SECURITIES AND EXCHANGE COMMISSION

                                 Washington, D.C. 20549

                                        Form 10-Q


(Mark One)

(X)     Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
        Exchange Act of 1934 For the quarterly period ended June 30, 1996

                                           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 1-10596


                              ESCO ELECTRONICS CORPORATION

                 (Exact name of registrant as specified in its charter)


        Missouri                                             43-1554045
(State or other jurisdiction of                         (I.R.S. Employer
incorporation or organization)                       Identification No.)

8888 Ladue Road, Suite 200                                   63124-2090
St. Louis, Missouri                                          (Zip Code)
(Address of principal executive offices)



        Registrant's telephone number, including area code:  (314) 213-7200


  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   

Number of common stock trust receipts outstanding at July 31, 1996:
11,400,537 receipts.



                          PART I.  FINANCIAL INFORMATION

Item 1. Financial Statements

                   ESCO ELECTRONICS CORPORATION AND SUBSIDIARIES
                  Condensed Consolidated Statements of Operations
                                    (Unaudited)
                 (Dollars in thousands, except per share amounts)



                                                                             Three Months Ended
                                                                                   June 30,           
                                                                           1996                 1995  

                                                                                         
Net sales                                                               $ 109,103              107,939
Costs and expenses:
  Cost of sales                                                           107,597               83,890
  Selling, general and administrative expenses                             17,443               18,679
  Interest expense                                                          1,455                1,560
  Other, net                                                                2,115                2,767
  Nonrecurring charges                                                     25,300                1,968
        Total costs and expenses                                          153,910              108,864
Loss before income taxes                                                 (44,807)                (925)
Income tax expense (benefit)                                             (25,396)                  308
Net loss                                                               $ (19,411)              (1,233)

Loss per share                                                         $   (1.72)                (.11)
See accompanying notes to condensed consolidated financial statements. ESCO ELECTRONICS CORPORATION AND SUBSIDIARIES Condensed Consolidated Statements of Operations (Unaudited) (Dollars in thousands, except per share amounts) Nine Months Ended June 30, 1996 1995 Net sales $ 339,157 315,927 Costs and expenses: Cost of sales 289,123 243,277 Selling, general and administrative expenses 52,911 55,891 Interest expense 4,269 3,945 Other, net 4,728 7,440 Nonrecurring charges 25,300 30,244 Total costs and expenses 376,331 340,797 Loss before income taxes (37,174) (24,870) Income tax expense (benefit) (22,099) 463 Net loss $ (15,075) (25,333) Loss per share $ (1.35) (2.31)
See accompanying notes to condensed consolidated financial statements. ESCO ELECTRONICS CORPORATION AND SUBSIDIARIES Condensed Consolidated Balance Sheets (Dollars in thousands) June 30, September 30, 1996 1995 Assets (Unaudited) Current assets: Cash and cash equivalents $ 1,526 320 Accounts receivable, less allowance for doubtful accounts of $339 and $242, respectively 44,233 48,224 Costs and estimated earnings on long-term contracts, less progress billings of $102,378 and $72,194 respectively 59,046 51,923 Inventories 80,620 107,421 Other current assets 4,605 3,975 Total current assets 190,030 211,863 Property, plant and equipment, at cost 121,690 116,226 Less accumulated depreciation and amortization 33,781 24,747 Net property, plant and equipment 87,909 91,479 Excess of cost over net assets of purchased businesses, less accumulated amortization of $1,460 and $1,051 respectively 20,081 20,490 Deferred tax assets, net 63,685 25,637 Other assets 20,856 28,532 $382,561 378,001 Liabilities and Shareholders' Equity Current liabilities: Short-term borrowings and current maturities of long-term debt $ 56,000 39,000 Accounts payable 44,141 42,327 Advance payments on long-term contracts, less costs incurred of $9,960 and $2,816, respectively 9,419 19,617 Accrued expenses and other current liabilities 36,250 39,510 Total current liabilities 145,810 140,454 Other liabilities 31,516 31,840 Long-term debt 21,897 23,452 Total liabilities 199,223 195,746 Commitments and contingencies Shareholders' equity: Preferred stock, par value $.01 per share, authorized 10,000,000 shares Common stock, par value $.01 per share, authorized 50,000,000 shares; issued 11,912,764 and 11,574,420 shares, respectively 119 116 Additional paid-in capital 226,514 210,205 Retained earnings (deficit) since elimination of deficit of $60,798 at September 30, 1993 (37,027) (21,952) Cumulative foreign currency translation adjustment 117 292 Minimum pension liability (1,998) (1,998) 187,725 186,663 Less treasury stock, at cost; 567,497 and 570,472 common shares, respectively (4,387) (4,408) Total shareholders' equity 183,338 182,255 $382,561 378,001
See accompanying notes to condensed consolidated financial statements. ESCO ELECTRONICS CORPORATION AND SUBSIDIARIES Condensed Consolidated Statements of Cash Flows (Unaudited) (Dollars in thousands) Nine Months Ended June 30, 1996 1995 Cash flows from operating activities: Net loss $(15,075) (25,333) Adjustments to reconcile net loss to net cash used by operating activities: Depreciation and amortization 10,809 10,516 Changes in operating working capital (7,907) (20,272) Write-off of certain assets 25,300 19,744 Effect of tax valuation allowance on tax provision (9,996) Other (11,870) (5,549) Net cash used by operating activities (8,739) (20,894) Cash flows from investing activities: Capital expenditures (6,468) (7,306) Acquisition of business, less cash acquired (1,596) Net cash used by investing activities (6,468) (8,902) Cash flows from financing activities: Net increase in short-term borrowings 17,000 30,000 Proceeds from long-term debt 1,490 Principal payments on long-term debt (1,555) (1,562) Other 968 490 Net cash provided by financing activities 16,413 30,418 Net increase in cash and cash equivalents 1,206 622 Cash and cash equivalents at beginning of period 320 2,656 Cash and cash equivalents at end of period $ 1,526 3,278
See accompanying notes to condensed consolidated financial statements. ESCO ELECTRONICS CORPORATION AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements (Unaudited) 1. Basis of Presentation The accompanying condensed consolidated financial statements, in the opinion of management, include all adjustments necessary for a fair presentation of the results for the interim periods presented. The condensed consolidated financial statements are presented in accordance with the requirements of Form 10-Q and consequently do not include all the disclosures required by generally accepted accounting principles. For further information refer to the consolidated financial statements and notes thereto included in the Company's Annual Report on Form 10-K for the year ended September 30, 1995. Certain prior year amounts have been reclassified to conform with the fiscal 1996 presentation. The fiscal year 1995 third quarter and nine month periods ended June 30, 1995 have been restated, as previously disclosed. The results for the three and nine month periods ended June 30, 1996 are not necessarily indicative of the results for the entire 1996 fiscal year. 2. Loss Per Share Loss per share is based on the weighted average number of common shares outstanding. For the three month and nine month periods ended June 30, 1996, loss per share is computed using 11,281,395 and 11,170,129 common shares outstanding, respectively. For the quarter and nine month periods ended June 30, 1995, loss per share is computed using 10,981,629 and 10,964,975 common shares outstanding, respectively. 3. Inventories Inventories consist of the following (dollars in thousands): June 30, September 30, 1996 1995 Finished Goods $ 4,949 4,442 Work in process on long-term contracts 60,214 92,559 Raw materials 15,457 10,420 Total inventories $ 80,620 107,421
Under the contractual arrangements by which progress payments are received, the U.S. Government has a security interest in the inventories associated with specific contracts. Inventories are net of progress payment receipts of $19,051,000 and $8,519,000 at June 30, 1996 and September 30, 1995, respectively. ESCO ELECTRONICS CORPORATION AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements (Unaudited) 4. Subsequent Event On July 22, 1996, the Company completed the sale of its Hazeltine subsidiary to GEC-Marconi Electronic Systems Corporation (GEC). The Company sold 100% of the common stock of Hazeltine for $110 million in cash and during July, repaid all outstanding short-term borrowings, the $8 million subordinated term loan, and paid down the bank term loan from $18.5 million to $13 million. Refer to the Company's Current Report filed on Form 8-K dated August 5, 1996. The key financial statement accounts of Hazeltine which are included in the unaudited condensed consolidated balance sheet at June 30, 1996 are as follows: June 30, 1996 Assets Accounts receivables, net $ 8,842 Costs and estimated earnings on long-term contracts 15,931 Inventories 21,418 Property, plant & equipment 32,774 Other (current and noncurrent) 4,147 $83,112 Liabilities and Shareholders' Equity Current liabilities $26,040 Other liabilities 1,081 Long-term debt 1,396 Shareholders' equity 54,595 $83,112
The estimated gain on the sale of Hazeltine may change upon final determination and settlement of post-closing adjustments. Included in the nine month unaudited condensed consolidated statements of operations are the operating results of Hazeltine as follows: Nine Months Ended June 30, 1996 1995 Net sales $86,301 80,078 Cost of sales 69,047 67,928 Selling, general and administrative expenses 11,485 10,427 Other costs and expenses, net 917 1,236 Earnings before income taxes $ 4,852 487
Included in the consolidated backlog of firm orders at June 30, 1996 is approximately $223.3 million related to Hazeltine. Item 2. Management's Discussion and Analysis of Results of Operations and Financial Condition Results of Operations - Three months ended June 30, 1996 compared with three months ended June 30, 1995. Net sales of $109.1 million for the third quarter of fiscal 1996 increased $1.2 million (1.1%) from net sales of $107.9 million for the third quarter of fiscal 1995. The increase was primarily due to increased volume at Hazeltine and PTI. Defense sales were $70.2 million and commercial sales were $38.9 million for the third quarter of fiscal 1996, compared with defense and commercial sales of $81.9 million and $26.0 million, respectively, in the third quarter of fiscal 1995. The increase in commercial sales in the third quarter of fiscal 1996 reflects additional sales of material handling equipment at SEI, Radio Frequency (RF) test equipment at EMC Test Systems and filtration products at PTI. The backlog of firm orders at June 30, 1996 was $473.5 million, compared with $500.6 million at March 31, 1996. During the third quarter of fiscal 1996 new orders aggregating $82 million were received, compared with $72.4 million in the third quarter of fiscal 1995. The most significant orders in the current period were for material handling equipment, commercial filtration products, and tank transporters. The fiscal 1996 third quarter gross profit decreased from the comparable period of fiscal 1995 primarily due to a $23 million adjustment of the estimate of the costs to complete the 60K Loader program at SEI. The fiscal 1996 third quarter gross margin, excluding the 60K Loader adjustment, decreased from the comparable period of fiscal 1995 due to changes in sales mix in both the defense and commercial segments. Selling, general and administrative expenses for the third quarter of fiscal 1996 were $17.4 million, or 16% of net sales, compared with $18.7 million, or 17.3% of net sales, for the same period a year ago. The fiscal 1996 third quarter decrease in both spending and as a percentage of sales is a result of successful cost containment programs throughout the Company. Interest expense was consistent in both periods presented. Other costs and expenses, net, were $2.1 million in the third quarter of fiscal 1996 compared to $2.8 million in the same period of fiscal 1995. The decrease in fiscal 1996 reflects the absence of amortization of a contract guarantee fee previously paid to Emerson Electric Co. (Emerson). Nonrecurring charges of $25.3 million in the third quarter of fiscal 1996 represent non-cash charges to reflect recent events which impacted the value of certain assets on the Company's balance sheet. The items affected include certain assets which management has determined are obsolete, costs incurred in anticipation of certain defense contract awards which the Company no longer expects to receive, and the downward adjustment in the Company's estimate of recoveries by the Company in a contract dispute. Nonrecurring charges of $2 million incurred during the third quarter of fiscal 1995 were related to the 1995 facilities consolidation program. Based on the Company's historical pretax income and losses, adjusted for significant nonrecurring items such as the facilities consolidation program, the change in accounting estimates and other nonrecurring costs, together with management's projection of future taxable income, management believes it is more likely than not that the Company will realize the benefits of the net deferred tax asset existing at June 30, 1996. In order to fully realize the net deferred tax asset existing at June 30, 1996, the Company will need to generate future taxable income of approximately $180 million, a significant portion of which is required to be realized prior to the expiration of the net operating loss (NOL) carryforwards, which will begin to expire in 2006. The Company had previously reduced its deferred tax valuation allowance systematically by utilizing projected taxable income over a specified future period of time. Management currently believes, considering the aforementioned items, the Company will generate sufficient taxable income to absorb all net operating loss carryforwards and deductible temporary differences prior to expiration of the NOLs, and accordingly, in the third quarter reduced its deferred tax valuation allowance by $21.6 million. The remaining deferred tax valuation allowance of approximately $3.5 million, represents management's best estimate of the portion of the deferred tax asset that may not be realized. Due to the 1993 Corporate Readjustment, $11.6 million of this reduction was credited directly to additional paid-in capital. The remaining $10 million was credited directly to the tax provision. There can be no assurance, however, that the Company will generate sufficient taxable income or a specific level of continuing taxable income in order to fully utilize the deferred tax assets in the future. The provision for taxes for this period also reflects foreign, state and local taxes. The tax expense for the three months ended June 30, 1995 reflects foreign, state and local taxes. Results of Operations - Nine months ended June 30, 1996 compared with nine months ended June 30, 1995. Net sales for the first nine months of fiscal 1996 were $339.2 million compared with net sales of $315.9 million for the first nine months of fiscal 1995. The increase was primarily due to increased sales volume at SEI, Hazeltine and PTI. Defense sales were $238 million and commercial sales were $101.2 million for the first nine months of fiscal 1996 compared with defense and commercial sales of $250.1 million and $65.8 million, respectively, in the first nine months of fiscal 1995. The increase in commercial sales in fiscal 1996 was the result of additional sales of material handling equipment at SEI, Radio Frequency (RF) test equipment at EMC Test Systems and filtration products at PTI. The backlog of firm orders at June 30, 1996 was $473.5 million, compared with $530.9 million at September 30, 1995. During the first nine months of fiscal 1996, orders aggregating $281.8 million were received, the most significant of which were for aircraft cargo loaders, commercial filtration products, airborne electronic identification systems and tank tansporters. This compares to $251.9 million of orders received in the first nine months of fiscal 1995. The gross profit percentage was 14.8% in the first nine months of fiscal 1996 compared to 23% in the first nine months of fiscal 1995. The decrease in gross profit percentage is primarily attributable to the third quarter 1996 adjustment on the 60K Loader program and changes in sales mix in both the defense and commercial segments. Selling, general and administrative expenses for the first nine months of fiscal 1996 were $52.9 million, or 15.6% of net sales, compared with $55.9 million or 17.7% of net sales, for the same period a year ago. The fiscal 1996 decrease in both spending and as a percentage of sales is a result of successful cost containment programs throughout the Company. Interest expense increased to $4.3 million from $3.9 million as a result of additional short-term borrowings and higher interest rates in fiscal 1996 as compared to fiscal 1995. Other costs and expenses, net, were $4.7 million in the first nine months of fiscal 1996 as compared to $7.4 million in the first nine months of fiscal 1995. The decrease reflects the absence of amortization of a contract guarantee fee previously paid to Emerson. Nonrecurring charges of $25.3 million in the nine months ended June 30, 1996 represent the costs as disclosed in three months ended June 30, 1996. Nonrecurring charges of $30.2 million incurred during the first nine months of fiscal 1995 were related to the facilities consolidation program and the change in accounting estimates for certain prepaid assets implemented in fiscal 1995. The tax benefit recognized in the nine month period ended June 30, 1996 reflects state, local and foreign tax expense of $1 million, and a federal deferred tax benefit of $10 million as described in the results of operations for the three months ended June 30, 1996. In addition, the Company recognized a federal deferred tax benefit of approximately $15.7 million relating to the current quarter's pretax loss. Tax expense in the nine month period ended June 30, 1995 reflects foreign, state and local taxes. Financial Condition Working capital decreased to $44.2 million at June 30, 1996 from $71.4 million at September 30, 1995. During the first nine months of fiscal 1996, accounts receivable decreased by $4 million as a result of cash collections. Inventories and costs and estimated earnings on long- term contracts decreased by $19.7 million primarily due to the nonrecurring adjustments in the quarter ended June 30, 1996. Advance payments on long-term contracts decreased by $10.2 million as production costs were incurred on certain foreign contracts. Accounts payable and accrued expenses decreased by $1.4 million during the first nine months of fiscal 1996 through payments necessary to satisfy outstanding commitments at September 30, 1995. Net cash used by operating activities was $8.7 million in the first nine months of fiscal 1996 and $20.9 million in the same period of fiscal 1995, primarily due to the changes in operating working capital mentioned above. Capital expenditures were $6.5 million in the first nine months of fiscal 1996 compared with $7.3 million in the first nine months of fiscal 1995. Major expenditures in the current period include capitalized facility costs at SEI, PTI and Rantec. On July 22, 1996, the Company completed the sale of its Hazeltine subsidiary, received $110 million in cash and repaid all outstanding short-term borrowings and the $8 million subordinated term loan. The remaining term debt, paid down from $18.5 million to $13 million, will be amortized at $.325 million per quarter until maturity. The remaining excess cash balance was invested in short-term accounts pending management's application of the excess cash balances (SEE ITEM 5. Other Information.). PART II. OTHER INFORMATION Item 5. Other Information. The Company's Board of Directors has approved a major share repurchase program that, subject to market conditions and certain other factors, will use up to $40 million to $50 million of the proceeds from the sale of Hazeltine to buy back shares of the Company's common stock. Depending upon market conditions and other factors, the Company expects to commence the share repurchase program within the next 90 days. Item 6. Exhibits and Reports on Form 8-K. (a) Exhibits Filed Herewith or Exhibit Incorporated Number Description by Reference 2 Stock Purchase Agreement dated Incorporated by as of May 23, 1996 (as amended Reference to July 19, 1996) between the Form 8-K dated Company and GEC-Marconi August 5, 1996 Electronic Systems Corporation at Exhibit 2 4 Amendment, Waiver and Consent dated as of June 6, 1996 to the Credit Agreement dated as of September 23, 1990 (as amended and restated as of September 29, 1995) among the Company, Defense Holding Corp., the Banks listed therein and Morgan Guaranty Trust Company of New York, as Agent (b) Reports on Form 8-K. There were no reports on Form 8-K filed during the quarter ended June 30, 1996. Subsequently, the registrant filed a Current Report on Form 8-K dated August 5, 1996 related to the sale of Hazeltine to GEC. SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. ESCO ELECTRONICS CORPORATION /s/ Philip M. Ford Senior Vice President and Chief Financial Officer (as duly authorized officer and principal financial officer of the registrant) Dated: August 13, 1996
 

5 1,000 9-MOS SEP-30-1996 JUN-30-1996 1,526 0 44,572 339 80,620 190,030 121,690 33,781 382,561 145,810 0 0 0 119 183,219 382,561 339,157 339,157 289,123 342,034 4,728 25,300 4,269 (37,174) (22,099) (15,075) 0 0 0 (15,075) (1.35) (1.35) THIS NUMBER DOES NOT INCLUDE $59.0 MILLION OF COSTS AND ESTIMATED EARNINGS ON LONG-TERM CONTRACTS.
>
EXHIBIT 4

AMENDMENT, WAIVER AND CONSENT dated as of June 6, 1996
(this Amendment) to the Credit Agreement dated as of
September 23, 1990 (as amended and restated as of
September 29, 1995) (the Credit Agreement), among ESCO
ELECTRONICS CORPORATION, a Missouri corporation (ESCO),
DEFENSE HOLDING CORP., a Delaware corporation (the
Borrower), the BANKS party thereto (the Banks) and
MORGAN GUARANTY TRUST COMPANY OF NEW YORK, as Agent
(the Agent).

          A.  Capitalized terms used and not otherwise
defined herein shall have the meanings assigned to them
in the Credit Agreement, as amended hereby.

          B.  ESCO and the Borrower have requested that
the Banks enter into this Amendment in order to permit
the potential sale of Hazeltine or its assets (the
Hazeltine Transaction).  Hazeltine is one of the
Borrower's Subsidiaries.  The Banks are willing to
permit the Hazeltine Transaction, subject to the terms
and conditions set forth herein.

          Accordingly, in consideration of the mutual
agreements herein contained and other good and valuable
consideration, the sufficiency and receipt of which are
hereby acknowledged, the parties hereto hereby agree as
follows:

          SECTION 1.  Consent and Waiver.  (a)  Subject
to the conditions set forth in paragraph (b) below, the
undersigned Banks hereby consent to the Hazeltine
Transaction under Section 5.13(b) of the Credit
Agreement and waive compliance with the provisions of
Sections 5.11(d) and 5.12 of the Credit Agreement to
the extent, but only to the extent, necessary to allow
the use of the proceeds of the Hazeltine Transaction as
provided below.

          (b)  The foregoing consent and waiver shall
be subject to the satisfaction of the following
conditions:

               (i)  The Hazeltine Transaction shall be
          consummated on or before September 30, 1996,
          as a sale of all the outstanding capital
          stock or all or substantially all of the
          assets of Hazeltine for fair market value
          (and in any event no less than $100,000,000)
          and solely for cash consideration.

               (ii)  At the time of and after giving
          effect to the Hazeltine Transaction, no
          Default shall have occurred and be
          continuing.

               (iii)  On the date of consummation of the
          Hazeltine Transaction (the Hazeltine Closing
          Date), the Agent shall have received a
          certificate from the Borrower as to the
          portion of the Borrowing Base (as reflected
          in the most recent Borrowing Base Certificate
          delivered prior to the Hazeltine Closing
          Date) transferred as a result of the
          Hazeltine Transaction.  The Borrowing Base
          shall thereupon be reduced to reflect the
          consummation of the Hazeltine Transaction and
          if on the Hazeltine Closing Date, after
          giving effect to the Hazeltine Transaction,
          the sum of the Letter of Credit Exposure plus
          the aggregate outstanding principal amount of
          the Working Capital Loans exceeds the
          Borrowing Base, the Borrower shall forthwith
          comply with Section 2.08(c) of the Credit
          Agreement.

               (iv)  None of ESCO, the Borrower or any
          Subsidiary shall have transferred any assets
          to Hazeltine prior to the Hazeltine Closing
          Date except in the ordinary course of
          business.

               (v)  On or prior to the Hazeltine
          Closing Date, unless the Borrower shall
          choose to remain liable after the Hazeltine
          Closing Date for all obligations and
          liabilities under the Hazeltine Letters of
          Credit, each Issuing Bank that shall have
          issued any of the Hazeltine Letters of Credit
          shall have received (A) letters of credit
          issued to such Issuing Bank in respect of the
          Hazeltine Letters of Credit issued by it, in
          amounts equal to the Letter of Credit
          Exposure in respect of such Hazeltine Letters
          of Credit and issued by a bank and in a form
          satisfactory to such Issuing Bank, supporting
          the obligations to reimburse drawings under
          such Hazeltine Letters of Credit, and (B) if
          the Hazeltine Transaction is consummated as a
          sale of assets, a written agreement,
          satisfactory in form to such Issuing Bank,
          signed by the purchaser of such assets, to
          the effect that such purchaser assumes all
          liability of the Borrower in respect of fees
          payable in respect of such Hazeltine Letters
          of Credit and obligations to reimburse Letter
          of Credit Disbursements thereunder.  If each
          such Issuing Bank receives the letters of
          credit and written agreement (if any) set
          forth in (A) and (B) above on the Hazeltine
          Closing Date, the Borrower shall pay all fees
          in respect of the Hazeltine Letters of Credit
          accrued through and including the Hazeltine
          Closing Date.

               (vi)  On, or within one Business Day
          after, the Hazeltine Closing Date, the
          Borrower shall prepay Term Loans in the
          aggregate principal amount of $6,000,000, if
          such prepayment is made prior to June 30,
          1996, or $5,500,000, if such prepayment is
          made on or after June 30, 1996.  As soon as
          practicable after the Hazeltine Closing Date
          and with such advance notice as is required
          by the terms thereof, the Borrower shall
          fully prepay the PTI Note.

          SECTION 2.  Amendment of the Credit
Agreement.  The Credit Agreement is hereby amended as
follows:

          (a)  Section 1.01 of the Credit Agreement is
hereby amended as follows:

               (i)  The definition of Consolidated
          Adjusted Net Income is hereby amended by
          inserting an ending parenthesis after the
          word nature at the end of such definition.

               (ii)  The definition of Letter of Credit
          Exposure is hereby amended by inserting at
          the end of the first sentence thereof:  , but
          the Letter of Credit Exposure shall not
          include any drawn or undrawn amounts under
          the Hazeltine Letters of Credit if and when
          the Hazeltine Letters of Credit cease to
          constitute Letters of Credit as provided in
          Section 2.14(n).

               (iii)  The definition of Specified
          Subsidiaries is hereby amended by inserting
          at the end of such definition the following
          proviso:  ;provided that Hazeltine shall
          cease to be a Specified Subsidiary upon
          consummation of the Hazeltine Transaction.

               (iv)  The following definitions are
          hereby added to Section 1.01 in their
          appropriate alphabetical order:

          Hazeltine Closing Date means the date of
consummation of the Hazeltine Transaction.

          Hazeltine Letters of Credit means Letters of
Credit that will remain outstanding after consummation
of the Hazeltine Transaction and that are issued to
support an obligation of Hazeltine or for the account
of Hazeltine.

          Hazeltine Transaction means the sale of all
the outstanding capital stock or all or substantially
all the assets of Hazeltine (and, in the case of an
asset sale, the liquidation of Hazeltine) in accordance
with the terms and conditions of Section 1 of the
Amendment, Waiver and Consent dated as of June 6, 1996,
relating to this Agreement.

          Restricted Payment Amount means an amount
equal to the net cash proceeds of the Hazeltine
Transaction received by the Borrower less the sum of
the amounts applied to prepay Term Loans and the PTI
Note in connection with the Hazeltine Transaction as
required by the terms and conditions of Section 1 of
the Amendment, Waiver and Consent dated as of June 6,
1996, relating to this Agreement; provided that the
Restricted Payment Amount shall not exceed $50,000,000.

          (b)  The first sentence of Section 2.08(a) of
the Credit Agreement is hereby amended by inserting at
the end thereof the following proviso:  ;provided that
if the Hazeltine Transaction is consummated, the
$500,000 amount referred to above shall be reduced to
$325,000 for payments due thereafter.

          (c)  Section 2.14 of the Credit Agreement is
hereby amended by inserting at the end thereof the
following additional paragraph:

               (n)  If the Hazeltine Transaction is
          consummated in accordance with Section 1 of
          the Amendment, Waiver and Consent dated as of
          June 6, 1996, relating to this Agreement and
          if each Issuing Bank that shall have issued
          any of the Hazeltine Letters of Credit shall
          have received the letters of credit and
          written agreement (if any) referred to in
          Section 1(b)(v) thereto, then on and as of
          the Hazeltine Closing Date (i) the Hazeltine
          Letters of Credit shall cease to constitute
          Letters of Credit hereunder, (ii) the
          Borrower, ESCO and the Subsidiaries shall be
          released from their obligations and
          liabilities in respect of the Hazeltine
          Letters of Credit and (iii) the Banks shall
          be released from their participations in the
          Hazeltine Letters of Credit; provided that
          (i) the Borrower shall indemnify the Issuing
          Banks in respect of the Hazeltine Letters of
          Credit for any failure by Hazeltine (or the
          purchaser of its assets) to pay fees in
          respect of the Hazeltine Letters of Credit
          after the Hazeltine Closing Date, and
          (ii) unless the Hazeltine Transaction is
          consummated as a sale by Hazeltine of its
          assets, Hazeltine shall not be released from
          its obligations and liabilities in respect of
          the Hazeltine Letters of Credit and shall
          remain liable on and after the Hazeltine
          Closing Date for the reimbursement of
          drawings under the Hazeltine Letters of
          Credit and for the payment of fees in respect
          thereof to the respective Issuing Banks, all
          on the terms specified in this Agreement
          applicable to Letters of Credit,
          notwithstanding any contrary provision herein
          or in any other Loan Document.

          (d)  Section 5.12 of the Credit Agreement is
hereby amended as follows:

          (i)  Clause (ii)(b) of Section 5.12 is hereby
     deleted and replaced with the following:  (b) the
     aggregate, cumulative dividends paid pursuant to
     this clause (ii) does not exceed during any fiscal
     year 25% of Consolidated Net Income for the next
     preceding fiscal year of ESCO plus, if the
     Hazeltine Transaction is consummated, additional
     dividends not to exceed, on a cumulative basis
     commencing with the Hazeltine Closing Date, the
     Restricted Payment Amount less any amounts paid
     for stock repurchases based on the Restricted
     Payment Amount pursuant to clause (iii) below;

          (ii)  Clause (iii)(b) of Section 5.12 is
     hereby deleted and replaced with the following: 
     (b) aggregate Restricted Payments pursuant to this
     clause (iii) shall not exceed $5,000,000 during
     the 12-month period ending on the date of such
     purchase and shall not exceed $10,000,000 on a
     cumulative basis commencing with September 30,
     1995, plus, if the Hazeltine Transaction is
     consummated, additional stock repurchases not to
     exceed, on a cumulative basis commencing with the
     Hazeltine Closing Date, the Restricted Payment
     Amount less any amounts paid as cash dividends
     based on the Restricted Payment Amount pursuant to
     clause (ii) above;

          (e)  Section 5.13(a) of the Credit Agreement
is hereby amended by inserting at the end of the first
parenthetical clause appearing in clause (iii) of such
Section, immediately before the close of such
parenthetical clause, the following:  ;provided that,
if the Hazeltine Transaction is consummated, then on
and after the Hazeltine Closing Date the foregoing
provisions of this parenthetical clause shall cease to
apply and, in lieu thereof, such cash consideration
shall not exceed, in any fiscal year, the excess of
$10,000,000 over the aggregate cumulative amount of
Investments made in such fiscal year in reliance upon
clause (g) of Section 5.16.

          (f)  Section 5.16 of the Credit Agreement is
hereby amended as follows:

               (i)  Section 5.16(c) thereof is hereby
          deleted in its entirety.

               (ii)  Section 5.16(g)(iii) is hereby
          amended by inserting at the end of Section
          5.16(g)(iii) the following: ;provided that,
          if the Hazeltine Transaction is consummated,
          then on and after the Hazeltine Closing Date
          the foregoing provisions of this Section
          5.16(g)(iii) shall cease to apply and, in
          lieu thereof, the aggregate cumulative amount
          of all Investments made immediately after any
          such Investment is made or acquired, in any
          fiscal year made in reliance upon this
          clause (g), shall not exceed the excess of
          $10,000,000 over the aggregate cumulative
          amount of consideration paid in such fiscal
          year in respect of acquisitions made in
          reliance upon clause (iii) of Section
          5.13(a).

          (g)  Section 5.22 of the Credit Agreement is
hereby amended by inserting at the end thereof the
phrase minus (iv) if the Hazeltine Transaction is
consummated, the aggregate amount that Consolidated
Adjusted Tangible Net Worth is reduced as a result of
repurchases of ESCO capital stock or the payment of any
cash dividends to the holders of ESCO capital stock
pursuant to clause (ii) or (iii) of Section 5.12, but
only to the extent made in reliance upon the Restricted
Payment Amount.

          SECTION 3.  Representations and Warranties. 
Each of ESCO and the Borrower hereby represents and
warrants to each Bank, on and as of the date hereof,
that:

          (a)  This Amendment has been duly authorized,
executed and delivered by each of ESCO and the
Borrower, and each of this Amendment and the Credit
Agreement as amended by this Amendment constitutes a
legal, valid and binding obligation of each of ESCO and
the Borrower, enforceable in accordance with its terms.

          (b)  The representations and warranties of
each of ESCO and Borrower contained in the Credit
Agreement and in each other Loan Document are true and
correct in all respects with the same effect as if made
on and as of the date hereof, except to the extent that
such representations and warranties expressly relate to
an earlier date.

          (c)  Before and after giving effect to this
Amendment, no Default has occurred and is continuing.

          SECTION 4.  Effectiveness.  This Amendment
shall become effective upon receipt by the Agent of
counterparts hereof signed by each of ESCO, the
Borrower, the Required Banks and each Issuing Bank.

          SECTION 5.  Miscellaneous.  (a)  This
Amendment constitutes the entire agreement and
understanding of the parties with respect to the
subject matter hereof and supersedes any and all prior
agreements and understandings, oral or written,
relating to the subject matter hereof.

          (b)  Section headings used herein are for
convenience of reference only and are not to affect the
construction of, or to be taken into consideration in
interpreting, this Amendment.

          (c)  This Amendment shall be construed in
accordance with and governed by the law of the State of
New York.

          (d)  Each reference to a party hereto shall
be deemed to include its successors and assigns, all of
whom shall be bound by this Amendment and to whose
benefit the provisions of this Amendment shall inure.

          (e)  This Amendment may be executed in any
number of counterparts, each of which shall be an
original but all of which, when taken together, shall
constitute but one instrument.

          (f)  Except as specifically amended or
modified hereby, the Credit Agreement shall continue in
full force and effect in accordance with the provisions
thereof.

          IN WITNESS WHEREOF, the parties hereto have
caused this Amendment to be duly executed by their
respective authorized officers as of the date first
above written.


ESCO ELECTRONICS CORPORATION 

  by
     /s/ Donald H. Nonnenkamp
     Name:  Donald H. Nonnenkamp
     Title: Vice President &     
            Treasurer

DEFENSE HOLDING CORP.

  by

    /s/ P.M. Ford             
    Name:  P.M. Ford
    Title: Sr. Vice President &  
           CFO


MORGAN GUARANTY TRUST COMPANY OF
NEW YORK, as Agent

  by
     /s/ Kevin J. O'Brien     
     Name:  Kevin J. O'Brien
     Title: Vice President


MORGAN GUARANTY TRUST COMPANY
OF NEW YORK

  by
     /s/ Kevin J. O'Brien     
     Name:  Kevin J. O'Brien
     Title: Vice President


THE BOATMAN'S NATIONAL BANK
OF ST. LOUIS

  by
     /s/ Debra G. Jansma        
     Name:  Debra G. Jansma
     Title: Vice President


THE BANK OF NEW YORK

  by
     /s/ John C. Lambert        
     Name:  John C. Lambert
     Title: Vice President


THE BANK OF NOVA SCOTIA

  by
     ___________________________
     Name:
     Title:


THE SUMITOMO BANK, LIMITED

  by
     /s/ Teresa A. Lekich       
     Name:  Teresa A. Lekich
     Title: Vice President


FIRST UNION NATIONAL BANK OF
NORTH CAROLINA

  by
     /s/ Mark M. Harden         
     Name:  Mark M. Harden
     Title: Vice President


SANWA BUSINESS CREDIT
CORPORATION

  by
     /s/ Lawrence J. Placek     
     Name:  Lawence J. Placek
     Title: Vice President