EDO Edo Corp

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

INTRODUCTION

EDO Corporation (the "Company") designs and manufactures a diverse range of products with core competencies in critical defense areas. We are a leading supplier of sophisticated, highly engineered products and systems for defense, aerospace and intelligence applications. We believe our advanced systems are mission-critical on a wide range of military programs and are at the core of transforming defense capabilities. We have two reporting segments: Engineered Systems and Services and Electronic Systems and Communications. Our Engineered Systems and Services segment comprises of aircraft armament systems, integrated composite structures, undersea warfare sonar systems, and professional engineering services. Our Electronic Systems and Communications segment provides highly-engineered electronic systems and equipment including electronic warfare systems, reconnaissance and surveillance systems, and command, control, communications, and computers (C4) products and systems. The Company has a disciplined acquisition program which is diversifying its 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.

Additional Information and Where to Find It

On September 17, EDO announced that it has entered into a definitive merger agreement with ITT Corporation, pursuant to which ITT will acquire all of the outstanding shares of EDO for $56.00 per share in cash.

In connection with the proposed merger, EDO filed with the SEC a definitive proxy statement and other relevant materials on November 5, 2007. The definitive proxy statement will be mailed to EDO's shareholders of record at the close of business on November 2, 2007, the record date for the special meeting of our shareholders to consider and vote on a proposal to approve and adopt the merger agreement. EDO's shareholders are urged to read the definitive proxy statement and other relevant materials carefully because they will contain important information about EDO and the merger.

Shareholders, investors and other interested parties may obtain a free copy of the definitive proxy statement and any other relevant documents (when they become available) that EDO files with the SEC at the SEC's web site at www.sec.gov. The definitive proxy statement and any other relevant documents may also be accessed at www.edocorp.com or obtained free from the Company by directing a request to EDO Corporation, 60 East 42nd Street, 42nd Floor, New York, NY 10165, Attn: Investor Relations.

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. Except for the treatment of tax contingency accruals, there have been no material changes from the methodology applied by management for critical estimates previously disclosed in the Company's most recent Annual Report on Form 10-K. Effective January 1, 2007, the company began to measure and record tax contingency accruals in accordance with FIN 48 - Accounting for Uncertainty in Income Taxes - an Interpretation of FASB Statement No. 109. The expanded disclosure requirements of FIN 48 are presented in Note 6 of this report. FIN 48 prescribes a threshold for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. Only tax positions meeting the more-likely-than-not recognition threshold at the effective date may be recognized or continue to be recognized upon adoption of this Interpretation. FIN 48 also provides guidance on accounting for de-recognition, interest and penalties, and classification and disclosure of matters related to uncertainty in income taxes. 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 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 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 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 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.

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.

THREE MONTHS ENDED SEPTEMBER 29, 2007 COMPARED WITH THREE MONTHS ENDED SEPTEMBER 30, 2006

 Net sales by segment were as follows:

 THREE MONTHS ENDED INCREASE/
 ------------------------------ (DECREASE)
 SEPTEMBER 29, SEPTEMBER 30, FROM
SEGMENT 2007 2006 PRIOR PERIOD
------- -----------------------------------------------
 (IN THOUSANDS)

Engineered Systems & Services $ 117,974 $ 79,409 48.6%
Electronic Systems & Communications 138,808 104,984 32.2%
 -----------------------------------------------
Total $ 256,782 $ 184,393 39.3%
 ===============================================

In the Engineered Systems and Services segment, the increase in sales is attributable primarily to the contribution of sales of CAS which was acquired on September 6, 2006, and higher sales on aircraft armament products. This increase was partially offset by lower sales in our flight-line test systems product and various undersea warfare programs.

In the Electronic Systems and Communications segment, the increase in sales is attributable to deliveries associated with the Transition Switch Module (TSM) program, sales contributed by IST which was acquired on September 15, 2006, increased sales on our force protection systems as well as spares related to ESM systems.

Operating earnings by segment were as follows:

 THREE MONTHS ENDED
 SEPTEMBER 29, SEPTEMBER 30,
SEGMENT 2007 2006
 ------------------------------
 (IN THOUSANDS)

Engineered Systems & Services $ 7,335 $ 646
Electronic Systems & Communications 8,779 1,758
 ------------------------------
Total $ 16,114 $ 2,404
 ==============================

Operating earnings for the three months ended September 29, 2007 were $16.1 million or 6.3% of net sales. This compares to operating earnings for the three months ended September 30, 2006 of $2.4 million or 1.3% of net sales.

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

 THREE MONTHS ENDED
 SEPTEMBER 29, SEPTEMBER 30,
 2007 2006
 --------------------------------
 (IN THOUSANDS)

Pension $ 610 $ 1,194
ESOP Compensation expense $ 1,725 $ 975
Other intangible asset amortization $ 2,562 $ 1,707
 ------------------------------
 $ 4,897 $ 3,876
 ==============================

The decrease in pension expense in 2007 compared to 2006 is attributable to changes in actuarial assumptions such as discount rate and return on plan assets as well as the contributions made by the Company in 2007 for the 2006 plan year. The higher ESOP compensation expense for the three months ended September 29, 2007 is attributable to our higher average stock price compared to the three months ended September 30, 2006. The increase in other intangible asset amortization expense is attributable to the acquisitions of CAS and IST in the third quarter of 2006.

The Engineered Systems and Services segment's operating earnings for the three months ended September 29, 2007 were $7.3 million or 6.2% of this segment's net sales compared to operating earnings of $0.6 million or 0.8% of this segment's net sales for the three months ended September 30, 2006. The increase is attributable the increased sales on aircraft armament programs, the mix of programs in our services division, and the contributions of CAS, which was acquired on September 6, 2006. These increases were partially offset by a $3.2 million cost growth on the ALOFTS sonar program and the aforementioned lower sales on flight line test systems.

For the three months ended September 30, 2006, operating earnings in the Engineering Systems and Services segment were negatively impacted by a $2.2 million cost growth on an aircraft armament systems program and a $0.4 million cost growth on an undersea warfare program as well as lower margins due to lower sales volume of composite structures, primarily the Joint Air to Surface Standoff Missile units (JASSM) and the attendant higher absorption of overhead costs. In addition, operating earnings for Engineered Systems and Services were impacted by a write-down of unamortized other intangible assets of $1.5 million related to the Company's rugged computer product line.

The Electronic Systems and Communications segment's operating earnings for the three months ended September 29, 2007 were $8.8 million or 6.3% of this segment's net sales compared to operating earnings of $1.8 million or 1.7% of this segment's net sales for the three months ended September 30, 2006. This increase is mainly attributable to sales on our TSM program, increased sale of our Antenna Products, and higher sales of ESM systems. This increase is partially offset by unabsorbed overhead costs at two of our facilities as we prepare for increased production of force protection systems.

For the three months ended September 30, 2006, operating earnings in the Electronic Systems and Communications segment were negatively impacted by the significantly lower sales volume of electronic force protection systems. In addition, earnings were negatively impacted by a charge of approximately $2.1 million related to the settlement of a contract dispute during the third quarter of 2006.

Selling, general and administrative expenses for the three months ended September 29, 2007 were $35.7 million or 13.9% of net sales compared to $30.2 million or 16.4% of net sales for the three months ended September 30, 2006. The increase is primarily attributable to the acquisitions of CAS and IST made in the third quarter of 2006 and includes the other intangible assets amortization expense associated with these acquisitions.

During the three months ended September 29, 2007, the Company recorded acquisition-related costs of $2.0 million for "stay-pay" related to the acquisitions in 2005 and 2006 compared to $1.0 million for the three months ended September 30, 2006. We expect to incur similar amounts related primarily to the CAS and IST acquisitions over the next 2 years.

Research and development expense for the three months ended September 29, 2007 decreased to $2.9 million or 1.1% of net sales from $4.7 million or 2.5% of net sales for the three months ended September 30, 2006, during which time there was higher than usual spending on electronic force protection and ESM Systems.

Interest expense, net of interest income, for the three months ended September 29, 2007 increased to $4.8 million from $2.5 million for the three months ended September 30, 2006, primarily due to interest on borrowings under our credit facility. Also included in interest expense is interest on our 4.0% Convertible Subordinated Notes ("Notes") which were issued in November 2005 and due in 2025, interest on the promissory note associated with the IST acquisition made in September 2006 and due in 2009, interest on the promissory note associated with the NexGen acquisition made in 2005 and due in 2008, and the amortization of deferred debt issuance costs associated with the offering of the Notes and amortization of deferred financing costs associated with our credit facility.

For the three months ended September 29, 2007 we recorded a discrete net income tax benefit of $4.7 million primarily related to changes in tax contingencies and the claim for the federal research and development credit for 2003 not previously claimed This compares to a $2.3 million discrete net income tax benefit recorded for the three months ended September 30, 2006 related primarily to claims for the federal research and development credit and extraterritorial income (ETI) exclusion tax benefits not previously claimed.

For the three months ended September 29, 2007, net earnings were $11.2 million or $0.49 per diluted common share on 25.4 million diluted shares compared to net earnings of $2.1 million or $0.11 per diluted common share on 18.6 million diluted shares for the three months ended September 30, 2006. The convertible Notes were dilutive for the third quarter of 2007 and anti-dilutive in the third quarter of 2006.

NINE MONTHS ENDED SEPTEMBER 29, 2007 COMPARED WITH NINE MONTHS ENDED SEPTEMBER 30, 2006

Net sales by segment were as follows:

 NINE MONTHS ENDED INCREASE/
 ------------------------------ (DECREASE)
 SEPTEMBER 29, SEPTEMBER 30, FROM
SEGMENT 2007 2006 PRIOR PERIOD
 ------------------------------------------------
 (IN THOUSANDS)

Engineered Systems & Services $ 353,954 $ 204,462 73.1%
Electronic Systems & Communications 404,264 252,038 60.4%
 ------------------------------------------------
Total $ 758,218 $ 456,500 66.1%
 ================================================

In the Engineered Systems and Services segment, the increase in sales is attributable primarily to the contribution of sales of CAS which was acquired on September 6, 2006, increased sales of our flight line test systems products and higher sales in undersea warfare products.

In the Electronic Systems and Communications segment, the increase in sales is attributable to deliveries associated with the Transition Switch Module (TSM) program, deliveries of force protection systems and the sales contributed by IST which was acquired on September 15, 2006.

Operating earnings by segment were as follows:

 NINE MONTHS ENDED
 SEPTEMBER 29, SEPTEMBER 30,
SEGMENT 2007 2006
 ------------------------------
 (IN THOUSANDS)
Engineered Systems & Services...................$ 25,902 $ 4,069
Electronic Systems & Communications............. 21,168 4,068
 ------------------------------
Total...........................................$ 47,070 $ 8,137
 ==============================

Operating earnings for the nine months ended September 29, 2007 were $47.1 million or 6.2% of net sales. This compares to operating earnings for the nine months ended September 30, 2006 of $8.1 million or 1.8% of net sales.

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

 NINE MONTHS ENDED
 SEPTEMBER 29, SEPTEMBER 30,
 2007 2006
 --------------------------------
 (IN THOUSANDS)

Pension.........................................$ 2,233 $ 3,582
ESOP Compensation expense.......................$ 4,209 $ 3,310
Other intangible asset amortization.............$ 7,713 $ 5,121
Stock-based compensation expense re: options....$ 970 $ 838
 --------------------------------
 $ 15,125 $ 12,851
 ================================

The decrease in pension expense in 2007 compared to 2006 is attributable to changes in actuarial assumptions such as discount rate and return on plan assets as well as the contributions made by the Company in 2007 for the 2006 plan year. The higher ESOP compensation expense for the first nine months of 2007 is attributable to our higher average stock price compared to the first nine months of 2006. The increase in other intangible asset amortization expense is attributable to the acquisitions of CAS and IST in the third quarter of 2006. The increase in stock-based compensation expense relates to the higher share price on the dates of grant compared to 2006.

The Engineered Systems and Services segment's operating earnings for the nine months ended September 29, 2007 were $25.9 million or 7.3% of this segment's net sales compared to operating earnings of $4.1 million or 2.0% of this segment's net sales for the nine months ended September 30, 2006. This increase is attributable to cost reductions on an aircraft armament program, increased sales on flight line test equipment, the contribution of CAS, which was acquired on September 6, 2006 and the mix of sales in our services business. These increases were partially offset by cost growth on the ALOFTS sonar program and an aircraft armament program.

For the nine months ended September 30, 2006, operating earnings in the Engineered Systems Services segment were negatively impacted by a $2.5 million cost growth on ALOFTS, $1.4 million and $2.2 million on two aircraft armament systems programs, $1.2 million related to the conclusion of a legal action as well as a write-off of unamortized other intangible assets of $1.5 million related to the Company's rugged computer product line.

In the Electronic Systems and Communications segment, operating earnings for the nine months ended September 29, 2007 were $21.2 million or 5.2% of this segment's net sales compared to operating earnings of $4.1 million or 1.6% of this segment's net sales for the nine months ended September 30, 2006. The increase is attributable to increased sales on our TSM program, electronic warfare products, and antenna products. This was partially offset by unabsorbed overhead costs at two of our facilities as we prepare for increased production of force protection systems, as well as cost growth on a close-out of an open contract issue on a long standing contract that is now complete.

For the nine months ended September 30, 2006, operating earnings were negatively impacted by less recovery of overhead expenses due to lower sales volume of electronic force protection systems, cost growth of $2.5 million on an interference cancellation program, lower milestone achievements of reconnaissance and surveillance systems, and approximately $5.0 million in legal costs and provisions for liabilities in respect of concluded legal matters.

Selling, general and administrative expenses for the nine months ended September 29, 2007 were $105.1 million or 13.9% of net sales compared to $79.0 million or 17.3% for the nine months ended September 30, 2006. The increase is primarily attributable to the acquisitions of CAS and IST made in 2006 including the other intangible assets amortization expense associated with these acquisitions.

During the nine months ended September 29, 2007, the Company recorded acquisition-related costs of $6.3 million for "stay-pay" related to the acquisitions made in 2005 and 2006, compared to $1.5 million for the nine months ended September 30, 2006. We expect to incur similar amounts related primarily to the CAS and IST acquisitions over the next 2 years.

Research and development expense for the nine months ended September 29, 2007 decreased to $7.4 million or 1.0% of net sales from $10.9 million or 2.4% of net sales for the nine months ended September 30, 2006, during which time there was higher spending on electronic force protection and aircraft armament systems.

Interest expense, net of interest income, for the nine months ended September 29, 2007 increased to $16.3 million from $5.1 million for the nine months ended September 30, 2006 primarily due to interest on borrowings under our credit facility. Also included in interest expense is interest on our 4.0% Convertible Subordinated Notes ("Notes") which were issued in November 2005 and due in 2025, interest on the promissory note associated with the IST acquisition made in September 2006 and due in 2009, interest on the promissory note associated with the NexGen acquisition made in 2005 and due in 2008, and the amortization of deferred debt issuance costs associated with the offering of the Notes and amortization of deferred financing costs associated with our credit facility.

For the nine months ended September 29, 2007, we recorded a discrete net income tax benefit of $4.7 million primarily related to changes in tax contingencies and the claim for the federal research and development credit for 2003 not previously claimed, compared to a $6.0 million discrete net income tax benefit recorded for the nine months ended September 30, 2006 related primarily to claims for the federal research and development credit and extraterritorial income (ETI) exclusion tax benefits not previously claimed and changes in tax contingencies.

For the nine months ended September 29, 2007, net earnings were $22.9 million or $1.05 per diluted common share on 25.2 million diluted shares compared to net earnings of $7.4 million or $0.40 per diluted common share on 18.6 million diluted shares for the nine months ended September 30, 2006. The Convertible Notes were dilutive for the nine months ended September 29, 2007 and anti-dilutive for the nine months ended September 30.

LIQUIDITY AND CAPITAL RESOURCES

Balance sheet

Cash and cash equivalents decreased 86.5% to $3.4 million at September 29, 2007 from $25.3 million at December 31, 2006. For the nine months ended September 29, 2007, cash provided by operations was $38.9 million, reflecting earnings from operations and collections of billed receivables which were partially offset by increases in inventories and contributions to the defined benefit pension plan. During the nine months ended September 29, 2007, we reduced our borrowings under the credit facility by a net $36.0 million. Furthermore, $9.3 million was used to settle the final purchase prices of CAS and IST, $12.2 million was used for the purchase of plant and equipment, $5.8 million for a scheduled principal payment on our IST promissory note and $1.9 million for the payment of common share dividends.

Accounts receivable decreased 12.1% to $233.1 million at September 29, 2007 from $265.3 million at December 31, 2006 due to collections of billed receivables. At September 29, 2007 approximately 90% of billed receivables were in the under-60 days aging category compared with 89% at December 31, 2006.

Inventories increased to $118.7 million at September 29, 2007 from $56.3 million at December 31, 2006 due primarily to the efforts expended on work-in-process on major programs such as TSM and Crew 2.1.

FINANCING ACTIVITIES

Credit Facility

We have a five-year credit facility with a consortium of banks, led by Citibank, N.A., as the administrative agent, Bank of America, N.A, as the documentation agent and Wachovia Bank, N.A. as syndication agent. The facility expires in November 2010.

The credit agreement provides for a revolving credit facility in an aggregate amount equal to $300 million with sub-limits of $20 million for short-term swing loans and $100 million for letters of credit. The potential cash borrowing under the facility is reduced by the amount of outstanding letters of credit. The Company has the option to select Base Rate or Eurodollar Rate loans under the terms of the Credit Agreement. Any borrowings under the facility would be priced initially at LIBOR plus a predetermined amount depending on our consolidated leverage ratio at the time of the borrowing. At September 29, 2007, LIBOR was approximately 5.13% and the applicable adjustment to LIBOR was 2.00%. 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%. In addition, the agreement provides for potential incremental credit extensions in the form of term loans or revolving credit commitment increases of up to $100 million.

At September 29, 2007 there were $21.9 million of letters of credit outstanding and $144.0 million of direct borrowings outstanding under the credit facility, resulting in $134.1 million available for additional borrowings. At December 31, 2006, there were $180.0 million of direct borrowings outstanding under the credit facility. Accrued interest payable related to the credit facility was $0.3 million and $0.8 million at September 29, 2007 and December 31, 2006, respectively.

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, leverage ratio, fixed charge coverage ratio, and senior secured leverage ratio. As of September 29, 2007, the Company was in compliance with its covenants. The credit facility is secured by the Company's accounts receivable, inventory and machinery and equipment.

4.0% Convertible Subordinated Notes due 2025 ("4.0% Notes")

In November 2005, we completed the offering of $201.2 million principal of 4.0% Notes and received proceeds of $195.7 million, net of $5.5 million of commissions. Interest payments are due May 15 and November 15 of each year commencing on May 15, 2006. The Company made its scheduled interest payment of $4.0 million on the 4.0% Notes during the second quarter of 2007. Accrued interest payable, included in accrued liabilities, was $3.1 million and $1.0 million at September 29, 2007 and December 31, 2006, respectively. 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 $34.19 per share, subject to adjustment in certain events. As of September 29, 2007, there had been no such conversions.

Shelf Registration

At September 29, 2007, our remaining capacity under the universal shelf registration statement that became effective in January 2004 was approximately $298.8 million. 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 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, actively seek 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.

COMMITMENT AND CONTINGENCIES

We are obligated under building and equipment leases expiring between 2007 and 2019. The aggregate future minimum lease commitments under those obligations with non-cancellable 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 credit 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.

In order to aggregate all commitments and contractual obligations as of September 29, 2007, we have included the following table:

 PAYMENTS DUE IN (IN MILLIONS):
 ----------------------------------------------------------------------
COMMITMENTS AND CONTRACTUAL OBLIGATIONS: 2012 AND
 TOTAL 2007 2008 2009 2010 2011 BEYOND
------------------------------------------------------------------------------------------------------------------------
Borrowings Under Revolver $ 144.0 $ 144.0 $ -- $ -- $ -- $ -- $ --
Notes payable 16.5 2.0 8.8 5.7 -- -- --
4.0% Convertible Subordinated Notes due 2025 (1) 201.2 -- -- -- -- -- 201.2
Operating leases 145.2 5.7 22.4 20.6 19.3 18.1 59.1
Letters of credit 21.9 2.5 7.0 11.8 -- -- 0.6
Projected pension contributions (2) 33.6 -- 14.7 8.5 8.3 2.1 --
Advance payment and performance bonds 1.7 -- -- 1.7 -- -- --
 ----------------------------------------------------------------------
Total $ 564.1 $ 154.2 $ 52.9 $ 48.3 $ 27.6 $ 20.2 $ 260.9
 ======================================================================

(1) Excludes interest of approximately $8 million annually.
(2) Actual pension contributions may differ from amounts presented above and are contingent on cash flow, liquidity, and actuarial assumptions.

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 is unlikely to 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.

For the three and nine months ended September 29, 2007, sales of TSM represented 12.7% and 15.1% of net sales, respectively. For the three and nine months ended September 30, 2006, sales of TSM represented 13.9% and 7.3% of net sales, respectively.

The funded backlog of unfilled orders at September 29, 2007 increased to $1,362.3 million from $804.4 million at December 31, 2006. Our backlog consists primarily of current orders under long-lived, mission-critical programs of key defense platforms.

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

The statements in this Quarterly 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 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, tax treatment of acquisitions, results of tax audits, the amount of the non-deductible portion of our non-cash ESOP compensation expense and other factors detailed under "Special Note Regarding Forward-Looking Statements" in the definitive proxy statement filed by the Company on November 5, 2007 in connection with the proposed sale of the company described in Note 2.

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