The Notes to the Consolidated Financial Statements (Item 8) are an integral part of Management's Discussion and Analysis of Financial Condition and Results of Operations and should be read in conjunction herewith. The following discussion and analysis of financial condition and results of operations contain forward-looking statements, which involve risks and uncertainties. Our actual results in future periods may differ significantly from the results discussed in or anticipated by such forward-looking statements. Readers should also refer to Risk Factors in Item 1A.

The United States is currently experiencing an economic slowdown. There have been disruptions in the capital and credit markets, and the number of unemployed workers has increased dramatically. Our largest customers are the Unites States Government and the Washington State Department of Transportation. To date, our business volumes from these customers has not been materially impacted by the economic downturn. Although our backlog of scheduled work totaled $84.0 million at the end of our fiscal year 2009, our future business volumes could be impacted in the event that general economic conditions continue to decline and federal, state and commercial spending on vessel maintenance and repair decreases. Continued economic distress could have negative impacts on a variety of financial services that we utilize, including insurance and access to surety bonding capacity, and constrain our ability to secure adequate insurance and bonding capacity for our business and/or increase the cost of such security. As disclosed in Note 6 of the Notes to Consolidated Financial Statements (Item 8), the recent turmoil in the financial markets has had a negative impact on the value of the marketable securities held the Todd Shipyards Corporation Retirement System defined benefit plan (the "Plan"). In spite of these impacts, the Plan remained over funded at the conclusion of our fiscal year ending March 29, 2009. As a result, we do not anticipate needing to make additional contributions to the Plan to maintain its funded status in the immediate future. To date, the impact of the economic slowdown on our liquidity has been immaterial. During fiscal year 2009, our cash flows from operations were more than sufficient to fund our capital expenditures and dividends. As of March 29, 2009, our $10.0 million line of credit was 95% available. See Item 1A, Risk Factors, in this Form 10-K for additional discussion on the risks to our business associated with economic and financial market conditions.

SIGNIFICANT REVENUE CONTRACTS

We are the largest private shipyard in the Pacific Northwest and are engaged in the construction, repair, maintenance, and overhaul of commercial and government vessels. Our headquarters and shipyard are in Seattle, Washington on Harbor Island. We also have employees located on-site at Puget Sound Naval Shipyard ("PSNS") in Bremerton, Washington, off-site in Bremerton, and at the Naval Station in Everett, Washington. Our wholly owned subsidiary, Everett Shipyard, Inc., operates on a site leased from the Port of Everett, Washington.

The majority of our ship repair business is generated from long-term Government contracts, which typically fall into one of two broad categories:

Cost-Type Contracts - Cost-type contracts provide for reimbursement of the contractor's allowable direct and indirect costs incurred and allocable to the contract plus a fee that represents profit. Cost-type contracts generally require that the contractor use its best efforts to accomplish the scope of the work within a specified time frame and a stated cost.

Government cost-type contracts typically include the following negotiated cost elements: direct material, labor and subcontracting costs, and certain indirect costs including allowable general, administrative and manufacturing overhead costs. Costs billed to contracts with the Government are regulated by the requirements of the Federal Acquisition Regulations ("FAR") as allowable and allocable costs. Examples of costs we incur and do not bill to the US Government in accordance with the requirements of FAR and CAS include, but are not limited to: certain legal costs, stock compensation expense, lobbying costs, charitable donations, and advertising costs.

Fixed-Price Contracts - A fixed-price contract is a contract in which the specified scope of work is agreed to for a price that is a pre-determined, negotiated amount and not generally subject to adjustment because of costs incurred by the contractor.

Contract Fees

Negotiated contract fee structures, for both cost-type and fixed-price contracts may include, but are not limited to: fixed-fee amounts, cost sharing arrangements to reward or penalize for either under or over cost target performance, positive award fee, and negative penalty arrangements. Profit margins may vary materially depending on the negotiated contract fee arrangements, percentage of completion of the contract, the achievement of performance objectives, and the stage of performance at which the right to receive fees, particularly under incentive and award fee contracts, is finally determined.

Award Fees

Certain contracts contain provisions consisting of award fees based on performance criteria such as cost, schedule, quality, management and effectiveness in meeting technical goals. Award fees are determined and earned based on the customer's subjective evaluation of our performance against such performance criteria.

Compliance and Monitoring

On a regular basis, we monitor our policies and procedures with respect to our contracts to ensure consistent application under similar terms and conditions as well as compliance with all applicable government regulations. In addition, the Defense Contract Audit Agency ("DCAA") routinely audits costs incurred and allocated to contracts with the Government. The Government has the ability to recover any costs which are improperly charged against or allocated to the contracts.

The table below summarizes status of our significant long-term contracts and a discussion of each contract follows. The amounts shown under Estimated Value of Contract are the estimated contract revenues at the inception of the contract.

                                                                   Estimated Value
    Contract           Customer       Contract Type   Vessel Type    of Contract
                                                      Frigates &      $60 to $75
(1) CMT           U.S. Navy             Cost-type     Destroyers       million
                                                       Aircraft
(2) CVN           U.S. Navy             Cost-type      Carriers      $133 million
(3) POLARS        U.S. Coast Guard      Cost-type     Icebreakers    $29 million
(4) HEALY         U.S. Coast Guard     Fixed-price    Icebreakers    $14 million
                                       Cost-type &

(1) CMT - This five-year contract was first awarded in fiscal year 2001 for the repair and maintenance of all surface combatants (frigates and destroyers) stationed at the Naval Station in Everett. This cost-plus-award-fee contract was extended by approximately five years in September of 2005. We are the prime contractor and lead a team of subcontractors who at times may perform as much as half of the work. The work is done either at our Seattle shipyard or pier-side at the Naval Station in Everett. We perform the work under this contract at the option of the Navy, which has not established a dollar value for the work. However, we believe that the value over the five-year life of the contract may be approximately $60 million to $75 million if all options are exercised. There is no assurance that the Navy will exercise all options, in whole or in part.

(2) CVN - This five year contract was awarded in fiscal year 2009 and consists of multiple contract options for planned incremental availabilities ("PIAs"), docking planned incremental availabilities ("DPIAs") and continuous maintenance and upkeep for the USS Lincoln (CVN-72), USS Stennis (CVN-74), and other CVN class vessels when they are in Puget Sound for maintenance. The work includes all types of non-nuclear ship repair, alterations and maintenance. Our workforce accomplishes all on-board work at PSNS in Bremerton, Washington, or at the Naval Station in Everett. The work is performed under a cost-type award fee with performance incentive fee contract and represents the third long term contract for aircraft carrier maintenance awarded to us. Various regional suppliers and subcontractors support us in this effort

(3) USCG POLARS - This five-year, cost-plus incentive fee multi-ship multi-option contract with the Coast Guard, was awarded in 2009 for the overhaul and continued maintenance of the two Polar Class Icebreakers stationed in Seattle, Washington. The options call for planned maintenance availabilities ("PMAs") and docking planned maintenance availabilities ("DPMAs") for the Polar Star (WAGB-10) and Polar Sea (WAGB-11). The work to be performed includes availability planning and general ship maintenance and repairs as needed, with emphasis on propulsion and deck machinery work. There is no assurance that the Coast Guard will exercise all options, in whole or in part.

(4) USCG HEALY - This fixed price, four and one half year multi-option contract with the Coast Guard was awarded in 2006 and provides for the periodic pier-side maintenance of the USCGC Healy ("Healy") at the Coast Guard Integrated Support Center in Seattle, Washington.

(5) ELECTRIC BOAT - In fiscal year 2004, we entered into a contract with Electric Boat Corporation of Groton, Connecticut ("Electric Boat") to support Electric Boat's work on Trident submarines. We also began work on a follow-on contract to fabricate components and to accomplish associated steel outfitting, project management and quality assurance functions. This contract is associated with the structural retrofit work accomplished by Electric Boat on the USS Ohio (SSGN 726) and USS Michigan (SSGN 727) at PSNS. We performed fabrication work on the USS Ohio under a cost-type incentive fee contract with Electric Boat, and under a fixed price contract for the associated project management and quality assurance work. We completed work on this contract in the second quarter of fiscal year 2005. We performed work on the USS Michigan under a fixed price contract. In addition to Electric Boat's contract for the Trident's structural retrofit at PSNS, we entered into a contract to provide a number of repair and alteration services aboard the USS Ohio and USS Michigan at PSNS. Our contract with Electric Boat for work on the USS Ohio and USS Michigan was substantially completed in fiscal year 2007.

(6) WASHINGTON STATE FERRIES - On December 1, 2008 we were awarded a $65.5 million firm fixed price contract from WSF for the construction of one 64-auto ferry. The ferry, to be built in our Seattle shipyard, is scheduled to be delivered 18 months after the Notice to Proceed which was issued by WSF on January 5, 2009. The contract contains penalties for failing to deliver the ferry on time.

In July 2007, we, as prime contractor, commenced negotiations with WSF for the terms and conditions of a contract to build up to four 144-auto ferries. We concluded those negotiations and executed the prime contract with WSF in December 2007. The contract is issued in two parts. Part A provides for the design of the ferries and Part B will dictate the terms of the actual construction of the ferries. Part A of the contract, which was awarded for $2.3 million, is shared between us and our primary subcontractor, Guido Perla & Associates of Seattle, Washington, who will provide ferry design services. We reached agreement on the terms and conditions of a subcontract with Martinac Shipbuilding of Tacoma, Washington in December 2007 to be a subcontractor to us. Once the design and cost estimate are complete, we are contractually obligated to negotiate a price and delivery schedule for Part B of the contract, covering the construction of the ferries, with WSF. The timetable for the contract execution of Part B is dependent upon the availability of funds from WSF. There are no assurances that we will reach agreement with WSF on a price for construction of the ferries, a mutually acceptable delivery schedule, or that the necessary funding will be available from the State of Washington to build any or all of the ferries.

MANAGEMENT'S OVERVIEW

The ship repair business consists of individual and short duration repair events, some of which the Government exercises under its various multi-ship, multi-option contracts. Consequently, operating results for any period presented are not necessarily indicative of results that may be expected in any other period.

The majority of our Navy and Coast Guard work volumes, as measured by direct labor hours and revenue, are associated with short-term (less than six months) vessel availabilities executed under multi-year option contracts.

During the first half of fiscal year 2009, we recorded $46.8 million, or 41% of our full year revenue. Revenues in the second half of the year were higher than the first half due to higher volumes of both cost-type and fixed-price work. Revenues for the third and fourth quarters of the year were $66.7 million. Work volumes in the second half of the fiscal year increased due to planning activities for the upcoming repair availability on the USS Lincoln aircraft carrier, as well as repair work for WSF, the Coast Guard, and commercial vessel owners.

For the full year ended March 29, 2009, we recorded revenue of $113.5 million, a decrease of $25.7 million, or approximately 18%, from fiscal year 2008 revenue of $139.2 million. Fiscal year 2009 volumes included repair and overhaul work on the Pacific Glacier, USS Abraham Lincoln, USS Stennis, USS Ingraham, USCGC Polar Sea, USCGC Healy and several WSF ferries. Work also began on the construction of a new 64-auto ferry for WSF. The year on year revenue decrease from fiscal 2008 to fiscal 2009 is primarily attributable to the lack of a major aircraft carrier availability in 2009.

For the fiscal year ended March 29, 2009, we reported operating income of $3.5 million, which was $2.5 million less than operating income for the fiscal year ended March 30, 2008 of $6.0 million. The decrease in operating income for the fiscal year was primarily attributable to a $3.1 million reserve established during fiscal year 2009 and associated with questioned subcontractor costs, which is discussed further in Government Contracting (Item 7).

OPERATING INCOME BY CONTRACT TYPE

Cost-type contracts

During fiscal year 2009, we experienced lower work volumes related to cost-type contracts as compared to fiscal year 2008. Our direct labor hours decreased approximately 49% from fiscal year 2008 on cost-type contracts. The year on year decrease is primarily attributable to no major aircraft carrier availability in 2009. Operating income attributable to cost-type contracts decreased by approximately 101% from fiscal year 2008 to fiscal year 2009 primarily due to volume decreases and $3.1 million reserve associated with questioned subcontractor costs, which is discussed further in Government Contracting (Item
7). The primary factors that impact operating income on cost-type contracts are work volumes, allowability of costs, the timing of the award fees and our ability to manage project costs.

Fixed-price contracts

Work volumes on fixed-price contracts, as measured by direct labor hours, were approximately 28% lower in fiscal year 2009 as compared to the prior year. In 2009, we began one major new construction project, the 64-auto ferry project, which started in the last quarter of fiscal year 2009. In addition, significant overhaul and repair work on the Pacific Glacier occurred in 2009. In fiscal year 2008, we performed several large overhaul and repair projects including the NOAA Okeanos Explorer, USNS Salvor, USNS Flint, M/V Taku and USCG Healy. Operating income on fixed price projects increased by 240% from fiscal year 2008 to fiscal year 2009. The primary drivers of improved profitability in fiscal year 2009 on fixed-price contracts included improved control of material costs, improved change order management, productivity improvements and sub-contract management.

Time-and- materials contracts

The work we completed under time-and-materials contracts in fiscal year 2009 was 18% lower as compared to fiscal year 2008. Operating income on time-and-materials contracts decreased year on year by approximately 37% from fiscal year 2008 to fiscal year 2009. The year on year decrease in operating income was primarily associated with the decrease in work volumes and terms negotiated for change orders and labor costs.

CONSOLIDATED OPERATING RESULTS

(in thousands)                                                    March 29, 2009        March 30, 2008              April 1, 2007
Revenue                                                            $   113,518   100%    $   139,165    (1)  100%    $  125,494    (1)  100%
Operating expenses:
                    Cost of revenue                                     76,554   67%          98,509         71%         90,754         72%
                    Administrative and MFG overhead                     33,545   30%          34,771         25%         34,405         27%
                    Other insurance settlements                           (90)   (0%)           (90)         (0%)           (86)        (0%)
Total operating expenses                                               110,009   97%         133,190         96%        125,073         100%
Operating Income                                                         3,509   3%            5,975    (1)  4%            421     (1)  0%
                    Lease income                                         3,762   3%            4,271         3%           4,886         4%
                    Lease expense                                        (523)   (0%)         (1,157)        (1%)        (2,166)        (2%)
                    Other income, net                                     962    1%             794          1%           1,103         1%
                    Gain/(loss) on available-for-sale securities           47    0%              96          0%            621          0%
Income before income tax expense                                         7,757   7%            9,979    (1)  7%           4,865    (1)  4%
Income tax expense                                                      (2,975)  (3%)         (3,394)   (1)  (2%)        (1,696)   (1)  (1%)
Net income                                                         $     4,782   4%      $     6,585    (1)  5%      $    3,169    (1)  3%

(1) Revised due to prior period corrections. See Note 20 of the Notes to Consolidated Financial Statements (Item 8).

REVENUES

Our revenues are primarily derived from work associated with individual and short duration repair events, some of which the Government exercises under its various multi-ship, multi-option contracts. We collect amounts from customers, which under common trade practices are referred to as sales taxes, and record these amounts on a net basis. We discuss many of the factors that influence our business volumes and revenues in Business (Item 1) and Risk Factors (Item 1A). These include, but are not limited to: general economic conditions; fluctuations in specific private sector customers' economic circumstances; the level of competition in the marketplace from domestic and international shipyards; our ability and willingness to compete for available projects; our capacity and capability to perform available work; the level of Government funding available for ship repair projects; the timing and duration of repair availabilities for Government vessels; Government decisions regarding the allocation of work between public and private shipyards; Government decisions regarding the volumes and types of work that will be solicited; and Government decisions regarding the specific contract vehicles that will be used to solicit work to private sector contractors. Consequently, revenues for any given period are not necessarily indicative of results that may be expected in any other period. We recognize revenue on the percentage-of completion method based upon the percentage of work completed to date compared to the estimate of total work at completion. When adjustments in contract value or estimated costs are determined, we generally reflect any changes from prior estimates in revenue in the current period using the cumulative catch-up method of accounting. As a result, our revenues in any given period may reflect the economic benefit or impact of changes in estimates in the current period for work performed in another period. For cost-type contracts with performance incentives or award fees, we only record revenue associated with incentives and award fees that we can be reasonably estimated in the current period. Conversely, incentives and award fees that we cannot reasonably estimate are recognized when awarded. As a result, our revenues in any given period may reflect incentive and award fee revenue associated with work that was performed in another period. For more information on our revenue recognition methods, see Note 1 of the Notes to Consolidated Financial Statements (Item 8).

2009 - We recorded revenues of $113.5 million during fiscal year 2009, a decrease of $25.7 million, or approximately 18%, from fiscal year 2008 when we reported revenues of $139.2 million. The decrease in total revenues was primarily due to the lack of a major aircraft carrier availability and lower new construction volumes as compared with fiscal year 2008. Fiscal year 2009 volumes included repair and overhaul work on the Pacific Glacier, USS Abraham Lincoln, USS Stennis, USS Ingraham, USCGC Polar Sea, USCGC Healy and several WSF ferries.

2008 - We recorded revenue of $139.2 million during fiscal year 2008, an increase of $13.7 million, or approximately 11%, from fiscal year 2007 when we reported revenue of $125.5 million. The increase in total revenues was primarily due to higher ship repair and new construction volumes on a range of projects including USS Stennis, USCGC Polar Sea, NOAA Okeanos Explorer, Excavator Barge, USNS Flint and USNS Salvor.

COST OF REVENUES

Our cost of revenues primarily consist of material costs, subcontractor costs, wages and related payroll benefits associated with our production staff, and depreciation and operating costs associated with our dry docks. We discuss many of the factors that influence our business profitability and cost of revenues in Business (Item 1) and Risk Factors (Item 1A). These include, but are not limited to: our willingness to accept lower profits in order to compete for available projects; our union and non-union wage structures; the mix of labor, materials and subcontractor costs on the projects we execute; our ability to formulate appropriate assumptions and produce reliable estimates for the work that we compete for and perform; our ability to perform at the costs estimated at the time of the original bid; our ability to recover customer initiated cost increases; the degree to which our business volumes adequately absorb costs (as cost of revenues) that would otherwise be recorded as manufacturing and administrative costs; our ability to negotiate Government cost-type reimbursement rates that adequately cover our indirect costs; our ability to effectively manage our operating costs and production efficiency; weather conditions which may benefit or hinder our work during any particular period; our ability to prevent labor actions and work stoppages; our exposure to commodity price fluctuations; and our ability to manage subcontractor performance. Consequently, our cost of revenue for any given period is not necessarily indicative of the cost of revenue that may be expected in any other period. When estimates of total costs incurred on a contract exceed estimates of total revenue to be earned, we record a provision for the entire loss on the contract as cost of revenue in the period the loss becomes evident. As a result, our cost of revenue in any given period may reflect the economic benefit or impact of changes in estimates of profit or loss for work that was or will be performed in another period. For more information on our revenue recognition methods, see Note 1 of the Notes to Consolidated Financial Statements (Item 8). Our cost of revenue as a percentage of revenue is affected by the factors that influence our revenues (as discussed above under "Revenues") as well as factors that influence our cost of revenue.

2009 - Cost of revenues for fiscal year 2009 were $76.6 million, which reflected a decrease of $22.0 million, or approximately 22%, from fiscal year 2008. This decrease was primarily attributable to a decrease in volumes in fiscal year 2009 compared to fiscal year 2008. Cost of revenues as a percentage of revenues was 67% and 71% for fiscal years 2009 and 2008, respectively. The decrease in cost of revenues as a percentage of revenue in fiscal year 2009 versus fiscal year 2008 was due to cost containment measures implemented by management which included staff reductions, enhanced subcontract management, and change order management improvements.

2008 - Cost of revenues for fiscal year 2008 were $98.5 million, which reflected an increase of $7.8 million, or approximately 9%, from fiscal year 2007. This increase was primarily attributable to an increase in volumes in fiscal year 2008 compared to fiscal year 2007. Cost of revenues as a percentage of revenues was 71% and 72% for fiscal years 2008 and 2007, respectively. The decrease in cost of revenues as a percentage of revenue in 2008 was primarily attributable to a greater share of our cost of revenues attributed to cost factors that generally command higher margins, and generally improved operating margins on fixed-price ship repair projects.

ADMINISTRATIVE AND MANUFACTURING OVERHEAD

Our administrative and manufacturing expenses primarily consist of wages and related payroll benefits for our internal administrative and production support employees. These expenses also include, but are not limited to: depreciation; telecommunications; material purchases and equipment rentals to support our production activities; employee training and development expenses; maintenance and lease expenses associated with our equipment and facilities; legal and accounting professional fees; insurance; business taxes; general corporate expenses; and other administrative and manufacturing expenses. We discuss many of the factors that influence our operating costs in Business (Item 1) and Risk Factors (Item 1A). These include, but are not limited to: our ability to effectively manage our operating costs; our union and non-union wage structures; our exposure to price fluctuations for purchased materials; the degree to which our business volumes are adequate to absorb costs (as cost of revenues) that would otherwise be recorded as administrative and manufacturing costs; and expenditures needed to ensure continuing service of our owned and leased machinery and equipment. Our administrative and manufacturing overhead includes a mix of fixed costs (e.g. depreciation, facility maintenance, and corporate administration costs), costs which are positively correlated with business volumes (e.g. labor and non-labor production support costs), costs which are negatively correlated with business volumes (e.g. production costs not fully absorbed by our business volumes in a given period), and costs which are variable but otherwise uncorrelated with business volumes (e.g. legal and environmental compliance costs). Consequently, our administrative and manufacturing overhead costs for any given period are not necessarily indicative of the costs that may be expected in any other period. Our manufacturing and administrative costs as a percentage of revenue are affected by the factors that influence our revenues (as discussed above under "Revenues") and the factors that influence our manufacturing and administrative costs.

2009 - Overhead costs for administrative and manufacturing activities for fiscal year 2009 were $33.5 million, which reflected a decrease of $1.2 million, or 4%, . . .