On 20 May 1971, the governments of Romania and Yugoslavia signed an agreement for the formation of YuRom, a joint R&D venture. The program was headed by Dipl. Dr. Engineer Teodor Zanfirescu of Romania and Colonel Vidoje Knezevic of Yugoslavia. The aircraft was intended as a replacement for the lightly armed Soko J-21 Jastreb and the Republic F-84 Thunderjet, then in the JNA arsenal.
The requirements called for a light aircraft to be built on a simple structure, using locally produced equipment and avionics, tough (able to operate on grass or damaged runways), easy to maintain and reliable. The aircraft was of conventional twin-engine, high mounted wing monoplane configuration with all flying surfaces swept. The designers originally planned a single-engined supersonic aircraft, but Britain would not authorize the license for the engine the designers wanted (due to Romania being in the Warsaw Pact), so the less-powerful Rolls-Royce Viper was chosen as the powerplant, as Soko had experience with license-building this engine. It was originally intended that an afterburner would be developed for the Viper engines, but there were prolonged difficulties with this project, meaning that none of the pre-production aircraft featured it, and neither did early production examples. During the 1980s, both countries developed slightly different versions to take advantage of the afterburning engines that had since become available.
The Yugoslav prototype 25002 made its first flight in November 1974 from Batajnica Air Base near Belgrade, with Major Vladislav Slavujevic at the controls.
The third aircraft, numbered 003, a pre-production two-seater version, made its first flight on 4 July 1977, but was lost almost a year later due to tail flutter problems. Construction continued, and the first batches of pre-production machines were delivered in 1978 to the Air Force Aircraft Testing Facility in Belgrade, with serial production being set up in Mostar, Bosnia and Herzegovina.
On 22 November 1984, Orao 25101 piloted by test pilot Marjan Jelen broke the sound barrier in a shallow dive over Batajnica Air Base, becoming the first Yugoslav-designed aircraft to exceed Mach 1. The aircraft is incapable of breaking the sound barrier in level flight, so it is classified as subsonic.