include sales of military
equipment to the U.S. Government for resale to foreign governments under the
Foreign Military Sales program.

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

Our contracts with the U.S. DoD consist of fixed-price contracts,
cost-reimbursable contracts and incentive contracts of both types. Fixed-price
contracts provide fixed compensation for specified work. Cost-reimbursable
contracts require us to perform specified work in return for reimbursement of
costs (to the extent allowable under U.S. government regulations) and a
specified fee. In general, while the risk of loss is greater under fixed-price
contracts than under cost-reimbursable contracts, the potential for profit under
such contracts is greater than under cost-reimbursable contracts. Under both
fixed-price incentive contracts and cost-reimbursable incentive contracts, an
incentive adjustment is made in our fee based on attainment of performance,
scheduling, cost, quality or other goals. The distribution of our government
contracts among the categories of contracts referred to above varies from time
to time.

COMPETITION AND OTHER FACTORS

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

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

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

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

ENVIRONMENTAL

Refer to Note 18 on page 55 of this Report for information regarding the
cost of compliance with environmental regulations.

9

EMPLOYEES

As of December 31, 2002, we employed 1,931 persons.

ITEM 2. PROPERTIES

All of our facilities except for the Deer Park, NY facility are leased. We
believe our facilities are adequate for our present purposes. All facilities in
the following listing are suitable for expansion by using available but unused
space, leasing additional available space, or by physical expansion of leased
buildings. However, in light of recent acquisitions, we are reviewing the status
of all of our facilities. We believe that, with respect to leases which expire
during 2003 and 2004, we will be able to either extend the lease or lease other
facilities on reasonable terms. Our obligations under the various leases are set
forth in Note 17 on page 55 of this Report.

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

ITEM 3. LEGAL PROCEEDINGS

The Company and/or its subsidiaries are parties to various legal
proceedings arising in the normal course of business, including various
environmental actions described in Note 18 on page 55 of this Report. While
litigation is subject to inherent uncertainties, management currently believes
that the ultimate outcome of these proceedings, individually and in the
aggregate, will not have a material adverse effect on the Company's consolidated
financial position, cash flow or overall results of operations. The following is
a description of certain proceedings:

U.S. v. EDO Corporation et al.; EDO Corporation et al. v. Elinco Associates
L.P. et al. (United States District Court, District of Connecticut). The Company
and three other companies entered into a consent decree in 1990 with the Federal
government for the remediation of a Superfund site in Norwalk, CT. The Superfund
site has been divided into three operable units. The consent decree relates to
two of the operable

10

units. The third operable unit has not been formally studied and the Company is
unable to determine whether the EPA will address the third operable unit or, if
it does, whether it will conclude that specific remedial response action will be
required for it, and in such event, what the costs, if any, or the Company's
degree of responsibility will be. As of December 31, 2002, the Company estimates
that its discounted liability over the remainder of the twenty-three years
related to the two operable units is approximately $2.3 million. See also Note
18 on page 55 of this Report.

Technip Offshore Inc. v. EDO Fiber Science and EDO Corporation (U.S.
District Court for the Southern District of Texas). Technip Offshore Inc.
(Technip), a U.S. subsidiary of Technip-Coflexip, S.A., a French corporation,
brought a declaratory judgment action seeking a declaration that Technip
Offshore Inc. is the owner of a patent application jointly filed by Technip and
the Company and that Technip has not breached an agreement with the Company by
offering to sell products described in the patent application to certain third
parties. The Company has denied the allegations and filed a counterclaim seeking
damages pursuant to certain agreements between the Company and Technip. Technip
does not seek damages.

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

None.

PART II

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

The information responsive to this item is set forth under the headings
"Common Share Prices" on page 25 and "Dividends" on page 25, together with
dividend information contained in the "Consolidated Statements of Shareholders'
Equity" on pages 29 through 31 and Note 9 on pages 43 and 44 of this Report.

ITEM 6. SELECTED FINANCIAL DATA

SELECTED FINANCIAL DATA

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

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

(a) Reflects $0.2 million and $0.4 million in 2002 for the write-off of
purchased in-process research and development ("IPR&D") and other
merger-related costs, respectively, associated with our acquisition of the
assets of Condor Systems, Inc., as well as a $2.0 million curtailment loss
associated with our defined benefit pension plan; a $0.9 million
post-retirement curtailment gain in 2001; $1.3 million and $11.5 million in
the years 2001 and 2000, respectively, for the write-off of IPR&D (in
2000); and other EDO-AIL merger-related costs (in 2001 and 2000); and $2.2
million in 1998 of litigation settlement income.

(b) Upon adoption of Statement of Financial Accounting Standard No. 142,
"Goodwill and Other Intangible Assets," we recorded a cumulative effect of a
change in accounting principle effective January 1, 2002. See Note 1(g) to
the consolidated financial statements as of and for the year ended December
31, 2002.

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

(d) EBITDAP consists of earnings from continuing operations before interest,
taxes, depreciation, amortization and non-cash pension and non-cash employee
stock ownership plan compensation expense, excluding a defined benefit
pension plan curtailment loss in 2002, a post-retirement curtailment gain in
2001, the write-off of IPR&D in 2002 and 2001, merger-related costs in 2002,
2001 and 2000, and litigation settlement income in 1998. Items excluded from
EBITDAP are significant components in understanding and assessing our
financial performance. EBITDAP is a measure commonly used by financial
analysts and investors to evaluate financial results of companies in our
defense and aerospace industry and, therefore, we believe it provides useful
information to investors. EBITDAP should not be considered in isolation or
as an alternative to net income, cash flows generated by operations,
investing or financing activities, or other financial statement data
presented in the consolidated financial statements as indicators of
financial performance or liquidity. Because EBITDAP is not a measure of
financial

13

performance determined in accordance with accounting principles generally
accepted in the United States and is susceptible to varying calculations
among companies, EBITDAP as presented may not be comparable to similarly
titled measures of other companies.

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

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

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

OVERVIEW

EDO Corporation (the "Company") is a leading supplier of sophisticated,
highly engineered products and systems for defense, aerospace and industrial
applications. We believe our advanced electronic, electromechanical systems,
information systems and engineered materials are mission-critical, standard
equipment on a wide range of military programs. We have three reporting
segments: Defense, Communications and Space Products, and Engineered Materials,
which represented 74%, 14% and 12%, respectively, of our net sales for the year
ended December 31, 2002.

Our Defense segment provides integrated front-line warfighting systems and
components including electronic warfare, radar countermeasures systems,
reconnaissance and surveillance systems, aircraft weapons suspension and release
systems, airborne mine countermeasures systems, integrated combat and sonar
systems, command, control and communications systems and professional,
operational, technical and information technology services for military forces
and governments worldwide. Our Communications and Space Products segment
supplies antenna products and ultra-miniature electronics and systems for the
remote sensing and electronic warfare industries. Our Engineered Materials
segment supplies commercial and military piezo-electric ceramic products and
advanced fiber composite structural products for the aircraft, communication,
navigation, chemical, petrochemical, paper and oil industries.

ACQUISITIONS AND DISPOSITION

On July 26, 2002, we acquired substantially all of the assets of Condor
Systems, Inc., a privately-held defense electronics company and its subsidiary
(together, "Condor") based in Morgan Hill and Simi Valley, California for $61.9
million in cash, in addition to transaction costs of $4.1 million, and the
assumption of certain normal employee benefit obligations, certain trade and
supplier payables and certain other accrued liabilities, primarily related to
contract loss reserves. We also assumed $28.0 million in outstanding standby
letters of credit. Condor had been operating under the protection of Chapter 11
of the U.S. Bankruptcy Code. We expect the acquisition of Condor to expand our
electronic warfare business in the areas of reconnaissance and surveillance
systems and communications and countermeasures systems. Condor became part of
our Defense and Communications and Space Products segments and was accretive to
earnings in 2002.

In October 2001, we acquired Dynamic Systems, Inc., a privately held
company based in Alexandria, Virginia for $13.9 million in cash, including
transaction costs. Dynamic Systems, Inc. became part of our Defense segment and
provides professional and information technology services primarily to the
Department of Defense and other government agencies. For the 12-month period
prior to the acquisition, Dynamic Systems Inc. had revenues of approximately
$15.0 million.

On April 28, 2000, one of our wholly-owned subsidiaries merged with AIL
Technologies Inc. ("AIL"). Under the merger agreement and share purchase
agreements with certain AIL shareholders, all of the outstanding shares of
common stock and preferred stock of AIL were exchanged for 6,553,194 newly
issued EDO common shares valued at $39.4 million and cash payments aggregating
$13.3 million. The merged company assumed AIL debt of $29.7 million. Of the
newly-issued shares, 5,270,540 were held in trust by AIL's Employee Stock
Ownership Plan (the "AIL ESOP"). As of January 1, 2001, the AIL ESOP and the

14

existing EDO Employee Stock Ownership Plan ("EDO ESOP") were merged into a
single plan (the "ESOP"). As of March 8, 2001, the existing preferred shares in
the EDO ESOP were converted into approximately 1,067,281 of our common shares.
In our public offering completed October 30, 2001, the ESOP sold 1,458,900
shares reducing its ownership of EDO to about 23% of outstanding common shares
as of December 31, 2001. As of December 31, 2002, the ESOP owns approximately
22% of outstanding common shares.

Each of the above acquisitions has been accounted for as a purchase
business combination and is included in our results of operations from its
acquisition date. The results of operations for the periods presented are
affected by the timing of these acquisitions.

In January 2000, we sold our satellite orientation sensor products
business, Barnes Engineering Company. Accordingly, our consolidated financial
statements treat the satellite products business as a discontinued operation.
Revenues, costs and expenses, assets and liabilities, and cash flows associated
with the satellite products business have been excluded from the respective
captions in the consolidated financial statements and discussion below.

DISCUSSION OF CRITICAL ACCOUNTING POLICIES

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

REVENUE RECOGNITION

Sales under long-term, fixed-price contracts, including pro-rata profits,
are generally recorded based on the relationship of costs incurred to date to
total projected final costs or, alternatively, as deliveries and other
milestones are achieved or services are provided. These projections are revised
throughout the lives of the contracts. Adjustments to profits resulting from
such revisions are made cumulative to the date of change and may affect current
period earnings.

Our gross profit is affected by a variety of factors, including the mix of
products, systems and services sold, production efficiencies, price competition
and general economic conditions. Estimated losses on long-term contracts are
recorded when identified. Sales under cost reimbursement contracts are recorded
as costs are incurred. Sales on other than long-term contract orders
(principally commercial products) are recorded as shipments are made.

INVENTORIES

Inventories under long-term contracts and programs reflect all accumulated
production costs, including factory overhead, initial tooling and other related
costs (including general and administrative expenses relating to certain of our
defense contracts), less the portion of such costs charged to cost of sales.
Inventory costs in excess of amounts recoverable under contracts and which
relate to a specific technology or application and which may not have
alternative uses are charged to cost of sales when such circumstances are
identified. All other inventories are stated at the lower of cost (principally
first-in, first-out method) or market.

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

Several factors may influence the sale and use of our inventories,
including our decision to exit a product line, technological change, new product
development and/or revised estimates of future product demand. If

15

inventory is determined to be overvalued due to one or more of the above
factors, we would be required to recognize such loss in value at the time of
such determination.

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

PROPERTY, PLANT AND EQUIPMENT AND OTHER LONG-LIVED ASSETS

Property, plant and equipment is recorded at cost and is depreciated on a
straight-line basis over the estimated useful lives of such assets. Leasehold
improvements are amortized over the shorter of their estimated useful lives or
their respective lease periods. In those cases where we determine that the
useful life of property, plant and equipment should be shortened, we would
depreciate the net book value in excess of the salvage value over its revised
remaining useful life thereby increasing depreciation expense. Factors such as
technological advances, changes to our business model, changes in our capital
strategy, changes in the planned use of equipment, fixtures, software or changes
in the planned use of facilities could result in shortened useful lives.

Long-lived assets, other than goodwill, are reviewed by us for impairment
whenever events or changes in circumstances indicate that the carrying amount of
any such asset may not be recoverable. The estimate of cash flow is based upon,
among other things, certain assumptions about expected future operating
performance. Our estimates of undiscounted cash flow may differ from actual cash
flow due to factors such as technological changes, economic conditions, changes
to our business model or changes in our operating performance. If the sum of the
undiscounted cash flows, excluding interest, is less than the carrying value, we
would recognize an impairment loss, measured as the amount by which the carrying
value exceeds the fair value of the asset.

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

PENSION AND POST-RETIREMENT BENEFIT OBLIGATIONS

We sponsor defined benefit pension and other retirement plans in various
forms covering all eligible employees. Several statistical and other factors
which attempt to anticipate future events are used in calculating the expense
and liability related to the plans. These factors include assumptions about the
discount rate, expected return on plan assets and rate of future compensation
increases as determined by us, within certain guidelines and in conjunction with
our actuarial consultants. In addition, our actuarial consultants also use
subjective factors such as withdrawal and mortality rates to estimate the
expense and liability related to these plans. The actuarial assumptions used by
us may differ significantly, either favorably or unfavorably, from actual
results due to changing market and economic conditions, higher or lower
withdrawal rates or longer or shorter life spans of participants.

FINANCIAL HIGHLIGHTS

For 2002, earnings before cumulative effect of a change in accounting
principle available for common shares were $14.0 million or $0.81 per diluted
share. In 2002, we recorded a $3.4 million net of tax charge ($0.20 per diluted
share) to account for the cumulative effect of a change in accounting principle
upon our adoption of SFAS No. 142, "Goodwill and Other Intangible Assets." This
charge occurred in the Engineered Materials segment and is comprised of $2.3
million and $1.9 million of impaired goodwill and trademark, respectively,
offset by a tax benefit of $0.8 million. Including the cumulative effect, net
earnings available for common shares were $10.6 million or $0.61 per diluted
share. The 2002 results include pretax merger-related

16

costs of $0.6 million associated with our acquisition of Condor in July 2002 and
a pretax defined benefit pension plan curtailment loss of $2.0 million.

Net sales for 2002 increased 26.5% to $328.9 million from $260.0 million
for 2001, reflecting five months of Condor's net sales in 2002, as well as
increases in sales of technology services attributable to twelve months of
Dynamic Systems' net sales in 2002 as compared to approximately three months in
2001 due to its acquisition in October 2001. In addition, there were increases
in sales of electronic warfare equipment, aircraft weapons suspension and
release systems, sonar systems, antenna products, electro-ceramic products and
advanced fiber composite structural products, partially offset by a net decrease
in our remaining product lines. Results of the former Condor business were
included from the acquisition date of July 26, 2002 and accounted for
approximately $36.3 million or 11.1% of 2002 net sales.

On April 2, 2002, we completed our offering of $137.8 million of 5.25%
Convertible Subordinated Notes due 2007 (the "Notes") and received $133.7
million, net of commissions paid. On November 8, 2002, we negotiated with a
consortium of banks to increase our credit facility's borrowing capacity from
$69.0 million to $140.0 million and again, on December 20, 2002, from $140.0
million to its current limit of $200.0 million.

On October 30, 2001, we completed a public offering of 3,716,100 shares of
our common stock, resulting in net proceeds to us of approximately $81.5
million. On November 27, 2001, we completed the redemption of all of our
outstanding 7% Convertible Subordinated Debentures due 2011 (the "Debentures").
Debentures with an aggregate outstanding face value of $22.1 million were
converted into 1,005,250 common shares and Debentures with an aggregate face
value of $0.2 million were redeemed for cash plus accrued interest.

RESULTS OF OPERATIONS

COMPARISON OF 2002 TO 2001

Net sales by segment were as follows:

Net sales for the year ended December 31, 2002 increased 26.5% to $328.9
million from $260.0 million of net sales from continuing operations for the year
ended December 31, 2001. This increase comprised sales growth of $60.0 million
for the Defense segment, $7.3 million for the Communications and Space Products
segment and $1.6 million for the Engineered Materials segment.

In the Defense segment, $28.7 million or 47.8% of the net increase was
attributable to five months of sales of Condor since its acquisition on July 26,
2002. Additionally in the Defense segment, there were increases in sales of
technology services attributable to twelve months of Dynamic Systems' net sales
in 2002 as compared to approximately three months in 2001 due to its acquisition
in October 2001, electronic warfare equipment attributable in part to the
Universal Exciter Upgrade program, aircraft weapons suspension and release
systems due in part to efforts on the production phase of the AMRAAM Vertical
Eject Launcher program for the F-22, efforts on the production lots of the
BRU-57 Multiple-Carriage Smart Bomb Rack platform with the U.S. Air Force,
efforts on the Joint Strike Fighter's suspension and release subsystem and
weapons release units programs and development efforts associated with the Small
Diameter Bomb program. There was also an increase in our sales of undersea sonar
systems. These increases in the Defense segment were partially offset most
notably by the decreases in sales of mine countermeasures systems as well as
integrated combat systems,

17

the latter of which was due primarily to the delay in orders anticipated to be
awarded to us in 2002 from international customers.

In the Communications and Space Products segment, $7.6 million of the net
increase in sales was attributable to sales of electronic protection systems
from the aforementioned acquisition of Condor. Additionally, sales increases in
our antenna product line were more than offset by decreases in sales of our
space sensor communication products.

In the Engineered Materials segment, there were increases in sales of
electro-ceramic products, attributable to transducers and sonar arrays, and
advanced fiber composite structural products.

Operating earnings for the year ended December 31, 2002 were $32.0 million
or 9.7% of net sales, before the write-off of $0.2 million of purchased
in-process research and development ("IPR&D") and $0.4 million of other
merger-related costs associated with our acquisition of the assets of Condor, as
well as a $2.0 million defined benefit pension plan curtailment loss. This
compares to operating earnings for the year ended December 31, 2001 of $27.5
million or 10.6% of net sales, before EDO-AIL merger-related costs of $1.3
million and a post-retirement benefits curtailment gain of $0.9 million.
Including the respective aforementioned charges or gain in each year, operating
earnings for the year ended December 31, 2002 were $29.4 million or 8.9% of net
sales compared to $27.1 million or 10.4% of net sales for the year ended
December 31, 2001. The decrease in operating margin for the year ended December
31, 2002 compared to the year ended December 31, 2001 was due primarily to the
recording of $6.0 million of defined benefit pension plan expense, which
includes $2.0 million of a curtailment loss, and ESOP compensation expense of
$4.0 million in 2002 compared to $2.6 million of pension income and $1.8 million
of ESOP compensation expense in 2001. The change to pension expense in 2002 from
pension income in 2001 was due primarily to continued poor performance of plan
assets invested in the stock market and the lowering of the discount rate in
2002 reflecting the general decline in interest rates. Additionally, pension
expense in 2002 included a $2.0 million curtailment loss upon an amendment to
the pension plan whereby benefits accrued were frozen as of December 31, 2002.
The increase in ESOP compensation expense is attributable in part to our higher
average stock price in 2002 compared to 2001. Pension and ESOP compensation
expense or income is allocated between cost of sales and selling, general and
administrative expense.

The Defense segment's operating earnings for the year ended December 31,
2002 were $28.7 million or 11.8% of this segment's net sales compared to
operating earnings for the year ended December 31, 2001 of $21.9 million or
11.9% of this segment's net sales. The increase in operating earnings in the
Defense segment is due primarily to the completion of some MK-105 Mod 4 mine
countermeasures systems in 2002 and final deliveries of Lots 4 and 5 of the
Universal Exciter Upgrade program resulting in additional profit based on final
costs at completion compared to prior estimates. These increases were offset in
part by a decrease in aircraft weapons suspension and release systems resulting
from a shift from primarily production efforts last year to lower-margin
non-recurring development efforts on recently awarded long-term programs. The
Communications and Space Products segment's operating loss for the year ended
December 31, 2002 was $0.4 million or 0.9% of this segment's net sales compared
to a loss of $0.4 million or 1.0% of this segment's net sales in 2001. Included
in the 2002 operating loss was a $1.5 million charge taken in the first quarter
to provide for manufacturing inefficiencies resulting from lowering our
production levels of the Ku-Band down converter. Such production level decrease
was prompted primarily by one of our primary customer's decrease in its
forecasted demand for our Ku-Band down converters. The Engineered Materials
segment's operating earnings for the year ended December 31, 2002 were $3.2
million or 8.3% of this segment's net sales compared to operating earnings for
the year ended December 31, 2001 of $4.6 million or 12.6% of this segment's net
sales. The net decrease in the Engineered Materials segment's operating earnings
was due primarily to the aforementioned pension expense in 2002 compared to
pension income in 2001, as well as a decrease in contribution from fiber
composite waste tanks, due primarily to the commercial aviation industry's
decreased demand for such tanks in 2002.

Selling, general and administrative expenses for the year ended December
31, 2002 increased to $47.6 million or 14.5% of net sales from $34.0 million or
13.1% of net sales for the year ended December 31, 2001. This increase was
primarily attributable to the acquisition of Condor in July 2002, twelve months
of

18

Dynamic Systems' expenses in 2002, and the aforementioned change to pension
expense in 2002 compared to pension income in 2001 and increased ESOP
compensation expense.

Research and development expense for the year ended December 31, 2002
decreased to $8.5 million or 2.6% of net sales from $8.8 million or 3.4% of net
sales for the year ended December 31, 2001. The decrease was primarily
attributable to higher expenditures in the Communications and Space Products
segment in 2001 relating to fiber optics product development.

Interest expense, net of interest income, for the year ended December 31,
2002 increased 123.6% to $5.0 million from $2.2 million for the year ended
December 31, 2001, due primarily to interest expense associated with our $137.8
million principal amount Notes, increased amortization expense of deferred debt
issuance costs associated with the offering of the Notes and increased
amortization of deferred financing costs associated with our credit facility
amended in November 2002, partially offset by an $0.8 million increase in
interest income due primarily to a higher average cash and cash equivalent
balance resulting from our offering of the Notes in April 2002 and stock
offering in 2001. Interest expense for the year ended December 31, 2001
consisted primarily of interest expense on our Debentures, which were fully
converted into common shares or redeemed in the fourth quarter of 2001.

Income tax expense reflects our effective rate of 42.5% for the year ended
December 31, 2002 compared to 38.6% for the year ended December 31, 2001. The
increase in the effective tax rate was principally attributable to the increased
amount of nondeductible, non-cash ESOP compensation expense and increase in
state taxes in 2002.

For the year ended December 31, 2002, earnings available for common shares
before cumulative effect of a change in accounting principle decreased to $14.0
million or $0.81 per diluted common share on 17.4 million diluted shares from
$14.8 million or $1.11 per diluted common share on 14.3 million diluted shares
for the year ended December 31, 2001. For the year ended December 31, 2002, net
earnings available for common shares after the cumulative effect of a change in
accounting principle decreased to $10.6 million or $0.61 per diluted common
share on 17.4 million diluted shares from $14.8 million or $1.11 per diluted
common share on 14.3 million diluted shares for the year ended December 31,
2001. The cumulative effect of a change in accounting principle for the year
ended December 31, 2002 was recorded as of January 1, 2002 and is shown net of a
tax benefit of $0.8 million on the consolidated statement of earnings. This
charge pertained to the impairment of goodwill and a trademark resulting from
impairment tests performed in 2002, as required by SFAS No. 142. The impairment
occurred in the Engineered Materials segment and is comprised of the following:
$2.2 million and $1.9 million of goodwill and a trademark, respectively, related
to our acquisition of Specialty Plastics and $0.1 million of goodwill related to
our acquisition of Zenix.

Dividends on preferred shares for the year ended December 31, 2001 were
$0.2 million. On March 8, 2001, we converted all of our outstanding preferred
shares into 1,067,281 common shares. No preferred dividends were paid after
March 8, 2001.

COMPARISON OF 2001 TO 2000

Net sales by segment were as follows:

Net sales for the year ended December 31, 2001 increased 26.0% to $260.0
million from $206.8 million for the year ended December 31, 2000. This increase
comprised sales growth of $41.5 million for the Defense

19

segment, $10.0 million for the Communications and Space Products segment and
$1.7 million for the Engineered Materials segment. Of this sales growth, $26.9
million in the Defense segment and $10.0 million in the Communications and Space
Products segment was attributable to the EDO-AIL merger. Since the EDO-AIL
merger was completed at the end of April 2000, the twelve months of 2000
reflected eight months of combined operations, while 2001 reflected a full
twelve months of combined operations. In addition, there were increases in sales
of aircraft weapons suspension and release systems, integrated combat systems,
technology services, electroceramic products and advanced fiber composite
structural products for the year ended December 31, 2001 compared to the year
ended December 31, 2000.

Operating earnings from continuing operations for the year ended December
31, 2001 (before considering one-time EDO-AIL merger-related costs of $1.3
million in 2001 and $11.5 million in 2000 and before a post-retirement benefits
curtailment gain of $0.9 million in 2001) increased to $27.5 million or 10.6% of
net sales from $20.7 million or 10.0% of net sales for the year ended December
31, 2000. The increase in operating earnings was attributable to the EDO-AIL
merger as well as earnings from completed mine countermeasures contracts and
increased margins in electro-ceramic products. These increases were partially
offset by losses in the Communications and Space Products segment on development
programs. For the year ended December 31, 2001, net earnings available for
common shares increased to $14.8 million or $1.11 per diluted common share on
14.3 million diluted shares from $0.4 million or $0.05 per diluted common share
on 10.7 million diluted shares for the year ended December 31, 2000.

Selling, general and administrative expenses for the year ended December
31, 2001 increased to $34.0 million or 13.1% of net sales from $29.2 million or
14.1% of net sales for the year ended December 31, 2000. This increase was
primarily attributable to the EDO-AIL merger and increased bid and proposal
costs.

Research and development expense for the year ended December 31, 2001
increased to $8.8 million or 3.4% of net sales from $5.4 million or 2.6% of net
sales for the year ended December 31, 2000. The increase was primarily
attributable to expenditures in the Communications and Space Products segment
relating to fiber optics product development.

Interest expense, net of interest income, for the year ended December 31,
2001 decreased to $2.2 million from $2.4 million for the year ended December 31,
2000.

Income tax expense reflected our effective rate of 38.6% for the year
ending December 31, 2001. This compares to an income tax expense at an effective
rate of 79.9% for the year ended December 31, 2000. The effective tax expense of
79.9% for the year ended December 31, 2000 was principally attributable to a
write-off of $6.7 million of purchased in-process research and development and
other expenses associated with the EDO-AIL merger that were not deductible for
income tax purposes.

Dividends on preferred shares for the year ended December 31, 2001
decreased to $0.2 million from $0.9 million for the year ended December 31,
2000, due to the conversion of all outstanding preferred shares into 1,067,281
common shares on March 8, 2001. No preferred dividends were paid after March 8,
2001.

IN-PROCESS RESEARCH AND DEVELOPMENT

For the year ended December 31, 2002, IPR&D of $0.2 million related to a
Condor project that had not reached technological feasibility and that had no
alternative future uses. The amount allocated to such project was expensed as of
the date of the acquisition.

For the year ended December 31, 2001, IPR&D of $6.7 million related to an
AIL project that had not reached technological feasibility and that had no
alternative future uses. The amount allocated to such project was expensed as of
the date of the EDO-AIL merger. This development project related to a generic
satellite subsystem called a Ku-Ku Band Down Converter for the fixed satellite
service market. The converter represented a single channel providing signal
conversion from uplink frequencies in the 14GHz range to the downlink
frequencies in the 12GHz range. At the time of the EDO-AIL merger, it was
estimated that 90% of the development effort had been completed and the
remaining development effort would take about six months to complete. This
project was completed, resulting in sales of Ku-Ku Band Converters in 2001.
During 2000 and the first six months of 2001, the efforts required to develop
the in-process technology of this project

20

into commercially viable products principally related to the completion of
planning, designing, prototyping and testing functions that were necessary to
establish that the down converter produced would meet its design specifications,
including technical performance features and functional requirements.

LIQUIDITY AND CAPITAL RESOURCES

BALANCE SHEET

Our cash, cash equivalents and marketable securities increased 128.3% to
$132.5 million at December 31, 2002 from $58.0 million at December 31, 2001.
This increase was due primarily to the aforementioned issuance of the Notes in
April 2002, which resulted in gross cash proceeds of $137.8 million before
commissions of $4.1 million, and cash provided by operations of $31.9 million.
The increase in cash and cash equivalents was offset by $59.0 million paid for
the acquisition of Condor in July 2002, net of cash acquired, $4.1 million paid
for transaction costs related to the Condor acquisition, $27.3 million of cash
restricted to collateralize outstanding letters of credit, $7.1 million for the
purchase of capital equipment and $2.4 million for the payment of common share
dividends.

During 2001, cash, cash equivalents and marketable securities increased to
$58.0 million from $16.6 million, primarily due to the receipt of net proceeds
of approximately $81.5 million from the sale of 3,716,100 common shares, $14.1
million provided by operations and $1.9 million from the exercises of stock
options. These increases were partially offset by uses of $13.9 million for the
acquisition of Dynamic Systems, $14.3 million for purchases of capital
equipment, $3.2 million for the repurchase of Debentures, $4.9 million for the
payment in full of the EDO ESOP loan obligation and $2.1 million for payment of
common and preferred dividends.

Restricted cash of $27.3 million at December 31, 2002 represents collateral
backing 105% of outstanding letters of credit assumed in connection with the
acquisition of Condor. As the letters of credit expire or are cancelled, the
collateral will be released. In the fourth quarter of 2002, we increased our
credit facility to $200.0 million, which will allow for issuance of letters of
credit under the amended facility and the release of restricted cash.

Accounts receivable increased 20.6% to $100.6 million at December 31, 2002
from $83.4 million at December 31, 2001 due primarily to the acquisition of
Condor. Excluding the effects of Condor, accounts receivable increased $2.5
million from December 31, 2001.

Inventories increased 41.3% to $32.4 million at December 31, 2002 from
$22.9 million at December 31, 2001 due primarily to the acquisition of Condor.
Excluding the effects of Condor, inventories increased $2.9 million from
December 31, 2001.

The notes receivable of $3.0 million at December 31, 2002 (of which $0.4
million is included in current assets at December 31, 2002) are comprised of a
note related to the sale of property in Deer Park in June 2000, which had a
balance of $1.1 million at December 31, 2002, and $1.9 million in notes related
to the sale of our former College Point facility in January 1996. The Deer Park
facility note is due in monthly installments through July 2015 and bears
interest at a rate of 7.5% per annum. The College Point facility notes are due
in annual amounts through September 2004 with a final payment of $1.3 million
due on December 31, 2004 and bear interest at 7.0% per annum. The latter notes
receivable are secured by a mortgage on the facility.

Contract advances increased 21.4% to $20.3 million at December 31, 2002
from $16.7 million at December 31, 2001 due to receipts of advances by Condor
subsequent to its acquisition date, offset by the use of previously received
advances for costs incurred on foreign contracts.

In 2002, capital expenditures of $7.1 million, excluding the effects of the
Condor acquisition, have decreased from the prior year as we incurred
significant capital expenditures in 2001 at the Deer Park facility in
anticipation of a potential sale leaseback, which did not occur in 2002. We are
currently reviewing the status of Deer Park and all of our facilities in light
of recent acquisitions.

21

FINANCING ACTIVITIES

Credit Facility

At December 31, 2002, we have a $200.0 million credit facility with a
consortium of banks, led by Citibank, N.A. as the administrative agent, Fleet
National Bank as the syndication agent and Wachovia Bank, N.A. as the
documentation agent. The facility expires in November 2005 and amended the $69.0
million credit facility in place at December 31, 2001.

The credit facility provides us with sub-limits of borrowing up to $125.0
million for acquisition-related financing and up to $125.0 million in standby
letters of credit financing. The potential cash borrowing under the facility is
reduced by the amount of outstanding letters of credit. Borrowings under the
facility will be priced initially at LIBOR plus a predetermined amount, ranging
from 1.25% to 1.75%, depending on our consolidated leverage ratio at the time of
the borrowing. At December 31, 2002, LIBOR was approximately 1.4% and the
applicable adjustment to LIBOR was 1.25%. The facility requires us to pay each
lender in the consortium a commitment fee on the average daily unused portion of
their respective commitment at a rate equal to 0.25%.

There were no direct borrowings outstanding under the credit facility at
December 31, 2002 or 2001. Letters of credit outstanding at December 31, 2002
pertaining to the credit facility were $31.5 million, resulting in $93.5 million
available at year end for standby letters of credit, if needed.

In connection with the credit facility, we are required to maintain both
financial and non-financial covenants and ratios, including but not limited to
minimum tangible net worth plus subordinated debt, leverage ratio, fixed charge
coverage ratio, earnings before interest and taxes to interest expense ratio,
total unsubordinated debt to tangible net worth, net income and dividends. As of
December 31, 2002, we were in compliance with our covenants. The credit facility
is secured by our accounts receivable, inventory and machinery and equipment.

As of December 31, 2001, we had a $69.0 million long-term credit facility
with a consortium of banks co-led by Mellon and EAB. This was the facility
amended in 2002. The credit facility included $19.0 million in five-year term
debt, payable in quarterly installments of $1.0 million, and $50.0 million in
revolving debt. Borrowings under the agreement bore interest based on LIBOR plus
an applicable margin of up to 2.00%, depending on the consolidated leverage
ratio as defined in the agreement. Borrowings were secured by our accounts
receivable, inventories and property, plant and equipment. Proceeds from the
term debt were used to repay existing term debt acquired in the EDO-AIL merger.
On October 31, 2001, all outstanding term debt of $14.2 million and all
outstanding revolving debt of $20.8 million were paid in full with the proceeds
of our public stock offering. At December 31, 2001, there were no borrowings
under the $50.0 million revolving credit facility.

5.25% Convertible Subordinated Notes due 2007

In April 2002, we completed the offering of the Notes and received proceeds
of $133.7 million, net of $4.1 million of commissions paid. Interest payments on
the Notes are due April 15 and October 15 of each year, commencing on October
15, 2002. Accrued interest payable, included in accrued expenses on our
consolidated balance sheet, at December 31, 2002 was $1.5 million.

The Notes are convertible, unless previously redeemed or repurchased by us,
at the option of the holder at any time prior to maturity, into our common
shares at an initial conversion price of $31.26 per share, subject to adjustment
in certain events. As of December 31, 2002, there had been no conversions.

7% Convertible Subordinated Debentures due 2011

During the fourth quarter of 2001, the Company redeemed all of its
outstanding Debentures. Debentures with an outstanding face value of $22.1
million were converted into 1,005,250 common shares under the conversion rights
of the Debentures and $0.2 million face value was redeemed for cash plus accrued
interest.

22

Employee Stock Ownership Trust ("ESOT") Loan

In July 2001, we paid in full our direct ESOT loan obligation with a
balance of $4.9 million at an interest rate of 82% of the prime-lending rate.
This obligation represented the bank borrowing by the EDO ESOT guaranteed by us.
The EDO ESOT has serviced this obligation with the dividends received on our
preferred shares and cash contributions from us. As described above under
"Acquisitions and Disposition," as of January 1, 2001, the AIL ESOP and the
existing EDO ESOP were merged into a single plan, and the preferred shares
issued by us and held by the EDO ESOT were converted into 1,067,281 of our
common shares, effective March 8, 2001. As of June 30, 2001, the merged ESOT
restructured its indirect loan from us to extend the maturity date to December
31, 2017. As a result of the conversion of the preferred shares, debt service on
the ESOP indirect loan will be funded by cash contributions from us.

We believe that, for the foreseeable future, we have adequate liquidity and
sufficient capital to fund our currently anticipated requirements for working
capital, capital expenditures, including acquisitions, research and development
expenditures, interest payments and servicing of the ESOP indirect loan. We
continue to focus on positioning ourselves to be a significant player in the
consolidation of first-tier defense suppliers and, to that end, have actively
sought candidates for strategic acquisitions. Future acquisitions may be funded
from any of the following sources: cash on hand; borrowings under our credit
facility; issuance of our common stock or other equity securities; and/or
convertible or other debt offerings.

COMMITMENTS AND CONTINGENCIES

In order to aggregate all commitments and contractual obligations as of
December 31, 2002, we have included the following table. Our commitments under
letters of credit and advance payment and performance bonds relate primarily to
advances received on foreign contracts. We do not expect to have to make
payments under these letters of credits or bonds since these obligations are
removed as we perform under the related contracts. The amounts for letters of
credit and performance bonds represent the amount of commitment expiration per
period.

Additionally, we are subject to certain legal actions that arise out of the
normal course of business. It is our belief that the ultimate outcome of these
actions will not have a material adverse effect on our consolidated financial
position, results of operations or liquidity.

CONCENTRATION OF SALES

We conduct a significant amount of our business with the United States
Government. Domestic U.S. Government sales, including sales to prime contractors
of the U.S. Government, accounted for approximately 75%, 69% and 63% of our
total net sales for 2002, 2001 and 2000, respectively. In addition, sales from
the Universal Exciter Upgrade program accounted for approximately 14%, 15% and
15% of our total net sales in 2002, 2001 and 2000, respectively. Although there
are currently no indications of a significant change in the status of government
funding of certain programs, should this occur, our results of operations,
financial position and liquidity could be materially affected. Such a change
could have a significant impact on our profitability and our stock price. This
could also affect our ability to acquire funds from our credit facility due to
covenant restrictions or from other sources. As of December 31, 2002, one
customer, a prime contractor, in addition to the U.S. Government accounted for
more than 10% of our consolidated accounts receivable.

23

BACKLOG

The funded backlog of unfilled orders at December 31, 2002 increased to
$375.0 million from $294.8 million at December 31, 2001. Our backlog consists
primarily of current orders under long-lived, mission-critical programs of key
defense platforms.

NEW ACCOUNTING STANDARDS

BUSINESS COMBINATIONS AND GOODWILL AND OTHER INTANGIBLE ASSETS

In June 2001, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 141, "Business Combinations," and No. 142, "Goodwill and Other Intangible
Assets." SFAS No. 141 requires that the purchase method of accounting be used
for all business combinations initiated after June 30, 2001. SFAS No. 141 also
includes guidance on the initial recognition and measurement of goodwill and
other intangible assets arising from business combinations completed after June
30, 2001. SFAS No. 142 prohibits the amortization of goodwill and intangible
assets with indefinite useful lives and requires that these assets be reviewed
for impairment at least annually. Intangible assets with definite lives will
continue to be amortized over their estimated useful lives. We adopted SFAS No.
142 effective January 1, 2002; however, the provisions that provide for the
non-amortization of goodwill were effective July 1, 2001 for acquisitions
completed after the issuance of SFAS No. 141. Accordingly, the goodwill acquired
in connection with the purchase of Dynamic Systems in October 2001 and Condor in
July 2002 is not being amortized.

We performed the required impairment tests of goodwill and indefinite lived
intangible assets as of January 1, 2002 using the two-step process prescribed in
SFAS No. 142. The first step was a review for potential impairment, while the
second step measured the amount of the impairment. The impairment charge
resulting from these transitional impairment tests was reflected as a cumulative
effect of a change in accounting principle as of January 1, 2002. The $3.4
million charge, net of an $0.8 million tax benefit, occurred in the Engineered
Materials segment and is comprised of $2.2 million and $1.9 million of impaired
goodwill and trademark, respectively, related to the acquisition of Specialty
Plastics and $0.1 million of impaired goodwill related to the acquisition of
Zenix.

IMPAIRMENT OR DISPOSAL OF LONG-LIVED ASSETS

In August 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long Lived Assets," which addresses financial
accounting and reporting for the impairment or disposal of long lived assets and
supersedes SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets to be Disposed Of," and the accounting and reporting
provisions of Accounting Principles Board Opinion No. 30, "Reporting the Results
of Operations," for a disposal of a segment of a business. We adopted SFAS No.
144 as of January 1, 2002. The effect of the adoption of this SFAS was not
material to our operating results or financial position.

EXIT OR DISPOSAL ACTIVITIES

On July 30, 2002, the FASB issued SFAS No. 146, "Accounting for Costs
associated with Exit or Disposal Activities." SFAS No. 146 requires that a
liability be recognized for costs associated with an exit or disposal activity
only when the liability is incurred. SFAS No. 146 also establishes fair value as
the objective for initial measurement of liabilities related to exit or disposal
activities. SFAS No. 146 is effective for exit or disposal activities initiated
after December 31, 2002. The adoption of SFAS No. 146, effective January 1,
2003, did not have a material effect on our consolidated financial statements.

ACCOUNTING FOR STOCK-BASED COMPENSATION

In December 2002, the FASB issued SFAS No. 148 "Accounting for Stock-Based
Compensation - Transition and Disclosure -- an Amendment of FASB Statement No.
123." SFAS No. 148 amends SFAS No. 123 to provide alternative methods of
transition for a voluntary change to the fair value based method of accounting
for stock-based employee compensation. In addition, SFAS No. 148 requires more
prominent and

24

more frequent disclosures in both annual and interim financial statements about
the method of accounting used for stock-based compensation and the effect of the
method used on reported results. The disclosure provisions of SFAS No. 148 are
effective for years ending after December 15, 2002 and have been reflected in
Note 14 to the consolidated financial statements. We do not plan to voluntarily
change our method of accounting for stock-based compensation. However, should we
change our method of accounting for stock-based compensation in the future, that
change would fall under the provisions of SFAS Nos. 123 and 148.

COMMON SHARE PRICES

EDO common shares are traded on the New York Stock Exchange. As of February
26, 2003, there were 1,964 shareholders of record (brokers and nominees counted
as one each).

The price range in 2002 and 2001 was as follows:

DIVIDENDS

During 2002 and 2001, the Board of Directors approved the payment of
quarterly cash dividends of $0.03 per common share. The Company's credit
facility places certain limits on the payment of cash dividends.

"SAFE HARBOR" STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF
1995

The statements in this Annual Report and in oral statements that may be
made by representatives of the Company relating to plans, strategies, economic
performance and trends and other statements that are not descriptions of
historical facts may be forward-looking statements within the meaning of the
Private Securities Litigation Reform Act of 1995, Section 27(a) of the
Securities Act of 1933 and Section 21(e) of the Securities Exchange Act of 1934.
Forward looking statements are inherently subject to risks and uncertainties,
and actual results could differ materially from those currently anticipated due
to a number of factors, which include, but are not limited to the following for
each of the types of information noted below.

U.S. and international military program sales, follow on procurement,
contract continuance, and future program awards, upgrades and spares support are
subject to: U.S. and international military budget constraints and
determinations; U.S. congressional and international legislative body
discretion; U.S. and international government administration policies and
priorities; changing world military threats, strategies and missions;
competition from foreign manufacturers of platforms and equipment; NATO country
determinations regarding participation in common programs; changes in U.S. and
international government procurement timing, strategies and practices; and the
general state of world military readiness and deployment.

Commercial satellite programs and equipment sales, follow-on procurement,
contract continuance and future program awards, upgrades and spares support are
subject to: establishment and continuance of various consortiums for satellite
constellation programs; delay in launch dates due to equipment, weather or other
factors beyond our control; and development of sufficient customer base to
support a particular satellite constellation program.

Commercial product sales are subject to: success of product development
programs currently underway or planned; competitiveness of current and future
production costs and prices and market and consumer base development of new
product programs.

Achievement of margins on sales, earnings and cash flow can be affected by:
unanticipated technical problems; government termination of contracts for
convenience; decline in expected levels of sales; underesti-

25

mation of anticipated costs on specific programs; the ability to effect
acquisitions; and risks inherent in integrating recent acquisitions into our
overall structure.

Expectations of future income tax rates can be affected by a variety of
factors, including statutory changes in Federal and state tax rates,
nondeductibility of goodwill amortization and IPR&D acquired in a stock purchase
business combination and the nondeductibility of our noncash ESOP compensation
expense.

The Company has no obligation to update any forward-looking statements.

26

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

CONSOLIDATED STATEMENTS OF EARNINGS

EDO CORPORATION AND SUBSIDIARIES

See accompanying Notes to Consolidated Financial Statements.

27

CONSOLIDATED BALANCE SHEETS

EDO CORPORATION AND SUBSIDIARIES

See accompanying Notes to Consolidated Financial Statements.

28

CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY

EDO CORPORATION AND SUBSIDIARIES

29

CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY -- (CONTINUED)
EDO CORPORATION AND SUBSIDIARIES

30

CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY -- (CONTINUED)
EDO CORPORATION AND SUBSIDIARIES

See accompanying Notes to Consolidated Financial Statements.

31

CONSOLIDATED STATEMENTS OF CASH FLOWS

EDO CORPORATION AND SUBSIDIARIES

32

CONSOLIDATED STATEMENTS OF CASH FLOWS -- (CONTINUED)
EDO CORPORATION AND SUBSIDIARIES

See accompanying Notes to Consolidated Financial Statements.

33

CONSOLIDATED STATEMENTS OF CASH FLOWS -- (CONTINUED)
EDO CORPORATION AND SUBSIDIARIES

EDO CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2002, 2001 AND 2000

(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

(a) PRINCIPLES OF CONSOLIDATION AND BUSINESS

The consolidated financial statements include the accounts of EDO
Corporation and all wholly-owned subsidiaries (the "Company"). All significant
intercompany accounts and transactions have been eliminated in consolidation.

The Company operates in three segments: Defense, Communications and Space
Products, and Engineered Materials. The Company discontinued its former
satellite products business (Barnes Engineering Company) in 1999.

(b) RESTRICTED CASH

At December 31, 2002, there is restricted cash of $27.3 million, which
relates to amounts collateralizing the outstanding letters of credit assumed as
part of the acquisition of Condor Systems, Inc. (Note 2). As the letters of
credit expire or are cancelled, collateral is released. On November 8, 2002, the
Company increased its credit facility from $69.0 million to $140.0 million and
again, on December 20, 2002, from $140.0 million to $200.0 million, which will
allow the Company to replace the letters of credit under the amended facility
and release the restricted cash.

(c) CASH EQUIVALENTS

The Company considers all securities with an original maturity of three
months or less at the date of acquisition to be cash equivalents.

(d) REVENUE RECOGNITION

Sales under long-term, fixed-price contracts, including pro-rata profits,
are generally recorded based on the relationship of costs incurred to date to
total projected final costs or, alternatively, as deliveries and other
milestones are achieved or services are provided. These projections are revised
throughout the lives of the contracts. Adjustments to profits resulting from
such revisions are made cumulative to the date of change and may affect current
period earnings.

Gross profit is affected by a variety of factors, including the mix of
products, systems and services sold or provided, production efficiencies, price
competition and general economic conditions. Estimated losses on long-term
contracts are recorded when identified. Sales under cost reimbursement contracts
are recorded as costs are incurred. Sales on other than long-term contract
orders (principally commercial products) are recorded as shipments are made.

(e) INVENTORIES

Inventories under long-term contracts and programs reflect all accumulated
production costs, including factory overhead, initial tooling and other related
costs (including general and administrative expenses relating to certain of the
Company's defense contracts), less the portion of such costs charged to cost of
sales. Inventory costs in excess of amounts recoverable under contracts and
which relate to a specific technology or application and which may not have
alternative uses are charged to cost of sales when such circumstances are
identified. All other inventories are stated at the lower of cost (principally
first-in, first-out method) or market.

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

34

EDO CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 2002, 2001 AND 2000

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

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

(f) LONG-LIVED ASSETS, OTHER THAN GOODWILL AND OTHER INTANGIBLES

Property, plant and equipment are stated at cost. Depreciation and
amortization have been provided primarily using the straight-line method over
the estimated useful lives of the assets. Leasehold improvements are amortized
over the shorter of their estimated useful lives or their respective lease
periods.

In those cases where the Company determines that the useful life should be
shortened, the Company would depreciate the net book value in excess of salvage
value over its revised remaining useful life thereby increasing depreciation
expense. Factors such as technological advances, changes to the Company's
business model, changes in the Company's capital strategy, changes in the
planned use of equipment, fixtures, software or changes in the planned use of
facilities could result in shortened useful lives.

Property, plant and equipment are reviewed for impairment whenever events
or changes in circumstances indicate that the carrying amount may not be
recoverable. If the sum of the undiscounted cash flows, excluding interest, is
less than the asset's carrying value, the Company recognizes an impairment loss,
measured as the amount by which the carrying value exceeds the fair value of the
asset.

The estimate of cash flow is based upon, among other things, certain
assumptions about expected future operating performance. The Company's estimates
of undiscounted cash flow may differ from actual cash flow due to such factors
as those listed above.

Costs associated with the acquisition and development of software for
internal use are recognized in accordance with Statement of Position ("SOP") No.
98-1, "Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use." In 2002 and 2001, the Company capitalized approximately $0.3
million and $1.7 million, respectively, of such costs. These costs are being
amortized on a straight-line basis over a period of four years.

Deferred financing costs are amortized on a straight-line basis over the
life of the related financing. The unamortized balances of $5.5 million and $0.5
million are included in other assets at December 31, 2002 and 2001,
respectively.

(g) BUSINESS COMBINATIONS AND GOODWILL AND OTHER INTANGIBLE ASSETS

In June 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standard ("SFAS") Nos. 141, "Business
Combinations," and 142, "Goodwill and Other Intangible Assets." SFAS No. 141
requires that the purchase method of accounting be used for all business
combinations initiated after June 30, 2001. SFAS No. 141 also includes guidance
on the initial recognition and measurement of goodwill and other intangible
assets arising from business combinations completed after June 30, 2001. SFAS
No. 142 prohibits the amortization of goodwill and intangible assets with
indefinite useful lives and requires that these assets be reviewed for
impairment at least annually. Intangible assets with definite lives will
continue to be amortized over their estimated useful lives. SFAS No. 142 was
adopted by the Company effective January 1, 2002; however, the provisions that
provide for the non-amortization of goodwill were effective July 1, 2001 for
acquisitions completed after the issuance of SFAS No. 141. Accordingly, the

35

EDO CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 2002, 2001 AND 2000

goodwill acquired in connection with the purchase of Dynamic Systems, Inc. in
October 2001 and Condor Systems, Inc. in July 2002 is not being amortized.

Impairment indicators include, among other conditions, cash flow deficits,
an historic or anticipated decline in revenue or operating profit, adverse legal
or regulatory developments, accumulation of costs significantly in excess of
amounts originally expected to acquire the asset and a material decrease in the
fair value of some or all of the assets.

The Company performed the required impairment tests of goodwill and
indefinite lived intangible assets as of January 1, 2002, using the two-step
process prescribed in SFAS No. 142. The first step was a review for potential
impairment, while the second step measured the amount of the impairment. The
impairment charge resulting from these transitional impairment tests was
reflected as a cumulative effect of a change in accounting principle as of
January 1, 2002. The $3.4 million charge, net of a tax benefit of $0.8 million,
occurred in the Engineered Materials segment and is comprised of $2.2 million
and $1.9 million of impaired goodwill and trademark, respectively, related to
the acquisition of Specialty Plastics and $0.1 million of impaired goodwill
related to the acquisition of Zenix. In the case of Zenix, the trend in sales
and earnings performance has been lower than expected resulting in the
impairment of the entire goodwill carrying value. In the case of Specialty
Plastics, the fair value of this reporting unit was estimated using a discounted
cash flow analysis, also resulting in an impairment loss of the entire goodwill
carrying value.

The changes in the carrying amount of goodwill by segment for the year
ended December 31, 2002 are as follows:

Summarized below are intangible assets subject to amortization as of
December 31:

The non-compete agreements and the other intangible assets are being
amortized on a straight-line basis over a two-year period. The purchased
technologies are being amortized on a straight-line basis over an eight-year
period. The amortization expense for the years ended December 31, 2002, 2001 and
2000 amounted to $0.9 million, $0.1 million and $0.1 million, respectively.
Amortization expense for 2003, 2004, 2005, 2006,

36

EDO CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 2002, 2001 AND 2000

2007 and thereafter related to these intangible assets are estimated to be $2.0
milion, $1.7 million, $1.5 million, $1.5 million, $1.5 million and $3.7 million,
respectively.

Since the total trademark carrying amount of $1.9 million was written off
in 2002 as part of the cumulative effect of a change in accounting principle,
there are no intangible assets other than goodwill not subject to amortization
as of December 31, 2002.

Net earnings for the year ended December 31, 2001 included goodwill and
trademark amortization expense of approximately $0.9 million before tax.
Excluding this amount net of tax would have resulted in basic net earnings per
common share and diluted net earnings per common share of $1.18 and $1.13,
respectively, for the year ended December 31, 2001. Net earnings for the year
ended December 31, 2000 included goodwill and trademark amortization expense of
$1.0 million before tax. Excluding this amount net of tax would have resulted in
basic net earnings per common share and diluted net earnings per common share of
$0.10 and $0.10, respectively, for the year ended December 31, 2000.

(h) INCOME TAXES

Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be realized or settled. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized in income in the
period that includes the enactment date.

(i) TREASURY SHARES

Common shares held as treasury shares are recorded at cost, with issuances
from treasury recorded at average cost. Treasury shares issued for directors'
fees are recorded as an expense for an amount equal to the fair market value of
the common shares on the issuance date.

(j) FINANCIAL INSTRUMENTS

The net carrying value of notes receivable approximates fair value based on
current rates for comparable commercial mortgages. The fair value of the
Company's 5.25% Convertible Subordinated Notes due 2007 (the "Notes") at
December 31, 2002 approximates its carrying value based on recent market
transactions. The fair value of the environmental obligation approximates its
carrying value since it has been discounted. The fair values of all other
financial instruments approximate book values because of the short-term
maturities of these instruments.

(k) USE OF ESTIMATES

Management of the Company has made a number of estimates and assumptions
relating to the reporting of assets and liabilities and the disclosure of
contingent assets and liabilities to prepare these consolidated financial
statements in conformity with accounting principles generally accepted in the
United States. Actual results could differ from these and other estimates.

(l) STOCK-BASED COMPENSATION

The Company accounts for its stock-based compensation plans in accordance
with Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock
Issued to Employees" and related interpretations. Under APB No. 25, because the
exercise price of the Company's stock options is set equal to the market price
of the underlying stock on the date of grant, no compensation expense is
recognized.
37

EDO CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 2002, 2001 AND 2000

(m) ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES

In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities" and on June 15, 2000, issued SFAS No. 138,
"Accounting for Certain Derivative Instruments and Certain Hedging Activities -
an Amendment to FASB Statement No. 133." These statements establish methods of
accounting for derivative financial instruments and hedging activities related
to those instruments as well as other hedging activities. The Company adopted
these statements in the first quarter of 2001. The effect of the adoption of
these statements was not material to the Company's operating results or
financial position.

(n) RECLASSIFICATIONS

Certain reclassifications have been made to prior year presentations to
conform to current year presentations.

(o) NEW ACCOUNTING STANDARDS

In August 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets," which addresses financial
accounting and reporting for the impairment or disposal of long-lived assets and
supersedes SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets to be Disposed Of," and the accounting and reporting
provisions of APB Opinion No. 30, "Reporting the Results of Operations," for a
disposal of a segment of a business. The Company adopted SFAS No. 144 as of
January 1, 2002. The effect of the adoption of this SFAS was not material to the
Company's operating results or financial position.

On July 30, 2002, the FASB issued SFAS No. 146, "Accounting for Costs
associated with Exit or Disposal Activities." SFAS No. 146 requires that a
liability be recognized for costs associated with an exit or disposal activity
only when the liability is incurred. SFAS No. 146 also establishes fair value as
the objective for initial measurement of liabilities related to exit or disposal
activities. SFAS No. 146 is effective for exit or disposal activities initiated
after December 31, 2002. The adoption of SFAS No. 146, effective January 1,
2003, did not have a material effect on the Company's operating results or
financial position.

In December 2002, the FASB issued SFAS No. 148 "Accounting for Stock-Based
Compensation -- Transition and Disclosure -- an Amendment of FASB Statement No.
123." SFAS No. 148 amends SFAS No. 123 to provide alternative methods of
transition for a voluntary change to the fair value based method of accounting
for stock-based employee compensation. In addition, SFAS No. 148 requires more
prominent and more frequent disclosures in both annual and interim financial
statements about the method of accounting used for stock-based compensation and
the effect of the method used on reported results. The disclosure provisions of
SFAS No. 148 are effective for years ending after December 15, 2002 and
accordingly are reflected in Note 14. Presently, the Company does not plan to
voluntarily change its method of accounting for stock-based compensation.
However, should the Company change its method of accounting for stock-based
compensation in the future, that change would fall under the provisions of SFAS
Nos. 123 and 148.

(2) ACQUISITIONS

On July 26, 2002, the Company acquired substantially all of the assets of
Condor Systems, Inc., a privately-held defense electronics company and its
domestic subsidiary (together, "Condor") for $61.9 million in cash, in addition
to transaction costs of $4.1 million, and the assumption of certain normal
employee benefit obligations, certain trade and supplier payables and certain
other accrued liabilities primarily related to contract loss reserves. In
addition, the Company assumed approximately $28.0 million of outstanding letters
of credit and deposited $5.0 million into an escrow account to be released upon
settlement of the closing Condor

38

EDO CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 2002, 2001 AND 2000

balance sheet. Condor had been operating under protection of Chapter 11 of the
U.S. Bankruptcy Code. The acquisition is expected to expand the Company's
electronic warfare business in the areas of reconnaissance and surveillance
systems. The acquisition was accounted for as a purchase and, accordingly,
Condor's operating results are included in the Company's consolidated financial
statements since the acquisition date. Condor became part of the Company's
Defense and Communications and Space Products segments.

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

Unaudited pro forma results of operations, assuming the acquisition of
Condor had been completed at the beginning of each period, which include
adjustments to net sales, cost of sales, interest income and expense,
amortization expense, purchased IPR&D and other merger-related costs, income tax
expense and assuming a retroactive effect of a change in accounting principle
upon adoption of SFAS No. 142 are as follows:

The pro forma results of operations are not necessarily indicative of the
actual results of operations that would have occurred had this acquisition been
completed at the beginning of the periods, or of the results which may occur in
the future.

The following table summarizes the allocation of the purchase price to the
assets acquired and liabilities assumed at the date of acquisition. The excess
of the purchase price over the net assets acquired recorded as goodwill, IPR&D
and other intangible assets is deductible for tax purposes over 15 years.

In October 2001, the Company acquired all of the stock of Dynamic Systems,
Inc., a privately-held company based in Alexandria, Virginia, which provides
professional and information technology services primarily to the Department of
Defense and other government agencies. The acquisition is expected to strengthen
and expand the range of services the Company offers to both existing and new
customers. The

39

EDO CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 2002, 2001 AND 2000

Company paid $13.7 million, including transaction costs and subsequent to a $0.2
million reduction in the purchase price, and accounted for the acquisition as a
purchase. Accordingly, the operating results of Dynamic Systems, Inc. have been
included in the Company's consolidated financial statements since the date of
acquisition. The excess of the purchase price over the fair market value of net
assets acquired was approximately $12.2 million, which is not deductible for
income tax purposes. On a pro forma basis, had the acquisition taken place as of
the beginning of each respective year, the results of operations would not have
been materially affected for 2001 and 2000.

The following table summarizes the allocation of the purchase price to the
assets acquired and liabilities assumed at the date of acquisition.

In April 2000, a wholly-owned subsidiary of the Company merged with AIL
Technologies, Inc. ("AIL") (the "EDO-AIL merger"). In connection with the
EDO-AIL merger, the Company issued 6,553,194 of its common shares valued at
$39.4 million, and made cash payments aggregating $13.3 million in exchange for
all of the outstanding common and preferred shares of AIL. In addition, the
Company incurred $2.7 million of transaction costs. The merger was accounted for
as a purchase and is included in the Company's results of operations since the
date of acquisition. The transaction resulted in goodwill of $3.6 million.

Associated with this merger and included in operating earnings in 2000 are
a $6.7 million write-off of purchased IPR&D, described more fully below, $1.5
million of severance costs and $3.3 million of other merger-related costs. Such
costs are included in write-off of purchased in-process research and development
and merger-related costs in the accompanying consolidated statements of
earnings. The $1.5 million of severance costs pertain to an AIL employee group
of approximately 200, all of which was paid as of December 31, 2001.

The IPR&D related to a project that had not reached technological
feasibility and that had no alternative future uses. The amount allocated to the
project was expensed as of the date of acquisition. The development project
related to a generic satellite subsystem called a Ku-Ku Band Down Converter for
a fixed satellite service market. The converter represents a single channel
providing signal conversion from uplink frequencies in the 14GHz range to the
downlink frequencies in the 12GHz range. The income approach was utilized for
the valuation analysis of the IPR&D. This approach focused on the
income-producing capability of the asset, which was based on relative market
sizes, growth factors and expected trends in technology. This approach also
included analysis of the stage of completion of the project, estimating the
costs to develop the purchased in-process technology into commercially viable
products, estimating the resulting net cash flows from such projects and
discounting the net cash flows back to their present value using a rate
commensurate with the relative risk levels. The rate used in discounting the net
cash flows from the IPR&D was 25%.

The efforts then required to develop the in-process technology of this
project into commercially viable products principally related to the completion
of planning, designing, prototyping, and testing functions that are necessary to
establish that the down converter produced will meet its design specifications,
including

40

EDO CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 2002, 2001 AND 2000

technical performance features and function requirements. At the time of the
EDO-AIL merger, it was estimated that 90% of the development effort had been
completed and the remaining development effort would take approximately six
months to complete, with a cost of approximately $1.0 million. This project is
now completed resulting in sales in 2001 of Ku-Ku Band Converters.

Unaudited pro forma results of operations, assuming the EDO-AIL merger had
been completed at the beginning of 2000, which include adjustments to interest
expense, amortization expense and income tax expense are as follows:

The pro forma results of operations are not necessarily indicative of the
actual results of operations that would have occurred had this merger been
completed at the beginning of the period, or of the results which may occur in
the future.

In November 1999, the Company acquired the outstanding stock of
M.Technologies Inc., an integrator of aircraft weapons and avionics systems, for
$3.0 million in cash paid at closing and a $1.5 million note to be paid over
three years. The note payable (fully paid as of December 31, 2002 and $0.5
million at December 31, 2001) has been recorded at its present value in the
accompanying consolidated balance sheet at an interest rate of 8%. The
acquisition has been accounted for as a purchase, and accordingly, the operating
results of M. Technologies have been included in the Company's consolidated
financial statements since the date of acquisition. The excess of the purchase
price over the fair market value of net assets acquired was approximately $4.4
million.

SUBSEQUENT EVENTS (UNAUDITED)

In February 2003, a wholly-owned subsidiary of the Company acquired all of
the stock of Advanced Engineering & Research Associates, Inc. ("AERA"), a
privately-held company located in Alexandria, Virginia, which provides
professional and information technology services primarily to the Department of
Defense and other government agencies. The acquisition is expected to strengthen
and expand the range of such services the Company offers. The preliminary
purchase price was $38.0 million, which included an amount placed in escrow. The
acquisition will be accounted for as a purchase, and the operating results of
AERA will be included in the Company's consolidated financial statements from
the date of the acquisition.

In March 2003, a wholly-owned subsidiary of the Company acquired all of the
stock of Darlington, Inc., a privately-held defense communications company based
in Alexandria, Virginia, which designs, manufactures and supports military
communications equipment and information networking systems. The acquisition is
expected to enhance the Company's existing positions on long-range platforms and
programs across the U.S. military services and in particular the U.S. Marine
Corps. The preliminary purchase price was $28.5 million, which included an
amount placed in escrow. The acquisition will be accounted for as a purchase,
and the operating results of Darlington, Inc. will be included in the Company's
consolidated financial statements from the date of the acquisition.

41

EDO CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 2002, 2001 AND 2000

(3) DISCONTINUED OPERATIONS

In November 1999, the Board of Directors of the Company approved the
decision to sell its satellite products business (Barnes Engineering Company),
which sale was completed in January 2000. The Company agreed to indemnify the
buyer for certain contract-related costs originally estimated at $2.3 million.
In 2001, a change in the estimate of remaining costs to be incurred resulted in
earnings from discontinued operations of $0.3 million, net of income taxes.

The revenues, costs and expenses, assets and liabilities, and cash flows
associated with the satellite products business have been excluded from the
respective captions in the accompanying consolidated financial statements.

(4) MARKETABLE SECURITIES

The Company determines the appropriate classification of securities at the
time of purchase and reevaluates such designation as of each balance sheet date.
All marketable securities are classified as available-for-sale securities.
Available-for-sale securities are carried at fair value, with the unrealized
gains and losses, net of tax, reported as a separate component of shareholders'
equity. Realized gains and losses, interest and dividends and declines in value
judged to be other-than-temporary declines are included in interest income
(expense). The cost of securities sold is based on the specific identification
method. At December 31, 2002 and 2001, the marketable securities balance
represents amounts in mutual funds.

(5) ACCOUNTS AND NOTES RECEIVABLE

Accounts receivable included $43.0 million and $39.1 million at December
31, 2002 and 2001, respectively, of unbilled revenues. Substantially all of the
unbilled balances at December 31, 2002 will be billed and are expected to be
collected during 2003. Total billed receivables due from the United States
Government, either directly or as a subcontractor to a prime contractor with the
Government, were $31.0 million and $26.2 million at December 31, 2002 and 2001,
respectively.

Notes receivable at December 31, 2002 include $1.9 million which relates to
the sale of the Company's College Point facility in January 1996, of which $0.4
million is included in current assets. The notes are due in equal quarterly
amounts through September 2004 with a final payment of $1.3 million due on
December 31, 2004 and bear interest at 7% per annum. The notes receivable are
secured by a mortgage on the facility. Also included in notes receivable at
December 31, 2002 is $1.1 million related to the sale in June 2000 of certain
parcels of land and a building at the Company's Deer Park facility, of which
$0.1 million is included in current assets. The gain on the sale was not
material as the carrying value approximated the sales value.

(6) INVENTORIES

Inventories are summarized by major classification as follows at December
31:

42

EDO CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 2002, 2001 AND 2000

(7) PROPERTY, PLANT AND EQUIPMENT, NET

The Company's property, plant and equipment at December 31 and their
related useful lives are summarized as follows:

(8) ACCRUED LIABILITIES

Accrued liabilities consisted of the following at December 31:

(9) LONG-TERM DEBT AND CREDIT FACILITY

CREDIT FACILITY

At December 31, 2002, the Company has a $200.0 million credit facility with
a consortium of banks, led by Citibank, N.A. as the administrative agent, Fleet
National Bank as the syndication agent and Wachovia Bank, N.A. as the
documentation agent. The facility expires in November 2005 and amended the $69.0
million credit facility in place at December 31, 2001. In connection with the
amended facility, $1.2 million of deferred finance costs are included in other
assets on the accompanying consolidated balance sheet and are being amortized
using the straight-line method over the term of the agreement.

The credit facility provides sub-limits of borrowing up to $125.0 million
for acquisition-related financing and up to $125.0 million in standby letters of
credit financing. The potential cash borrowing under the facility is reduced by
the amount of outstanding letters of credit. Borrowings under the facility will
be priced initially at LIBOR plus a predetermined amount, ranging from 1.25% to
1.75%, depending on the Company's consolidated leverage ratio at the time of the
borrowing. At December 31, 2002, LIBOR was approximately

43

EDO CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 2002, 2001 AND 2000

1.4% and the applicable adjustment to LIBOR was 1.25%. The facility requires the
Company to pay each lender in the consortium a commitment fee on the average
daily unused portion of their respective commitment at a rate equal to 0.25%.

There were no direct borrowings outstanding under the credit facility at
December 31, 2002 or 2001. Letters of credit outstanding at December 31, 2002
pertaining to the credit facility were $31.5 million, resulting in $93.5 million
available for additional letters of credit, if needed.

In connection with the credit facility, the Company is required to maintain
both financial and non-financial covenants and ratios, including but not limited
to minimum tangible net worth plus subordinated debt, leverage ratio, fixed
charge coverage ratio, earnings before interest and taxes to interest expense
ratio, total unsubordinated debt to tangible net worth, net income and
dividends. As of December 31, 2002, the Company was in compliance with its
covenants. The credit facility is secured by the Company's accounts receivables,
inventory and machinery and equipment.

5.25% CONVERTIBLE SUBORDINATED NOTES DUE 2007

In April 2002, the Company completed its offering of $137.8 million of
5.25% Convertible Subordinated Notes due 2007 and received $133.7 million, net
of commissions paid. Interest payments on the Notes are due April 15 and October
15 of each year, commencing on October 15, 2002. Accrued interest payable,
included in accrued liabilities on the accompanying consolidated balance sheet,
at December 31, 2002 was $1.5 million.

In connection with the offering of the Notes, there are $4.1 million of
unamortized debt issuance costs at December 31, 2002, which are included in
other assets on the accompanying consolidated balance sheet and are being
amortized using the straight-line method through April 2007.

The Notes are convertible, unless previously redeemed or repurchased by the
Company, at the option of the holder at any time prior to maturity, into the
Company's common stock at an initial conversion price of $31.26 per share,
subject to adjustment in certain events. As of December 31, 2002, there had been
no such conversions.

7% CONVERTIBLE SUBORDINATED DEBENTURES DUE 2011

During the fourth quarter of 2001, the Company redeemed all of its
outstanding 7% Convertible Subordinated Debentures due 2011 (the "Debentures").
As a result of the redemption, $22.1 million face value of the Debentures were
converted into 1,005,250 common shares and $0.2 million face value were redeemed
for cash. During 2001, the Company also purchased $3.4 million of the Debentures
for $3.2 million and recognized a gain of $0.2 million, which is included in
other non-operating income in the accompanying consolidated statement of
earnings.

(10) EMPLOYEE STOCK OWNERSHIP PLAN AND TRUST

The Company sponsored two employee stock ownership plans: the existing EDO
Employee Stock Ownership Plan ("EDO ESOP"); and the AIL Employee Stock Ownership
Plan ("AIL ESOP") that was acquired in connection with the EDO-AIL merger. These
two plans were merged into a single plan effective as of January 1, 2001
("merged ESOP"), and the preferred shares from the EDO ESOP were converted into
1,067,281 common shares as of March 8, 2001. The merged ESOP provides retirement
benefits to substantially all employees.

Prior to the EDO-AIL merger, the EDO ESOP was being accounted for under
Statement of Position ("SOP") No. 76-3, "Accounting Practices for Certain
Employee Stock Ownership Plans" and the AIL ESOP was being accounted for under
SOP No. 93-6, "Employers' Accounting for Employee Stock

44

EDO CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 2002, 2001 AND 2000

Ownership Plans." The merged ESOP is being accounted for under SOP No. 93-6.
Accordingly, 328,993 unallocated shares of common stock related to the EDO ESOP
and now held by the merged ESOP are not considered outstanding for the purposes
of computing earnings per share in 2002 and 2001, respectively. In prior years,
such shares were considered outstanding in accordance with SOP No. 76-3.

As of June 30, 2001, the merged ESOP restructured its indirect loan from
the Company to extend the maturity date to December 31, 2017. As part of this
restructuring, the EDO ESOP bank loan obligation was paid in full on July 30,
2001.

As quarterly payments are made under the indirect loan, unallocated common
shares in the merged ESOP are committed-to-be-released. The allocation to
participants is based on (i) a match of 50% of the first 6% of the participants'
401(k) contributions; (ii) $600 per participant; and (iii) any remaining
distribution is based on participants' relative compensation. The cost basis of
the unearned/unallocated shares is initially recorded as a reduction to
shareholders' equity. Compensation expense is recorded based on the market value
of the Company's common shares as they are committed-to-be-released. The
difference between the market value and the cost basis of the shares is recorded
as additional paid-in capital. Dividends on unallocated shares are recorded as
compensation expense.

In 2002, 2001 and 2000, respectively, non-cash ESOP compensation expense
recorded by the Company amounted to $4.0 million, $1.8 million and $1.8 million.
At December 31, 2002, there are 2,500,188 unearned/unallocated shares which have
an aggregate market value of $52.0 million and 1,751,605 allocated shares. Total
principal and interest payments made in 2002 and 2001 under the merged ESOP
indirect loan amounted to $1.7 million and $1.1 million, respectively.

A discussion of each plan prior to the merger follows.

EDO ESOP

During 1988, the EDO Employee Stock Ownership Trust ("EDO ESOT") purchased
89,772 preferred shares from the Company for approximately $19.2 million. The
preferred shares were being allocated to employees on the basis of compensation.
The preferred shares provided for dividends of 8% per annum, which were
deductible by the Company for Federal and state income tax purposes. The tax
benefit that was attributable to unallocated preferred shares was reflected as
an increase to retained earnings. Each unallocated preferred share was
convertible at its stated conversion rate into 10 common shares. Allocated
preferred shares were convertible at the greater of the stated conversion rate
or the fair value of each preferred share divided by the current market price of
each common share. The EDO ESOT purchased the preferred shares from the Company
using the proceeds of a bank borrowing guaranteed by the Company. The EDO ESOT
serviced this obligation with the dividends received on the preferred shares and
any additional contributions from the Company as required. Principal and
interest payments on the note of the EDO ESOT were to be made in quarterly
installments through 2003. Interest was charged at 82% of the prime lending
rate. During 2001 and 2000, respectively, the Company's cash contributions and
dividends on the preferred shares were used to repay principal of $0.9 million
and $1.6 million and pay interest of $0.2 million and $0.5 million. During 2001
and 2000, respectively, cash contributions of $0.7 million and $1.2 million were
made to the EDO ESOP and were recorded as compensation expense.

The EDO ESOT's borrowing guaranteed by the Company was reflected as a
liability on the consolidated balance sheets with an equal amount as a reduction
to shareholders' equity, offsetting the increase in the capital stock accounts.
As the principal portion of the note was repaid, the liability and the EDO ESOT
loan obligation, included in shareholder's equity, were reduced concurrently.

45

EDO CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 2002, 2001 AND 2000

AIL ESOP

The AIL ESOP held AIL common shares prior to the EDO-AIL merger which were
converted to EDO common shares. The cost basis of the unearned AIL ESOP shares
were recorded as a reduction to shareholders' equity, offsetting the increase in
the capital stock accounts. As AIL ESOP shares were committed-to-be-released to
plan participants, the earned AIL ESOP shares were released from the unearned
AIL ESOP shares account based on the cost of the shares to the AIL ESOP. The
allocation to participants was based on (i) $600 per employee at the market
value of the common shares and (ii) pro rata based on compensation. Compensation
expense was recorded based on the market value of the Company's common shares.
The Company recorded the difference between the market value of the shares
committed-to-be-released and the cost of these shares to the AIL ESOP to
additional paid-in capital.

In 2000, the Company recorded compensation expense of approximately $1.8
million subsequent to the EDO-AIL merger and contributed approximately $2.0
million to the AIL ESOP to cover the AIL ESOP's indirect loan service
requirements.

(11) INCOME TAXES

The 2002, 2001 and 2000 significant components of the provision for income
taxes attributable to continuing operations are as follows:

The reconciliation of income tax attributable to continuing operations
computed at the U.S. Federal tax rate to income tax expense is:

46

EDO CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 2002, 2001 AND 2000

The significant components of deferred tax assets and liabilities as of
December 31 are as follows:

(12) SHAREHOLDERS' EQUITY

On October 31, 2001, the Company completed the public sale of 3,716,100 of
its common shares and received net proceeds of approximately $81.5 million.

At various times beginning in 1983, the Board of Directors has authorized
and subsequently increased by amendments, a plan to purchase an aggregate amount
of 4,190,000 common shares. As of December 31, 2002, the Company had acquired
approximately 4,091,000 common shares in open market transactions at prevailing
market prices. Approximately 4,026,000 of these shares have been used for
various purposes, including: conversion of preferred shares; contributions of
common shares to the EDO ESOP; grants pursuant to the Company's Long-Term
Incentive Plans; payment of directors' fees; partial payment of a 50% stock
dividend; and stock options exercised. As of December 31, 2002 and 2001,
respectively, the Company held 94,322 and 182,459 common shares in its treasury
for future use.

At December 31, 2002, the Company had reserved 6,161,473 authorized and
unissued common shares for stock option and long-term incentive plans and
conversion of the Notes.

47

EDO CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 2002, 2001 AND 2000

(13) EARNINGS PER SHARE

The following table sets forth the computation of basic and diluted
earnings per share:

The assumed conversion of the Notes was anti-dilutive for 2002. The assumed
conversion of the Debentures was anti-dilutive for 2000.

(14) STOCK PLANS

The Company has granted nonqualified stock options to officers, directors
and other key employees under plans approved by the shareholders in 2002 for the
purchase of its common shares at the fair market value of the common shares on
the dates of grant. Options under the 2002 Long-Term Incentive Plan ("LTIP")
generally become exercisable on the third anniversary of the date of the grant
and expire on the tenth anniversary of the date of the grant. The 2002 LTIP will
expire in 2012. Options under the 2002 Non-Employee Director Stock Option Plan
("NEDSOP"), which pertains only to non-employee directors, are immediately
exercisable and expire on the tenth anniversary of the date of the grant. The
2002 NEDSOP will also expire in 2012.

Changes in options outstanding are as follows:

48

EDO CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 2002, 2001 AND 2000

The options outstanding as of December 31, 2002 are summarized as follows:

The 2002 plan also provides for restricted common share long-term incentive
awards as defined under the plan. As of December 31, 2002 plan participants had
been awarded 392,000 restricted common shares. Deferred compensation is recorded
for the fair value of the restricted common share awards on the date of grant
and is amortized over the five-year period the related services are provided.
The amount charged to operations in 2002, 2001 and 2000 was $0.2 million, $0.3
million and $0.7 million, respectively. As of December 31, 2002, 696,141 shares
are available for additional awards.

The per share weighted-average fair value of stock options granted was
$15.28, $4.88 and $3.22 in 2002, 2001 and 2000, respectively, on the dates of
grant using the Black Scholes option-pricing model with the following
weighted-average assumptions: 2002 -- expected dividend yield of 1%, risk free
interest rate of 4.8%, expected stock volatility of 51%, and an expected option
life of 7 1/2 years; 2001 -- expected dividend yield of 1%, risk free interest
rate of 4.9%, expected stock volatility of 47%, and an expected option life of
7 1/2 years; and 2000 -- expected dividend yield of 1.3%, risk free interest
rate of 6.5%, expected stock volatility of 42%, and an expected option life of
7 1/2 years. The Company applies APB Opinion No. 25 in accounting for its stock
option grants and, accordingly, no compensation cost has been recognized in the
consolidated financial statements for its stock options which have exercise
prices equal to or greater than the fair values of the common shares on the
dates of the grant. Had the Company determined compensation cost based on the
fair values at the grant dates for its stock options under SFAS No. 123,
"Accounting for Stock-Based Compensation," the Company's earnings from
continuing operations, and basic and diluted earnings from continuing operations
per common share would have been reduced to the pro forma amounts indicated
below:

49

EDO CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 2002, 2001 AND 2000

(15) OTHER EMPLOYEE BENEFIT PLANS

DEFINED BENEFIT PLANS

The Company maintains a noncontributory defined benefit pension plan
covering substantially all of its employees. In November 2002, the plan was
amended whereby benefits accrued under the plan were frozen as of December 31,
2002. The Company's funding policy is to make annual contributions to the extent
such contributions are actuarially determined and tax deductible.

In 2002, the Company recorded pension expense of $6.0 million, which
includes a curtailment loss of $2.0 million resulting from the aforementioned
amendment to the plan. In 2001 and 2000, the Company recorded pension income of
$2.8 million and $4.6 million, respectively. The expected long-term rate of
return on plan assets was 9.5% in 2002 and 2001 and 9% in 2000. For 2003 pension
expense, the expected return on plan assets has been reduced to 8.75%. The
actuarial computations assumed a discount rate on benefit obligations at
December 31, 2002 and 2001 of 6.75% and 7.25%, respectively. The assumed rate of
compensation increase of 4.95% for 2002 and 2001 approximated the Company's
previous experience. No compensation increase will be assumed after 2002 due to
the aforementioned freezing of the plan. The assets of the pension plan consist
primarily of equity and fixed income securities, which are readily marketable.

A summary of the components of net periodic pension (expense) income
follows:

The following sets forth the funded status of the plan as of December 31:

50

EDO CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 2002, 2001 AND 2000

In accordance with the provisions of SFAS No. 88, "Employers' Accounting
for Settlements and Curtailments of Defined Benefit Plans and for Termination
Benefits," since the curtailment of $19.3 million did not exceed the previous
unrecognized net loss, no portion of the $19.3 million curtailment was
recognized in earnings for 2002. Accordingly, the remaining unrecognized net
loss will be accounted for in future pension plan expense consistent with SFAS
No. 87, "Employers' Accounting for Pensions."

Due to the lower discount rate and a decline in the fair market value of
plan assets during 2002 and 2001, the accumulated benefit obligation at December
31, 2002 and 2001 exceeded the fair value of plan assets by $48.6 million and
$11.3 million, respectively. Consequently, a net of tax comprehensive loss of
$19.8 million and $12.9 million was charged against shareholders' equity in 2002
and 2001, respectively. Amounts recognized in the consolidated balance sheets at
December 31 are as follows:

NON-QUALIFIED PLANS

The Company has a supplemental defined benefit plan for substantially all
employees under which employees may receive an amount by which benefits earned
under the pension plan exceed the limitations imposed by the Internal Revenue
Code. The Company also has a supplemental retirement plan for officers and
certain employees. Benefits are based on years of service and certain
compensation that is excluded under the qualified plan.

Total expenses under the non-qualified plans in 2002, 2001 and 2000 were
$1.4 million, $0.7 million and $0.9 million, respectively. The supplemental
plans of EDO and AIL were combined in 2001.

51

EDO CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 2002, 2001 AND 2000

A summary of the components of net periodic pension expense follows:

Summarized below is the funded status of the combined supplemental plans as
of December 31:

Due to the lower discount rate during 2002 and 2001, the accumulated
benefit obligation at December 31, 2002 and 2001 exceeded the fair value of plan
assets by $11.0 million and $8.9 million, respectively. Consequently, a net of
tax comprehensive loss of $0.8 million and $0.5 million was charged against

52

EDO CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 2002, 2001 AND 2000

shareholders' equity in 2002 and 2001, respectively. Amounts recognized in the
consolidated balance sheets at December 31 are as follows:

401(K) PLANS

In 2000, there were four 401(k) plans sponsored by the Company covering
substantially all employees. These plans were merged as of January 1, 2001. The
current merged plan provides for matching by the Company of 50% of the first 6%
of employee contributions. The match is provided in the Company's common stock
under the ESOP plan. In 2000, matching contributions under the original plans
were not material.

(16) POST-RETIREMENT HEALTH CARE AND LIFE INSURANCE BENEFITS

The Company provides certain health care and life insurance benefits to
qualified retired employees and dependents at certain locations. These benefits
are funded as benefits are provided, with the retiree paying a portion of the
cost through contributions, deductibles and coinsurance provisions. The Company
has always retained the right to modify or terminate the plans providing these
benefits.

In accordance with SFAS No. 106, "Employers' Accounting for Post-Retirement
Benefits Other Than Pensions," the Company recognizes these benefit expenses on
an accrual basis as the employees earn them during their employment rather than
when they are actually paid.

EDO POST-RETIREMENT BENEFIT PLAN

Post-retirement health care and life insurance expense (income) included
the following components:

In 2001, the Company recognized a curtailment gain as a result of a plan
amendment whereby coverage will not be provided for future retirees.

53

EDO CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 2002, 2001 AND 2000

The funded status of the EDO post-retirement health care and life insurance
benefits plan is as follows as of December 31:

Actuarial assumptions used in determining the accumulated post-retirement
benefit obligation include a discount rate of 6.75% and 7.25% at December 31,
2002 and 2001, respectively, and estimated increases in health care costs. The
Company has limited its increase in health care costs to 5% per year by
requiring the retirees to absorb any costs in excess of 5% and has used such
rate to measure its obligation.

AIL POST-RETIREMENT BENEFIT PLAN

Post-retirement expense included in the consolidated financial statements
comprised the following:

The funded status of the AIL post-retirement benefit plan is as follows as
of December 31:

54

EDO CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 2002, 2001 AND 2000

Actuarial assumptions used in determining the accumulated post-retirement
benefit obligation include a discount rate of 6.75% and 7.25% at December 31,
2002 and 2001, respectively. The accumulated benefit obligation would not be
affected by increases in healthcare costs since such costs are funded by the
participants.

(17) COMMITMENTS AND CONTINGENCIES

The Company is contingently liable under the terms of letters of credit
aggregating approximately $86.9 million at December 31, 2002, should it fail to
perform in accordance with the terms of its contracts with foreign customers.

At December 31, 2002, the Company and its subsidiaries were obligated under
building and equipment leases expiring between 2003 and 2012. The aggregate
future minimum lease commitments under those obligations with noncancellable
terms in excess of one year are as follows:

- 2003 - $7,995

- 2004 - $6,432

- 2005 - $5,467

- 2006 - $4,448

- 2007 - $4,011

- Thereafter - $18,919

Rental expense for continuing operations under such leases for the years
ended December 31, 2002, 2001 and 2000 amounted to $5.2 million, $4.7 million
and $3.9 million, respectively.

(18) LEGAL MATTERS

The Company and three other companies entered into a consent decree in 1990
with the Federal government for the remediation of a Superfund site. The
Superfund site has been divided into three operable units. The consent decree
relates to two of the operable units. The third operable unit has not been
formally studied and, accordingly, no liability has been recorded by the
Company. The Company believes that the aggregate amount of the obligation and
timing of cash payments associated with the two operable units subject to the
consent decree are reasonably fixed and determinable. Accordingly, the
environmental obligation has been discounted at five percent. Management
estimates that as of December 31, 2002, the discounted liability over the
remainder of the twenty three years related to these two operable units is
approximately $2.3 million of which approximately $0.3 million has been
classified as current and is included in accrued liabilities. Approximately $0.6
million of the $2.3 million liability will be incurred over the next five years.

The Company is also involved in other environmental cleanup efforts, none
of which management believes is likely to have a material adverse effect on the
Company's consolidated financial position, results of operations or liquidity.

Additionally, the Company and its subsidiaries are subject to certain legal
actions that arise out of the normal course of business. It is management's
belief that the ultimate outcome of these actions will not have a material
adverse effect on the Company's consolidated financial position, results of
operations or liquidity.

(19) BUSINESS SEGMENTS

The Company determines its operating segments based upon an analysis of its
products and services, production processes, types of customers, economic
characteristics and the related regulatory environment,

55

EDO CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 2002, 2001 AND 2000

which is consistent with how management operates the Company. The Company's
continuing operations are conducted in three business segments: Defense,
Communications and Space Products, and Engineered Materials.

Our Defense segment provides integrated front-line warfighting systems and
components including electronic warfare, radar countermeasures systems,
reconnaissance and surveillance systems, aircraft weapons suspension and release
systems, airborne mine countermeasures systems, integrated combat and sonar
systems, command, control and communications systems and professional,
operational, technical and information technology services for military forces
and governments worldwide. Our Communications and Space Products segment
supplies antenna products and ultra-miniature electronics and systems for the
remote sensing and electronic warfare industries. Our Engineered Materials
segment supplies commercial and military piezo-electric ceramic products and
advanced fiber composite structural products for the aircraft, communication,
navigation, chemical, petrochemical, paper and oil industries.

Domestic U.S. Government sales, which include sales to prime contractors of
the U.S. Government, amounted to 75%, 69% and 63% of net sales, which were 82%,
77% and 69% of Defense's net sales, 62%, 55% and 66% of Communications and Space
Products' net sales and 42%, 41% and 33% of Engineered Materials' net sales for
2002, 2001 and 2000, respectively. Export sales comprised 15%, 15% and 18% of
net sales for 2002, 2001 and 2000, respectively. In addition, the Universal
Exciter Upgrade program in the Defense segment comprised approximately 14%, 15%
and 15% of net sales for 2002, 2001 and 2000, respectively.

Principal products and services by segment are as follows:

Defense Segment

- Electronic Warfare

- Radar Countermeasures Systems

- Reconnaissance and Surveillance Systems

- Aircraft Weapons Suspension and Release Systems

- Airborne Mine Countermeasures Systems

- Integrated Combat Systems

- Command, Control and Communications Systems

- Undersea Systems

- Professional, Operational, Technical and Information Technology Services

Communications and Space Products Segment

- Antenna Products

- Communications and Countermeasures Systems

- Space Products

Engineered Materials Segment

- Electro-Ceramic Products

- Advanced Fiber Composite Structural Products

56

EDO CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 2002, 2001 AND 2000

Information by segment on sales, operating earnings, identifiable assets,
depreciation and amortization, and capital expenditures is as follows for each
of the three years ended December 31:

57

EDO CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 2002, 2001 AND 2000

Merger-related costs, including IPR&D, attributable to the Condor
acquisition and the EDO-AIL merger are included in the segments as follows:

58

QUARTERLY FINANCIAL INFORMATION (UNAUDITED)

The following table sets forth unaudited quarterly financial information
for 2002 and 2001 (in thousands, except per share amounts).

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

(a) Includes merger-related costs of $0.5 million

(b) Includes merger-related costs of $0.8 million.

(c) Includes write-off of purchased in-process research and development costs of
$0.2 million and merger-related costs of $0.2 million.

(d) Includes merger-related costs of $0.2 million and a $2.0 million defined
benefit pension plan curtailment loss.

(e) Includes a $0.9 million post-retirement curtailment gain.

(f) Upon adoption of Statement of Financial Accounting Standard No. 142,
"Goodwill and Other Intangible Assets," the Company recorded a cumulative
effect of a change in accounting principle effective January 1, 2002. See
Note 1(g) to the consolidated financial statements as of and for the year
ended December 31, 2002.

59

REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS

The Board of Directors and Shareholders
EDO Corporation

We have audited the accompanying consolidated balance sheets of EDO
Corporation and subsidiaries as of December 31, 2002 and 2001, and the related
consolidated statements of earnings, shareholders' equity and cash flows for
each of the three years in the period ended December 31, 2002. Our audits also
included the financial statement schedule listed in the index at Item 15(a).
These consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.

We conducted our audits in accordance with auditing standards generally
accepted in the 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 consolidated financial statements referred to above
present fairly, in all material respects, the financial position of EDO
Corporation and subsidiaries at December 31, 2002 and 2001 and the results of
their operations and their cash flows for each of the three years in the period
ended December 31, 2002, in conformity with accounting principles generally
accepted in the United States. 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.

As discussed in Note 1(g) to the consolidated financial statements,
effective January 1, 2002, the Company changed its method of accounting for
goodwill to conform with Statement of Financial Accounting Standard No.
142,"Goodwill and Other Intangible Assets."

/s/ Ernst & Young LLP

New York, New York
February 11, 2003

60

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE

None.

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS

The information called for by Item 10 (except to the extent set forth in
this Item) is incorporated in this Report by reference to the Company's
definitive proxy statement relating to the Annual Meeting of Shareholders
anticipated to be held on April 22, 2003.

EXECUTIVE OFFICERS

61

Each officer is either elected by the board of directors or, as provided in
our By-Laws, appointed by the Chief Executive Officer and holds office until the
first meeting of the board following the next succeeding annual meeting of
shareholders, and thereafter until a successor is appointed and qualified,
unless the executive officer dies, is disqualified, resigns or is removed in
accordance with our By-Laws.

ITEM 11. EXECUTIVE COMPENSATION

The information called for by Item 11 is incorporated in this Report by
reference to the Company's definitive proxy statement relating to the Annual
Meeting of Shareholders anticipated to be held on April 22, 2003.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS

The information called for by Item 12 is incorporated in this Report by
reference to the Company's definitive proxy statement relating to the Annual
Meeting of Shareholders anticipated to be held on April 22, 2003.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

The information called for by Item 13 is incorporated in this Report by
reference to the Company's definitive proxy statement relating to the Annual
Meeting of Shareholders anticipated to be held on April 22, 2003.

ITEM 14. CONTROLS AND PROCEDURES

Evaluation of disclosure controls and procedures

Within the 90 day period prior to filing this Report, we carried out an
evaluation, under the supervision and with the participation of management,
including our Chief Executive Officer and Chief Financial Officer, of the
effectiveness of the design and operation of our disclosure controls and
procedures. Based upon the evaluation, the Chief Executive Officer and Chief
Financial Officer concluded that the design and operation of these disclosure
controls and procedures were effective to ensure that information required to be
disclosed in reports that we file or submit under the Securities Exchange Act of
1934 is recorded, processed, summarized and reported within the time periods
specified in the Securities and Exchange Commission rules and forms.

Changes in internal controls

There were no significant changes in EDO's internal controls or in other
factors that could significantly affect these controls subsequent to the date of
their evaluation.

PART IV

ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K

(a) Financial Statements and Financial Statement Schedules and Exhibits

1. FINANCIAL STATEMENTS.

Consolidated Balance Sheets as of December 31, 2002 and 2001

Consolidated Statements of Earnings for the Years Ended December 31, 2002,
2001 and 2000

Consolidated Statements of Shareholders' Equity for the Years Ended
December 31, 2002, 2001 and 2000

Consolidated Statements of Cash Flows for the Years Ended December 31,
2002, 2001 and 2000

Notes to Consolidated Financial Statements

Report of Ernst & Young LLP

62

2. FINANCIAL STATEMENT SCHEDULES.

See Schedule II -- Valuation and Qualifying Accounts below. All other
schedules have been omitted because they are not applicable.

SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS

- ---------------
(a) Amount acquired as a result of purchase of Condor Systems, Inc. on July 26,
2002.

(b) Amount acquired as a result of purchase of Dynamic Systems, Inc. on October
9, 2001.

(c) Amount acquired as a result of purchase of AIL Technologies, Inc. on April
28, 2000.

63

3. EXHIBITS.

2(a) Agreement and Plan of Merger by and among the Company, EDO
Acquisition III Inc. and AIL Technologies Inc. as amended
and restated dated January 2, 2000 (incorporated herein by
reference to the Company's Annual Report on Form 10-K for
the fiscal year ended December 31, 1999, Exhibit 2(a)).
2(b) Management Stock Purchase Agreement dated as of January 2,
2000 between the Company as Buyer and eleven individuals as
Sellers, relating to the purchase and sale of shares of
common stock of AIL Technologies Inc. (incorporated herein
by reference to the Company's Annual Report on Form 10-K for
the fiscal year ended December 31, 1999, Exhibit 2(b)).
2(c) Stock Purchase Agreement dated as of January 2, 2000 between
the Company, as Buyer, and Defense Systems Holding Co., as
Seller, relating to the purchase and sale of shares of
common and preferred stock of AIL Technologies Inc.
(incorporated herein by reference to the Company's Annual
Report on Form 10-K for the fiscal year ended December 31,
1999, Exhibit 2(c)).
2(d) Stock Purchase Agreement dated as of October 9, 2001, by EDO
Acquisition II, Inc. and the former stockholders of Dynamic
Systems, Inc., with a list of the schedules and exhibits
(incorporated herein by reference to the Company's Annual
Report on Form 10-K for the fiscal year ended December 31,
2001, Exhibit 2(d)).
2(e) Amended and Restated Asset Purchase Agreement and Amendment
1 thereto, dated as of May 31, 2002, between EDO Acquisition
IV Inc., a wholly-owned subsidiary of the Company, as Buyer,
and Condor Systems, Inc. and CEI Systems, Inc. as Sellers
(incorporated herein by reference to the Company's Current
Report on Form 8-K dated July 26, 2002, Exhibits 2.1 and
2.2).
2(f) Stock Purchase Agreement, dated as of February 5, 2003,
between EDO Professional Services Inc, a wholly-owned
subsidiary of the Company, as Buyer and four individuals as
Sellers (incorporated herein by reference to the Company's
Current Report on Form 8-K dated February 5, 2003, Exhibit
2.1).
3(a)(1) Certificate of Incorporation of the Company and amendments
thereto dated June 14, 1984, July 18, 1988 and July 22, 1988
(incorporated herein by reference to the Company's Annual
Report on Form 10-K for the fiscal year ended December 31,
1994, Exhibit 3(i)).
3(a)(2) Amendment to the Certificate of Incorporation of the Company
dated July 29, 1998 (incorporated herein by reference to the
Company's Annual Report on Form 10-K for the fiscal year
ended December 31, 1998, Exhibit 3(i)).
3(a)(3)* Amendment to the Certificate of Incorporation of the Company
dated May 17, 2002.
3(b) By-Laws of the Company effective October 1, 2002
(incorporated herein by reference to the Company's Quarterly
Report on Form 10-Q for the quarterly period ended September
28, 2002, Exhibit 3(ii)).
4(a) Indenture, dated as of April 2, 2002, by and between the
Company and HSBC Bank, USA, as trustee (incorporated herein
by reference to the Company's Quarterly Report on Form 10-Q
for the quarterly period ended March 30, 2002, Exhibit
4(a)).
4(b) Registration Rights Agreement, dated as of April 2, 2002, by
and among the Company and Salomon Smith Barney, Inc., SG
Cowen Securities Corporation and Robertson Stephens, Inc.,
as representatives of the initial purchasers (incorporated
herein by reference to the Company's Quarterly Report on
Form 10-Q for the quarterly period ended March 30, 2002,
Exhibit 4(b)).

64

10(a)(1)* Credit Agreement, dated as of November 8, 2002, by and among
the Company and AIL Systems Inc., with Citibank N.A., Fleet
National Bank, Wachovia Bank, N.A., et al.
10(a)(2)* Amendment No. 1, dated December 20, 2002, to the Credit
Agreement dated as of November 8, 2002 described above.
10(a)(3)* Amendment No. 2, dated February 4, 2003, to the Credit
Agreement dated as of November 8, 2002 described above.
10(a)(4)* Amendment No. 3, dated February 28, 2003, to the Credit
Agreement dated as of November 8, 2002 described above.
10(b) EDO Corporation 1996 Long-Term Incentive Plan (incorporated
herein by reference to the Company's Annual Report on Form
10-K for the fiscal year ended December 31, 1996, Exhibit
10(a)).
10(c)* EDO Corporation 2002 Long-Term Incentive Plan.
10(d) Executive Life Insurance Plan Agreements, as amended through
January 23, 1990, between the Company and 28 employees and
retirees (incorporated herein by reference to the Company's
Annual Report on Form 10-K for the fiscal year ended
December 31, 1994, Exhibit 10(g)).
10(e) Form of Directors' and Officers' Indemnity Agreements
between the Company and 23 current Company directors and
officers (incorporated herein by reference to the Company's
Annual Report on Form 10-K for the fiscal year ended
December 31, 1996, Exhibit 10(d)).
10(f) Consent Decree, entered on November 25, 1992, amongst the
United States, the Company, Plessey, Inc., Vernitron
Corporation and Pitney Bowes, Inc. Incorporated by reference
to Exhibit 10(e) to the Company's Annual Report on Form 10-K
for the fiscal year ended December 31, 1998.
10(g) EDO Corporation 1997 Non-Employee Director Stock Option Plan
(incorporated herein by reference to the Company's
Registration Statement on Form S-8, File No. 333-77865,
dated May 6, 1999).
10(h)* EDO Corporation 2002 Non-Employee Director Stock Option
Plan.
10(i) EDO Corporation Compensation Plan for Directors
(incorporated by reference to the Company's Annual Report on
Form 10-K for the fiscal year ended December 31, 1998,
Exhibit 10(g)).
10(j) Supplemental Executive Retirement Plan, dated July 1, 2001
(incorporated by reference to the Company's Annual Report on
Form 10-K for the fiscal year ended December 31, 2001,
Exhibit 10(i)).
10(k)* Employment Agreement, dated as of February 1, 2003, by and
between EDO Corporation and James M. Smith.
10(l)* Change in Control Agreement dated March 3, 2003 between the
Company and Frederic B. Bassett.
10(m)* Change in Control Agreement dated March 21, 2002, between
the Company and Patricia D. Comiskey.
10(n)* Change in Control Agreement dated March 25, 2002 between the
Company and George P. Fox, Jr.
10(o)* Change in Control Agreement dated March 21, 2002 between the
Company and William J. Frost.
10(p)* Change in Control Agreement dated March 22, 2002 between the
Company and Milo Hyde.

65

10(q)* Change in Control Agreement dated March 21, 2002 between the
Company and Harvey N. Kreisberg.
10(r)* Change in Control Agreement dated March 26, 2002 between the
Company and Frank W. Otto.
10(s)* Change in Control Agreement dated May 1, 2002 between the
Company and Lisa M. Palumbo.
21* List of Subsidiaries.
23* Consent of Independent Auditors

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

* Filed herewith.

(b) Reports on Form 8-K

The following reports on Form 8-K were filed during the three months ended
December 31, 2002:

66

CERTIFICATIONS

I, James M. Smith, certify that:

1. I have reviewed this annual report on Form 10-K of EDO
Corporation;

2. Based on my knowledge, this annual report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances under
which such statements were made, not misleading with respect to the period
covered by this annual report;

3. Based on my knowledge, the financial statements, and other
financial information included in this annual report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
annual report;

4. The registrant's other certifying officers and I are responsible
for establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
have:

a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this annual report is
being prepared;

b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the filing
date of this annual report (the "Evaluation Date"); and

c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;

5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons performing
the equivalent functions):

a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's ability
to record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and

b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
controls; and

6. The registrant's other certifying officers and I have indicated in
this annual report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant deficiencies
and material weaknesses.

Date: March 13, 2003

/s/ JAMES M. SMITH
--------------------------------------
James M. Smith
Chairman, President and Chief
Executive Officer

67

CERTIFICATIONS

I, Frederic B. Bassett, certify that:

1. I have reviewed this annual report on Form 10-K of EDO
Corporation;

2. Based on my knowledge, this annual report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances under
which such statements were made, not misleading with respect to the period
covered by this annual report;

3. Based on my knowledge, the financial statements, and other
financial information included in this annual report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
annual report;

4. The registrant's other certifying officers and I are responsible
for establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
have:

a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this annual report is
being prepared;

b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the filing
date of this annual report (the "Evaluation Date"); and

c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;

5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons performing
the equivalent functions):

a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's ability
to record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and

b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
controls; and

6. The registrant's other certifying officers and I have indicated in
this annual report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant deficiencies
and material weaknesses.

Date: March 13, 2003

/s/ FREDERIC B. BASSETT
--------------------------------------
Frederic B. Bassett
Vice President-Finance,
Treasurer and Chief Financial Officer

68