EDO CORP - 10-K Annual Report

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

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

FOR THE FISCAL YEAR ENDED: DECEMBER 31, 2004

OR

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

FOR THE TRANSITION PERIOD FROM TO

COMMISSION FILE NUMBER 1-3985

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

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

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

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

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

SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
NONE

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

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

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

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

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

DOCUMENTS INCORPORATED BY REFERENCE:

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

TABLE OF CONTENTS

1

PART I

ITEM 1. BUSINESS

INTRODUCTION

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

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

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

ACQUISITIONS

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

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

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

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

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

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

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

SEGMENTS

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

Our reporting segments currently consist of the following business units:

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

DEFENSE SEGMENT

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

ELECTRONIC WARFARE SYSTEMS

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

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

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

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

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

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

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

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

RECONNAISSANCE AND SURVEILLANCE SYSTEMS

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

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

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

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

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C4I PRODUCTS AND SERVICES

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

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

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

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

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

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

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

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

5

RUGGED COMPUTERS AND ELECTRONICS

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

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

AIRCRAFT ARMAMENT

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

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

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

In 2004, we:

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

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

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

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

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

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

6

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

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

UNDERSEA WARFARE

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

AIRBORNE MINE COUNTERMEASURES SYSTEMS

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

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

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

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

SONAR SYSTEMS

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

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

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

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

PROFESSIONAL AND ENGINEERING SERVICES

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

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

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

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

- Training & Performance Systems

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

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

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

- Systems Engineering

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

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

- Operation Analysis and Program Management

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

COMMUNICATIONS AND SPACE PRODUCTS SEGMENT

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

ANTENNA PRODUCTS

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

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

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

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

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

ELECTRONIC FORCE PROTECTION

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

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

INTERFERENCE CANCELLATION

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

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

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

SPACE PRODUCTS

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

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ENGINEERED MATERIALS SEGMENT

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

ELECTRO-CERAMIC PRODUCTS

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

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

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

INTEGRATED COMPOSITE STRUCTURES

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

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

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

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

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

10

RESEARCH AND DEVELOPMENT

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

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

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

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

MARKETING AND INTERNATIONAL SALES

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

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

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

11

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

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

BACKLOG

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

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

GOVERNMENT CONTRACTS

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

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

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

COMPETITION AND OTHER FACTORS

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

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

12

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

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

ENVIRONMENTAL

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

EMPLOYEES

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

RISK FACTORS

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

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

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

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

- terminate contracts for its convenience;

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

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

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

- control or prohibit the export of our products.

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

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

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

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

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

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

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

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

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

- design complexity and rapid technological obsolescence; and

- the constant need for design improvement.

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

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

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

14

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

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

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

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

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

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

- diversion of management's attention from existing operations;

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

- exposure to unforeseen liabilities of acquired companies.

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

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

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

15

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

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

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

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

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

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

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

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

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

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

16

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

- borrow additional money or issue guarantees;

- pay dividends or other distributions to shareholders;

- make investments;

- create liens on assets;

- sell assets;

- enter into transactions with affiliates; and

- engage in mergers or consolidations.

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

ITEM 2. PROPERTIES

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

18

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

ITEM 3. LEGAL PROCEEDINGS

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

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

19

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

None.

PART II

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

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

20

ITEM 6. SELECTED FINANCIAL DATA

SELECTED FINANCIAL DATA

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

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

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

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

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

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

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

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

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

OVERVIEW

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

- Defense Electronics

- Aircraft Armament

- Undersea Warfare

- Professional Services

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

- Integrated Composite Structures

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

22

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

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

ACQUISITIONS

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

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

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

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

23

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

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

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

SALE OF PROPERTY

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

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

DISCUSSION OF CRITICAL ACCOUNTING POLICIES

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

REVENUE RECOGNITION

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

INVENTORIES

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

24

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

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

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

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

PROPERTY, PLANT AND EQUIPMENT AND OTHER LONG-LIVED ASSETS

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

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

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

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

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

PENSION AND POST-RETIREMENT BENEFITS OBLIGATIONS

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

25

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

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

FINANCIAL HIGHLIGHTS

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

RECENT ACCOUNTING PRONOUNCEMENTS

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

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

26

RESULTS OF OPERATIONS

COMPARISON OF 2004 TO 2003

Net sales by segment were as follows:

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

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

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

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

27

Operating earnings were as follows:

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

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

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

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

28

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

The Engineered Materials segment's operating earnings for the year ended
December 31, 2004 were $5.4 million or 11.3% of this segment's net sales
compared to operating earnings of $2.4 million or 5.3% of this segment's net
sales for the year ended December 31, 2003. Strong margins on spares primarily
contributed to the increase in operating earnings. In the second quarter of
2004, there was a negative impact of $0.8 million which related to the undersea
warfare systems program issue in the Defense segment. A component for sonar
equipment produced in the engineered materials segment experienced failures
during testing. The estimate of the cost to remedy the problem resulted in the
$0.8 million charge to earnings. During the year ended December 31, 2004, this
segment's operating earnings were positively affected by a net $0.4 million,
resulting from $1.1 million received in a settlement of a legal matter,
partially offset by related legal fees. During the year ended December 31, 2003,
we incurred a charge of $0.7 million to write-down inventory and receivables
related to the microwave product line that serviced the telecommunications
industry. As sales were not materializing to expected levels, we conducted an
analysis which resulted in the write-down of $0.6 million of inventory and $0.1
million of unbilled receivables.

Selling, general and administrative expenses for the year ended December
31, 2004 of $78.8 million decreased as a percent of net sales to 14.7% from
15.6% for the year ended December 31, 2003. This decrease was attributable
primarily to facilities consolidations and other synergies achieved on the AERA
and Darlington acquisitions. Included in selling, general and administrative
expenses in 2004 and 2003 were $2.2 million and $1.1 million, respectively, of
external costs for compliance with Sarbanes-Oxley. We have not quantified the
internal costs.

Research and development expense for the year ended December 31, 2004
increased to $11.6 million or 2.2% of net sales from $8.6 million or 1.9% of net
sales for the year ended December 31, 2003. The increase is attributable to
expenditures in reconnaissance and surveillance systems and force protection
systems.

Interest expense, net of interest income, for the year ended December 31,
2004 decreased to $7.8 million compared to $8.2 for the year ended December 31,
2003, primarily due to higher interest income on a higher average cash balance.
Interest expense is associated primarily with our $137.8 million principal
amount of 5.25% Convertible Subordinated Notes ("Notes") issued in April 2002,
amortization of deferred debt issuance costs associated with the offering of the
Notes, and amortization of deferred financing costs associated with our credit
facility.

Income tax expense reflects an effective rate of 34.9% for the year ended
December 31, 2004 and 41.8% for the year ended December 21, 2003. In 2004, the
Company recorded an income tax benefit of $2.8 million due to the reversal of
income tax contingencies which were determined to be no longer needed during the
fourth quarter of 2004.

For the year ended December 31, 2004, net earnings were $29.1 million or
$1.49 per diluted common share on 22.4 million diluted shares compared to net
earnings from continuing operations of $13.4 million or $0.76 per diluted common
share on 17.6 million diluted shares for the year ended December 31, 2003. The
convertible notes had a dilutive effect for the year ended December 31, 2004,
but not for the year ended December 31, 2003. In the year ended December 31,
2003, we received notification of final settlement of bankruptcy matters
pertaining to our former energy business. Upon the discontinuance of such
business in 1996, a liability was established pending final settlement of the
bankruptcy. This liability was reversed as of December 31, 2003. Consequently,
$1.4 million, which was net of income tax expense of $1.0 million, was reported
as earnings from discontinued operations in the accompanying statement of
earnings.

29

COMPARISON OF 2003 TO 2002

Net sales by segment were as follows:

Net sales for the year ended December 31, 2003 increased 40.1% to $460.7
million from $328.9 million for the year ended December 31, 2002. This increase
comprised sales growth of $116.4 million for the Defense segment, $8.2 million
for the Communications and Space Products segment and $7.0 million for the
Engineered Materials segment.

In the Defense segment, $91.3 million of the net increase was attributable
to sales of Emblem Group Ltd. ("Emblem"), Darlington, Inc. ("Darlington"), and
Advanced Engineering & Research Associates, Inc. ("AERA") since their
acquisition dates of June 16, March 10, and February 5, 2003, respectively. In
addition, $48.4 million of the increase is attributable to a full year's worth
of sales of reconnaissance and surveillance systems associated with the
acquisition of substantially all of the assets of Condor Systems, Inc.
("Condor"), compared to only five months in 2002. In addition, there were
increases in sales of aircraft weapons suspension and release systems due in
part to the F/A-22 AMRAAM Vertical Eject Launcher program, the BRU-57 Multiple
Carriage Smart Bomb Rack program, and development efforts on the Joint Strike
Fighter weapons suspension and release units programs. Sales of undersea sonar
systems and aircraft radar signal simulator units also increased in 2003
compared to 2002. These increases were offset by decreases in sales of
electronic warfare equipment as well as integrated combat systems. The decrease
in sales of electronic warfare equipment was due to the completion of the
Universal Exciter Upgrade ("UEU") production program in the third quarter of
2003. The decrease in integrated combat systems was due primarily to delays in
receipt of orders from foreign customers.

In the Communications and Space Products segment, most of the net increase
in sales was attributable to a full year's worth of sales of electronic
protection systems from the aforementioned acquisition of Condor compared to
only five months in 2002. 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. There
were also increases in sales of integrated composite structures including work
associated with the Sikorsky Comanche program as well as production and
installation of our composite pipe on offshore oil rig projects resulting from
increased activity in the Gulf of Mexico.

30

Operating earnings by segment were as follows:

Operating earnings for the year ended December 31, 2003 were $30.9 million
or 6.7% of net sales. This compares to operating earnings for the year ended
December 31, 2002 of $29.4 million or 8.9% of net sales. The 2003 results were
negatively impacted by a $9.2 million loss on the sale of our facility in Deer
Park, a $0.9 million curtailment loss associated with our non-qualified pension
plan, and $0.9 million of costs associated with the acquisition of the former
Condor business. In 2002, operating earnings included a $2.0 million curtailment
loss associated with our defined benefit pension plan and $0.6 million of costs
associated with the acquisition of substantially all of the assets of the former
Condor business. In addition, 2003 operating earnings include $4.9 million of
intangible asset amortization expense associated with the Condor, AERA,
Darlington and Emblem acquisitions. This compares to total amortization expense
of approximately $1.0 million for 2002. Also included in operating earnings for
the year ended December 31, 2003 is pension expense of $3.9 million and ESOP
compensation expense of $3.3 million. Included in operating earnings for the
year ended December 31, 2002 is pension expense of $4.0 million and ESOP
compensation expense of $4.0 million. The lower ESOP compensation expense for
2003 is attributable to our lower average stock price in 2003 compared to 2002.
Pension and ESOP compensation expense are allocated between cost of sales and
selling, general and administrative expense.

The Defense segment's operating earnings for the year ended December 31,
2003 were $35.0 million or 9.7% of this segment's net sales compared to $28.7
million or 11.8% of this segment's net sales for the year ended December 31,
2002. In 2003, operating earnings were positively affected by higher-margin
sales of reconnaissance and surveillance systems from the acquisition of
substantially all of the assets of Condor, efficiencies achieved on higher
production volume associated with our radar signal simulator, and higher margin
sales of aircraft weapons suspension and release systems. The completion of
production activities on certain long-term programs, including the UEU, also
resulted in earnings at relatively high margins. In addition, there were high
margins recognized on various B-1B spares and repairs contracts. These increases
were offset in part by a shift in the margins of mine countermeasure systems
from higher-margin production on the MK105 program last year to lower-margin,
non-recurring development efforts this year associated with OASIS, as well as by
the aforementioned lower sales of combat systems. Operating earnings for 2003
were also negatively impacted by amortization expense pertaining to intangible
assets associated with acquisitions.

The Communications and Space Products segment's operating earnings for the
year ended December 31, 2003 were $3.6 million or 6.5% of this segment's net
sales compared to an operating loss of $0.4 million or 0.9% of this segment's
net sales in 2002. In 2003, operating earnings in this segment were negatively
impacted by a $1.1 million pre-tax charge to write down satellite-related
inventory to net realizable value. This reduction was caused by competitive
price pressure from our major customer as well as some obsolescence. This charge
was more than offset by the receipt of an award fee on a classified program as
well as the contribution from the higher sales of communications systems from
the acquisition of substantially all of the assets of Condor. Included in the
2002 operating loss was a $1.5 million charge to provide for manufacturing
inefficiencies resulting from our primary customer's decrease in its forecasted
purchases of our satellite down converters.

The Engineered Materials segment's operating earnings for the year ended
December 31, 2003 were $2.4 million or 5.3% of this segment's net sales compared
to operating earnings of $3.1 million or 8.3% of this
31

segment's net sales in 2002. During the year ended December 31, 2003, we
incurred a pre-tax charge of $0.7 million to write down inventory and
receivables related to the microwave product line that services the
telecommunications industry. As sales from such product line were not
materializing to expected levels set forth in the business plan for this line,
we conducted an analysis of market potential. Such analysis was completed in the
second quarter of 2003 and indicated that approximately $0.1 million of unbilled
receivables were unrecoverable and that the net realizable value of the related
inventory was $0.6 million lower than its book value. In addition, the decrease
in this segment's operating earnings as a percentage of net sales was due to a
decrease in contribution from composite structural products resulting from a
shift in sales to lower-margin, non-recurring engineering efforts associated
with the Sikorsky Comanche program.

Selling, general and administrative expenses for the year ended December
31, 2003 increased to $71.9 million or 15.6% of net sales from $47.6 million or
14.5% of net sales for the year ended December 31, 2002. This increase was
primarily attributable to three acquisitions made in 2003.

Research and development expense for the year ended December 31, 2003
increased slightly to $8.6 million or 1.9% of net sales from $8.5 million or
2.6% of net sales for the year ended December 31, 2002. As a percent of sales,
the decrease is attributable to the absence of such expenditures in the services
businesses.

Interest expense, net of interest income, for the year ended December 31,
2003 increased 64.5% to $8.2 million from $5.0 million for the year ended
December 31, 2002, due primarily to interest expense associated with our $137.8
million principal amount Notes issued in April 2002, 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.

Income tax expense reflects an effective rate of 41.8% for the year ended
December 31, 2003 compared to 42.5% for the year ended December 31, 2002. The
decrease in the effective tax rate was principally attributable to the decreased
amount of non-deductible, non-cash ESOP compensation expense in 2003.

For the year ended December 31, 2003, earnings available for common shares
were $14.8 million or $0.84 per diluted common share on 17.6 million diluted
shares compared to earnings before cumulative effect of change in accounting
principle of $14.0 million or $0.81 per diluted common share on 17.4 million
diluted shares for the year ended December 31, 2002. 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.

LIQUIDITY AND CAPITAL RESOURCES

BALANCE SHEET

Our cash and cash equivalents increased 14.1% to $98.9 million at December
31, 2004 from $86.6 million at December 31, 2003. Cash generated from operations
was $25.7 million. Investing activities included $14.0 million used for the
purchase of capital equipment, partially offset by $1.2 million received on
notes receivable and $0.3 million received upon settlement of an escrow related
to the purchase of Emblem. Financing activities included $2.4 million used for
payment of common share cash dividends, partially offset by $1.5 million of
proceeds from the exercise of stock options.

Accounts receivable increased 14.5% to $153.8 million at December 31, 2004
from $134.3 million at December 31, 2003. The increase is attributable to the
higher sales volume. The majority of the increase relates to timing of billed
receivables.

32

Inventories increased 52.2% to $52.9 million at December 31, 2004 from
$34.7 million at December 31, 2003 due primarily to the efforts expended on
work-in-progress on major programs, such as the force protection systems program
for which deliveries will continue into 2005.

The notes receivable of $7.2 million at December 31, 2004 (all in current
assets) and $8.1 million at December 31, 2003 (of which $1.6 million was in
current assets) represent the notes receivable from the sale of our facility in
Deer Park in 2003 and the sale of our former College Point facility in January
1996. The Deer Park facility note is due no later than October 9, 2005. The
College Point facility note is due in annual amounts through September 2005 with
a final payment due on December 31, 2005 and bears interest at 7% per annum. The
latter note receivable is secured by a mortgage on the facility.

FINANCING ACTIVITIES

Credit Facility

We have a $200.0 million credit facility with a consortium of banks, led by
Citibank, N.A. as the administrative agent, Bank of America as the syndication
agent and Wachovia Bank, N.A. as the documentation agent. The facility expires
in November 2005. 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. Any
borrowings under the facility would 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, 2004, LIBOR was
approximately 2.55% 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, 2004 or 2003. Letters of credit outstanding at December 31, 2004
pertaining to the credit facility were $39.8 million, resulting in $85.2 million
available at December 31, 2004 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
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. Also, the Company cannot declare or pay any dividend on
its outstanding common stock in an amount that exceeds fifty percent of its
consolidated net income for the immediately preceding quarter. As of December
31, 2004, we were in compliance with our covenants. The credit facility is
secured by our accounts receivable, inventory and machinery and equipment.

5.25% Convertible Subordinated Notes due 2007("Notes")

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 liabilities on our
consolidated balance sheet, was $1.5 million at December 31, 2004 and 2003.

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, 2004, there had been no conversions.

Shelf Registration

On December 23, 2003, we filed a shelf registration statement to
potentially offer for sale common shares, preferred shares, debt securities and
warrants. We may sell any combination of the foregoing securities in one or more
offerings up to an aggregate initial offering price of $500,000,000.

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 funding of our pension and post-retirement
benefit
33

obligations. 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, 2004, we have included the following table. We are obligated under
building and equipment leases expiring between 2005 and 2017. The aggregate
future minimum lease commitments under those obligations with noncancellable
terms in excess of one year are shown below. Our commitments under letters of
credit and advance payment and performance bonds relate primarily to advances
received on foreign contracts should we fail to perform in accordance with the
contract terms. 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.

Actual pension contributions may differ from amounts presented above and
are contingent on cash flow and liquidity.

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. 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.

BACKLOG

The funded backlog of unfilled orders at December 31, 2004 increased to
$474.6 million from $462.3 million at December 31, 2003. Our backlog consists
primarily of current orders under long-lived, mission-critical programs on key
defense platforms.

COMMON SHARE PRICES

EDO common shares are traded on the New York Stock Exchange. As of February
21, 2005, there were 1,803 shareholders of record (brokers and nominees counted
as one each).

34

The price range in 2004 and 2003 was as follows:

DIVIDENDS

During 2004 and 2003, 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.

PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS

None.

"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, the
general state of world military readiness and deployment; and the ability to
obtain export licenses.

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; underestimation 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.

35

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

CONSOLIDATED STATEMENTS OF EARNINGS

EDO CORPORATION AND SUBSIDIARIES

See accompanying Notes to Consolidated Financial Statements.
36

CONSOLIDATED BALANCE SHEETS

EDO CORPORATION AND SUBSIDIARIES

See accompanying Notes to Consolidated Financial Statements.
37

CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY

EDO CORPORATION AND SUBSIDIARIES

See accompanying Notes to Consolidated Financial Statements.
39

CONSOLIDATED STATEMENTS OF CASH FLOWS

EDO CORPORATION AND SUBSIDIARIES

See accompanying Notes to Consolidated Financial Statements.
41

EDO CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2004, 2003 AND 2002

(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.

(b) 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. Included in
cash equivalents is marketable securities that are held in mutual funds.

(c) 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 or provided, production efficiencies, price
competition and general economic conditions. Estimated losses on long-term
contracts are recorded when identified.

(d) INVENTORIES

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

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

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

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

42

EDO CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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

Property, plant and equipment are recorded at cost and is generally
depreciated on a straight-line basis over the estimated useful lives of such
assets. Amortization of leasehold improvements is computed using the
straight-line method over the shorter of the remaining lease term or the
estimated useful lives of the improvements.

In those cases where the Company determines that the useful life of
property, plant and equipment 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.

The Company reviews its long-lived assets for impairment in accordance with
Financial Accounting Standards Board ("FASB") Statement of Financial Accounting
Standard ("SFAS") No. 144, "Accounting for Impairment or Disposal of Long-Lived
Assets". The Company adopted SFAS No. 144 on January 1, 2002. SFAS No. 144
requires the Company to review its long-lived assets for impairment whenever
events or changes in circumstances indicate that the carrying amount of any such
asset may not be recoverable. The estimate of cash flow, which is used to
determine recoverability, is based upon, among other things, certain assumptions
about future operating performance.

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

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 2004 and 2003, the Company capitalized approximately $0.6
million and $4.3 million, respectively, of such costs. These costs are being
amortized on a straight-line basis over periods ranging from two to four years.

Deferred financing costs are amortized on a straight-line basis over the
life of the related financing. The unamortized balances of $2.7 million and $4.1
million are included in other assets at December 31, 2004 and 2003,
respectively.

(f) BUSINESS COMBINATIONS AND GOODWILL AND OTHER INTANGIBLE ASSETS

In June 2001, the FASB issued 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.

In accordance with SFAS No. 142, 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

43

EDO CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

implied fair value is less than the carrying value in order to determine the
amount, if any, of the impairment loss required to be recorded. Impairment
indicators include, among other conditions, cash flow deficits, an historic or
anticipated decline in revenue or operating profits, adverse legal or regulatory
developments, accumulation of costs significantly in excess of amounts
originally expected to acquire the asset and/or a material decrease in the fair
value of some or all of the assets. The Company performs the required impairment
tests of goodwill as of October 1 each year. There was no indication of
impairment at December 31, 2004 and 2003.

The changes in the carrying amount of goodwill by segment for the years
ended December 31, 2004 and 2003 are as follows:

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

The amortization expense for the years ended December 31, 2004, 2003 and
2002 amounted to $5.5 million, $4.9 million and $0.9 million, respectively.
Amortization expense for 2005, 2006, 2007, 2008,

44

EDO CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

2009 and thereafter related to these intangible assets is estimated to be $5.3
million, $5.3 million, $5.1 million, $4.5 million, $4.4 million and $25.8
million, respectively.

(g) 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.

(h) 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.

(i) 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, 2004 was approximately $146.8 million based on recent market
transactions compared to a carrying value of $137.8 million. At December 31,
2003, the fair value of the Notes was approximately $150.6 million based on
recent market transactions compared to a carrying value of $137.8 million. 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.

(j) 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.

(k) 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. The following table illustrates the effect on net earnings and
earnings per share if the Company had applied the fair market value recognition
provisions of SFAS No. 123 "Accounting for Stock-Based Compensation" whereby
compensation expense would be recognized as incurred for stock-based employee
compensation. For purposes of pro forma disclosures, the estimated fair value of
the options is amortized to expense over the options' vesting period. The per
share weighted-average fair value of stock options granted was $13.06, $10.63
and $15.28 in 2004, 2003 and 2002, respectively, on the dates of grant using the
Black Scholes option-pricing model with the following weighted-average
assumptions: 2004 -- expected dividend yield of 1%, risk free interest rate of
3.8%, expected volatility of 47%, and an expected option life of 6 years;
2003 -- expected dividend yield of 1%, risk free interest rate of 3.6%, expected
volatility of 51%, and an expected option life of 7 1/2 years; 2002 -- expected

45

EDO CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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.

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

(l) RECLASSIFICATIONS

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

(2) ACQUISITIONS

On June 16, 2003, the Company acquired for cash all of the stock of Emblem
Group Ltd. ("Emblem"), a privately-held company based in Brighton, England.
Emblem, now known as EDO (UK) Ltd., is a supplier of aerospace and defense
products and services, primarily through its MBM Technology Ltd. unit in
England, now known as EDO MBM Technology Ltd., and Artisan Technologies, Inc.
subsidiary in the United States, now known as EDO Artisan. Emblem has a core
competency in aircraft weapons-carriage and interfacing systems that reinforces
EDO's position as a global leader in aircraft armament release systems. Emblem
is expected to broaden the Company's customer base in Europe. The purchase price
was L16.1 million ($27.0 million), excluding transaction costs of approximately
$1.9 million. In the second quarter of 2004 we received $0.3 million from an
escrow account resulting in a decrease in purchase price and, therefore,
goodwill. Emblem became part of the Company's Defense segment. The excess of the
purchase price over the net assets acquired recorded as goodwill and other
intangibles related to Emblem's units located in England is deductible

46

EDO CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

for U.S. income tax purposes over 15 years. The excess of the purchase price
over the net assets acquired related to Artisan Technologies, Inc. is not
deductible for income tax purposes.

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

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

On July 26, 2002, a wholly-owned subsidiary of the Company acquired
substantially all of the assets and assumed certain liabilities of Condor
Systems, Inc., a privately-held defense electronics company and its domestic
subsidiary (together, "Condor") for $62.5 million in cash, in addition to
transaction costs of $5.0 million. The acquisition expanded the Company's
electronic warfare business in the areas of reconnaissance and surveillance
systems. The assets became part of the Company's Defense and Communications and
Space Products segments. The excess of the purchase price over the net assets
acquired recorded as goodwill, IPR&D and other intangible assets is deductible
for income tax purposes over 15 years.

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

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

47

EDO CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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

Adjustments resulting from the settlement of purchase prices on AERA,
Darlington and Emblem have been made.

Unaudited pro forma results of operations, assuming the acquisitions of
Emblem, Darlington, AERA and Condor had been completed at the beginning of each
period are summarized below. The results reflect adjustments to net sales, cost
of sales, amortization expense, compensation expense, purchased in-process
research and development costs, interest income and expense and income tax
expense. The interest rate used in determining pro forma adjustments to interest
income or expense was based on the average yield of the Company's invested cash
and cash equivalents and approximated 1.0% for each of the respective periods
presented below.

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

(3) DISCONTINUED OPERATIONS

In 2003, we received notification of final settlement of bankruptcy matters
pertaining to our former energy business. Upon the discontinuance of such
business in 1996, a liability was established pending final settlement of the
bankruptcy. This liability was reversed in the second quarter of 2003.
Consequently, $1.4 million, net of income tax expense of $1.0 million, was
reported as earnings from discontinued operations in the accompanying statement
of earnings.

48

EDO CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

(4) ACCOUNTS AND NOTES RECEIVABLE

Accounts receivable included $51.8 million and $44.1 million at December
31, 2004 and 2003, respectively, of unbilled revenues. Substantially all of the
unbilled balances at December 31, 2004 will be billed and are expected to be
collected during 2005. Total billed receivables due from the United States
Government, either directly or as a subcontractor to a prime contractor with the
Government, were $70.9 million and $67.6 million at December 31, 2004 and 2003
respectively.

Notes receivable consist of the following at December 31, 2004 and December
2003:

The original notes from the sale of the College Point facility in January 1996
were to be paid in full by December 31, 2004. However, one note was collected in
full in 2004 and the other note was amended and extended to December 31, 2005.
The latter note is due in equal quarterly amounts through September 2005 with a
final payment of $0.1 million due on December 31, 2005 and bears interest at 7%
per annum. It is secured by a mortgage on the facility. Also included in notes
receivable is the note related to the sale of the Company's Deer Park facility
in July 2003. The note is due no later than October 9, 2005. The note accrues
imputed interest at 4% per annum and will be paid with the note.

(5) INVENTORIES

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

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EDO CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

(6) PROPERTY, PLANT AND EQUIPMENT, NET

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

On June 24, 2003, the Board of Directors of the Company approved the
decision to sell the Company's 726,000 square foot facility in Deer Park, NY.
The Company recorded a pre-tax impairment loss of $9.2 million in the second
quarter of 2003, as the net book value of the assets exceeded the fair value
less the costs to sell. The fair value was based on a $29.0 million sales price
per the sales agreement entered into in July 2003. This impairment charge
represents the entire loss the Company expects to incur.

Of the $29.0 million sales price, $22.0 million is in cash and $7.0 million
is in the form of a purchase money mortgage and note. The Company closed on the
sale in October 2003 and received the cash less closing payments. The note
receivable is due no later than October 9, 2005. As part of the agreement, we
will lease the facility through October 10, 2005, with the option to terminate
before such date. The lease agreement does not have any renewal or buyout
options.

(7) ACCRUED LIABILITIES

Accrued liabilities consisted of the following at December 31:

(8) LONG-TERM DEBT AND CREDIT FACILITY

CREDIT FACILITY

At December 31, 2004, the Company has a $200 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. In connection with
the amended

50

EDO CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

facility, $0.4 million and $0.9 million of deferred finance costs are included
in other assets on the accompanying consolidated balance sheet at December 31,
2004 and 2003, respectively, 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. Any borrowings under the facility
would 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, 2004, LIBOR was approximately 2.55% 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, 2004 or 2003. Letters of credit outstanding at December 31, 2004
pertaining to the credit facility were $39.8 million, resulting in $85.2 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. Also, the Company cannot declare or pay any dividend on its
outstanding common stock in an amount that exceeds fifty percent of its
consolidated net income for the immediately preceding quarter. As of December
31, 2004, 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,
was $1.5 million at December 31, 2004 and 2003.

In connection with the offering of the Notes, there are $2.1 million and
$3.1 million of unamortized debt issuance costs at December 31, 2004 and 2003,
respectively, 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, 2004, there had been
no such conversions.

(9) EMPLOYEE STOCK OWNERSHIP PLAN AND TRUST

The Company sponsors an employee stock ownership plan (ESOP) which provides
retirement benefits to substantially all employees.

The ESOP has an indirect loan from the Company payable through December 31,
2017. As quarterly payments are made under the indirect loan, unallocated common
shares in the 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) a special allocation for employees who meet certain service
requirements; (iii) a

51

EDO CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

fixed amount per participant chosen annually; and (iv) 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 2004, 2003 and 2002, non-cash ESOP compensation expense recorded by the
Company amounted to $4.3 million, $3.3 million, and $4.0 million, respectively.
At December 31, 2004, there are 2,161,180 unearned/unallocated shares which have
an aggregate market value of $68.6 million and 1,756,996 allocated shares. Total
principal and interest payments made in 2004, 2003, and 2002 under the merged
ESOP indirect loan amounted to $1.7 million in each of the three years.

(10) INCOME TAXES

The 2004, 2003 and 2002 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:

52

EDO CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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

The Company is subject to ongoing tax examinations in various
jurisdictions, which may result in challenges to tax positions taken and,
accordingly, the Company may record adjustments to provisions based on the
probable outcomes of such matters. However, the Company believes that the
resolution of these matters will not have a material effect on its financial
position, results of operations or cash flows. In 2004, the Company recorded an
income tax benefit of $2.8 million due to the reversal of income tax
contingencies which were determined to be no longer needed during the fourth
quarter of 2004.

(11) SHAREHOLDERS' EQUITY

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, 2004, the Company had acquired
approximately 4,091,000 common shares in open market transactions at prevailing
market prices. Approximately 4,046,000 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, 2004 and 2003,
respectively, the Company held 94,585 and 88,128 common shares in its treasury
for future use.

At December 31, 2004, the Company had reserved 6,083,511 authorized and
unissued common shares for stock option and long-term incentive plans and
conversion of the Notes.

53

EDO CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

(12) EARNINGS PER SHARE

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

The assumed conversion of the Notes was dilutive for 2004 and anti-dilutive
for 2003 and 2002.

The following table summarizes, for each year presented, the number of
shares excluded from the computation of diluted earnings per share, as their
effect upon potential issuance was anti-dilutive.

(13) 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.

54

EDO CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Changes in options outstanding are as follows:

The options outstanding as of December 31, 2004 are summarized as follows:

The 2002 LTIP also provides for restricted common share long-term incentive
awards as defined under the plan. As of December 31, 2004 plan participants had
been awarded 521,000 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 fair value of a restricted common share award is calculated as the average
of the high and low market values of our common shares on the grant date, as
reported for such date on a national exchange or nationally recognized system of
price quotation. In the event that there are no transactions reported on such
exchange or system on such date, the average would be based on the high and low
market values of our common shares on the immediately preceding date. The amount
charged to operations in 2004, 2003 and 2002 was $0.9 million, $0.3 million and
$0.2 million, respectively. The increase in the expense for 2004 compared to
prior years is due to an increase in the amount of shares granted in 2004 as
well as the higher fair value on the date of grant. As of December 31, 2004,
591,511 shares are available for additional awards.

(14) OTHER EMPLOYEE BENEFIT PLANS

DEFINED BENEFIT PLANS

The Company maintains a qualified noncontributory defined benefit pension
plan covering less than one half of its employees. In November 2002, the plan
was amended whereby participation and 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 at least equal to the minimum
required contribution and are tax deductible.

55

EDO CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

In 2004, 2003 and 2002 the Company recorded pension expense of $2.2
million, $3.9 million and $6.0 million, respectively. For 2002, the expense
included a curtailment loss of $2.0 million resulting from the aforementioned
amendment to the plan.

A summary of the weighted-average rate assumptions as of December 31 used
in pension calculations follows. (Since the Company froze the defined benefit
plan in December 2002 there is no future compensation increase for subsequent
years.)

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

Plan asset investment decisions are made by the Pension Investment
Committee of the Board of Directors. This committee utilizes the services of a
financial advisor in the selection and monitoring of specific asset managers. At
its periodic meetings the committee reviews the performance of various funds
against benchmarks and makes investment decisions which are then carried out by
the fund trustee. The target asset allocation is 70% equity instruments and 30%
fixed income instruments. The assets are invested in a variety of both actively
managed and passive funds chosen by the committee. Furthermore, equity
investments are diversified across U.S. and non-U.S. stocks, as well as growth,
value, and small and large capitalizations. Our plan investments are diversified
to mitigate any adverse results from one security class on the entire investment
portfolio. A small amount of excess return is expected from active investment
management.

PLAN ASSETS

The assets of the Company's defined benefit plans are managed on a
commingled basis in a third party master trust. The investment policy and
allocation of the assets in the master trust were approved by the Company's
Pension Plans Investment Committee of the Board of Directors, which has
oversight responsibility for the Company's retirement plans.

56

EDO CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The investment allocation for each major asset class as a percent of plan
asset fair value as of December 31 is as follows:

In 2004, the Company made no contribution to the plan compared to a
contribution of $5.0 million in 2003. The Company plans to contribute up to $6.0
million in 2005.

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

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

57

EDO CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Due to the lower discount rate, offset by positive fund performance, the
accumulated benefit obligation at December 31, 2004 and 2003 exceeded the fair
value of plan assets by $60.7 million and $40.4 million, respectively. The
Company recorded an additional minimum liability of $66.4 million and $48.4
million as of December 31, 2004 and 2003, respectively. Consequently, net of tax
comprehensive loss of $10.7 and income of $4.2 million were charged against
shareholders' equity in 2004 and 2003, respectively. Amounts recognized in the
consolidated balance sheets at December 31 are as follows:

ESTIMATED FUTURE BENEFIT PAYMENTS

The following table presents estimated future benefit payments:

NON-QUALIFIED PLANS

The Company 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. In November 2003 the plan was amended
whereby benefits under the plan were frozen for all but two individuals as of
December 31, 2003. Consequently, a curtailment charge of $0.9 million was
recorded in 2003. The plan is unfunded and has no assets.

A summary of the weighted-average assumptions as of December 31 used in
pension calculations follows:

Total expenses under the non-qualified plans in 2004, 2003 and 2002 were
$1.2 million, $2.6 million and $1.4 million, respectively. The 2003 expense
included the aforementioned $0.9 million curtailment charge.

58

EDO CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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:

The accumulated benefit obligation at December 31, 2004 and 2003 exceeded
the fair value of plan assets by $15.1 million and $10.8 million, respectively.
The Company recorded an additional minimum liability of $6.1 million and $2.1
million as of December 31, 2004 and 2003, respectively. Consequently, a net of
tax comprehensive loss of $2.4 million and income of $0.4 million were charged
against shareholders' equity in

59

EDO CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

2004 and 2003, respectively. Amounts recognized in the consolidated balance
sheets at December 31 are as follows:

ESTIMATED FUTURE PENSION BENEFIT PAYMENTS

The following table presents estimated future benefit payments:

401(K) PLANS

The Company sponsors a 401(k) plan covering substantially all employees
which provides for a match 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.

(15) 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 included the
following components:

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EDO CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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 5.75% and 6.25% at December 31,
2004 and 2003, 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.

The effects of a one percentage point change in the assumed health care
cost trend rates would have had the following effects increase/(decrease) in
cost and/or obligation on the results for fiscal year 2004:

The above 1% increase/decrease trend is based primarily on the change in
dental trend rates, since medical plan benefits are capped.

AIL POST-RETIREMENT BENEFIT PLAN

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

61

EDO CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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

Actuarial assumptions used in determining the accumulated post-retirement
benefit obligation include a discount rate of 5.75% and 6.25% at December 31,
2004 and 2003, respectively. The accumulated benefit obligation would not be
affected by increases in healthcare costs for retirees since such costs are
funded by the participants. Healthcare trend costs will only affect the amounts
related to disabled participants.

The effects of a one percentage point change in the assumed health care
cost trend rates would have had the following effects increase/(decrease) in
cost and/or obligation on the results for fiscal year 2004:

(16) COMMITMENTS AND CONTINGENCIES

In order to aggregate all commitments and contractual obligations as of
December 31, 2004, the following table is included. The Company is obligated
under building and equipment leases expiring between 2005 and 2017. The
aggregate future minimum lease commitments under those obligations with
noncancellable terms in excess of one year are shown below. The Company's
commitments under letters of credit and advance payment and performance bonds
relate primarily to advances received on foreign contracts which would be paid
only if the Company failed to perform in accordance with the contract terms. The
Company does not expect to have to make payments under these letters of credits
or bonds since these obligations are removed as

62

EDO CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

we perform under the related contracts. The amounts for letters of credit and
performance bonds represent the amount of commitment expiration per period.

Actual pension contributions may differ from amounts presented above and
are contingent on cash flow and liquidity.

Rental expense for the years ended December 31, 2004, 2003 and 2002
amounted to $13.6 million, $10.7 million and $5.4 million, respectively.

(17) 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, 2004, the discounted liability over the
remainder of the twenty-one years related to these two operable units is
approximately $1.9 million of which approximately $0.3 million has been
classified as current and is included in accrued liabilities. Approximately $0.6
million of the $1.9 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.

(18) 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, 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.

The Defense segment provides integrated front-line warfighting systems and
components including electronic-warfare systems, reconnaissance and surveillance
systems, aircraft weapons suspension and release systems, integrated combat
systems, command, control, communications, computers, and intelligence (C4I)

63

EDO CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

products and systems, undersea-warfare systems and professional and engineering
services for military forces and friendly governments worldwide. The
Communications and Space Products segment supplies antenna products and
ultra-miniature electronics and systems for the remote sensing and electronic
warfare industries. The Engineered Materials segment supplies commercial and
military piezo-electric ceramic products and integrated composite structures for
the aircraft and oil industries. The Company has a disciplined acquisition
program which is diversifying the base of major platforms and customers.

Domestic U.S. Government sales, which include sales to prime contractors of
the U.S. Government, amounted to 62%, 76% and 75% of net sales, which were 73%,
80% and 82% of Defense's net sales, 89%, 71% and 62% of Communications and Space
Products' net sales and 49%, 49% and 42% of Engineered Materials' net sales for
2004, 2003 and 2002, respectively. International sales comprised 14%, 18% and
15% of net sales for 2004, 2003 and 2002, respectively. In addition, the
Universal Exciter Upgrade program in the Defense segment comprised approximately
0%, 2% and 14% of net sales for 2004, 2003 and 2002, respectively.

Principal products and services by segment are as follows:

DEFENSE SEGMENT

- Reconnaissance and Surveillance Systems
- Command, Control, Communications, Computers and Intelligence (C4I)
- Electronic Warfare
- Undersea Warfare Sonar Systems
- Aircraft Armament
- Airborne Mine Countermeasures Systems
- Rugged Computer and Electronics
- Professional and Engineering Services

COMMUNICATIONS AND SPACE PRODUCTS SEGMENT

- Electronic Force Protection Systems
- Interference Cancellation
- Antenna Products

ENGINEERED MATERIALS SEGMENT

- Electro-Ceramic Products
- Integrated Advanced Composite Structures Products

64

EDO CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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:

65

EDO CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Acquisition-related costs in 2003 and 2002, including IPR&D, attributable
to the Condor acquisition are included in the segments as follows:

(19) GUARANTOR AND NON-GUARANTOR SUBSIDIARIES

The Company may, from time to time, issue indebtedness, a condition of
which would be the guarantee of this indebtedness by certain of its
subsidiaries. Presented below is condensed consolidating financial information
for the Company and the contemplated subsidiary guarantors and non-guarantors at
December 31, 2004 and 2003 and for each of the three years in the period ended
December 31, 2004. There were no subsidiaries that would have been non-guarantor
subsidiaries for 2002. Each contemplated subsidiary guarantor is 100% owned,
directly or indirectly, by the Company. Any guarantees that may be issued will
be full and unconditional, as well as joint and several. In connection with the
Company's credit facility, the Company cannot declare or pay any dividend on its
outstanding common stock in an amount that exceeds fifty percent of its
consolidated net income for the immediately preceding quarter.

66

EDO CORPORATION

CONDENSED CONSOLIDATING BALANCE SHEET
DECEMBER 31, 2004

67

EDO CORPORATION

CONDENSED CONSOLIDATING STATEMENT OF EARNINGS
DECEMBER 31, 2004

68

EDO CORPORATION

CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
DECEMBER 31, 2004

69

EDO CORPORATION

CONDENSED CONSOLIDATING BALANCE SHEET
DECEMBER 31, 2003

70

EDO CORPORATION

CONDENSED CONSOLIDATING STATEMENT OF EARNINGS
DECEMBER 31, 2003

71

EDO CORPORATION

CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
DECEMBER 31, 2003

72

EDO CORPORATION

CONDENSED CONSOLIDATING STATEMENT OF EARNINGS
DECEMBER 31, 2002

73

EDO CORPORATION

CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
DECEMBER 31, 2002

74

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

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, 2004 and 2003, and the related
consolidated statements of earnings, shareholders' equity and cash flows for
each of the three years in the period ended December 31, 2004. Our audits also
included the financial statement schedule listed in the index at Item 15(a).
These consolidated financial statements and schedule are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
consolidated financial statements and schedule based on our audits.

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

In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of EDO
Corporation and subsidiaries at December 31, 2004 and 2003 and the results of
their operations and their cash flows for each of the three years in the period
ended December 31, 2004, in conformity with U.S. generally accepted accounting
principles. Also, in our opinion, the related financial statement schedule, when
considered in relation to the basic financial statements taken as a whole,
presents fairly, in all material respects, the information set forth therein.

As discussed in Note 1(f) 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."

We also have audited, in accordance with the standards of the Public
Company Accounting Oversight Board (United States), the effectiveness of EDO
Corporation's internal control over financial reporting as of December 31, 2004,
based on criteria established in Internal Control-Integrated Framework issued by
the Committee of Sponsoring Organizations of the Treadway Commission and our
report dated February 23, 2005 expressed an unqualified opinion thereon.

/s/ ERNST & YOUNG LLP

New York, New York
February 23, 2005

75

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Directors and Shareholders
EDO Corporation

We have audited management's assessment, included in the accompanying
Management's Report on Internal Controls that EDO Corporation and subsidiaries
maintained effective internal control over financial reporting as of December
31, 2004, based on criteria established in Internal Control -- Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO). EDO Corporation's management is responsible for maintaining
effective internal control over financial reporting and for its assessment of
the effectiveness of internal control over financial reporting. Our
responsibility is to express an opinion on management's assessment and an
opinion on the effectiveness of the Company's internal control over financial
reporting based on our audit.

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

A company's internal control over financial reporting is a process designed
to provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company's internal control over
financial reporting includes those policies and procedures that (1) pertain to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company's
assets that could have a material effect on the financial statements. Because of
its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.

In our opinion, management's assessment that EDO Corporation and
subsidiaries maintained effective internal control over financial reporting as
of December 31, 2004, is fairly stated, in all material respects, based on
criteria established in Internal Control -- Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission (COSO). Also,
in our opinion, EDO Corporation and subsidiaries maintained, in all material
respects, effective internal control over financial reporting as of December 31,
2004, based on Internal Control -- Integrated Framework issued by the Committee
of Sponsoring Organizations of the Treadway Commission (COSO).

We have also audited, in accordance with the standards of the Public
Company Accounting Oversight Board (United States), the consolidated balance
sheets of EDO Corporation and subsidiaries as of December 31, 2004 and 2003, and
the related consolidated statements of operations, cash flows, and changes in
shareholders' equity for each of the three years in the period ended December
31, 2004 and our report dated February 23, 2005 expressed an unqualified
opinion.

/s/ ERNST & YOUNG LLP

New York, New York
February 23, 2005

76

QUARTERLY FINANCIAL INFORMATION (UNAUDITED)

The following table sets forth unaudited quarterly financial information
for 2004 and 2003 (in thousands, except per share amounts).

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

(a) Includes pre-tax acquisition-related costs of $0.2 million.

(b) Includes pre-tax acquisition-related costs of $0.2 million and an impairment
loss on the facility at Deer Park of $9.2 million.

(c) Includes pre-tax acquisition-related costs of $0.2 million.

(d) Includes pre-tax acquisition-related costs of $0.3 million and a $0.9
million non-qualified pension plan curtailment loss.

77

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

None.

ITEM 9A. CONTROLS AND PROCEDURES

EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES

As of the end of the period covered by this Annual Report on Form 10-K the
Company carried out an evaluation, under the supervision and with the
participation of the Company's senior management, including the Chief Executive
Officer and the Chief Financial Officer, as well as members of the Board of
Directors, of the effectiveness of the design and operation of the Company's
disclosure controls and procedures.

Based on their evaluation , the Chief Executive Officer and the Chief
Financial Officer of the Company have concluded that the Company's disclosure
controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the
Securities Exchange Act of 1934) are effective to ensure that the information
required to be disclosed by the Company in the reports that it files or submits
under the Securities Exchange Act of 1934 is recorded, processed, summarized and
reported within the time periods specified in SEC rules and forms.

CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING

There were no changes in EDO's internal controls over financial reporting
during EDO's last fiscal quarter that have materially affected, or likely to
materially affect internal controls over financial reporting.

MANAGEMENT'S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING

Management is responsible for establishing and maintaining adequate
internal control over financial reporting, as such term is defined in Exchange
Act Rules 13a-15(f) and 15d-15(f). Under the supervision and with the
participation of our management, including our Chief Executive Officer and Chief
Financial Officer, we conducted an evaluation of the effectiveness of our
internal control over financial reporting based on the framework in Internal
Control -- Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission. Based on our evaluation under the
framework in Internal Control -- Integrated Framework, our management concluded
that our internal control over financial reporting was effective as of December
31, 2004. Management's assessment of the effectiveness of our internal control
over financial reporting as of December 31, 2004 has been audited by Ernst and
Young LLP, an independent registered public accounting firm, as stated in their
report which is included herein.

ITEM 9B. OTHER INFORMATION

None.

78

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 26, 2005.

EXECUTIVE OFFICERS

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.

79

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 26, 2005.

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 26, 2005.

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 26, 2005.

ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES

Information appearing under the captions "Fees to Independent Registered
Public Accountants for fiscal 2004 and 2003" in the 2005 Proxy Statement is
hereby incorporated by reference.

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, 2004 and 2003

Consolidated Statements of Earnings for the Years Ended December 31, 2004,
2003 and 2002

Consolidated Statements of Shareholders' Equity for the Years Ended
December 31, 2004, 2003 and 2002

Consolidated Statements of Cash Flows for the Years Ended December 31,
2004, 2003 and 2002

Notes to Consolidated Financial Statements

Reports of Ernst & Young LLP

2. FINANCIAL STATEMENT SCHEDULES.

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

80

SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS

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

(a) Amounts acquired as a result of purchase of Emblem Group Ltd. on June 16,
2003, Darlington, Inc. on March 10, 2003, and Advanced Engineering &
Research Associates, Inc. on February 5, 2003.

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

3. EXHIBITS

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

* Filed herewith.

(b) Reports on 8-K

The following reports on 8-K were filed during the three months ended on
December 31, 2004:

84

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this Report to be signed on its behalf by the
undersigned, its principal executive officer and principal financial officer,
thereunto duly authorized.

EDO CORPORATION (REGISTRANT)

By: /s/ JAMES M. SMITH
------------------------------------
James M. Smith
President and Chief Executive
Officer

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

Dated: March 1, 2005

POWER OF ATTORNEY

KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Lisa M. Palumbo and William J. Frost, and each of
them, his true and lawful attorneys-in-fact and agents, with full power of
substitution and resubstitution, for him and in his name, place and stead, in
any and all capacities, to sign any and all amendments to the Annual Report on
Form 10-K for the Company's 2004 fiscal year, and to file the same, with all
exhibits thereto, and other documents in connection therewith, with the
Securities and Exchange Commission, granting unto said attorneys-in-fact and
agents, and each of them, full power and authority to do and perform each and
every act and thing requisite and necessary to be done, as fully to all intents
and purposes as he might or could do in person, hereby ratifying and confirming
all that said attorneys-in-fact and agents or either of them, or their or his
substitutes, may lawfully do or cause to be done by virtue thereof.

Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed below on February 25, 2005 by the following persons on
behalf of the Registrant and in the capacities indicated.