AYDIN CORP, 10-K, 1998-03-31

AYDIN CORP
10-K, 1998-03-31
RADIO & TV BROADCASTING & COMMUNICATIONS EQUIPMENT

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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

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, 1997__.
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 ____1-7203____.

AYDIN CORPORATION

_______________________________________________________
(Exact name of registrant as specified in its charter)

Delaware 23-1686808

________________________________ ___________________________
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization Identification No.)

700 DRESHER ROAD
HORSHAM, PENNSYLVANIA 19044
_________________________________ __________________________
(Address of principal executive offices) (Zip Code)

Registrant's telephone number, including area code (215)657-7510

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

Name of each exchange
Title of each class on which registered
______________________________ _________________________

Common Stock, $1 Par Value New York Stock Exchange

Securities registered pursuant to Section 12(g) of the Act:

NONE
_________________
(Title of Class)

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. ____

The aggregate market value of 5,117,257 shares of Common Stock
held by non-affiliates, computed using the closing price as of
March 25, 1998, was $62,686,398.

Number of shares of Common Stock outstanding as of March 25,
1998 5,216,300.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the following documents are incorporated by
reference:

- 1997 Annual Report to Stockholders of Aydin Corporation
(hereinafter, "Annual Report") - Parts I and II
- Proxy Statement of Aydin Corporation, to be filed on or about
April 2, 1998
(hereinafter,"Proxy Statement") - Part III

<PAGE>
INDEX TO FORM 10-K
----------------------------------------------------------
This index lists the requirements of Form 10-K and the page number
in this Form 10-K (or in the Annual Report or the Proxy Statement)
where each item can be found.

PART I

Item 1 Business............................ 10-K, pp. 2-5
Item 2 Properties.......................... 10-K, p. 5
Item 3 Legal Proceedings................... 10-K, p. 6
Item 4 Submission of Matters to a Vote
of Security Holders................ 10-K, p. 6
Executive Officers of the
Registrant......................... 10-K, pp. 6-7

PART II

Item 5 Market for the Registrant's Common
Equity and Related Stockholder
Matters............................ Annual Report, p. 30
Inside back cover
Item 6 Selected Financial Data............. Annual Report, p. 30
Item 7 Management's Discussion and
Analysis of Financial Condition
and Results of Operation........... Annual Report, pp.
25-28
Item 7A Quantitative and Qualitative
Disclosures About Market Risk...... Not Applicable
Item 8 Financial Statements and
Supplementary Data................. Annual Report,
pp. 14-24, 29, 30
Item 9 Changes In and Disagreements With
Accountants on Accounting and
Financial Disclosure............... Not Applicable

PART III

Item 10 Directors and Executive Officers
of the Registrant................. Proxy Statement,
pp. 3-5, 10
10-K, pp. 6-7
Item 11 Executive Compensation............. Proxy Statement,
pp. 5-7, 8-9
Item 12 Security Ownership of Certain
Beneficial Owners and Management.. Proxy Statement,
pp. 2-3
Item 13 Certain Relationships and
Related Transactions.............. 10-K, p. 8

PART IV

Item 14 Exhibits, Financial Statement
Schedules and Reports on Form 8-K. 10-K, pp. 9-10
Exhibits
<PAGE>

PART I

ITEM 1. BUSINESS
(a) General Development of Business

Aydin Corporation (the "Company" or "Aydin") was
incorporated under the laws of the State of Delaware in
September, 1967.

The Company consists domestically of three major operating
and four smaller support divisions, and two foreign
operating subsidiaries. The Company disposed of its 80%
interest in its Argentine subsidiary on December 31, 1996
and now owns 19% of that company. The divisions and
subsidiaries are profit centers each with engineering,
manufacturing, marketing and accounting functions.

(b) Financial Information About Industry Segments

The Company operates predominantly in the electronics
manufacturing industry. Therefore, no segment information
is reported.

The following table sets forth the percentage of the
Company's total revenue contributed by each of its primary
classes of products (among which overlapping does occur)
for each of the last three years:

<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
(1) Communications 35.7% 31.1% 39.6%
(2) Telemetry 41.0 42.8 36.7
(3) Displays 17.8 20.7 19.8
(4) All other 5.5 5.4 3.9
---- ---- ----
Totals 100% 100% 100%
</TABLE>

As stated above, the Company operates predominantly in the
electronics manufacturing industry, and all information
set forth below is with respect to the Company's business
as a whole. The Company designs, manufactures, and sells
three main classes of products as set forth above and as
described below:

(1) Communications
Aydin provides a wide range of data and voice
communication systems and products for the commercial
and military markets throughout the world in a
variety of public and private networks. In addition,
Aydin custom-designs complex mission-critical
applications such as right-of-way communications for
utility, railway and pipeline companies, and the
establishment of vital links to offshore platforms
and satellite earth stations. Aydin also provides
complete air defense communications systems and
commercial air traffic control solutions.

Aydin also manufactures and installs communications
products used in satellite earth stations, providing
both primary and back-up links such as Aydin's state-
of-the-art Satellite TDMA Terminals used for
commercial and government networks--among them AT&T,
Sprint and WorldCom, and national telecom operations
in the UK, France, Germany, Canada, Singapore and
Brazil.

Aydin Communications has supplied turnkey
telecommunications systems to Australia, Thailand,
Turkey, Argentina, Zambia, Malaysia, Saudi Arabia,
Finland and other countries, serving infrastructure
needs with integrated systems that may include line-
of-sight radios, satellite earth stations,
multiplexers, switches, fiber-optic cables, and other
technology.

(2) Telemetry
Aydin Telemetry products are used by space agencies
such as NASA and in defense and aerospace programs
such as aircraft and weapons development. These
products and systems serve aerospace, satellite and
commercial aircraft markets in the United States and
abroad. Aydin

(page 2)
<PAGE>
designs, manufactures and markets an extensive
product line and provides turnkey systems integration
for airborne and ground-based applications. These
airborne and ground systems gather critical
information from spacecraft, satellites, aircraft,
guided weapons and ground vehicles. This equipment
calibrates, processes and records or transmits
information by radio or microwave links to a fixed or
mobile ground station that receives, processes and
analyzes the data.

(3) Displays
Aydin designs, manufactures and markets in the United
States and abroad a complete line of of high-
resolution CRT monitors, flat panel displays and
monitors used by public and private sector industries
that require high performance and durability. These
include process control factories, shipboard
information centers, stock exchange trading floors
and financial service companies, medical diagnostic
or treatment centers, utility companies and other
unique installations. Aydin also offers ruggedized
and "TEMPEST"-qualified versions of its monitor
products for military applications.

The Company's products and systems are sold directly by
Company sales personnel and manufacturers'
representatives. Sales personnel for the Company are
located in many cities across the United States as well as
at key major military bases, with corporate marketing
located in Horsham, PA. With respect to exports, sales
efforts are conducted by its international subsidiaries,
its international sales network and manufacturers'
representatives in many countries.

The Company maintains standard product lines and systems
sold by catalog, although it generally does not maintain
an inventory of finished goods. A portion of current sales
is attributable to such standard products, modifications
thereof and turnkey communications systems using these
products. Another portion of sales is attributable to
special, made-to-order equipment based upon a customer's
specific requirements.

The Company's customers include U.S. and foreign
communications and electronic and aerospace firms,
electric utilities, regulated and unregulated telephone
organizations, major transportation organizations, other
industrial and financial concerns and process control
companies, research laboratories, universities, large
defense contractors, foreign governments, the U.S.
Government through various agencies of the Department of
Defense and the National Aeronautics and Space
Administration.

A breakdown of sales for the last three years including
sales to major customers who accounted for 10% or more of
sales is as follows:

<TABLE>
<CAPTION>
1997 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
U.S. Government Agencies (direct and $ 37,596,000 $ 38,728,000 $ 44,309,000
indirect), principally Department of
Defense (1)

Export and foreign sales including 49,394,000 47,495,000 58,059,000
equipment sold to other U.S.
companies for export (1)(2)(3)

U.S. commercial and industrial 28,381,000 30,355,000 38,239,000
business
------------ ------------ ------------
TOTAL NET SALES $115,371,000 $116,578,000 $140,607,000
------------ ------------ ------------
------------ ------------ ------------
<FN>
(1) The U.S. Government and the Government of Turkey were the
only customers to whom sales exceeded 10% of consolidated
sales during any of the past three years. Sales to the
Government of Turkey amounted to $21,496,000 in 1997,
$15,116,000 in 1996, and $16,549,000 in 1995.
(2) Includes foreign sales of $21,200,000 for 1997,
$27,000,000 for 1996, and $28,943,000 for 1995.
(3) A breakdown of total export and foreign sales by
geographic area follows in section (d) below.
</TABLE>
(page 3)
<PAGE>

Raw materials for the Company's business consist of
manufactured components and parts. The Company's raw
materials are presently available in adequate supply on
the open market.

The Company holds no material patents, trademarks,
licenses, franchises or concessions.

The Company's operations are not seasonal to any material
extent.

As stated above, although the Company maintains standard
product lines and systems sold by catalog, it generally
does not maintain a significant level of finished goods
inventory. However, the Company maintains an adequate
level of raw materials inventory so that it will be able
to meet initial delivery requirements of customers. The
Company has had no material difficulty in obtaining goods
from suppliers. The Company does not provide rights to
return its products, and generally does not provide
extended payment terms to customers.

The backlog of unfilled orders at December 31, 1997 was
$71 million as compared to $84 million at December 31,
1996. Approximately 20% of the 1997 backlog is not
reasonably expected to be filled within the current year.

The backlog includes approximately $10 million for a
command, control and communications project for the
Government of Turkey for which the work is expected to be
completed over the next two years. This contract became
effective in October 1990.

All contracts with the U.S. Government and some of the
foreign governments are subject to cancellation at the
convenience of the government. In the event a contract
with the U.S. Government is so terminated, the Armed
Services Procurement Regulations provide that the Company
shall be reimbursed for expenses incurred and shall be
entitled to reasonable profits.

The greater portion of the Company's business is obtained
by competitive bidding, while some is obtained through
sole source negotiation. In the domestic marketplace,
the Company competes with some major U.S. companies from
time to time; however, some of the competition in the
U.S. comes from companies which are similar in size or
smaller than Aydin. In the international marketplace,
Aydin competes with major companies in addition to U.S.
firms. A number of such competitors are larger than Aydin
with greater financial resources, while some are similar
to or smaller than Aydin.

Technical capability, reputation, price, ability to meet
delivery schedules and reliability are the principal
competitive factors. Depending on the particular product
itself and the requirements of the contract documents,
the number of firms competing with Aydin generally ranges
from one to ten.

Estimated amounts spent during 1997, 1996, and 1995 on
Company-sponsored research and development activities,
and customer-sponsored research activities relating to
the development of new products, services or techniques
or the improvement of existing products, services or
techniques are as follows:

<TABLE>
<CAPTION>
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Company-sponsored research and
development on direct cost basis $3,079,000 $8,315,000 $6,603,000

Customer-sponsored research
and development activities $2,747,000 $2,081,000 $2,873,000
</TABLE>

The Company, along with others, was responsible for the
costs of cleanup under an order of the State of
California at a site leased by the Company prior to 1984.
Cleanup of the site was completed during 1996 and site
monitoring over a 30-year period commenced in 1997. The
estimated site monitoring costs to be expended over the
30-year period is $3.1 million, of which $126,000 was
expended during 1997. The amount to be paid has been
included in the accompanying consolidated balance sheet
as an other liability discounted at 7% to the expected
payment dates. Expected payments are approximately
$100,000 annually. The December 31, 1996 balance sheet
included an other (non current) asset of $2.6 million
representing an expected insurance recovery based on a
declaratory judgment in favor of the Company by the State
of
(page 4)
<PAGE>

California. The declaratory judgment was reversed in
April 1997, resulting in a $2.6 million write off. The
California Supreme Court has agreed to review this
reversal and briefs have been filed. In addition to the
above matter, the Company, along with others, have been
notified by the EPA that it may be a potentially
responsible party for the costs of cleanup of a waste
disposal site. The Comany estimates that its ultimate
liability in this matter could be approximately $100,000
and has recorded this liability as of December 31, 1997.

The Company employs approximately 1,200 persons, with
operations concentrated principally in the Philadelphia
area. Employer-employee relations are considered to be
satisfactory.

(d) Financial Information About Foreign and Domestic
Operations and Export Sales
The Company had no significant foreign operations prior
to 1991 although a $210 million contract from the
Government of Turkey became effective in October 1990
with approximately 35% of this contract being performed
by the Company's Turkish subsidiary. The remaining
backlog on this contract at December 31, 1997 was
approximately $10 million. Foreign assets included in
the consolidated balance sheet amounted to $21.0 million,
$21.7 million, and $25.6 million, at December 31, 1997,
1996, and 1995, respectively. Of these amounts, $5.1
million, $2.5 million, and $.4 million at December 31,
1997, 1996, and 1995, respectively, are cash and short-
term investments of the Company's Turkish subsidiary
consisting mainly of U.S. dollar denominated interest-
bearing time deposits and Eurobonds. Foreign sales and
pretax income for 1997 amounted to $21.2 million and $1.8
million respectively. Foreign sales and pretax income for
1996 amounted to $27.0 million and $.9 million,
respectively. Foreign sales and pretax income for 1995
amounted to $28.9 million and $5.4 million, respectively.
The Company's domestic operations include sales derived
from customers or projects located in areas of the world
outside the United States. Export and foreign sales for
1997, 1996, and 1995 by geographic area are set forth
below:

<TABLE>
<CAPTION>
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
Asia $ 2,663,000 $ 4,259,000 $ 6,224,000
Africa 1,946,000 3,203,000 4,003,000
Europe 40,792,000 28,452,000 35,360,000
North America 1,683,000 1,273,000 1,605,000
South America 1,871,000 9,735,000 10,604,000
Other 439,000 573,000 263,000
----------- ----------- -----------
Total export and
foreign sales $49,394,000 $47,495,000 $58,059,000
----------- ----------- -----------
----------- ----------- -----------
</TABLE>

On a percentage basis, export and foreign sales (direct
and indirect) accounted for approximately 43% of total
sales in 1997, 41% of total sales in 1996, and 41% in
1995. A majority of such export and foreign sales were in
the telecommunications field. Licenses are required from
U.S. Government agencies for most of the Company's export
products. The Company and its foreign subsidiaries may be
adversely affected by certain risks generally associated
with foreign contracts and operations, including ownership
and control limitations, currency fluctuations,
restrictions on repatriation of profits, difficulty in the
enforcement of judgments, late delivery penalties,
potential political or labor instability and general
worldwide economic conditions. However, such factors have
not had a material effect on the Company's operations to
date, and management believes that the risks involved in
such foreign business are no greater than the normal risks
of any other portion of the Company's sales. The Company
has generally been able to protect itself against foreign
credit risks through contract provisions, advance payments
and irrevocable letters of credit in its favor. However,
it should be noted that foreign contracts are sometimes
subject to foreign laws.

ITEM 2. PROPERTIES
The Company's total plant capacity at December 31, 1997 is
approximately 400,000 square feet of administrative and
production facilities, 237,000 of which it owns and the balance
of which it leases. All major leased properties are held under
leases expiring between 1998 and 2002, most with renewal
options. As part of the restructuring and consolidation, three
Company-owned buildings (258,000 square feet) were sold during
1997. The Company maintains its corporate headquarters in
Horsham, Pennsylvania, and has sales offices within and outside
the U.S.

(page 5)
<PAGE>

The administrative and production facilities occupied by the
Company are well maintained and suitable for its operations,
and include plant area, warehouse space, and management,
engineering and clerical offices. The plants of each of the
manufacturing operations generally contain machine shops,
assembly areas, testing facilities and packing and shipping
departments in addition to the engineering and laboratory
areas.

ITEM 3. LEGAL PROCEEDINGS
During 1995 a subcontractor to the Company in the TMRC program
with the Government of Turkey filed a demand for arbitration
alleging a breach of contract and equitable adjustment of $12.4
million. This claim was subsequently amended and at December
31, 1997 amounts to $27.8 million. The Company has filed a
claim against the subcontractor for an amount in excess of the
subcontractor s claim. The arbitration hearing was concluded
and post-hearing briefs were filed in December 1997. A decision
is expected April 10, 1998. Based on discussions with its
outside counsel, management believes that it has meritorious
defenses and counterclaims and expects the Company to be
successful in its defenses. However, if the outcome is
unfavorable, it could have a material adverse impact on the
Company s financial position and results of operations.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of security holders
during the Fourth Quarter of 1997.

EXECUTIVE OFFICERS OF THE REGISTRANT
The names, ages, year first elected as officer or appointed as
general manager, positions and recent prior experience of all
current executive officers of the Company as of March 25, 1998,
are as follows:

I. GARY BARD, CHAIRMAN AND C.E.O.
60. 1996. Chairman of the Board of Directors and Chief
Executive Officer since May 6, 1996. President of the
Company from October 8, 1996 through October 23, 1997.
Prior to that, Vice President and General Manager,
Federal Systems Solutions Integration Division of Unisys
Corporation, providing integration solutions to the
federal, state and local government marketplace, since
October 1995. Consultant on software development from
February 1993 to October 1995. Chief Operating Officer
of Open Software Foundation, from November 1992 to
February 1993, and President of Integrated Systems
Division of Computer Sciences Corporation, from July 1984
to November 1992.

JOHN F. VANDERSLICE, PRESIDENT AND C.O.O.
57. 1983. President and Chief Operating Officer of the
Company since October 23, 1997. President of the
Telemetry Division (formerly the Vector Division)
(manufactures airborne data communications products)
since November 1982. Previously, he was Manager of
Engineering (1969-1972), Operations Manager (1972-1973),
and Vice President of Operations (1973-1982) of the
Vector Division.

JAMES R. HENDERSON, VICE PRESIDENT
40. 1996. Vice President, Treasurer and Chief Financial
Officer of the Company since July 1996. Prior to joining
the Company, he held various accounting and financial
positions with Unisys Corporation (services and computer
manufacturing): Director of Financial Planning and
Accounting (1989-1991), Controller of Defense Operations
(1991-1993), Executive Assistance to the President of the
Defense Group (1993-1994), Director of Operations for
Unisys Services Division (1994-1995), and Controller of
Unisys Outsourcing Division (1995-1996).

H. BARRY MASER, VICE PRESIDENT
61. 1996. Vice President of Business Development of the
Company since November 1996. Prior to joining the
Company, he was President of Lynbar Group, Inc., a
manufacturing representative, business planning and
market planning company (1981-1996).

DEMIRHAN HAKIMOGLU, VICE PRESIDENT
59. 1992. Vice President of the Company. Mr. Hakimoglu
was first elected Vice President in February 1991, and
resigned that position in July 1991. He was re-elected
Vice President in February 1992. He also served as
Chairman of the Board and CEO of the Company's Turkish
subsidiary, Aydin Yazilim ve Elektronik Sanayi A.S.
(software design, manufactures digital microwave radios,
telcom equipment and systems), from

(page 6)
<PAGE>

July 1990 through January 1998. Prior to that, he served
in various engineering and management positions with
various divisions of the Company since 1968 (except for a
two year period, 1978-1980).

HERBERT WELBER, CONTROLLER AND ASSISTANT TREASURER
62. 1986. Controller and Assistant Treasurer of the
Company since August 1986. Previously, he was Controller
and Vice President of Displays Division (formerly the
Controls Division) (manufactures display terminals) since
August 1981.

Each of the above officers was elected at the Annual Meeting of
the Board of Directors on April 25, 1997. Officers are elected
each year after the Annual Meeting of Stockholders. Each
serves subject to the discretion of the Board of Directors
until his successor shall be elected or until his death,
disqualification, resignation or removal in the manner provided
in the Company's By-Laws. There are no family relationships
among any executive officers of Aydin.

(page 7)
<PAGE>

PART II

ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
Incorporated by reference is the information under the heading,
"Common Stock Prices" and "Stockholder and Dividend
Information" on page 30 of the Annual Report. The Company has
no present plans to pay any cash dividends. Future cash
dividends, if any, will depend on business conditions. There
are no restrictions that prevent the Company from paying future
cash dividends, except that the Company's Board of Directors
had determined in December 1992 that no cash dividend will be
declared or paid for the foreseeable future, and except for
maintaining compliance with certain covenants of a Credit
Agreement for the funding of a standby Letter of Credit that
prohibit the payment of a dividend or other distributions on
account of the Company's capital stock if any Event of Default
has occurred under the Credit Agreement.

ITEM 6. SELECTED FINANCIAL DATA
Incorporated by reference is the information under the heading,
"Selected Financial Data" on page 30 of the Annual Report.

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Incorporated by reference is the information under the heading,
"Management's Discussion and Analysis of Financial Condition
and Results of Operations" on pages 25-28 of the Annual Report.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK
Not Applicable.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Incorporated by reference are the Consolidated Financial
Statements of Aydin Corporation and the related Notes to
Consolidated Financial Statements, and Report of Independent
Auditors on pages 14 to 24 and 29, and the data under the
heading, "Quarterly Financial Data" on page 30, of the Annual
Report.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
None.

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Incorporated by reference is the information under the heading,
"Election of Directors" on pages 3-5 of the Proxy Statement,
the information under the heading, "Section 16(a) Beneficial
Ownership Reporting Compliance" on page 10 of the Proxy
Statement, and the information under the heading, "Executive
Officers of the Registrant" on pages 6 and 7, Part I of this
10-K.

ITEM 11. EXECUTIVE COMPENSATION
Incorporated by reference is the information under the heading,
"Compensation of Executive Officers", "Option Grants in Last
Fiscal, "Aggregated Option Exercises and Fiscal Year-End Option
Values", "Employment Contracts and Termination of Employment
Arrangements", and "Compensation Committee Interlocks and
Insider Participation" on pages 5 to 7 and 8 and 9 of the Proxy
Statement.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
Incorporated by reference is the information under the
headings, "Beneficial Ownership of Common Stock" and
"Beneficial Ownership by Management" on pages 2 and 3 of the
Proxy Statement.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
None.

(page 8)
<PAGE>

PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS
ON FORM 8-K
The Company files as part of this report the following
documents:

(a) 1. Financial Statements
The following is a list of the Consolidated Financial
Statements of Aydin Corporation and Subsidiaries
which have been incorporated by reference from the
Annual Report as set forth in Item 8 - "Financial
Statements and Supplementary Data":

Consolidated Balance Sheets, as of December 31, 1997
and 1996.
Consolidated Statements of Operations for the years
ended December 31, 1997, 1996 and 1995.
Consolidated Statements of Cash Flows for the years
ended December 31, 1997, 1996 and 1995.
Notes to Consolidated Financial Statements.
Report of Independent Auditors.

2. Schedules
The following is a list of the Schedules of Aydin
Corporation and Subsidiaries filed as part of this
report:

Schedule II - Valuation and Qualifying Accounts

Report of Independent Auditors

All other schedules not listed above are omitted
because they are inapplicable or are not required.

3. Exhibits
The following is a list of Exhibits filed as part of
this report:

3(i) Restated Certificate of Incorporation (filed
as Exhibit No. 3(i) to Registrant's Annual
Report on Form 10-K for the year ended
December 31, 1994 and incorporated herein by
reference).

3(ii) By-laws (filed as Exhibit 3(ii) to
Registrant's Annual Report on Form 10-K for
the year ended December 31, 1996 and
incorporated herein by reference).

10.1 Employment Agreement, I. Gary Bard (filed as
Exhibit No. 10.1 to Registrant's Quarterly
Report on Form 10-Q for the quarter ended
September 28, 1996 and incorporated herein by
reference).

10.2 Employment Agreement, H. Barry Maser (filed
as Exhibit No. 10.3 to Registrant's Quarterly
Report on Form 10-Q for the quarter ended
September 28, 1996 and incorporated herein by
reference).

10.3 Employment Agreement, James R. Henderson
(filed as Exhibit No. 10.4 to Registrant's
Quarterly Report on Form 10-Q for the quarter
ended September 28, 1996 and incorporated
herein by reference).

10.4 The 1994 Incentive Stock Option Plan, as
amended (filed as Exhibit No. 10.5 to
Registrant's Annual Report on Form 10-K for
the year ended December 31, 1996 and
incorporated herein by reference).

10.5 The 1996 Equity Incentive Plan, as amended.

10.6 Restricted Stock Agreement, H. Barry Maser,
dated December 16, 1996 (filed as
Exhibit No. 10.8 to Registrant's Annual
Report on Form 10-K for the year ended
December 31, 1996 and incorporated herein by
reference).

10.7 Amended and Restated Warrant of Registrant
issued to I. Gary Bard to purchase up to
133,334 shares of Common Stock.

(page 9)
<PAGE>

10.8 Amended and Restated Warrant of Registrant
issued to John F. Vanderslice to purchase up
to 66,666 shares of Common Stock.

13 Annual Report to Security Holders (only those
parts incorporated by reference)

21 Subsidiaries of Registrant

23 Consent of Independent Auditors

27.1 Financial Data Schedule (electronic filing
only)

27.2 Restated Financial Data Schedule for
December 31, 1995 (electronic filing only)

99 Independent Auditors' Report

All other exhibits not listed above are omitted
because they are inapplicable.

(b) Reports on Form 8-K
No reports on Form 8-K were filed during the Fourth
Quarter of 1997.

<TABLE>
<CAPTION>
AYDIN CORPORATION
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS 1996, 1995, AND 1994

COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
DESCRIPTION Balance at ADDITIONS Deductions - Balance at
Beginning Charged to Charged to Describe End of Period
of Period Costs and Other Accounts
Expenses - Describe
<S> <C> <C> <C> <C> <C>
Year 1997
_________
Deducted from asset accounts:
Allowance for doubtful accounts $ 982,000 $ 280,000 $ 599,000(1) $ 663,000
Raw materials inventory reserve 1,830,000 923,000 1,518,000(2) 1,235,000
__________ __________ __________ __________
Totals $2,812,000 $1,203,000 $2,117,000 $1,898,000

Year 1996
_________
Deducted from asset accounts:
Allowance for doubtful accounts $ 289,000 $1,061,000 $ 368,000(1) $ 982,000
Raw materials inventory reserve 1,256,000 3,842,000 3,268,000(2) 1,830,000
__________ __________ __________ __________
Totals $1,545,000 $4,903,000 $3,636,000 $2,812,000

Year 1995
_________
Deducted from asset accounts:
Allowance for doubtful accounts $ 323,000 $ 19,000 $ 53,000(1) $ 289,000
Raw materials inventory reserve 2,450,000 1,120,000 2,314,000(2) 1,256,000
__________ __________ ____________ __________
Totals $2,773,000 $1,139,000 $2,367,000 $1,545,000

<FN>
(1) Uncollectible accounts written off, net of recoveries. The
increase in 1997 write-offs reflects primarily foreign
receivables provided for in 1996.
(2) Obsolete inventory written off.
</TABLE>

(page 10)
<PAGE>
SIGNATURES

Pursuant to the requirements of section 13 or 15(d) of the
Securities Exchange Act of 1934, the registrant has duly
caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.

Aydin Corporation

Dated: __March 30, 1998__ By: ____/s/ Robert A. Clancy_____
Robert A. Clancy
Secretary

Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following
persons on behalf of the registrant and in the capacities and
on the dates indicated.

By: ___/s/ I. Gary Bard _______ Dated: __March 30, 1998__
I. Gary Bard
Chief Executive Officer and
Chairman of the Board of Directors

By: __/s/ John F. Vanderslice__ Dated: __March 30, 1998__
John F. Vanderslice
President, Chief Operating
Officer and Director

By: __/s/ James R. Henderson___ Dated: __March 30, 1998__
James R. Henderson
Vice President, Treasurer and
Chief Financial Officer

By: __/s/ Herbert Welber_______ Dated: __March 30, 1998__
Herbert Welber
Controller and Assistant Treasurer
Principal Accounting Officer

By: __/s/ Ira Brind____________ Dated: __March 30, 1998__
Ira Brind
Director

By: __/s/ Nev A. Gokcen________ Dated: __March 30, 1998__
Nev A. Gokcen
Director

By: __/s/ Gary Mozenter________ Dated: __March 30, 1998__
Gary Mozenter
Director

By: __/s/ Harry D. Train_______ Dated: __March 30, 1998__
Harry D. Train, II
Director

<PAGE>
EXHIBIT INDEX
Exhibit No. Description of Exhibit

3(i) Restated Certificate of Incorporation
(filed as Exhibit No. 3(i) to Registrant's
Annual Report on Form 10-K for the year
ended December 31, 1994 and incorporated
herein by reference).

3(ii) By-laws (filed as Exhibit 3(ii) to
Registrant's Annual Report on Form 10-K for
the year ended December 31, 1996 and
incorporated herein by reference).

10.1 Employment Agreement, I. Gary Bard (filed as
Exhibit No. 10.1 to Registrant's Quarterly
Report on Form 10-Q for the quarter ended
September 28, 1996 and incorporated herein
by reference).

10.2 Employment Agreement, H. Barry Maser (filed
as Exhibit No. 10.3 to Registrant's Quarterly
Report on Form 10-Q for the quarter ended
September 28, 1996 and incorporated herein by
reference).

10.3 Employment Agreement, James R. Henderson
(filed as Exhibit No. 10.4 to Registrant's
Quarterly Report on Form 10-Q for the quarter
ended September 28, 1996 and incorporated herein
by reference).

10.4 The 1994 Incentive Stock Option Plan, as amended
(filed as Exhibit No. 10.5 to Registrant's Annual
Report on Form 10-K for the year ended
December 31, 1996 and incorporated herein by
reference).

10.5 The 1996 Equity Incentive Plan, as amended.

10.6 Restricted Stock Agreement, H. Barry Maser, dated
December 16, 1996 (filed as Exhibit No. 10.8 to
Registrant's Annual Report on Form 10-K for the
year ended December 31, 1996 and incorporated
herein by reference).

10.7 Amended and Restated Warrant of Registrant issued
to I. Gary Bard to purchase up to 133,334 shares of
Common Stock.

10.8 Amended and Restated Warrant of Registrant issued to
John F. Vanderslice to purchase up to 66,666 shares
of Common Stock.

13 Annual Report to Security Holders (only those parts
incorporated by reference)

21 Subsidiaries of Registrant

23 Consent of Independent Auditors

27.1 Financial Data Schedule (electronic filing only)

27.2 Restated Financial Data Schedule for December 31, 1995
(electronic filing only)

99 Independent Auditors' Report

<PAGE>
Exhibit 10.5

THE 1996 EQUITY INCENTIVE PLAN
OF
AYDIN CORPORATION

600,000 Shares
(Last Amended February 5, 1998)

1. Purpose. The purpose of the Aydin Corporation 1996
Equity Incentive Plan (the "Plan") is to further the growth,
development and financial success of Aydin Corporation and its
subsidiaries by providing additional incentives to those
officers and key employees who are responsible for the
management of the business affairs of the Company, or its
subsidiaries, which will enable them to participate directly
in the growth of the capital stock of the Company. The Company
intends that the Plan will facilitate securing, retaining and
motivating management employees of high caliber and potential.
To accomplish these purposes, the Plan provides a means
whereby management employees may receive stock options
("Options") to purchase the Company's Common Stock.

2. Definitions. As used in this plan, "Corporation" or
the "Company" means Aydin Corporation; "Board of Directors"
means the Board of Directors of Aydin Corporation; "employee"
includes directors, officers and other key employees of the
Corporation and its subsidiaries; "Stock Option Committee"
(the "Committee") means the Board of Directors; "Common Stock"
means the Corporation's Common Stock of the par value of $1.00
per share; "Code" means the Internal Revenue Code of 1986, as
amended from time to time.

3. Administration. The Plan shall be administered by the
Committee who shall have full and final authority, in its sole
discretion, to interpret the provisions of the Plan and to
decide all questions of fact arising in its application; to
determine the employees to whom Options shall be granted and
the type, amount, size and terms of each such grant; to
determine the time when Options shall be granted; and to make
all other determinations necessary or advisable for the
administration of the Plan. All decisions, determinations and
interpretations of the Committee shall be final and binding on
all optionees and all other holders of Options granted under
the Plan.

4. Stock Subject to the Plan. Subject to Section 17
hereof, the shares that may be issued under the Plan shall not
exceed in the aggregate 600,000 shares of Common Stock. Such
shares may be authorized and unissued shares or shares issued
and subsequently reacquired by the Company. Except as
otherwise provided herein, any shares subject to an Option
that for any reason expires or are terminated unexercised as
to such shares shall again be available under the Plan.

5. Eligibility To Receive Options. Persons eligible to
receive Options under the Plan shall be limited to those
officers and other key employees of the Company, or any
subsidiary of the Company (as defined in Section 425 of the
Code), who are in positions in which their decisions, actions
and counsel significantly impact upon the profitability and
success of the Company, or any subsidiary of the Company.
Directors of the Company who are not also officers or
employees of the Company, or any subsidiary of the Company
shall be eligible to participate in the Plan, provided that
such persons shall not be eligible to receive grants of
Incentive Stock Options, as such term is defined in Section 6
hereof.

6. Types of Options. Grants may be made at any time and
from time to time by the Committee in the form of stock
options to purchase shares of Common Stock. Options granted
hereunder may be Options that are intended to qualify as
incentive stock options within the meaning of Section 422 of
the Code or any amendment or substitute thereto ("Incentive
Stock Options") or Options that are not intended to so qualify
("Nonqualified Stock Options").

7. Option Agreements. Options for the purchase of Common
Stock shall be evidenced by written agreements in such form
not inconsistent with the Plan as the Committee shall approve
from time to time. The Options granted hereunder may be
evidenced by a single agreement or by multiple agreements, as
determined by the Committee in its sole discretion. Each
option agreement shall contain in substance the following
terms and conditions:

(a) Type of Option. Each option agreement shall
identify the Options represented thereby either as Incentive
Stock Options or Nonqualified Stock Options, as the case may
be.

(b) Option Price. Each option agreement shall set
forth the purchase price of the Common Stock purchasable upon
the exercise of the Option evidenced thereby. Subject to the
limitation set forth in Section 7(d)(ii) off the Plan, the
purchase price of the Common Stock subject to an Incentive
Stock Option shall be not less than 100% of the fair market
value of such stock on the date the Option is granted, as
determined by the Committee, but in no event less than the par
value of such stock. The purchase price of the Common Stock
subject to a Nonqualified Stock Option shall be not less than
100% of the fair market value of such stock on the date the
Option is granted, as determined by the Committee. For this
purpose, fair market value on any date shall be the mean
between the highest and the lowest quoted selling prices of
the stock on an exchange, or if the stock is not traded that
day, the fair market value shall be as determined by the
Committee pursuant to Section 422 of the Code.

(c) Exercise Term. No option may be exercised after
ten years from the date of its grant. Unless the option
Agreement provides otherwise, any time after one year from the
date of grant the employee may exercise his option in
accordance with the following schedule:

After: The optionee may purchase:

One year from date of grant..................25% of the total.
Two years from date of grant...An additional 25% of the total.
Three years from date of grant.An additional 25% of the total.
Four years from date of grant..An additional 25% of the total.

The Committee shall have the power to permit an acceleration
of previously established exercise terms, subject to the
requirements set forth herein, upon such circumstances and
subject to such terms and conditions as the Committee deems
appropriate.

(d) Incentive Stock Options. In the case of an
Incentive Stock Option, each option agreement shall contain
such other terms, conditions and provisions as the Committee
determines to be necessary or desirable in order to qualify
such Option as a tax-favored Option (within the meaning of
Section 422 of the Code or any amendment or substitute thereto
or regulation thereunder) including without limitation, each
of the following except that any of these provisions may be
omitted or modified if it is no longer required in order to
have an Option qualify as a tax-favored Option within the
meaning of Section 422 of the Code or any substitute therefor:

(i) The aggregate fair market value (determined
as of the date the Option is granted) of the Common Stock with
respect to which Incentive Stock Options are first exercisable
by any employee during any calendar year (under all plans of
the Company) shall not exceed $100,000.

(ii) No Incentive Stock Options shall be
granted to any employee if at the time the Option is granted
to the individual who owns stock possessing more than 10% of
the total combined voting power of all classes of stock of the
Company or its subsidiaries unless at the time such Option is
granted the Option price is at least 110% of the fair market
value of the stock subject to the Option and, by its terms,
the Option is not exercisable after the expiration of five
years from the date of grant.

(iii) No Incentive Stock Options shall be
exercisable more than 30 days (or three months, in the case
where the employee is placed on layoff, or one year, in the
case of an employee who dies or becomes disabled within the
meaning of Section 22(e)(3) of the Code or any substitute
therefor) after termination of employment.

(e) Substitution of Options. Options may be granted
under the Plan from time to time in substitution for stock
options held by employees of other corporations who are about
to become, and who do concurrently with the grant of such
options become, employees of the Company, or a subsidiary of
the Company as a result of a merger or consolidation of the
employing corporation with the Company, or a subsidiary of the
Company, or the acquisition by the Company, or a subsidiary of
the Company of the assets of the employing corporation, or the
acquisition by the Company, or a subsidiary of the Company of
stock of the employing corporation. The terms and conditions
of the substitute options so granted may vary from the terms
and conditions set forth in this Section 7 to such extent as
the Committee at the time of grant may deem appropriate to
conform, in whole or in part, to the provisions of the stock
options in substitution for which they are granted.

8. Date of Grant. The date on which an Option shall be
deemed to have been granted under the Plan shall be the date
of the Committee's authorization of the Option or such later
date as may be determined by the Committee at the time the
Option is authorized. Notice of the determination shall be
given to each individual to whom an Option is so granted
within a reasonable time after the date of such grant.

9. Exercise and Payment for Shares. Options may be
exercised in whole or in part, from time to time, by giving
written notice of exercise to the Secretary of the Company,
specifying the number of shares to be purchased, except that
no Option may be exercised in whole or in part during the
first twelve months after such Option is granted. The
purchase price of the shares with respect to which an Option
is exercised shall be payable in full with the notice of
exercise in cash, Common Stock at fair market value, or a
combination thereof. The fair market value of Stock so
delivered shall be the mean of the high and the low prices on
the principal exchange upon which the Stock is traded on the
trading day immediately preceding the date of exercise.

10. Rights upon Termination of Employment. In the
event that an optionee ceases to be an employee of the
Company, or any subsidiary of the Company for any reason other
than lay-off, death, or disability (within the meaning of
Section 22(e)(3) of the Code or any substitute therefore), the
optionee shall have the right to exercise the Option during
its term within a period of 30 days (three months in the event
of a lay-off) after such termination to the extent that the
Option was exercisable at the time of termination. In the
event that an optionee dies or becomes disabled prior to the
expiration of his Option and without having fully exercised
his Option, the optionee or his successor shall have the right
to exercise the Option during its term within a period of one
year after termination of employment due to death or
disability to the extent that the Option was exercisable at
the time of termination unless, by its terms, it expires
sooner.

11. General Restrictions. Each Option granted under
the Plan shall be subject to the requirement that if at any
time the Committee shall determine that (i) the listing,
registration or qualification of the shares of Common Stock
subject or related thereto upon any securities exchange or
under any state or federal law, or (ii) the consent or
approval of any government regulatory body, or (iii) an
agreement by the recipient of an Option with respect to the
disposition of shares of Common Stock is necessary or
desirable as a condition of or in connection with the granting
of such Option or the issuance or purchase of shares of Common
Stock thereunder, such Option shall not be consummated in
whole or in part unless such listing, registration,
qualification, consent, approval or agreement shall have been
effected or obtained free of any conditions not acceptable to
the Committee.

12. Rights of a Stockholder. The recipient of any
Option under the Plan, unless otherwise provided by the Plan,
shall have no rights as a stockholder unless and until
certificates for shares of Common Stock are issued and
delivered to him.

13. Right to Terminate Employment. Nothing contained
in the Plan or in any option agreement entered into pursuant
to the Plan shall confer upon any optionee the right to
continue in the employment of the Company or any subsidiary of
the Company or affect any right that the Company or any
subsidiary of the Company may have to terminate the employment
of such optionee.

14. Withholding. Whenever the Company proposes or is
required to issue or transfer shares of Common Stock under the
Plan, the Company shall have the right to require the
recipient to remit to the Company an amount sufficient to
satisfy any federal, state or local withholding tax
requirements prior to the delivery of any certificate or
certificates for such shares. If and to the extent authorized
by the Committee in its sole discretion, an optionee may make
an election, by means of a form of election to be prescribed
by the Committee, to have shares of Common Stock that are
acquired upon exercise of an Option withheld by the Company or
to tender other shares of Common Stock or other securities of
the Company owned by the optionee to the Company at the time
of exercise of an Option to pay the amount of tax that would
otherwise be required by law to be withheld by the Company as
a result of any exercise of an Option. Any such election
shall be irrevocable and shall be subject to termination by
the Committee, in its sole discretion, at any time. Any
securities so withheld or tendered will be valued by the
Committee at the mean of the high and the low prices the
Common Stock traded on the trading day immediately preceding
the date exercised.

15. Non-Assignability. No Option under the Plan shall be
assignable or transferable by the recipient thereof except by
will or by the laws of descent and distribution. During the
life of the recipient, such Option shall be exercisable only
by such person or by such person's guardian or legal
representative.

16. Non-Uniform Determinations. The Committee's
determination under the Plan (including without limitation
determinations of the persons to receive Options, the form,
amount and timing of such grants, the terms and provisions of
Options, and the agreements evidencing same) need not be
uniform and may be made selectively among persons who receive,
or are eligible to receive, grants of Options under the Plan
whether or not such persons are similarly situated.

17. Adjustments.

(a) Changes in Capitalization. Subject to any
required action by the stockholders of the Company, the number
of shares of Common Stock covered by each outstanding Option
and the number of shares of Common Stock that have been
authorized for issuance under the Plan but as to which no
Options have yet been granted or which have been returned to
the Plan upon cancellation or expiration of an Option, as well
as the price per share of Common Stock covered by each such
outstanding Option, shall be proportionately adjusted for any
increase or decrease in the number of issued shares of Common
Stock resulting from a stock split, reverse stock split, stock
dividend, combination or reclassification of the Common Stock,
or any other increase or decrease in the number of issued
shares of Common Stock effected without receipt of
consideration by the Company; provided, however, that
conversion of any convertible securities of the Company shall
not be deemed to have been "effected without receipt of
consideration." Such adjustment shall be made by the
Committee, whose determination in that respect shall be final,
binding and conclusive. Except as expressly provided herein,
no issuance by the Company of shares of stock of any class, or
securities convertible into shares of stock of any class,
shall affect, and no adjustment by reason thereof shall be
made with respect to, the number or price of shares of Common
Stock subject to an Option.

(b) Dissolution or Liquidation. In the event of the
proposed dissolution or liquidation of the Company, all
outstanding Options will terminate immediately prior to the
consummation of such proposed action, unless otherwise
provided by the Committee. The Committee may, in the exercise
of its sole discretion in such instances, declare that any
Option shall terminate as of a date fixed by the Committee and
give each Option holder the right to exercise his Option as to
all or any part of the shares of Common Stock covered by the
Option, including shares as to which the Option would not
otherwise be exercisable.

(c) Sale or Merger. In the event of a proposed sale
of all or substantially all of the assets of the Company, or
the merger of the Company with or into another corporation,
the Committee, in the exercise of its sole discretion, may
take such action as it deems desirable, including, but not
limited to (i) causing an Option to be assumed or an
equivalent option to be substituted by such successor
corporation or a parent or subsidiary of such successor
corporation, (ii) providing that each Option holder shall have
the right to exercise his Option as to all of the shares of
Common Stock covered by the Option, including shares as to
which the Option would not otherwise be exercisable, or (iii)
declare that an Option shall terminate at a date fixed by the
Committee provided that the Option holder is given notice and
opportunity to exercise his Option prior to such date.

18. Amendment. The Committee may terminate or amend the
Plan at any time. The termination or any modification or
amendment of the Plan shall not, without the consent of a
participant, affect his rights under an Option previously
granted.

19. Reservation of Shares. The Company, during the
term of the Plan, will at all times reserve and keep available
such number of shares as shall be sufficient to satisfy the
requirement of the Plan. Inability of the Company to obtain
authority from any regulatory body having jurisdiction, which
authority is deemed by the Company's counsel to be necessary
to the lawful issuance and sale of any shares hereunder, shall
relieve the Company of any liability for the failure to issue
or sell such shares as to which such requisite authority shall
not have been obtained.

20. Effect on Other Plans. Participation in the Plan
shall not affect an employee's eligibility to participate in
any other benefit or incentive plan of the Company or any
subsidiary of the Company. Any Options granted pursuant to
the Plan shall not be used in determining the benefits
provided under any other plan of the Company or any subsidiary
of the Company unless specifically provided.

21. Duration of the Plan. The Plan shall remain in
effect until all Options granted under the Plan have been
satisfied by the issuance of shares, but no Option shall be
granted more than ten years after the date the Plan is adopted
by the Company's Board of Directors.

22. Forfeiture for Dishonesty. Notwithstanding
anything to the contrary in the Plan, if the Committee finds,
by a majority vote, after full consideration of the facts
presented on behalf of both the Company and any optionee, that
the optionee has been engaged in fraud, embezzlement, theft,
commission of a felony or dishonest conduct in the course of
his employment or retention by the Company or any subsidiary
of the Company that damaged the Company, or any subsidiary of
the Company or that the optionee has disclosed confidential
information of the Company or any subsidiary of the Company,
the optionee shall forfeit all unexercised Options and all
exercised Options under which the Company has not yet
delivered the certificates. The decision of the Committee in
interpreting and applying the provisions of this Section 22
shall be final. No decision of the Committee however, shall
affect the finality of the discharge or termination of such
optionee by the Company or any subsidiary of the Company in
any manner.

23. No Prohibition on Corporate Action. No provision
of the Plan shall be construed to prevent the Company or any
officer or director thereof from taking any action deemed by
the Company or such officer or director to be appropriate or
in the Company's best interests whether or not such action
could have an adverse effect on the Plan or any Options
granted hereunder, and no optionee or optionee's estate,
personal representative or beneficiary shall have any claim
against the Company or any officer or director thereof as a
result of the taking of such action.

24. Indemnification. With respect to the
administration of the Plan, the Company shall indemnify each
present and future member of the Committee and the Board of
Directors against, and each member of the Committee and the
Board of Directors shall be entitled without further action on
their part to indemnity from the Company for, all expenses
(including the amount of judgments and the amount of approved
settlements made with a view to the curtailment of costs of
litigation, other than amounts paid to the Company itself)
reasonably incurred by them in connection with or arising out
of, any action, suit or proceeding in which they may be
involved by reason of they being or having been a member of
the Committee or the Board of Directors, whether or not they
continue to be such member at the time of incurring such
expenses; provided, however, that such indemnity shall not
include any expenses incurred by any such member of the
Committee or the Board of Directors (i) in respect of matters
as to which they shall be finally adjudged in any such action,
suit or proceeding to have been guilty of gross negligence or
willful misconduct in the performance of their duty as such
member of the Committee or the Board of Directors: or (ii) in
respect of any matter in which any settlement is affected for
an amount in excess of the amount approved by the Company on
the advice of its legal counsel; and provided further that no
right of indemnification under the provisions set forth herein
shall be available to or enforceable by any such member of the
Committee or the Board of Directors unless, within 60 days
after institution of any such action, suit or proceeding, they
shall have offered the Company in writing the opportunity to
handle and defend same at its own expense. The foregoing
right of indemnification shall inure to the benefit of the
heirs, executors or administrators of each such member of the
Committee or the Board of Directors and shall be in addition
to all other rights to which such member may be entitled as a
matter of law, contract or otherwise.

25. Miscellaneous Provisions.

(a) Compliance with Plan Provisions. No optionee or
other person shall have any right with respect to the Plan,
the Common Stock reserved for issuance under the Plan or in
any Option until a written option agreement shall have been
executed by the Company and the optionee and all the terms,
conditions and provisions of the Plan and the Option
applicable to such optionee (and each person claiming under or
through him) have been met.

(b) Approval of Counsel. In the discretion of the
Committee, no shares of Common Stock, other securities or
property of the Company or other forms of payment shall be
issued hereunder with respect to any Option unless counsel for
the Company shall be satisfied that such issuance will be in
compliance with applicable federal, state, local and foreign
legal, securities exchange and other applicable requirements.

(c) Compliance with Rule 16b-3. To the extent that
Rule 16b-3 under the Exchange Act applies to Options granted
under the Plan, it is the intent of the Company that the Plan
comply in all respects with the requirements of Rule 16b-3,
that any ambiguities or inconsistencies in construction of the
Plan be interpreted to give effect to such intention and that
if the Plan shall not so comply, whether on the date of
adoption or by reason of any later amendment to or
interpretation of Rule 16b-3, the provisions of the Plan shall
be deemed to be automatically amended so as to bring them into
full compliance with such rule.

(d) Effects of Acceptance of Option. By accepting
any Option or other benefit under the Plan, each optionee and
each person claiming under or through him shall be
conclusively deemed to have indicated his acceptance and
ratification of, and consent to, any action taken under the
Plan by the Company, the Board of Directors, the Committee or
its delegates.

(e) Construction. The masculine pronoun shall
include the feminine and neuter, and the singular shall
include the plural, where the context so indicates.

26. Stockholder Approval. The exercise of any Option
granted under the Plan shall be subject to the approval of the
Plan by the affirmative vote of the holders of a majority of
the outstanding shares of the Common Stock present, or
represented, and entitled to vote at a meeting duly held.

<PAGE>
Exhibit 10.7

THE SECURITIES ISSUABLE UPON EXERCISE HEREOF (THE
"SECURITIES") WILL BE ACQUIRED FOR INVESTMENT AND HAVE NOT
BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 OR ANY OTHER
SECURITIES LAWS, AND MAY NOT BE OFFERED, SOLD, PLEDGED OR
HYPOTHECATED UNTIL SUCH SHARES HAVE BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933 AND OTHER APPLICABLE SECURITIES LAWS,
OR IN THE OPINION OF COUNSEL IN FORM AND SUBSTANCE REASONABLY
SATISFACTORY TO THE COMPANY, SUCH OFFER, SALE OR TRANSFER,
PLEDGE OR HYPOTHECATION IS IN COMPLIANCE THEREWITH.

AMENDED AND RESTATED WARRANT

For the Purchase of up to
133,334 Shares of Common Stock, 1.00 Par Value,
of
Aydin Corporation

1. Issuance and Exercise of Warrant.

1.1. Issuance of Warrant. For value received, I. Gary
Bard, an individual, or registered assigns, (the "Warrant
Holder"), is entitled to purchase from Aydin Corporation, (the
"Company"), a Delaware corporation, up to 133,334 shares (the
"Shares") of Common Stock, par value $1.00 per share, of the
Company, upon surrender of this Warrant to the Company and upon
payment of the Exercise Price (as hereinafter defined), subject
to the terms and conditions set forth herein.

1.2. Exercise of Warrant; Expiration.

(a) Exercisability. This Warrant is exercisable in
whole or in part commencing on and after its date of issuance
and shall expire at 5:00 p.m., Philadelphia Time on May 14,
2000 (the "Expiration Date"); provided, however, that the
initial exercise of this Warrant shall be for the purchase of
at least 66,667 Shares, as such amount may be adjusted from
time to time pursuant to the provisions of Section 2 hereof.

(b) Exercise Price. The price for which the Shares
may be purchased upon the exercise of this warrant shall be as
follows: (i) 66,667 of the Shares shall be exercisable for
$12.10 per Share and (ii) 66,667 of the Shares shall be
exercisable for $13.20 per Share (each such price being
hereinafter referred to as the "Exercise Price").

2. Adjustments; Anti-Dilution Provisions.

2.1. Stock Split, Subdivision or Combination. If the
Company, at any time while this Warrant is outstanding, shall
split, subdivide or combine its Common Stock (by
reclassification or otherwise than by payment of a dividend in
the respective class), an appropriate and equitable adjustment
shall be made as of the effective date of such action in the
number of Shares as to which this Warrant, or portion thereof
then unexercised, shall be exercisable and in the Exercise
Price of such Shares in order to reflect such stock split,
subdivision or combination.

2.2. Asset or Capital Dividend. If the Company, at any
time while this Warrant is outstanding, shall make a
distribution of its assets to the holders of its Common Stock
and/or any class of stock convertible into or exchangeable for
its Common Stock as a dividend in liquidation or partial
liquidation or as a return of capital other than as a dividend
payable out of funds legally available for dividends under the
laws of the Commonwealth of Pennsylvania, the Warrant Holder
shall, upon exercise and payment of the Exercise Price for
each Share purchased hereunder within 14 business days after
notification of such distribution pursuant to Section 12
below, be entitled to receive, in addition to the number of
shares receivable thereupon, and without payment of any
additional consideration thereof, a sum equal to the amount of
such assets as would have been payable to such Warrant Holder
had such Warrant Holder been the holder of record of such
shares on the record date for such distribution; and an
appropriate provision therefor shall be made for the Warrant
Holder to be made a party to any such distribution.

2.3. Adjustments for Consolidation, Merger, Sale of
Assets, Reorganization or Reclassification. In the event the
Company, at any time or from time to time while this Warrant
is outstanding, (a) shall consolidate with or merge into any
other entity and shall not be the continuing or surviving
corporation of such consolidation or merger, or (b) shall
permit any other entity to consolidate with or merge into the
Company and the Company shall be the continuing or surviving
entity but, in connection with such consolidation or merger,
the Common Stock shall be changed into or exchanged for
capital stock or other securities or property of any other
equity, or (c) shall transfer all or substantially all of its
properties and assets to any other entity, or (d) shall effect
a capital reorganization or reclassification of the Common
Stock (other than one deemed to result in the issue of
additional shares of such class), then, and in each such
event, lawful provision shall be made so that the Warrant
Holder shall be entitled to receive upon the exercise hereof
at anytime after the consummation of such consolidation,
merger, transfer, reorganization or reclassification, in lieu
of the Shares issuable upon exercise of this Warrant prior to
such consummation, the capital stock and other securities and
property to which the Warrant Holder would have been entitled
upon such consummation if the Warrant Holder had exercised
this Warrant immediately prior thereto.

2.4. Certificate of Adjustment. The Company shall
promptly furnish or cause to be furnished to the Warrant
Holder a certificate setting forth each adjustment made
pursuant to this Section 2.

3. No Fractional Shares. No fractional Shares shall be
issued in connection with any exercise hereof, and if the
total number of Shares that remains unexercisable would result
in a fraction, such number of Shares shall be rounded to the
nearest whole Share.

4. No Shareholder Rights. This Warrant shall not
entitle the Warrant Holder to any of the rights of a
stockholder of the Company.

5. Reservation of Shares. The Company covenants that
the Shares issuable upon the exercise of this Warrant have
been duly authorized and reserved and, when issued and paid
for, will be validly issued, fully paid and non-assessable.
The issuance of this Warrant shall constitute full authority
to those officers of the Company who are charged with the duty
of executing stock certificates to execute and issue the
necessary certificates for Shares upon the exercise of this
Warrant.

6. Exercise of Warrant.

6.1. Manner of Exercise. To exercise this Warrant,
in whole or in part, the Warrant Holder shall deliver to the
Company, at its address specified in Section 12 below: (a) a
written notice in the form of Annex A hereto of such Warrant
Holder's election to exercise this Warrant, specifying the
number of Shares to be purchased and whether the purchase is
pursuant to clause (i) or clause (ii) of Section 1.2(b),(b) a
wire transfer or a certified or official bank check or checks
payable to the order of the Company in an amount equal to the
product of the applicable Exercise Price per Share and the
number of Shares to be purchased at such time pursuant to the
Warrant and such notice, and (c) the original copy of this
Warrant. Upon receipt of such items, the Company shall, as
promptly as practicable, and in any event within 20 days
thereafter, issue or cause to be issued and delivered to such
Warrant Holder a certificate or, if requested by the Warrant
Holder, multiple certificates representing the aggregate
number of full Shares issuable upon such exercise. This
Warrant shall be deemed to have been exercised and such
certificate or certificates shall be deemed to have been
issued, and such Warrant Holder or any other person so
designated to be named therein shall be deemed to have become
a holder of record of such shares for all purposes, as of the
date that said notice, together with said cash or check or
checks and this Warrant, are received by the Company as
aforesaid. If this Warrant shall have been exercised in part,
the Company shall, at the time of delivery of said certificate
or certificates, deliver to such Warrant Holder a new Warrant
evidencing the rights of such Warrant Holder to purchase the
unpurchased Shares, which new Warrant shall in all other
respects be identical to this Warrant.

6.2. Payment of Taxes and Expenses. All Shares
issuable upon the exercise of this Warrant shall be validly
issued, fully paid and non-assessable, and the Company shall
pay all expenses in connection with, and all taxes and other
governmental charges that may be imposed in respect of, the
issue or delivery thereof, other than any federal, state or
local income tax or other tax based upon gross or net income,
owned by the Warrant Holder on account of such issuance or
delivery. The Company shall not be required, however, to pay
any tax or other charge imposed in connection with any transfer
involved in the issue of any certificate for shares in any name
other than that of the registered Warrant Holder, and in such
case the Company shall not be required to issue or deliver any
stock certificate until such tax or other charge has been paid
or it has been established to the Company's reasonable
satisfaction that no such tax or other charge is due.

7. Registration Rights. The Shares issued upon exercise
of this Warrant shall be subject to the Amended and Restated
Registration Rights Agreement dated as of May 14, 1997 between
the Company and the Warrant Holder.

8. Agreement to Vote Shares. For as long as the Warrant
Holder and/or any of its affiliates remain the beneficial
owner of the Shares issued upon exercise of the Warrant, at
any meeting of stockholders of the Company at which directors
of the Company are to be elected, the Warrant Holder and each
such affiliate agree to vote any and all such Shares for the
election to the Board of those persons nominated by the
Company's Board of Directors. The Warrant Holder further
agrees that the Shares may not be transferred in a privately
negotiated transaction that has not been registered under the
Securities Act of 1933, unless the transferee shall have
agreed to be bound by the terms of this Section 8. The
Warrant Holder agrees to the placement of a restrictive legend
on the certificate(s) representing the Shares relating to this
restriction.

9. Replacement of Warrant. On receipt of evidence
reasonably satisfactory to the Company of the loss, theft,
destruction or mutilation of this Warrant and, in the case of
any such loss, theft or destruction of this Warrant, on
delivery of an indemnity agreement or security reasonably
satisfactory in form and amount to the Company or, in the case
of any such mutilation, upon surrender and cancellation of
such Warrant, the Company, at the expense of the Warrant
Holder, will execute and deliver, in lieu thereof, a new
Warrant.

10. Transfer of Warrant. This Warrant may be
transferred by the Warrant Holder subject to compliance with
applicable federal and state securities laws; provided,
however, that any transferee of this Warrant shall have agreed
in writing to assume and be bound by the obligations of the
Warrant Holder and/or its affiliates under the terms and
provisions of Section 8 of this Warrant.

11. Miscellaneous. This Warrant shall be governed by
the internal law, but not the law of conflicts, of the State
of Delaware. The headings in this Warrant are for purposes of
convenience and reference only and shall not be deemed to
constitute a part hereof. Neither this Warrant nor any term
hereof may be changed, waived, discharged or terminated orally
except by an instrument in writing signed by the Company and
the registered Warrant Holder. The invalidity or
unenforceability of any provision hereof shall in no way affect
the validity or enforceability of any other provision.

12. Notice Generally. Any notice, demand or delivery
pursuant to the provisions hereof shall be sufficiently given
or made if sent by registered or certified mail, postage
prepaid, or overnight delivery service, addressed to the
Warrant Holder at such Warrant Holder's last known address
appearing on the books of the Company, or, except as herein
otherwise expressly provided, to the Company at Aydin
Corporation, 700 Dresher Road, P.O. Box 349, Horsham, PA
19044, Attention: President, or such other address as shall
have been furnished to the party giving or making such
notice, demand or delivery.

13. Replacement of Warrant. This Warrant is one of two
Warrants issued as of this date for the purchase of an
aggregate of 200,000 shares of Common Stock of the Company in
connection with the transfer and cancellation of the Amended
and Restated Warrant dated as of May 14, 1997 issued by the
Company to EA Industries, Inc. pursuant to the Warrant Transfer
Agreement dated as of this date between EA Industries, Inc. and
I. Gary Bard and John F. Vanderslice.

<PAGE>

ISSUED AS OF THIS 11th day of February, 1998.

AYDIN CORPORATION
Attest:

__/s/ Robert A. Clancy___ By:__/s/ James R. Henderson__
Secretary James R. Henderson, V.P. & CFO

<PAGE>
ANNEX A
NOTICE OF EXERCISE

(To be Executed by
the Registered Warrant Holder
in Order to Exercise the Warrant)

The undersigned hereby irrevocably elects to exercise the
right to purchase from Aydin Corporation _________(_______)
Shares covered by the Warrant dated ________, 1998 and issued
to I. Gary Bard, according to the conditions thereof.

Check one:

___ Such exercise is being made pursuant to clause (i)
of Section 1.2(b), and the undersigned herewith
makes payment of the Exercise Price of such Shares
in full. Such payment is hereby tendered in the
form of $___________ by wire transfer or by
certified or bank check.

___ Such exercise is made pursuant to clause (ii) of
Section 1.2(b), and the undersigned herewith makes
payment of the Exercise Price of such Shares in
full. Such payment is hereby tendered in the form
of $___________ by wire transfer or by certified or
bank check.

The undersigned understands that the Shares being issued
hereunder have not been registered under the Securities Act of
1933 (the "Act") or any state securities laws and that such
Shares may not be sold, transferred, or assigned except:
(i) pursuant to an effective registration thereof under the
Act; or (ii) if in the opinion of counsel for the registered
owner thereof, which opinion is reasonably satisfactory to the
Company, the proposed sale, transfer or assignment may be
effected without such registration under the Act and will not
be in violation of applicable state securities laws.

Printed Name
of Registered
Dated: _______ Warrant Holder:________________________

Signature: ________________________

Address: ________________________

<PAGE>
Exhibit 10.8

AMENDED AND RESTATED WARRANT

For the Purchase of up to
66,666 Shares of Common Stock, 1.00 Par Value,
of
Aydin Corporation

1. Issuance and Exercise of Warrant.

1.1. Issuance of Warrant. For value received, John F.
Vanderslice, an individual, or registered assigns, (the
"Warrant Holder"), is entitled to purchase from Aydin
Corporation, (the "Company"), a Delaware corporation, up to
66,666 shares (the "Shares") of Common Stock, par value $1.00
per share, of the Company, upon surrender of this Warrant to
the Company and upon payment of the Exercise Price (as
hereinafter defined), subject to the terms and conditions set
forth herein.

1.2. Exercise of Warrant; Expiration.

(a) Exercisability. This Warrant is exercisable in
whole or in part commencing on and after its date of issuance
and shall expire at 5:00 p.m., Philadelphia Time on May 14,
2000 (the "Expiration Date"); provided, however, that the
initial exercise of this Warrant shall be for the purchase of
at least 33,333 Shares, as such amount may be adjusted from
time to time pursuant to the provisions of Section 2 hereof.

(b) Exercise Price. The price for which the Shares
may be purchased upon the exercise of this warrant shall be as
follows: (i) 33,333 of the Shares shall be exercisable for
$12.10 per Share and (ii) 33,333 of the Shares shall be
exercisable for $13.20 per Share (each such price being
hereinafter referred to as the "Exercise Price").

2. Adjustments; Anti-Dilution Provisions.

2.4. Certificate of Adjustment. The Company shall
promptly furnish or cause to be furnished to the Warrant
Holder a certificate setting forth each adjustment made
pursuant to this Section 2.

4. No Shareholder Rights. This Warrant shall not
entitle the Warrant Holder to any of the rights of a
stockholder of the Company.

6. Exercise of Warrant.

6.2. Payment of Taxes and Expenses. All Shares
issuable upon the exercise of this Warrant shall be validly
issued, fully paid and non-assessable, and the Company shall
pay all expenses in connection with, and all taxes and other
governmental charges that may be imposed in respect of, the
issue or delivery thereof, other than any federal, state or
local income tax or other tax based upon gross or net income,
owned by the Warrant Holder on account of such issuance or
delivery. The Company shall not be required, however, to pay
any tax or other charge imposed in connection with any ransfer
involved in the issue of any certificate for shares in any name
other than that of the registered Warrant Holder, and in such
case the Company shall not be required to issue or deliver any
stock certificate until such tax or other charge has been paid
or it has been established to the Company's reasonable
satisfaction that no such tax or other charge is due.

<PAGE>

ISSUED AS OF THIS 11th day of February, 1998.

AYDIN CORPORATION
Attest:

__/s/ Robert A. Clancy___ By:__/s/ James R. Henderson__
Secretary James R. Henderson, V.P. & CFO

<PAGE>
ANNEX A
NOTICE OF EXERCISE

(To be Executed by
the Registered Warrant Holder
in Order to Exercise the Warrant)

Check one:

Printed Name
of Registered
Dated: _______ Warrant Holder:________________________

Signature: ________________________

Address: ________________________

<PAGE>
Exhibit 13

(FRONT COVER)

Global Communications Solutions

Making the Connection, Worldwide

AYDIN
1997 Annual Report

<PAGE>

MISSION STATEMENT

AYDIN's business mission is to add value to our customers, our
shareholders and our employees, as a world class provider of
products and systems for the acquisition and distribution of
information over electronics communications media.

The Company designs, engineers, manufactures, markets,
distributes and installs technologically advanced
communications products and systems.

AYDIN's direct customers are industrial, commercial, space,
government and defense organizations around the world.

AYDIN's products and systems include communications
infrastructure equipment and systems, airborne and ground
telemetry products, C3 systems (command, control and
communications), radar automation and integration systems,
military communications systems, radios, microwave components
and displays.

AYDIN's communications solutions range from supplying basic
components to providing turnkey systems.

The Company has facilities in the US, the UK and Turkey, and
supports communications systems installations worldwide.

(page one)
<PAGE>

TO OUR SHAREHOLDERS

Letter from: Chairman and CEO, I. Gary Bard

Financial Results
Our results in 1997 were consistent with management's
continuing objective to make AYDIN a growing, profitable global
communications company. Share price at year end showed a 26%
increase in comparison to the previous year, beginning the
process of adding intrinsic value for our customers, our
shareholders and our employees.

Consistent with our plan, AYDIN achieved profitability in the
second half of the year. Although net income for the year
still reflected a loss, significant improvements were made in
lowering our cost structure in 1997. AYDIN's sales in 1997
were $115,371,000 versus $116,578,000 in 1996, a decrease of
1%. Our net loss was $1,692,000 versus a net loss of
$14,780,000 in 1996. We incurred a disappointing $2.6 million
non-cash litigation expense resulting from the unexpected
overturn, by the California Superior Court, of a ruling
previously favoring AYDIN. Loss per share in 1997 was $0.34
versus a $2.88 loss per share in 1996.

In the second half of 1997, AYDIN showed a net income of
$517,000 excluding a $1,800,000 one-time sale of real estate,
achieving our planned turnaround objective on target in just
over twelve months. In 1997, internal growth and
diversification contributed to our success. Moving forward, we
will continue to enhance our core businesses in communications
and telemetry through internal growth and potential strategic
acquisition.

AYDIN-solutions to satisfy enormous global demand for efficient
communications

As Chief Executive Officer of AYDIN, I lead a management team
committed to constantly adding shareholder value.

Building from our core telemetry business where AYDIN is the
preeminent supplier worldwide, we will capitalize on the growth
in commercial communications markets, characterized by a broad
customer base with significant potential.

We believe AYDIN's growth will accelerate over the coming years
as a direct result of successful efforts by our management team
to fully satisfy these customer needs.

(page two)
<PAGE>

AYDIN: reforming, refocusing and returning shareholder value

When I was appointed Chief Executive Officer in May of 1996, I
initiated the migration of AYDIN from an engineering-focused
organization to an organization focused on customer
satisfaction and fulfilling market demand.

Throughout 1997, we continued to energize AYDIN's migration by
consolidating key business operations, which enables us to
focus our energy on strategic business objectives for
Communications, Telemetry and Displays-our three core markets.

The AYDIN principle-to add value for our customers, our
shareholders, and our employees

Perhaps most important, we are continuing to add long-term
value by developing a highly skilled, proactive team: Our
singular mission is to improve our customers' productivity with
communications products and services that add value by
satisfying their users' needs in a highly reliable,
cost-effective manner.

(page three)
<PAGE>

Communications is the capturing, transmittal, processing and
display of information, via electronic media, from one or many
sources to one or many destinations.

In the highly competitive communications industry, AYDIN offers
added value:

- - Through our resident skills in applied technology, providing
a wide range of technologically sophisticated communications
solutions that fully satisfy user needs, including
interoperability requirements and capacity for cost-effective
future enhancement

- - Through our local understanding of domestic and overseas
markets, where demand is increasing exponentially

- - Through strategic partnering and cooperative support with
other communications providers who already engage AYDIN based
on our technological expertise and on the flexibility and
shorter decision-making cycles that a mid-sized organization
like ours can provide

- - Through continuous management of customer-focused service,
supported structurally by divisional responsibility for
manufacturing, marketing and sales operations

- - Through our ability to access new markets where our current
customers and partners have significant reach

AYDIN defines communications

Communications is a vital, evolving marketplace where demand is
increasing exponentially. In a recently televised feature of
Edwin Newman's Executive Forum, I offered this updated
definition:

Communications is the capturing, transmittal, processing and
display of information, via electronic media, from one or many
sources to one or many destinations. Display reception may be
audio, visual or a combination of formats.

In the past, communications chiefly implied telephony and wire
transmission. Technological advances-and market demand-have
changed this. Now, communications encompasses data, voice,
graphics, animation and video, transmitted by telephone, cable,
satellite, radio and other means.

AYDIN brings depth and breadth of experience to the world's
communications marketplaces, with our offerings of turnkey
systems and components for traditional and non-traditional
technologies.

(page four)
<PAGE>

AYDIN brings depth and breadth of experience to the world's
communications marketplaces, with our offerings of turnkey
systems and components for traditional and non-traditional
technologies.

AYDIN-known for efficient communications solutions

AYDIN's technological expertise serving strategic military
needs and commercial organizations makes us very attractive to
investors who recognize the enormous global demand for
efficiency in communications.

As a result of our experience in the US and overseas markets,
AYDIN provides a broad range of communications solutions that
are locally appropriate in terms of resources, market demand
and potential, planned usage, cost and efficiency for current
and future interoperability.

Moving forward, AYDIN's demonstrated capacity to serve world
markets efficiently, through a variety of technological
alternatives, will differentiate us as a leading provider of
communications solutions.

AYDIN's mission is to add value for our customers, our
shareholders and our employees. We will accomplish this by
continuing to supply and support communications solutions that
measurably improve productivity, worldwide.

/s/ I. Gary Bard

I. Gary Bard
Chairman of the Board and Chief Executive Officer

During 1997 AYDIN narrowed its focus to three core markets:
Communications, Telemetry and Displays

Communications
AYDIN's Satellite TDMA Terminal provides high reliability,
cost-competitive communications for INTELSAT users (telephone
companies) around the world. Our transcoders, microwave radios
and network access devices are used to support telephony, data
communications and cable TV applications.

Telemetry
AYDIN is a world leader in distributed data acquisition systems
used for flight testing in commercial and military aircraft.

Displays
AYDIN, an industry leader in displays, offers state-of-the-art
CRT and flat panel displays packaged for military, industrial
process control, factory floor, automation, financial and
medical markets.

(page five)
<PAGE>

COMMUNICATIONS

Wireless systems are capable of serving millions of people
globally, at a fraction of the cost of traditional wired
installations.

AYDIN Communications

AYDIN Communications provides a wide range of data and voice
communication systems and products for the commercial and
military markets. Our standard offerings are currently deployed
throughout the world in a variety of public and private
networks. In addition, AYDIN custom designs complex mission
critical
applications such as right-of-way communications for utility,
railway and pipeline companies, and the establishment of vital
links to offshore platforms and satellite earth stations. AYDIN
also provides complete air defense communications systems and
commercial air traffic control solutions.

AYDIN is well recognized by commercial, governmental and
military organizations as a leading provider of technologically
sophisticated solutions for efficient communications in a broad
range of operating environments, worldwide.

(page six)
<PAGE>

AYDIN manufactures and installs communications products used in
satellite earth stations, providing both primary and back up
links such as AYDIN's state-of-the-art Satellite TDMA Terminals
used for commercial and government networks-among them, AT&T,
Sprint and WorldCom, and national telecom operations in the UK,

France, Germany, Canada, Singapore and Brazil.

AYDIN Communications has supplied turnkey telecommunications
systems to Australia, Thailand, Turkey, Argentina, Zambia,
Malaysia, Saudi Arabia, Finland and other countries, serving
infrastructure needs with integrated systems that may include
line-of-sight-radios, satellite earth stations, multiplexers,
switches, fiber-optic cables and other technology.

In the Middle East, our AYDIN Yazilim subsidiary produces,
installs and supports a variety of communications equipment and
systems, including the Government of Turkey's critical Mobile
Air Defense System. Licensed to produce all products of AYDIN
Corporation, AYDIN Yazilim has a core staff of approximately
300 engineers and production workers.

AYDIN Communications highlights, 1997

AYDIN installs advanced TDMA satellite terminals--8 countries
in 8 months: AYDIN is the leading supplier of next-generation
TDMA terminals, worldwide. These TDMA terminals provide 3:1
cost savings and double the efficiency of earlier systems,
permitting twice as many users per satellite. Between May and
December 1997,
AYDIN installed advanced TDMA terminals in 8 nations: the US,
Canada, Sweden, Switzerland, Germany, Argentina, Israel and
Singapore. At the date of this Report, over 20 nations have
ordered their next-generation TDMA terminals from AYDIN.

AYDIN awarded NATO contracts for Radar Integration Systems
(RIS) program: In follow-on contracts, AYDIN will provide a
third RIS program control center for Denmark and components for
fielded sites in Denmark, Greece, Turkey, Belgium and Italy.
The RIS program integrates various NATO radars, providing
greater operational flexibility to NATO Control & Reporting
Centers.

(graphic)
AYDIN's next-generation TDMA provides 3:1 cost savings over
earlier technology

Focus on the future: AYDIN Communications

Communications and telemetry combined represent approximately
77% of AYDIN's current business and its greatest opportunity
for growth. In 1998, we will focus on additional applications
for high-volume communications providers, a segment that
presents immediate potential due to substantial lack of current
worldwide communications capacity. The long-term potential is
equally attractive to AYDIN shareholders. It has been shown
that business and personal productivity increases as
communications systems are installed, thus demand will continue
to grow.

AYDIN's newest product, the DigiCall Wireless Local Loop
system, successfully passed its first factory test milestone in
1997. This exciting new product family uses the GSM standard
adopted by 135 nations, enhancing its acceptance worldwide.
Our DigiCall wireless system can bring telephone service to
millions of people globally, at a fraction of the cost of wired
installations.

(page seven)
<PAGE>

TELEMETRY

AYDIN Telemetry

AYDIN Telemetry products and systems are used by space agencies
such as NASA and in defense and aerospace programs such as
aircraft and weapons development. AYDIN is a world leader in
the design, manufacture and systems integration for flight
testing and flight certification instrumentation for commercial
and military applications.

AYDIN Telemetry serves aerospace, satellite and commercial
aircraft markets. We design, manufacture and market an
extensive product line and provide turnkey systems integration
for airborne and ground-based applications.

(page eight)
<PAGE>

AYDIN airborne and ground systems gather critical information
from spacecraft, satellites, aircraft, guided weapons and
ground vehicles. Our equipment calibrates, processes and
records or transmits information, by radio or microwave links,
to a fixed or mobile ground station that receives, processes
and analyzes the data.

AYDIN airborne systems are compact, rugged and uniquely
designed for use in harsh environments or where space is
limited. Our ground systems employ data-driven architecture,
the latest computer and microcircuit technology, and advanced
software management techniques to provide superior data
management and analytical capacity.

AYDIN Telemetry highlights, 1997

AYDIN to supply instrumentation kits for UK SKYFASH and
SIDEWINDER missiles: The United Kingdom Ministry of Defense has
awarded AYDIN Telemetry two multimillion-dollar contracts to
deliver Service Practice Instrumentation (SPI) kits used in
SKYFASH and SIDEWINDER air-to-air missiles. AYDIN digital and
RF product-based instrumentation are used extensively worldwide
for pilot training, missile development and performance
testing.

AYDIN supplies Lockheed Martin aircraft flight test
instrumentation: Lockheed Martin will use AYDIN Flight Test
Instrumentation for the Joint Strike Fighter (JSF) testing
program meeting US Navy, Marine, Air Force and UK Royal Navy
requirements. In this multimillion-dollar engagement, AYDIN
will manufacture a majority of the flight test instrumentation
equipment and integrate the AYDIN data acquisition system and
other subcontracted equipment for two next-generation,
multi-role strike fighter aircraft. AYDIN is a leading supplier
of the Department of Defense standard Common Airborne
Instrumentation System (CAIS).

AYDIN supplies NASA/BOEING USA with Space Shuttle
instrumentation: AYDIN provides NASA Space Shuttle Orbiter with
the critical fuel cell measurement system, which monitors and
measures all 96 fuel cells that power the Shuttle. AYDIN has
been a prime contractor and subcontractor to NASA and Rockwell
(Boeing), since the early 70s, in the Space Shuttle programs.

Focus on the future: AYDIN Telemetry

AYDIN Telemetry advanced technology products continue to be a
standard in the industry. For Telemetry, 1998 will be a year
of continuous sales growth, including these key areas:
- - Boeing has selected AYDIN to provide data acquisition systems
for the JSF program
- - Demand is high for AYDIN transmission, reception and
processing equipment used in commercial satellite
communications and for space data information needs
- - The Pacific Rim presents substantial opportunity for market
expansion, capitalizing on AYDIN product capabilities

(page nine)
<PAGE>

DISPLAYS

High-resolution displays are a $2 billion, growing market...and
flat panels are taking the lead.

AYDIN Displays

AYDIN Displays is an industry leader offering a complete line
of high-resolution CRT monitors, flat panel displays and
monitors used by public and private sector industries that
require superior performance and durability. These include
process control factories, shipboard information centers, Stock
Exchange trading floors and financial service companies,
medical diagnostic or treatment centers, utility companies and
other unique installations.

For more than a quarter century, AYDIN has been a key supplier
of CRT displays to military and industrial markets. Now, to
meet demand in both traditional and new markets, we are
expanding our flat panel product line to include a full range
of displays that provide high quality resolution combined with
lower life-cycle costs, reduced power usage and lightweight
portability for ease of use.

(page ten)
<PAGE>

AYDIN Displays highlights, 1997

Raytheon selects AYDIN: Raytheon's Marine Division selected
AYDIN to design and manufacture high-resolution displays used
in integrated bridge navigation on commercial vessels. Both
Raytheon and Sperry Marine, market leaders in commercial
shipping, use AYDIN displays for bridge navigation systems in
virtually all non-military ships, ranging from passenger
ferries to merchant marine vessels and commercial oil tankers.
These large-screen, high-resolution displays are shielded
against the earth's magnetic field, which is essential to
navigational accuracy and safety.

US Navy uses AYDIN C2P communications datalink for surface
ships: AYDIN's Command and Control Processor (C2P), a rehost
human/machine interface, is used by the US Navy Tactical
Datalink Program Office to support message handling and
monitoring. AYDIN's C2P technology conforms to worldwide
standards used by the Navy's AEGIS surface ships.

AYDIN equips Trident Submarines: Trident submarines use AYDIN's
ruggedized environmental computer workstations with flat panel
displays for message handling and monitoring of tactical,
non-weapons communications. AYDIN's high-resolution, color
liquid crystal displays provide undistorted visibility,
inherent magnetic immunity and greater efficiencies in terms of
weight and power usage.

Focus on the future: AYDIN Displays

AYDIN Displays is a leading supplier of high quality display
solutions for specialized use, providing a comprehensive and
integrated product offering that includes the broadest range of
high resolution screen sizes, packaging schemes and
configurable features. The high-resolution display business is
a $2 billion market, providing us substantial opportunity for
growth in sales.

To accomplish this, we aligned our organization to:
- - Focus on our core strengths of packaging and feature-rich
product configurations to improve sales
- - Provide a comprehensive range of both CRT and flat panel
configurations, with CRT displays sized from 14 to 29 inches
and flat panel displays sized from 14 to 20 or more inches
- - Continue to differentiate our products by adding value with
unique packaging such as touch screen, EMI and magnetic field
shielding, ruggedized housing and custom user configurations
- - Increase our marketing, distribution and service functions to
add value to our products and enhance customer satisfaction
with superior quality and delivery
- - Leverage our leadership and expertise in military and process
control markets to achieve greater share in high-growth
segments of non-consumer graphic displays, such as financial
services and medical equipment

(page eleven)
<PAGE>

COMMUNICATIONS
TELEMETRY
DISPLAYS

<PAGE>

14 Consolidated Data
17 Notes to Consolidated Financial Statements
25 Management's Discussion and Analysis of Financial
Condition and Results of Operation
29 Report of Independent Auditors
30 Selected Financial Data

<PAGE>

CONSOLIDATED STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
Year Ended December 31,
1997 1996 1995
<S> <C> <C> <C>
- -------------------------------------------------------------------------------
Net Sales $115,371,000 $116,578,000 $140,607,000
- -------------------------------------------------------------------------------
Costs and expenses:
Cost of sales 86,886,000 94,363,000 102,391,000
Selling, general and administrative 27,160,000 29,833,000 25,660,000
Research and development 3,079,000 8,315,000 6,603,000
Interest expense (income), net (918,000) 189,000 45,000
Restructuring costs - 3,730,000 -
Environmental remediation costs 2,612,000 - -
Gain on sale of facilities (2,874,000) - -
- -------------------------------------------------------------------------------
115,945,000 136,430,000 134,699,000
- -------------------------------------------------------------------------------
Income (loss) before income taxes
and minority interest (574,000) (19,852,000) 5,908,000

Income tax provision (recovery) 1,118,000 (4,979,000) 1,971,000
- -------------------------------------------------------------------------------
Income (loss) before minority interest (1,692,000) (14,873,000) 3,937,000

Less minority interest - (93,000) 7,000
- -------------------------------------------------------------------------------
Net income (loss) $ (1,692,000) $ (14,780,000) $ 3,930,000
- -------------------------------------------------------------------------------
Earnings (loss) per common and common
equivalent share
Basic $ (0.33) $ (2.88) $ 0.78
Diluted $ (0.34) $ (2.88) $ 0.77
- -------------------------------------------------------------------------------
</TABLE>
See notes to consolidated financial statements
(page 14)
<PAGE>

CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
Year Ended December 31,
1997 1996
<S> <C> <C>
Assets
- -------------------------------------------------------------------------------
Current Assets:
Cash and cash equivalents $ 4,059,000 $ 5,495,000
Restricted cash and investment securities 6,102,000 7,571,000
Accounts receivable, net of allowances
for doubtful accounts of $663,000 (1997) and
$982,000 (1996) 24,137,000 25,156,000
Unbilled revenue 39,682,000 37,993,000
Inventories, net of allowances of
$1,235,000 (1997) and $1,830,000 (1996) 17,913,000 16,415,000
Prepaid expenses and other 5,593,000 6,372,000
- -------------------------------------------------------------------------------
Total Current Assets 97,486,000 99,002,000

Property, Plant and Equipment, at cost,
net of accumulated depreciation and
amortization of $53,199,000 (1997)
and $59,261,000 (1996) 14,479,000 22,739,000

Other Assets 90,000 2,622,000
- -------------------------------------------------------------------------------
Total Assets $112,055,000 $124,363,000
- -------------------------------------------------------------------------------

Liabilities and Stockholders' Equity
- -------------------------------------------------------------------------------
Current Liabilities:
Short-term bank debt $ 200,000 $ 2,800,000
Accounts payable 8,668,000 14,865,000
Accrued liabilities:
Compensation 4,088,000 3,836,000
Other 1,972,000 1,991,000
Contract billings in excess of
recognized revenues 2,507,000 2,278,000
Accrued and deferred income taxes 3,869,000 4,467,000
- -------------------------------------------------------------------------------
Total Current Liabilties 21,304,000 30,237,000

Deferred Income Taxes 461,000 2,665,000
Other Liabilities 948,000 1,134,000
Stockholders' Equity:
Common stock, par value $1-authorized,
7,500,000 shares; issued and outstanding,
1997-5,208,800 shares; 1996-5,133,400 shares 5,209,000 5,133,000
Additional paid-in capital 3,141,000 2,436,000
Retained earnings 81,411,000 83,103,000
Foreign currency translation effects (419,000) (345,000)
- -------------------------------------------------------------------------------
Total Stockholders' Equity 89,342,000 90,327,000
- -------------------------------------------------------------------------------
Total Liabilities and Stockholders' Equity $112,055,000 $124,363,000
- -------------------------------------------------------------------------------
</TABLE>
See notes to consolidated financial statements
(page 15)
<PAGE>

CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
Year Ended December 31,
1997 1996 1995
<S> <C> <C> <C>
Operating Activities
- -------------------------------------------------------------------------------
Net income (loss) $ (1,692,000) $ (14,780,000) $ 3,930,000

Adjustments to reconcile net
income (loss) to net cash
provided (used) by operating
activities:
Depreciation and amortization 2,873,000 3,008,000 3,032,000
Deferred income taxes 4,116,000 (3,891,000) 833,000
Minority interest - (93,000) 7,000
Gain on sale of facilities (2,874,000) (216,000) -
Environmental remediation costs 2,612,000 (2,612,000) -
Changes in other operating assets
and liabilities, net:
Accounts receivable 1,019,000 28,060,000 (17,865,000)
Unbilled revenue (1,689,000) 8,934,000 7,982,000
Contract billings in excess of
recognized revenues 229,000 (565,000) (1,326,000)
Inventories (1,498,000) 6,365,000 (2,216,000)
Prepaid expenses and other 779,000 (4,795,000) (227,000)
Accounts payable (6,197,000) (14,357,000) 2,167,000
Accrued liabilities 233,000 (1,543,000) (3,230,000)
Other long-term liabilities (186,000) 1,134,000 -
Accrued and deferred income taxes (6,918,000) (5,141,000) (1,269,000)
Other (154,000) 681,000 203,000
- -------------------------------------------------------------------------------
Cash provided (used) by operating
activities (9,347,000) 189,000 (7,979,000)

Investing Activities
Proceeds from sale of facilities 11,462,000 1,159,000 -
Purchase of property, plant and
equipment (3,201,000) (1,066,000) (3,170,000)
- -------------------------------------------------------------------------------
Cash provided (used) by investing
activities 8,261,000 93,000 (3,170,000)

Financing Activities
Release of collateral on restricted
cash and investment securities 1,469,000 4,101,000 6,498,000
Principal payments on long-term debt - (1,112,000) (839,000)
Purchase of treasury stock - - (248,000)
Minority investment in consolidated
subsidiary - 3,000 83,000
Proceeds from exercise of stock
options 781,000 269,000 1,522,000
Net repayment of short-term
borrowings (2,600,000) (2,686,000) (1,000,000)
- -------------------------------------------------------------------------------
Cash provided (used) by financing
activities (350,000) 575,000 6,016,000

Increase (decrease) in cash and cash
equivalents (1,436,000) 857,000 (5,133,000)

Cash and cash equivalents at
beginning of year 5,495,000 4,638,000 9,771,000
- -------------------------------------------------------------------------------
Cash and cash equivalents at
end of year $ 4,059,000 $ 5,495,000 $ 4,638,000
- -------------------------------------------------------------------------------
</TABLE>
See notes to consolidated financial statements
(page 16)
<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note A-Summary of Significant Accounting Policies

Principles of Consolidation

The consolidated financial statements include the accounts of
the Company and its wholly owned subsidiaries. All significant
inter-company transactions and balances are eliminated in
consolidation. At December 31, 1996, the Company disposed of
all but 19% of its prior 80% ownership in AYDIN S.A.
(Argentina).

Accordingly, the assets and liabilities of AYDIN S.A. were no
longer included in the consolidated balance sheet as of
December 31, 1997 and 1996, but 80% of the operating results (a
$600,000 net loss) and an additional $535,000 loss on
disposition of its ownership was included in the 1996
consolidated statement of operations. The remaining 19%
investment in AYDIN S.A. is carried at a zero value at December
31, 1997 and 1996.

Contract Accounting

Revenue on long-term contracts that are greater than $100,000
are generally recorded on the percentage-of-completion method.
For such contracts, a portion of the total contract price is
included in sales in the proportion that costs incurred to date
bear to total estimated costs at completion. The impact of
periodic revisions in costs and estimated profit is reflected
in the accounting period in which the facts become known.

For all other contracts, revenue is recognized upon completion
of the contract or upon shipment of identifiable units.

The entire amount of ultimate losses estimated to be incurred
upon completion of contracts is charged to income when such
losses become known.

Contract progress billings are based upon contract provisions
for customer advance payments, contract costs incurred and
completion of specified contract objectives. Progress billing
balances at December 31, 1997 and 1996 amounted to $3,096,000
and $4,649,000, respectively. Progress billings are netted
against unbilled revenue on the consolidated balance sheet.
Contracts may provide for customer retainage of a portion of
amounts billed until contract completion. All contract
retainage of $397,000 at December 31, 1997 matures in 1998.
Contract retainage is included on the consolidated balance
sheet as part of accounts receivable. Substantially all of the
accounts receivable and unbilled revenue balances at December
31, 1997 are expected to be collected during 1998, although
collection of the unbilled revenue is dependent upon the
Company meeting performance milestones.

Use of Estimates

In preparing its financial statements in accordance with
generally accepted accounting principles, management is
required to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial
statements and revenues and expenses during the reported
periods. Actual results could differ from those estimates. One
such area where the use of estimates could have a significant
impact on future results is estimated costs at completion and,
in some cases, contract value on the Company's larger long-term
contracts. During 1997 and 1996, changes to these estimates on
the Company's larger long-term contracts had no significant
aggregate negative impact, except for the TMRC contract with
the Government of Turkey. For TMRC, there was a negative impact
in 1996 of approximately $5.7 million pre-tax resulting from
revisions of contract values and estimates of costs to
complete, of which $2.6 million represented negotiations with
the customer that extended performance milestones. Other areas
where use of estimates could have a significant impact on
future results are inventory obsolescence, accounts receivable
bad debts, warranties, claims and litigation.

Cash and Cash Equivalents and Investment Securities

The Company considers all highly liquid investments with a
maturity of three months or less when purchased to be cash
equivalents. Cash equivalent balances at December 31, 1997 and
1996 amounted to $4,059,000 and $1,584,000, respectively. All
of this cash and cash equivalents are in high quality banks.

Restricted cash and investment securities at December 31, 1997
and 1996 represents interest bearing collateral required to be
maintained against letters of credit. Of the total of
$6,102,000 of restricted cash and investment securities, $4
million consists of foreign corporate bonds, which are
classified as available for sale. Realized gains and losses on
the sales of investment securities will be included in
consolidated results of operations. At December 31, 1997, the
fair market value of the foreign corporate bonds approximated
cost. The contractual maturity date is 2002. Actual maturities
may differ from the contractual maturity because the Company or
the issuers have the right to sell or prepay obligations.

Approximately $5.3 million of the Company's total cash and
investment securities (restricted and non-restricted) balances
at December 31, 1997 were

(page 17)
<PAGE>

in foreign banks, including $5.1 million in Turkey. Almost all
of the cash and investment securities in Turkey are in dollar
denominated instruments. As a result, there is no material
effect of exchange rate changes on cash balances.

Inventories

Inventories are valued at the lower of cost or market. Cost is
determined using first-in, first-out (FIFO) and the average
cost method which approximates FIFO.

Fair Value of Financial Instruments

The Company's financial instruments include cash equivalents,
investment securities and receivables. The carrying amounts of
these instruments approximate their market value.

Depreciation and Amortization

Depreciation is provided by the straight-line method over the
estimated useful lives of the depreciable assets. Amortization
of leasehold improvements under operating leases is provided
over the terms of the related leases or the asset lives, if
shorter. Buildings are depreciated over lives up to 35 years.
Machinery and equipment is depreciated over useful lives
ranging from 3 to 5 years. Accelerated methods are used for tax
purposes.

Advertising, Research and Development Costs and Interest
Expense

The Company expenses advertising costs and research and
development costs as incurred. Advertising costs were $489,000,
$441,000 and $371,000 for 1997, 1996 and 1995, respectively.
Interest expense for the years 1997, 1996 and 1995 amounted to
$114,000, $988,000 and $1,243,000, respectively. Interest paid
for the years 1997, 1996 and 1995 amounted to $164,000,
$1,417,000 and $832,000, respectively.

Income Taxes

The Company accounts for income taxes on the liability method
in accordance with Statement of Financial Accounting Standards
(SFAS) No. 109.

Foreign Currency Translation

Balance sheet accounts of the Company's United Kingdom
subsidiary are translated from the local currency into US
dollars at year-end rates, while income and expenses are
translated at the weighted-average exchange rate for the year.
The resulting translation gains or losses are shown as a
separate component of stockholders' equity. The translation
effects of the Turkish subsidiary are reflected in the
statements of operations because of the high inflation in the
Turkish economy. Pretax income includes foreign currency
translation losses relating to the Turkish subsidiary of
$428,000 for 1997 and a gain of $274,000 for 1996.

Earnings (Loss) Per Common Share

During 1997, the Company adopted the provisions of Statement of
Financial Accounting Standards No. 128, "Earnings per Share
(SFAS 128)." SFAS 128 eliminates primary and fully diluted
earnings per share and requires presentation of basic and
diluted earnings per share. Basic earnings per share excludes
dilution and is computed by dividing income available to common
shareholders by the weighted-average common shares outstanding
during the period. Diluted earnings per share takes into
account the potential dilution that could occur if securities
or other contracts to issue common stock were exercised and
converted into common stock. Prior periods' earnings per share
calculations have been restated to reflect the adoption of SFAS
No. 128. Weighted average shares outstanding for 1997, 1996 and
1995 were 5,151,600, 5,123,622 and 5,043,824, respectively.

Options to purchase 496,113 shares at a weighted average
exercise price of $10.89 per share and warrants for 200,000
shares at a weighted exercise price of $12.65 were not included
in the computation of 1997 diluted loss per share.

Warranty Costs

The usual warranty period on the Company's contracts and
products is one year, which is provided for in warranty
accruals.

Long-Lived Assets

The Company continually reviews long-lived assets to assess
recoverability from future operations using undiscounted cash
flows. Impairments would be recognized in operating results if
a permanent diminution in value had occurred.

New Accounting Standards

In June, 1997 the Financial Accounting Standards Board (FASB)
issued Statement of Financial Accounting Standards (SFAS) No.
130, "Reporting Comprehensive Income," which is effective in
1998 and thereafter. SFAS No. 130 requires entities presenting
a complete set of financial statements to include details of
comprehensive income. Comprehensive income consists of net
income or loss for the current period and also includes income,
expenses, gains, and losses that bypass the income statement
and are reported directly in a separate component of equity.
The effect of adopting SFAS No. 130 is not

(page 18)
<PAGE>

expected to be material to the Company's financial position or
results of operations.

In June 1997, the FASB issued SFAS No. 131, "Disclosures about
Segments of an Enterprise and Related Information," which is
effective in 1998 and thereafter. SFAS No. 131 requires that
public business enterprises report certain information about
operating segments in complete sets of financial statements
(and in condensed financial statements of interim periods
issued to shareholders beginning no later than in 1999). It
also requires that public business enterprises report certain
information about their products and services, the geographic
areas in which they operate and their major customers.
Management is currently evaluating the disclosure impact of
SFAS No. 131 on its financial statements.

Reclassifications

Certain reclassifications, none of which affected net income,
have been made to prior years' amounts in order to conform to
the current year's presentation.

Note B-Inventories

Inventories consist of:

<TABLE>
<CAPTION>
1997 1996
- ---------------------------------------------------------
<S> <C> <C>
Raw materials $ 9,807,000 $ 7,938,000
Work in process 6,217,000 5,957,000
Finished product 1,889,000 2,520,000
- ---------------------------------------------------------
$17,913,000 $16,415,000
- ---------------------------------------------------------
</TABLE>

Note C-Property, Plant and Equipment

The Company's investment in property, plant and equipment is
shown below:

<TABLE>
<CAPTION>
1997 1996
- ---------------------------------------------------------
<S> <C> <C>
Land $ 1,456,000 $ 5,074,000
Buildings 11,211,000 18,987,000
Machinery and
equipment 55,011,000 57,939,000
- ---------------------------------------------------------
67,678,000 82,000,000

Less accumulated
depreciation and
amortization 53,199,000 59,261,000
- ---------------------------------------------------------
$14,479,000 $22,739,000
- ---------------------------------------------------------
</TABLE>

Note D-Credit Arrangements

On January 8, 1998 the Company signed a three-year $10 million
revolving credit facility with AT&T Capital which can be used
for cash borrowing and/or letters of credit. A maximum of $7
million can be used for letters of credit, in addition to
existing letter of credit arrangements. The amount of cash
borrowing on the revolver will be based on eligible accounts
receivable and inventory. This arrangement also provides for a
term loan of $2 million secured by machinery and equipment.
Interest rates on cash borrowings will be at the prime rate
plus 1% and a commission rate of 1.25% will be charged on
letters of credit. The collateral for this credit arrangement
is a preferred first priority lien and security interest on all
domestic assets of the Company, except real estate, plus $1.7
million of cash. This secured cash is expected to be released
starting in the first quarter of 1998 based on the Company
achieving specified earnings levels and maintaining certain
working capital levels.

At December 31, 1997, $8.6 million of letters of credit were
outstanding for various foreign contracts under a $9.1 million
credit facility with a bank, which is renewable annually in
June. The letters of credit have been issued to foreign
entities principally to guarantee performance under contracts
or the return of advance payments. The Company's real estate
has been pledged as security against these letters of credit,
which carry a commission rate of 1.6%.

Also at December 31, 1997, an $8.3 million of letter of credit
remained open with a foreign bank for the duration of the
Company's TMRC contract with the Government of Turkey. Cash
collateral of $4.5 million was on deposit with the bank at
December 31, 1997 against this letter of credit, which carries
a commission rate of 1.0%. After the letter of credit balance
decreases to an amount below $8 million, the cash collateral
requirement will be reduced to 50% of the outstanding balance
of the letter of credit. This letter of credit balance is
expected to be liquidated during the first half of 1999, when
the contract is scheduled to be completed.

The weighted average interest rates on short-term borrowings
outstanding at December 31, 1997 and 1996 were 10.5% and 9.9%,
respectively.

Note E-Environmental Remediation

The Company, along with others, was responsible for the costs
of cleanup under an order of the State of California at a site
leased by the Company prior to 1984. Cleanup of the site was
completed during 1996 and site monitoring over a 30-year period
commenced in 1997. The estimated site monitoring costs to be
expended over the 30-year period are $3.1 million, of which
$126,000 was expended during 1997. The amount to be paid has
been included in the accompanying consolidated balance sheet as
an other liability discounted at 7% to the expected payment
dates. Expected payments are approximately $100,000 annually.

(page 19)
<PAGE>

The December 31, 1996 balance sheet included an other
(non-current) asset of $2.6 million representing an expected
insurance recovery based on a declaratory judgment in favor of
the Company by the State of California. The declaratory
judgment was reversed in April 1997, resulting in a $2.6
million write-off. The California Supreme Court has agreed to
review this reversal and briefs have been filed.

Note F-Stockholders' Equity

The changes in common stock, additional paid-in capital,
treasury stock, retained earnings and foreign currency
translation effects during the years 1995, 1996 and 1997 were
as follows:

<TABLE>
<CAPTION>
Foreign
Common Additional Currency
Stock Paid-In Treasury Retained Translation
Par $1 Capital Stock Earnings Effects
----------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance,
January 1, 1995
(4,990,400 common
shares) $4,990,000 $787,000 $ - $93,953,000 $(513,000)

Issuance of
136,716 shares
on exercise of
stock options 137,000 1,385,000 - - -

Tax benefit related
to shares acquired
by employees under
stock options - 249,000 - - -

Acquisition of 14,991
shares of treasury
stock received from
employees as payment for
stock options exercises - - (248,000) - -

Retirement of 14,991
treasury shares (15,000) (233,000) 248,000 - -

Foreign currency
translation adjustment - - - - (97,000)

Net income - - - 3,930,000 -
- --------------------------------------------------------------------------------
Balance,
December 31, 1995
(5,112,127 common
shares) 5,112,000 2,188,000 - 97,883,000 (610,000)

Issuance of 21,273
shares on exercise of
stock options 21,000 237,000 - - -

Tax benefit related
to shares acquired by
employees under
stock options - 11,000 - - -

Foreign currency
translation adjustment - - - - 265,000

Net loss - - - (14,780,000) -
- --------------------------------------------------------------------------------

Balance,
December 31, 1996
(5,133,400 common
shares) 5,133,000 2,436,000 - 83,103,000 (345,000)

Issuance of 17,500
shares on exercise
of stock options 18,000 163,000 - - -

Issuance of 57,900
shares against
bonus plan 58,000 536,000 - - -

Tax benefit related
to shares acquired by
employees under
stock options - 6,000 - - -

Foreign currency

translation adjustment - - - - (74,000)

Net loss - - - (1,692,000) -
- --------------------------------------------------------------------------------

Balance,
December 31, 1997
(5,208,800 common
shares) $5,209,000 $3,141,000 $ - $81,411,000 $(419,000)
- --------------------------------------------------------------------------------
</TABLE>
(page 20)
<PAGE>

Note G-Stock Options and Warrants

Pursuant to stock option plans, the Company has granted certain
officers, directors and key employees options to purchase
shares of its common stock. Options granted under the plans
must have an option price determined by the Board of Directors,
but in any event, not less than the fair market value of the
stock on the date of grant. Generally, options become
exercisable one-fourth annually beginning one year after grant,
on a cumulative basis, and expire ten years after grant. Prior
to April 1997, the expiration was five years after grant.

There is no charge to income with respect to stock options
under the plans. A summary of the changes in options during
1995, 1996 and 1997 follows:

<TABLE>
<CAPTION>
Shares Weighted Average Shares
Under Exercise Available
Option Price for Option
- ---------------------------------------------------------------------------------
<S> <C> <C> <C>
At January 1, 1995 323,118 $ 11.66 91,283
Options granted:
Option plan 22,900 12.11 (22,900)
Individual options 72,000 11.37 (72,000)
Options exercised (136,716) 11.13 -
Options canceled (22,639) 12.34 22,639
Authorization of individual options - - 72,000
- ---------------------------------------------------------------------------------
At December 31, 1995 258,663 $ 12.02 91,022
Options granted:
Option plan 378,000 10.39 (378,000)
Options exercised (10,275) 12.69 -
Options canceled (113,300) 9.89 113,300
Authorization of 1996 options - - 500,000
Cancellations of authorization - - (70,000)
- ---------------------------------------------------------------------------------
At December 31, 1996 513,088 $ 10.81 256,322
Options granted:
Option plan 124,450 11.73 (124,450)
Options exercised (17,500) 10.31 -
Options canceled (123,925) 11.46 123,925
Cancellations of authorization - - (10,000)
- ---------------------------------------------------------------------------------
At December 31, 1997 496,113 $10.89 245,797
- ---------------------------------------------------------------------------------
</TABLE>

The following table summarizes information concerning currently
outstanding and exercisable stock options:

<TABLE>
<CAPTION>
Total Shares Under Option Shares Exercisable
- ---------------------------------------------------------------------------------
Weighted-Average Weighted- Weighted-
Range of Remaining Average Average
Exercise Number Contractual Exercise Number Exercise
Price Outstanding Life (Years) Price Exercisable Price
- ---------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$9.38-$14.07 494,213 8.7 $10.87 113,108 $10.90
- ---------------------------------------------------------------------------------
$14.08-$16.75 1,900 5.8 $16.30 1,900 $16.30
----------- ----------
496,113 115,008
- ---------------------------------------------------------------------------------
</TABLE>
(page 21)
<PAGE>

The Company has adopted only the disclosure provisions of
Financial Accounting Standard No. 123, "Accounting for
Stock-Based Compensation" (FAS 123). It applies APB Opinion No.
25, "Accounting for Stock Issued to Employees," and related
interpretations in accounting for its plans and does not
recognize compensation expense for its stock-based compensation
plans other than restricted stock. If the Company had elected
to recognize compensation expense based upon the fair value at
the grant date for awards under these plans consistent with the
methodology prescribed by FAS 123, the Company's net income and
earnings per share would be reduced to the pro forma amounts
indicated below:

<TABLE>
<CAPTION>
1997 1996 1995
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net income (loss) As reported $(1,692,000) $(14,780,000) $ 3,930,000
Pro forma $(2,452,000) $(15,128,000) $ 3,855,000
- --------------------------------------------------------------------------------
Earnings (loss) per share As reported $ (0.34) $ (2.88) $ 0.77
Pro forma $ (0.48) $ (2.95) $ 0.76
</TABLE>

These pro forma amounts may not be representative of future
disclosures because they do not take into effect pro forma
compensation expense related to grants made before 1995. The
fair value of each option grant is estimated on the date of
grant using the Black-Sholes options-pricing model with the
following weighted-average assumptions used for grants in 1997,
1996 and 1995, respectively: dividend yield of 0 percent for
all years; expected volatility of 27.9, 27.3 and 29.9 percent;
risk-free interest rates of 6.08, 6.23 and 7.60 percent; and
expected lives of 5 to 10 years.

In May 1997, the Company issued warrants with three-year
expiration dates for 200,000 shares of its common stock to a
former shareholder at exercise prices of $12.10 and $13.50 per
share. These warrants remain outstanding and have had no impact
on the Company's earnings per share calculations. After year
end these warrants were purchased by two executives of the
Company.

Note H-Taxes on Income

The provision (recovery) for income taxes is shown below. The
recoveries shown on the current lines for each year represent
tax loss carrybacks to earlier years, utilization of foreign
tax credits, and other items.

<TABLE>
<CAPTION>
Federal State Foreign Total
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1997
Current $(4,466,000) $(622,000) $2,417,000 $(2,671,000)
Deferred 3,161,000 622,000 - 3,783,000
Charge equivalent to
tax benefit related to
shares acquired by

employees under
stock options 6,000 - - 6,000
- --------------------------------------------------------------------------------
$(1,299,000) $ - $2,417,000 $ 1,118,000
--------------------------------------------------------
1996
Current $(5,019,000) $ (3,000) $3,923,000 $(1,099,000)
Deferred 21,000 (344,000) (3,568,000) (3,891,000)
Charge equivalent to
tax benefit related to
shares acquired by
employees under
stock options 11,000 - - 11,000
- --------------------------------------------------------------------------------
$(4,987,000) $(347,000) $ 355,000 $(4,979,000)
--------------------------------------------------------
1995
Current $ (877,000) $(130,000) $1,896,000 $ 889,000
Deferred 533,000 173,000 127,000 833,000
Charge equivalent to
tax benefit related to
shares acquired by
employees under
stock options 249,000 - - 249,000
- --------------------------------------------------------------------------------
$ (95,000) $ 43,000 $2,023,000 $ 1,971,000
--------------------------------------------------------
</TABLE>
(page 22)
<PAGE>

The components of deferred income tax balances follow. No
valuation allowances were required.

<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------------------------
1997 1996 1995
<S> <C> <C> <C>
Contract accounting $1,350,000 $2,271,000 $7,353,000
Excess tax over book depreciation 1,357,000 2,755,000 2,811,000
Inventory valuation (613,000) (829,000) (677,000)
State deferred taxes - (211,000) (328,000)
Environmental clean-up (322,000) 503,000 -
Other, net (722,000) 344,000 (435,000)
- --------------------------------------------------------------------------------
$1,050,000 $4,833,000 $8,724,000
- --------------------------------------------------------------------------------
</TABLE>

A reconciliation between the federal statutory rate and the
effective income tax rate (computed by dividing income taxes by
income before income taxes and minority interest) is as
follows:

<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------------------------
1997 1996 1995
<S> <C> <C> <C>
Federal statutory rate (34.0)% (34.0)% 34.0%
State income taxes net of federal
tax benefit (32.8) (0.5) 0.5
Benefit from nontaxable FSC income (29.2) (1.0) (2.1)
Effects of higher foreign income
taxes, including dividends of a
foreign subsidiary and
foreign tax credits 286.8 6.1 1.3
Other, net 4.0 4.3 (0.3)
- --------------------------------------------------------------------------------

Effective income tax rate 194.8% (25.1)% 33.4%
- --------------------------------------------------------------------------------
</TABLE>

Income tax payments, net of refunds, amounted to $1,614,000 in
1995, $6,989,000 in 1996 and $383,000 in 1997. As of December
31, 1997, the Company expects to receive approximately $3.9
million of refundable income taxes (net of payments) from the
IRS. These refundable taxes are included in the December 31,
1997 balance sheet under the "prepaid expenses and other"
caption.

The Company has not provided deferred income taxes on
cumulative unremitted earnings of foreign subsidiaries
amounting to approximately $4 million because of the
availability of approximately $1.6 million of foreign tax
credits that expire in 2002. These foreign tax credits would
eliminate the US tax liability related to the inclusion of the
foreign earnings. During 1997, $2.9 million of dividends was
received from the Company's Turkish subsidiary.

Pre-tax income from foreign operations is shown under Note I.

Note I-Nature of Operations, Export Sales, Major Customers and
Foreign Operations

The Company designs, engineers, manufactures, markets,
distributes and installs technologically advanced
communications products and systems, which are sold worldwide.
AYDIN generates approximately 40% of its sales from standard
products and systems and the balance of its sales from
custom-designed systems and equipment based on customers'
specific requirements. AYDIN offers a broad range of products
due to its ability to combine analog microwave engineering
methods with digital techniques and software.

Export sales by geographic area are as follows:

<TABLE>
<CAPTION>
1997 1996 1995
- ---------------------------------------------------------------
<S> <C> <C> <C>
Asia $ 2,663,000 $ 4,259,000 $ 6,224,000
Africa 1,946,000 3,203,000 4,003,000
Europe 20,385,000 10,767,000 18,273,000
North America 1,683,000 1,273,000 1,605,000
South America 1,871,000 435,000 376,000
Other 439,000 573,000 263,000
- ---------------------------------------------------------------
Total export sales $28,987,000 $20,510,000 $30,744,000
- ---------------------------------------------------------------
</TABLE>
(page 23)
<PAGE>

The US Government and the Government of Turkey were the only
customers to whom sales exceeded 10% of consolidated sales
during any of the past three years.

Sales to US Government agencies, principally the Department of
Defense, amounted to $37,596,000, $38,728,000, and $44,309,000
in 1997, 1996 and 1995, respectively. Sales to the Government
of Turkey amounted to $21,496,000, $15,116,000 and $16,549,000
in 1997, 1996 and 1995, respectively.

Foreign assets included in the consolidated balance sheet
amounted to $21.0 million and $21.7 million at December 31,
1997 and 1996, respectively. Of these amounts, $5.1 million and
$2.5 million, at December 31, 1997 and 1996, respectively, are
cash and short-term investments of the Company's Turkish
subsidiary consisting primarily of US dollar denominated
interest-bearing time deposits and Euro bonds. Foreign sales
and pretax income for 1997 was $21.2 million and $1.8 million,
respectively, of which substantially all of the income comes
from the Company's Turkish subsidiary. Foreign sales and pretax
income for 1996 amounted to $27.0 million and $0.9 million,
respectively, of which substantially all of the income was from
the Turkish subsidiary. Foreign sales and pretax income for
1995 amounted to $28.9 million and $5.4 million, respectively,
of which substantially all of the income was from the Turkish
subsidiary. The 1997 results exclude the Argentine subsidiary,
which was disposed of on December 31, 1996.

Note J-Restructuring Costs

During the third quarter of 1996 the Company announced a plan
to consolidate and restructure its domestic operations. The
Company recorded a charge of $3.7 million in the third quarter
for the restructuring, of which approximately $1.5 million was
for cash outlays and $2.2 million was for non-cash asset write-
offs. The major charges consisted of: severance benefits for
150 terminated employees ($600,000); loss on sale of a product
line ($500,000); inventory write-offs ($1,000,000) and capital
equipment write-offs ($300,000) in connection with the cutback
of product lines; and write-off of goodwill in connection with
the sale of a product line ($400,000). The restructuring was
completed during the third quarter of 1997.

Note K-Commitments and Contingencies

During 1995, a subcontractor to the Company in the TMRC program
with the Government of Turkey filed a demand for arbitration
alleging a breach of contract and equitable adjustment of $12.4
million. This claim was subsequently amended and at December
31, 1997 amounts to $27.8 million. The Company has filed a
claim against the subcontractor for an amount in excess of the
subcontractor's claim. The arbitration hearing was concluded
and post-hearing briefs were filed in December 1997. A decision
is expected before the third quarter of 1998. Based on
discussions with its outside counsel, management believes that
it has meritorious defenses and counterclaims and expects the
Company to be successful in its defenses. However, if the
outcome is unfavorable, it could have a material adverse impact
on the Company's financial position and results of operations.

The Company's US Government contracts are subject to audit by
the government and price adjustment under certain
circumstances. The Company also has receivables due from the US
Government on certain contracts whose collectability is
dependent on the Company prevailing in its positions.
Management believes it has sufficient reserves to cover these
matters. However, unfavorable outcomes could have a material
impact on future results of operations.

Future annual minimum rental payments required under operating
leases that have lease terms in excess of one year at December
31, 1997 are as follows: 1998-$450,000; 1999-$463,000;
2000-$367,000; 2001-$382,000; 2002-$195,000.

(page 24)
<PAGE>

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

This section represents a review of the Company's consolidated
financial condition and results of operations. In addition to
historical information, this discussion and analysis contains
forward-looking statements. The forward-looking statements
contained herein are subject to certain risks and uncertainties
that could cause actual results to differ materially from those
projected. Readers are cautioned not to place undue reliance on
these forward-looking statements, which reflect management's
analysis only as of the date hereof. The Company undertakes no
obligation to publicly revise or update these forward-looking
statements to reflect events and circumstances that arise after
the date hereof.

Liquidity and Sources of Capital

The Company has significantly improved its available sources of
capital since December 31, 1996. In January 1998, the Company
successfully negotiated a $10 million asset-based credit
facility and a $2 million term loan. This facility can be used
for cash borrowings or letters of credit issuance. In the
second quarter 1997, the Company also negotiated more favorable
letter of credit terms with a Turkish bank on the TMRC contract
with the Government of Turkey. The new terms extended the
letter of credit expiration date until completion of the TMRC
contract, whereas the prior letter of credit required renewal
every four months. In addition, the new terms reduced the
required cash collateral by approximately $1.5 million.

Liquidity has also been significantly improved. Pursuant to the
1996 restructuring plan, the sale of three company-owned
facilities during 1997 generated $11.5 million of cash of which
$1.4 million was used to upgrade existing facilities to
accommodate the resulting relocation of operations from the
sold facilities. Short-term bank debt was reduced to $200,000
at December 31, 1997 from $2.8 million a year ago. The Company
is generally current with its vendors as evidenced by the
decline in accounts payable to $8.7 million at December 31,
1997 compared to $14.9 million a year ago.

Uses of cash during 1997 included a $1.7 million increase in
unbilled revenue and a $1.5 million increase in inventories.
The increase in unbilled revenue reflects delays in shipments
on a couple of programs resulting in an excess of costs
incurred in 1997 (and resulting revenues recognized) compared
to billings rendered. These billings have been shifted into
1998. The increase in inventories was primarily a result of the
ramp-up, during 1997, of a new product line.

Primarily as a result of the aforementioned decrease in
accounts payable and the increases in unbilled revenue and
inventory, $9.3 million of cash was used in operating
activities during 1997.

Other significant changes in balance sheet accounts from a year
ago are: (1) the $8.2 million decline in the net book value of
property, plant and equipment primarily from the sale of
facilities as noted above; (2) the $2.5 million decrease in
other assets resulting from the write-off of an anticipated
insurance recovery of money previously spent ($1.4 million) and
to be spent ($1.1 million) over a 30-year period on an
environmental clean-up at a site leased by the Company prior to
1984. The write-off resulted from an unfavorable court ruling
in April 1997 involving the future collection of the insurance
recovery. The Company has appealed this ruling to the
California Supreme Court; (3) the $2.2 million decrease in
deferred income taxes (non-current portion) because of the book
versus tax depreciation timing differences in connection with
the sale of facilities in 1997.

The restructuring plan to consolidate and restructure domestic
operations announced during third quarter 1996 was completed
during third quarter 1997. The Company recorded a charge of
$3.7 million in 1996 for the restructuring, of which
approximately $1.5 million was for cash outlays and $2.2
million was for non-cash asset write-offs. At December 31,
1996, a restructuring accrual of $586,000 remained. This
accrual balance was sufficient to absorb 1997 restructuring
costs with no material adjustment.

As is discussed in Note K to the financial statements, a
subcontractor to the Company on the TMRC program has alleged a
breach of contract and filed for damages of $27.8 million in a
recently concluded arbitration hearing. The Company has filed a
claim in excess of the subcontractor's claim. An arbitration
decision is expected before the third quarter 1998. Based on
discussions with its outside counsel, management expects the
Company to be successful in its defenses. However, if the
outcome is unfavorable, it could have a material adverse impact
on the Company's financial position and results of operations.

(page 25)
<PAGE>

collectability is dependent on the Company prevailing in its
positions. Management believes it has sufficient reserves to
cover these matters. However, unfavorable outcomes could have a
material impact on future results of operations.

The Company is aware of the issues associated with programming
changes required in its existing computer systems as the year
2000 approaches. This issue is pervasive and complex, as
virtually every computer operation will be affected by the
rollover of the two-digit year value to 00. Unrelated to this
Year 2000 issue, the Company is planning to acquire new
computer systems, including new operating and applications
software. Issues not addressed by new systems will be addressed
by the Company's internal MIS organization. Management has not
yet assessed the Year 2000 compliance expense and related
potential effect on the Company's earnings, but the Company
does not believe the expense will be materially above the
planned expenses.

Based on present backlog and projected cash flows, the Company
anticipates financing its capital needs from internal sources
and future borrowings against its existing credit line.

In 1996, cash provided by operations was $189,000 compared to a
negative cash flow from operations of $8.0 million in 1995.
Cash collected during 1996 was approximately $153 million
compared to net sales of $117 million. The excess of
collections versus sales is reflected as a $37 million
reduction in accounts receivable and unbilled revenue on the
consolidated balance sheet at December 31, 1996 compared to
1995. Most of these decreases related to two large contracts
(TMRC and RIS). The year 1996 included two significant uses of
cash--IRS payments of approximately $7 million and a $9 million
payment to a TMRC software subcontractor.

Results of Operations

1997 versus 1996

Net sales for 1997 of $115.4 million were essentially flat
compared to 1996 sales of $116.6 million. Sales related to the
Turkish subsidiary were up $7.9 million from 1996. The
subsidiary's sales were negatively impacted in 1996 because of
delays in the TMRC program with the Government of Turkey, which
reduced 1996 sales by $5.7 million. This condition was
corrected by 1997. There were no 1997 sales from the Argentine
subsidiary, which was sold on December 31, 1996, compared to
1996 sales of $9.3 million. Sales from all other business areas
were essentially unchanged from 1996.

The Company's Turkish subsidiary operates in a highly
inflationary economy with corresponding declines in the Turkish
currency versus the US dollar. The Company protected itself
against these conditions by including clauses in its TMRC
contract that escalate contract values from a predetermined
base price by the percentage increase in Turkish inflation.
This does not protect the Company from performance delays,
however. The contract represents the vast majority of revenue
and profit of the Turkish subsidiary.

US Government sales amounted to 33% of total sales in 1997 and
1996. Export and foreign sales increased to 43% of total sales
from 41% in 1996. Domestic industrial (commercial) sales
decreased to 24% of total sales from 26% last year.

Backlog at December 31, 1997 amounted to $71 million compared
to $84 million at December 31, 1996. All of the decrease was
from the TMRC contract, which is nearing completion. Backlog
from other business was essentially flat. Probable production
options are not included in these backlog numbers.

Cost of sales as a percentage of sales was 75.3% in 1997
compared to 80.9% in 1996. The improvement resulted from 1996
delays on the TMRC and another large program which was
corrected during 1997, and cost savings achieved as a result of
the 1996 restructuring plan.

Selling, general, and administrative and research and
development costs decreased by $7.9 million from 1996. Of this
decrease, $2.4 million was for 1996 expenses of the Argentine
subsidiary, which was sold on December 31, 1996. Approximately
$900,000 of this decrease was from lower bad debts expense
compared to 1996 when there was $1 million of bad debts
write-offs involving mostly foreign receivables. The 1996 level
of write-offs was abnormally high compared to prior experience
and consisted mostly of three well known foreign government
related enterprises including one for approximately $400,000
which was a customer of the Argentine subsidiary. The 1996
level of write-offs is not expected to continue. The balance of
the decrease reflects cost reductions pursuant to the Company's
1996 restructuring plan including pruning of certain product
lines and a more focused targeting in 1997 of

(page 26)
<PAGE>

research and development projects to the Company's core
businesses. A significant amount was spent in 1996 on wireless
local loop development projects for which the Company is now
seeking partners to share the high cost of development. A
significant amount was also spent in 1996 on automatic vehicle
location development projects, which have been discontinued.

Interest income (net of interest expense) for 1997 amounted to
$918,000 compared to net interest expense of $189,000 in 1996.
This favorable swing of $1.1 million resulted from IRS interest
income in 1997 on income tax refunds compared to IRS interest
expense in 1996 on taxes owed. The favorable swing also
reflects the lower level of short-term bank debt during 1997
compared to 1996.

Restructuring costs, environmental remediation costs and gain
on sale of facilities are explained above in the Liquidity and
Sources of Capital section.

The 1997 income tax provision of $1.1 million on the pre-tax
loss of $574,000 resulted from the effects of foreign income
taxes in excess of tax benefits on US losses.

1996 versus 1995

Net sales for 1996 of $117 million declined by 17% from 1995
sales of $141 million. Approximately $10 million of this
decline was in the company's non-TMRC systems business where no
new large contracts were won during 1996. In addition, sales
(and pre-tax profits) on the TMRC contract for 1996 were
negatively impacted by $5.7 million because of prior years'
delays in reaching contract performance milestones, which
required increases in estimated costs at completion during 1996
and resulted in the customer imposing liquidated damages.
Negotiations with the customer concluded in third quarter 1996
resulted in contract modifications, which extended performance
milestones and had a positive effect on maintaining contract
profitability.

US Government sales increased slightly to 33% of total sales
from 32% in 1995. Export and foreign sales were 41% of total
sales in both 1996 and 1995. Domestic industrial (commercial)
sales were 26% of total sales compared to 27% in 1995.

Backlog at December 31, 1996 was approximately $84 million as
compared to $106 million a year ago, a decline of $22 million.
Most of this decline was from the TMRC backlog, which declined
by $14 million, from $41 million to $27 million. Probable
production options are not included in these backlog numbers.

Cost of sales as a percentage of sales was 80.9% in 1996
compared to 72.8% in 1995. Approximately 50% of the increase
resulted from the 1996 negative TMRC sales impact referred to
above. The balance of the increase resulted from inventory
write-offs caused by discontinued or de-emphasized product
lines and a higher proportion of fixed overhead costs in
relationship to the reduced 1996 sales.

Selling, general and administrative (SG&A) expenses increased
by $4,173,000 (16%) in 1996 to $29,833,000 because of certain
unusual operating expenses incurred in 1996 that are part of
SG&A. These included: (1) $1.3 million of costs related to the
Argentine subsidiary for which the Company disposed of its
majority interest during 1996; (2) $750,000 of proposal costs;
and (3) $1 million of bad debts write-offs involving mostly
foreign receivables. The balance of the increase was from
increased selling costs in the telecommunications area, added
corporate infrastructure costs and costs related to a potential
business combination that was abandoned.

(page 27)
<PAGE>

Research and development costs increased by $1.7 million (26%)
during 1996 because of expanded developments in
telecommunications systems.

During the third quarter of 1996, the Company announced a plan
to consolidate and restructure its domestic operations. The
Company recorded a charge of $3.7 million in the third quarter
for expected restructuring costs consisting of approximately
$1.5 million for cash outlays and $2.2 million for non-cash
asset write-offs. The major components of the charge were: (1)
severance benefits for 150 terminated employees ($600,000); (2)
loss on sale of a product line ($500,000); (3) inventory
write-offs ($1,000,000) and capital equipment write-offs
($300,000) in connection with the discontinuation of product
lines; and (4) write-off of goodwill associated with the sale
of a product line ($400,000). The restructuring proceeded
through 1996 as planned with no significant changes from the
original plan. The Company anticipated annual cash savings of
approximately $4.3 million as a result of lower labor and
facility costs emanating from the restructuring.

The original restructuring plan anticipated the termination of
150 employees. At December 31, 1996, 90 of these terminations
had occurred and termination benefits were paid to those
individuals. The remainder of the terminations and payment of
the related termination benefits of $331,000 occured during the
first half of 1997.

Restructuring charges and their application during 1996 and
1997 were as follows:

<TABLE>
<CAPTION>
Total Restructuring 1996 1997
Provision (in 1996) Spending Spending
- ------------------------------------------------------------------------------
<S> <C> <C> <C>
Employee termination benefits $ 600,000 $ 269,000 $ 331,000
Loss on sale of product line 500,000 500,000 -
Inventory and equipment
write-offs 1,300,000 1,300,000 -
Goodwill write-off 400,000 400,000 -
Other costs 900,000 645,000 255,000
- ------------------------------------------------------------------------------
Totals $3,700,000 $3,114,000 $586,000
- ------------------------------------------------------------------------------
</TABLE>

The effective income tax rate decreased to 25.1% for 1996
compared to 33.4% for 1995 primarily because the effects of
higher foreign income taxes and dividends from a foreign
subsidiary reduced the tax benefit from the US losses.

(page 28)
<PAGE>

REPORT OF INDEPENDENT AUDITORS

Report of Grant Thornton LLP
Independent Auditors
Stockholders and Board of Directors
AYDIN Corporation

We have audited the consolidated balance sheets of AYDIN
Corporation and subsidiaries as of December 31, 1997 and 1996
and the related consolidated statements of operations and cash
flows for each of the three years in the period ended December
31, 1997. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility
is to express an opinion on these financial statements based on
our audits.

We conducted our audits in accordance with generally accepted
auditing standards. 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
consolidated financial position of AYDIN Corporation and
subsidiaries as of December 31, 1997 and 1996 and the
consolidated results of their operations and their consolidated
cash flows for each of the three years in the period ended
December 31, 1997, in conformity with generally accepted
accounting principles.

/s/ Grant Thornton LLP

Philadelphia, Pennsylvania
February 2, 1998

(page 29)
<PAGE>

SELECTED FINANCIAL DATA

($000 omitted except for per share amounts)

<TABLE>
<CAPTION>
1997 1996* 1995 1994 1993
----------------------------------------------------
<S> <C> <C> <C> <C> <C>
For the Year
Net sales $115,731 $116,578 $140,607 $142,441 $141,475
Cost of sales 86,886 94,363 102,391 104,270 118,554
Income (loss) before
income taxes and
minority interest (574) (19,852)* 5,908 6,927 (7,312)
Net income (loss) (1,692) (14,780) 3,930 5,047 (4,967)
Earnings (loss) per share:
Basic (0.33) (2.88) 0.78 1.01 (1.00)
Diluted (0.34) (2.88) 0.77 1.01 (1.00)
Cash dividend per share - - - - -
Return on average
stockholders' equity (2%) (16%) 4% 5% (5%)

At Year End
Total Assets $112,055 $124,363 $166,860 $166,078 $169,721
Working Capital 76,182 68,765 85,615 81,786 76,506
Long-term debt - - 770 1,549 1,902
Stockholders' equity 89,342 90,327 104,573 99,217 93,959

Stockholders' equity
per share 17.15 17.60 20.46 19.88 18.86

<FN>
*Income (loss) before income taxes and minority interest
includes a $3,730,000 restructuring charge in the third
quarter.
</TABLE>

Quarterly Financial Data
($000 omitted except for per share amounts)

1st 2nd 3rd 4th Year
----------------------------------------------------
<S> <C> <C> <C> <C> <C>
1997
Net sales $ 26,914 $ 32,322 $ 25,990 $ 30,145 $115,371
Cost of sales 20,247 25,232 19,259 22,148 86,886
Income (loss) before
income taxes
and minority interest (3,518) 677 2,041 226 (574)
Net income (loss) (4,269) 260 1,894 423 (1,692)
Earnings (loss) per share:
Basic (0.83) 0.05 0.37 0.08 (0.33)
Diluted (0.83) 0.05 0.36 0.08 (0.34)

1996
Net sales $ 36,283 $ 26,706 $ 25,249 $ 28,340 $116,578
Cost of sales 25,308 25,228 20,425 23,402 94,363
Income (loss) before
income taxes
and minority interest 1,441 (9,352) (7,756) (4,185) (19,852)
Net income (loss) 963 (7,024) (5,467) (3,252) (14,780)
Earnings (loss) per share:
Basic 0.19 (1.37) (1.07) (0.63) (2.88)
Diluted 0.19 (1.37) (1.07) (0.63) (2.88)
- --------------------------------------------------------------------------------
</TABLE>

Common Stock Prices

<S> <C> <C>
1997 High Low
- -------------------------------------------------
Fourth Quarter $ 14.125 $ 11.125
Third Quarter 12.625 11.0625
Second Quarter 12.50 10.50
First Quarter 11.625 9.25

1996 High Low
- -------------------------------------------------
Fourth Quarter $ 11.00 $ 8.50
Third Quarter 13.75 9.75
Second Quarter 17.50 13.00
First Quarter 15.50 12.875
</TABLE>

Stockholder and Dividend Information
AYDIN has approximately 6,000 stockholders of record and
individual participants in security position listings. AYDIN
has no present plans to pay any special cash dividends.

(page 30)
<PAGE>

[graphic]

(page 31)
<PAGE>

AYDIN CORPORATE HEADQUARTERS
Horsham, PA

AYDIN COMMUNICATIONS
Horsham, PA
System Integration; Command, Control & Communications (C3); Air
Traffic Control; Modernization & Integration of Radars; Turnkey
Communications Systems; Digital Wireless Telephony Equipment &
Systems; Cell Extender; Network Access Equipment; Transcoders;
Multiplexers; Telecom Systems; Microcell; DACS; Satellite
Modems; Satellite TDMA Next-Generation Equipment; Digital &
Analog Microwave Radios.

San Jose, CA
Thin Film Solid State Amplifiers & Microwave Integrated Circuit
Components for Wireless Telecommunications.

Turkey
AYDIN Yazilim ve Elektronik Sanayi A.S.
Software; Command, Control & Communications Systems (C3); Air
Defense; Digital Microwave Radios; Air-to-Ground VHF & UHF
Radios; Telecom Equipment & Systems; Computer Equipment &
Systems; Display Terminals.

AYDIN TELEMETRY
Newtown, PA
Airborne Data Acquisition Equipment & Systems (Telemetry);
Ground Data Receiving & Processing; Transmitters; Transponders;
Receivers; Power Amplifiers; Digital Recorders; Data Links;
Avionics; Bus Products; Ground-to-Air UHF/VHF Transceivers &
Multiplexers; Special Microcircuits.

AYDIN DISPLAYS
Horsham, PA
High Resolution Color Monitors; Flat Panels & Workstation
Products; Military Display Processors; Ruggedized Monitors &
Workstations; SPECTRUM AUTOSYNC Color Monitors; Color Display
Terminals; Workstations; X-Terminals.

United Kingdom
AYDIN Europe Limited
European Operations
(all products, systems & support).

OTHER
Croyden, PA
AYDIN Electro Fab
Single-sided,
Double-sided & Multilayer
Printed Circuit Boards.

Montgomeryville, PA
AYDIN Raytor
Precision Metal Fabrications.

Rancho Dominguez, CA
AYDIN Molded Devices
Vinyl Components.

(inside flyleaf)
<PAGE>

CORPORATE INFORMATION AND DIRECTORY

Board of Directors

I. Gary Bard
Chairman of the Board and Chief Executive Officer
AYDIN

John F. Vanderslice
President and Chief Operating Officer
AYDIN

Dr. Nev A. Gokcen
Thermodynamicist, Department of
the Interior Bureau of Mines (Retired)

Admiral Harry D. Train, II
United States Navy (Retired)
Former Commander-In-Chief,
US Atlantic Command
Manager, Hampton Roads Operations,
Science Applications International Corporation

Ira Brind
President and co-founder, of
Brind-Lindsay & Co., Inc.
President of the Board of Managers,
of The Wistar Institute
Chairman of the Board of Trustees, of Thomas Jefferson
University Hospital

Gary Mozenter
Former Partner, Vice-Chairman
and Executive Committee Member,
at Coopers & Lybrand LLP

Corporate Officers

I. Gary Bard*
Chairman and Chief Executive Officer

John F. Vanderslice*
President and Chief Operating Officer

James R. Henderson*
Vice President,
Treasurer and Chief Financial Officer

H. Barry Maser*
Vice President of Business Development
and International Sales

Demirhan Hakimoglu*
Vice President

Robert A. Clancy
Secretary and Corporate Counsel

Herbert Welber*
Controller and Assistant Treasurer

AYDIN Corporate Headquarters
AYDIN Corporation
700 Dresher Road
Horsham, PA 19044

Telephone: 215-657-7510
Fax: 215-657-3830
Internet address: www.aydin.com

Independent Auditors
Grant Thornton LLP
Two Commerce Square
Philadelphia, Pennsylvania 19103

General Counsel
Duane, Morris & Heckscher LLP
One Liberty Place
Philadelphia, Pennsylvania 19103

Registrar & Transfer Agent
ChaseMellon Shareholders Services, L.L.C.
Overpeck Centre
85 Challenger Road
Ridgefield Park, New Jersey 07660

Stock Data
AYDIN shares (ticker symbol AYD) are traded on the New York
Stock Exchange

Form 10-K
A copy of the AYDIN Annual Report on Form 10-K to the
Securities and Exchange Commission is available without charge
upon written request to:

Investor Relations
AYDIN
700 Dresher Road
Horsham, Pennsylvania 19044
(215) 657-7510

Annual Meeting
Shareholders are invited to attend our annual meeting:
Friday, May 1, 1998 at 3:00 pm
AYDIN Corporate Headquarters
700 Dresher Road
Horsham, Pennsylvania 19044

* Executive Officer

Get More Information Online. Chat with the CEO and learn more
about AYDIN on the Internet at http://www.aydin.com

(inside cover)
<PAGE>

AYDIN
Corporation
700 Dresher Road
Horcham, PA 19044
www.aydin.com

(back cover)
<PAGE>
Exhibit 21

SUBSIDIARIES OF REGISTRANT

<TABLE>
<CAPTION>
NAME (and name under which JURISDICTION PERCENTAGE
they do business-same) OF INCORPORATION OWNED
- -------------------------- ----------------- ----------
<S> <C> <C>
Aydin Europe Limited United Kingdom 100%
Aydin, S.A. Argentina 19%
Aydin Foreign Sales Limited Guam 100%
Aydin Investments, Inc. Delaware 100%
Aydin Yazilim ve Elektronik
Sanayi A.S. Turkey 100% (1)

<FN>
- --------------
(1) Ninety nine (99%) percent of the 100% is owned by
registrant's wholly owned subsidiary, Aydin Investments,
Inc.

<PAGE>
Exhibit 23

CONSENT OF INDEPENDENT AUDITORS

We consent to incorporation by reference in Registration
Statement Numbers: 333-31263, 33-61537, 33-53549, 33-34863, 33-
22016, 33-14284, 2-97645, 2-93603, 2-77623, and 2-64093 on Form
S-8 of Aydin Corporation of our reports dated February 2, 1998,
relating to the consolidated balance sheet of Aydin Corporation
and subsidiaries as of December 31, 1997 and the related
consolidated statements of operations and cash flows, and
related schedules for the year ended December 31, 1997, which
reports appear in or incorporated by reference in the 1997
Annual Report on Form 10-K of Aydin Corporation.

/s/ Grant Thornton LLP

Philadelphia, Pennsylvania
March 24, 1998

<PAGE>
Exhibit 99

INDEPENDENT AUDITORS' REPORT

Under date of February 2, 1998, we reported on the consolidated
balance sheet of Aydin Corporation and subsidiaries as of
December 31, 1997, and the related consolidated statements of
operations and cash flows for the year ended December 31, 1997,
as contained in the 1997 Annual Report to Stockholders. These
consolidated financial statements and our reports thereon are
incorporated by reference in the annual report on Form 10-K for
the year 1997. In connection with our audit of the
aforementioned consolidated financial statements, we also have
audited the related financial statement schedules as listed in
the accompanying index. These financial statement schedules
are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial
statement schedules based on our audit.

In our opinion, such financial statement schedules, when
considered in relation to the basic consolidated financial
statements taken as a whole, present fairly, in all material
respect, the information set forth therein.

/s/ Grant Thornton LLP

Philadelphia, Pennsylvania
February 2, 1998

</TABLE>

<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted
from Annual Report to Stockholders and is qualified in its
entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER>1,000

<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<CASH> 10,161
<SECURITIES> 0
<RECEIVABLES> 24,137
<ALLOWANCES> 0
<INVENTORY> 17,913
<CURRENT-ASSETS> 97,486
<PP&E> 67,678
<DEPRECIATION> 53,199
<TOTAL-ASSETS> 112,055
<CURRENT-LIABILITIES> 21,304
<BONDS> 0
<COMMON> 5,209
0
0
<OTHER-SE> 84,133
<TOTAL-LIABILITY-AND-EQUITY> 112,055
<SALES> 115,371
<TOTAL-REVENUES> 115,371
<CGS> 86,886
<TOTAL-COSTS> 115,945
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (918)
<INCOME-PRETAX> (574)
<INCOME-TAX> 1,118
<INCOME-CONTINUING> (1,692)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,692)
<EPS-PRIMARY> (0.33)
<EPS-DILUTED> (0.34)

</TABLE>

<ARTICLE> 5
<LEGEND>
This restated schedule contains summary financial information
extracted from the 1995 Annual Report to Stockholders and is
qualified in its entirety by reference to such financial
statements.
</LEGEND>
<RESTATED>
<MULTIPLIER>1,000

<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> DEC-31-1995
<CASH> 16,310
<SECURITIES> 0
<RECEIVABLES> 53,216
<ALLOWANCES> 0
<INVENTORY> 22,780
<CURRENT-ASSETS> 140,810
<PP&E> 84,679
<DEPRECIATION> 59,055
<TOTAL-ASSETS> 166,860
<CURRENT-LIABILITIES> 55,195
<BONDS> 770
<COMMON> 5,112
0
0
<OTHER-SE> 99,461
<TOTAL-LIABILITY-AND-EQUITY> 166,860
<SALES> 140,607
<TOTAL-REVENUES> 140,607
<CGS> 102,391
<TOTAL-COSTS> 134,699
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 45,000
<INCOME-PRETAX> 5,908
<INCOME-TAX> 1,971
<INCOME-CONTINUING> 3,937
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,930
<EPS-PRIMARY> .78
<EPS-DILUTED> .77

</TABLE>