SEC Filing - ESCO Technologies Inc.

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SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

----------------------------------

FORM 10-K

/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended September 30, 1996

/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period -------------- 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 (I.R.S. EMPLOYER
OF INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)

8888 Ladue Road, Ste. 200
St. Louis, Missouri 63124-2090
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)

REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE:

(314) 213-7200

SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:

Name of Each
Exchange on
Title of Each Class Which Registered
------------------- ----------------

Common Stock Trust Receipts New York Stock
Exchange, Inc.

Common Stock, par value $0.01 per New York Stock
share Exchange, Inc.

Preferred Stock Purchase Rights New York Stock
Exchange, Inc.

(Cover page 1 of 2 pages)

2
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:

None

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
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 l0-K or any
amendment to this Form l0-K. [X]

Aggregate market value of the Common Stock Trust Receipts held by
non-affiliates of the registrant as of close of business on December 11,
1996: $111,750,522.

[FN]
For purpose of this calculation only, without determining whether the
following are affiliates of the registrant, the registrant has assumed that
(i) its directors and executive officers are affiliates, and (ii) no party
who has filed a Schedule 13D or 13G is an affiliate.

Number of Common Stock Trust Receipts outstanding at December 11, 1996:
11,799,171 Receipts.

DOCUMENTS INCORPORATED BY REFERENCE:

1. Portions of the registrant's Annual Report to Stockholders for fiscal
year ended September 30, 1996 (the "1996 Annual Report") (Parts I and II).

2. Portions of the registrant's Proxy Statement dated December 6, 1996
(Part III).

(Cover page 2 of 2 pages)

ESCO ELECTRONICS CORPORATION
INDEX TO ANNUAL REPORT ON FORM 10-K

Item Description Page
- ---- ----------- ----

Part I

1. Business 1

The Company 1
Products 1
Marketing and Sales 4
Government Defense Contracts 4
Intellectual Property 6
Backlog 6
Purchased Components and Raw Materials 6
Competition 6
Research and Development 7
Environmental Matters 7
Employees 8
Financing 8
History of the Business 8

2. Properties 9

3. Legal Proceedings 11

4. Submission of Matters to a Vote of Security Holders 11

Executive Officers of the Registrant 11

Part II

5. Market for the Registrant's Common Equity and Related
Stockholder Matters 12

6. Selected Financial Data 12

7. Management's Discussion and Analysis of Financial Condition and
Results of Operations 12

8. Financial Statements and Supplementary Data 12

9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure 12

Item Description Page
- ---- ----------- ----

Part III

10. Directors and Executive Officers of the Registrant 13

11. Executive Compensation 13

12. Security Ownership of Certain Beneficial Owners and Management 13

13. Certain Relationships and Related Transactions 13

Part IV

14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K 13

SIGNATURES 18

INDEX TO EXHIBITS 19

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PART I

ITEM 1. BUSINESS
- ----------------

THE COMPANY

ESCO Electronics Corporation ("ESCO") is a holding company for seven
operating subsidiaries consisting of: Systems & Electronics Inc. ("SEI"),
Rantec Microwave & Electronics, Inc. ("Rantec"), PTI Technologies Inc.
("PTI"), Vacco Industries ("Vacco"), Distribution Control Systems, Inc.
("DCSI"), EMC Test Systems, L.P. ("ETS") and PTI Technologies Limited ("PTI
Limited"). These operating subsidiaries are wholly-owned subsidiaries of
Defense Holding Corp. ("DHC"), a wholly-owned subsidiary of ESCO. ESCO and
its direct and indirect wholly-owned subsidiaries are hereinafter referred
to collectively as the "Company".

These operating subsidiaries are engaged in the research, development,
manufacture, sale and support of a wide variety of defense and commercial
systems and products. Defense items principally are supplied to the United
States Government under prime contracts with the Army, Navy and Air Force and
under subcontracts with their prime contractors, and are also sold to foreign
customers. Commercial items are supplied to a variety of customers worldwide.
The Company's businesses are subject to a number of risks and uncertainties,
including without limitation those discussed below. See also Item 3. "Legal
Proceedings" and "Management's Discussion and Analysis" appearing in the 1996
Annual Report.

On July 22, 1996, ESCO sold its Hazeltine Corporation ("Hazeltine")
subsidiary to GEC-Marconi Electronic Systems Corporation ("GEC-Marconi").

PRODUCTS

The Company operates in two principal industry segments: defense and
commercial. Prior to its divestiture, Hazeltine primarily operated within
the defense segment. See Note 11 of the Notes to Consolidated Financial
Statements in the 1996 Annual Report, which Note is herein incorporated by
reference.

DEFENSE PRODUCTS

The Company's defense products are described below. Current activity
includes the development of new products as well as production and support,
in the form of spare parts and service, of existing products.

DEFENSE ELECTRONICS
-------------------

Defense electronics equipment is designed and manufactured by SEI and
Rantec. These subsidiaries primarily produce a diverse mix of military
equipment which includes, but is not limited to, the following product
lines:

* SEI produces airborne radar systems for ground mapping,
weather imaging, terrain following and fire control applications.
All of these products have completed the production phase and are
currently in the spares support phase.

* SEI also supplies electronic systems for the detection and
identification of threat radar and a lightweight man-portable
surveillance radar that detects and classifies moving personnel,
vehicles, low flying aircraft and artillery round impact.

* Automatic test equipment (ATE) for ground support of radar
and other avionics equipment is also

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produced by SEI. Current activity in this area is concentrated on
development and production of mobile electronic test sets. These
portable test sets are utilized for testing equipment on high
performance fighter aircraft as well as a specialized military
transport aircraft. In addition, SEI is currently developing a high
power device test system which will be a part of the U.S. Navy's
family of avionics test equipment. SEI also provides interface
adapters and test program software to meet the needs of each
particular unit under test.

* Rantec produces microwave antennas and antenna mounting and
positioning systems for airborne radar, missile guidance,
electronic warfare, military air traffic control and communications.
Rantec also produces power systems for use in electronic warfare and
cockpit display systems.

Prior to its divestiture, Hazeltine's primary product lines in the
defense electronics category were:

* Electronic identification and support equipment for use on tactical
aircraft, ships and ground-based radar sites, both mobile and fixed,
including airborne Identification Friend or Foe (IFF) equipment and
a combined interrogator transponder (CIT) that has been integrated
into several types of fighter aircraft.

* Jam-resistant, tactical communications equipment, which feature
technologies such as advanced waveforms and antennas, adaptive
processing, and advanced networks and architectures. Examples
include secure packet-switched networks, data links and a highly
flexible, tri-service, multi-band, multi-mode, multi-waveform
tactical radio.

* High-resolution displays used on early-warning aircraft.

* Anti-submarine warfare equipment including UHF satellite
communications buoys for submarines and other underwater vehicles;
communications receivers for anti-submarine aircraft; advanced
acoustic countermeasure systems providing enhancement of submarine
self defense; high frequency sonar arrays for submarines to provide
mine avoidance and improved under-ice navigation; and acoustic
transducers for surface ships and submarines.

DEFENSE SYSTEMS
---------------

SEI supplies light, medium and heavy transportation systems and weapon
subsystems to the armed forces. Currently in production is a multiple-wheeled
trailer with individually steerable axles for transporting large battle tanks.
In fiscal year 1996, this product (the M1000 trailer) contributed $34.0 million
in sales revenue; in fiscal year 1995, $64.5 million; and in fiscal year 1994,
$41.7 million. SEI also supplies high-capacity aircraft cargo loaders which aid
in rapid tactical deployment, and is currently developing a 60,000 pound
capacity cargo loader for the U.S. Air Force. Further, SEI produces tactical
bridging systems and missile canisters for an air defense missile launching
system.

SEI also designs and manufactures launching and guidance systems
utilizing electro-optic technology for anti-armor missiles. These systems
are manufactured in differing configurations for installation on a variety
of helicopters as well as armored vehicles. SEI is currently developing
the mission equipment package for the Bradley Fire Support Team Vehicle,
which is used to direct artillery fire or locate and designate enemy
targets for laser guided weapons.

COMMERCIAL PRODUCTS

The Company's commercial products are described below.

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FILTRATION/FLUID FLOW
---------------------

PTI and PTI Limited develop and manufacture a wide range of filtration
products. PTI is a leading supplier of filters to the commercial aerospace
market. PTI's industrial business includes the supply of filtration
solutions to the industrial and mobile fluid power markets and
petrochemical processing industry. PTI also manufactures microfiltration
and ultrafine filtration products used in a variety of commercial markets
and applications. PTI Limited is a manufacturer and distributor of filter
products, primarily in the European industrial marketplace. Vacco and PTI
jointly develop and manufacture industrial filtration elements and systems
primarily used within the petrochemical and nuclear industries, where a
premium is placed on superior performance in a harsh environment. Vacco
also supplies latch valves, check valves and filters to the aerospace
industry, primarily for use on satellites. Vacco uses its etched disk
technology to specialize in quiet valves and manifolds for U.S. Navy
applications.

COMMUNICATIONS/TEST
-------------------

ETS designs and manufactures electromagnetic compatibility (EMC) test
equipment. It also supplies controlled radio frequency testing
environments (anechoic chambers), shielded structures for high security
data processing, and electromagnetic absorption materials. ETS's products
include antennas, towers and turntables, field probes, calibration
equipment and other accessories required for performing EMC testing. ETS
also supplies TEM (transverse electromagnetic mode) and GTEM! (gigahertz -
transverse electromagnetic mode) test cells and associated test software.
These cells and, in particular, the GTEM! provide a controlled environment
for quickly performing both emission and immunity testing with minimal test
setup changes.

DCSI is a leading manufacturer of two-way power line communication
systems for the utility industry. These systems, based on patented
communications technology, provide the electric utilities with
demand-side management, distribution automation, and automatic meter
reading capabilities, thus improving the efficiency of power delivery to
the consumer of electric energy.

Rantec designs and manufactures antennas and feeds for commercial uses,
including an electronically scanned antenna used for control and navigation
of air traffic. Rantec has also developed and will produce a commercial
satellite cross-link antenna for use on the IRIDIUM(R) system, a
forthcoming communications satellite system. Rantec also produces
satellite antenna systems for use on commercial aircraft for in-flight
entertainment.

SEI has extensive experience in the design and manufacture of location
systems for military applications. SEI used this technological expertise
to develop a vehicle location, tracking and communications system which
will have applications in theft deterrence, fleet management and messaging
communications.

Prior to its divestiture, Hazeltine's primary product in the
communications category was a line of intelligent antenna systems for the
commercial wireless communications marketplace including planar,
multi-beam and adaptive array-based products.

OTHER INDUSTRIAL PRODUCTS
-------------------------

SEI supplies electronic sorting and material handling equipment to the
United States Postal Service and other customers.

Rantec designs and manufactures various power supplies, principally for
high resolution computer and avionics displays and other industrial equipment.

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MARKETING AND SALES

The Company's defense products predominantly are sold directly or
indirectly to the U.S. Government under contracts with the Army, Navy and
Air Force and subcontracts with prime contractors of such entities. Direct
and indirect sales to the U.S. Government accounted for approximately 53%,
70% and 74% of the Company's total sales in the fiscal years ended September 30,
1996, 1995 and 1994, respectively. Hazeltine's U.S. Government sales in those
years represented 16%, 21% and 21%, respectively, of the Company's total sales.
See Notes 2 and 11 of the Notes to Consolidated Financial Statements in the 1996
Annual Report, which Notes are herein incorporated by reference.

The Company's commercial products generally are distributed to original
equipment manufacturers and aftermarket users through a domestic and
foreign network of distributors and sales representatives. Utility
communication systems are sold directly to the electric utilities.

International sales accounted for approximately 33%, 29% and 24% of the
Company's total sales in the fiscal years ended September 30, 1996, 1995
and 1994, respectively. The increase in fiscal year 1996 was primarily due
to additional sales of the CIT at Hazeltine prior to its divestiture,
volume increases at PTI Limited and additional weapons systems sales at SEI.
Hazeltine's international sales in the fiscal years ended September 30,
1996, 1995 and 1994 amounted to 13%, 13% and 9%, respectively, of the
Company's total sales. See Notes 2 and 11 of the Notes to Consolidated
Financial Statements in the 1996 Annual Report. Predominantly, these
international sales involve defense products. Since most of the Company's
foreign export sales involve technologically advanced products, services
and expertise, U.S. export control regulations limit the types of products
and services that may be offered and the countries and governments to which
sales may be made. The Department of State issues and maintains the
International Traffic in Arms Regulations pursuant to the Arms Export
Control Act. Pursuant to these regulations, certain products and services
cannot be exported without obtaining a license from the Department of
State. Most of the defense products that the Company sells abroad cannot
be sold without such a license. Consequently, the Company's international
sales may be adversely affected by changes in the U.S. Government's export
policy or by any suspension or revocation of the Company's foreign export
control licenses.

In addition, the Company's international sales are subject to risks
inherent in foreign commerce, including currency fluctuations and
devaluations, the risk of war, changes in foreign governments and their
policies, differences in foreign laws, uncertainties as to enforcement of
contract rights, and difficulties in negotiating and litigating with
foreign sovereigns.

For its defense products, the Company maintains a domestic field
marketing/sales network with offices located in the Washington, D.C. area
and at several major U.S. Government defense procurement centers. The
Washington, D.C. office carries out legislative and customer liaison
activities with all branches of the U.S. armed services and liaison
activities with foreign government offices in the Washington, D.C. area.
The primary responsibility for individual products or programs is handled
within the product line organizations, with the field organization
providing closely coordinated assistance.

GOVERNMENT DEFENSE CONTRACTS

A portion of the Company's defense contracts with the U.S. Government
and subcontracts with prime contractors of the U.S. Government are firm
fixed-price contracts. Under firm fixed-price contracts, work is performed
and paid for at a fixed amount without adjustment for the actual costs
experienced in connection with the contracts. Therefore, unless the
customer actually or constructively alters or impedes the work performed,
all risk of loss due to cost overruns is borne by the contractor. All
Government prime contracts and virtually all of the Company's subcontracts
provide that they may be terminated at the convenience of the Government.
Upon such termination, the contractor is normally entitled to receive the
purchase price for delivered items, reimbursement for allowable costs
incurred and allocable to the contract (which do not include many ordinary
costs of doing business in a commercial context) and an allowance for
profit on the allowable costs incurred

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or adjustment for loss if completion of performance would have resulted
in a loss. The contractor is also normally entitled to reimbursement of
the cost it incurs to prepare and to negotiate a settlement of the
termination for convenience.

In addition, the Company's prime and subcontracts provide for
termination for default if the Company fails to perform or breaches a
material obligation. In the event of a termination for default, the
customer may have the unilateral right at any time to require the Company
to return unliquidated progress payments pending final resolution of the
propriety of the termination for default. If the customer purchases the
same or similar products from a third party, the Company may also have to
pay the excess, if any, of the cost of purchasing the substitute items over
the contract price in the terminated contract. A customer, if it has
suffered other ascertainable damages as a result of a sustained default,
could demand payment of such damages by the Company.

The Company incurs significant work-in-progress costs in the
performance of U.S. Government contracts. However, the Company is usually
entitled to invoice the Government for monthly progress payments. The
current progress payment rate is 75%; however, there is no assurance that
this rate will not change in the future. Any reduction in the rate would
increase the amount of working capital required for these contracts. The
Government does not recognize interest as an allowable contract
expenditure; therefore, a progress payment rate decrease may have an
adverse effect on the Company's cash flow and profitability.

The Company's backlog includes firm fixed-price U.S. Government
contracts, development programs and production programs in their early
phases. These programs have inherently high risks associated with design,
first article testing and customer acceptance. The profitability of such
programs cannot be assured, and they could represent exposure to the
Company. In the event of development or production problems that are not
actually or constructively caused by the customer, the Company would have
the responsibility for proposing and providing curative action with no
additional compensation. In the event the customer does not accept the
curative action or the curative action does not succeed, the contract could
be terminated for default.

In connection with the Company's U.S. Government business, the Company
is also subject to Government investigations of its policies, procedures
and internal controls for compliance with procurement regulations and
applicable laws. The Company may be subject to downward contract price
adjustments, refund obligations or civil and criminal penalties, and
suspension or debarment from Government contracting. It is the Company's
policy to cooperate with the Government in any investigations of which it
has knowledge, but the outcome of any such Government investigations
cannot be predicted with certainty.

As a U.S. Government contractor, the Company faces additional risks,
including dependence on Congressional appropriations and administrative
allotment of funds, changes in Governmental policies which may reflect
military and political developments, substantial time and effort required
for design and development, significant changes in contract scheduling,
complexity of designs and the rapidity with which products become obsolete
due to technological advances, constant necessity for design improvements,
intense competition for available Government business, and difficulty of
forecasting costs and schedules when bidding on developmental and highly
sophisticated technical work (possibly resulting in unforeseen
technological difficulties and/or cost overruns). Foreign sales involve
additional risks due to possible changes in economic and political
conditions. See "Marketing and Sales" above.

As a U.S. Government contractor, recognition of revenue is based upon
certain accounting policies described in Note 1(f) of the Notes to
Consolidated Financial Statements in the 1996 Annual Report, which Note is
herein incorporated by reference. The Company periodically reviews
contracts in the ordinary course to ascertain if customer actions or
inactions have caused or will cause increased costs. The Company has
submitted requests for equitable adjustments ("REAs") and claims seeking
additional compensation, which involve substantial amounts of money. To
the extent these REAs and claims are finally resolved for less than the
amounts anticipated, the Company's financial position and operating results
could be adversely affected.

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INTELLECTUAL PROPERTY

Although the Company owns or has other rights in various forms of
intellectual property (i.e., patents, trademarks, copyrights, mask works
and other items), it believes that currently its business is not materially
dependent on intellectual property rights. With respect to patents in
particular, most of the Company's U.S. Government contracts authorize it to
use U.S. patents owned by others if necessary in performing such contracts.
Corresponding provisions in Government contracts awarded to other companies
make it impossible for the Company to prevent others from using its patents
in most domestic defense work. However, as the Company expands its
presence in commercial markets, it is placing a greater emphasis on
developing intellectual property and protecting its rights therein.

BACKLOG

The backlog of firm orders was approximately $246.7 million at
September 30, 1996 and approximately $530.9 million at September 30, 1995.
However, firm order backlog at September 30, 1995 was $294.6 million as
adjusted to remove Hazeltine's backlog. As of September 30, 1996, it is
estimated that: (i) defense business accounted for approximately 65% of the
firm orders and commercial business accounted for approximately 35%, and
(ii) domestic customers accounted for approximately 79% of the firm orders
and foreign customers accounted for approximately 21%. Of the total
backlog of orders at September 30, 1996, approximately 88% (including all
commercial orders) is expected to be completed in the fiscal year ending
September 30, 1997.

PURCHASED COMPONENTS AND RAW MATERIALS

The Company's products require a wide variety of components and
materials. Although the Company has multiple sources of supply for most of
its material requirements, certain components are supplied by sole-source
vendors, and the Company's ability to perform certain contracts depends on
their performance. In the past, these required raw materials and various
purchased components generally have been available in sufficient
quantities.

COMPETITION

The Company faces intense competition from a large number of firms for
nearly all of its products. The principal competitive factors are price,
service, quality, technical expertise and the ability to design and
manufacture products to desired specifications.

The reduced military threat posed by the former Soviet Union and the
continued domestic pressure to balance the Federal budget have led to
reductions in U.S. defense spending for production equipment. These
reductions have resulted in recent consolidations within the defense
industry. In addition, the U.S. Government's increasing willingness to
purchase commercial products where feasible will introduce new competitors
in traditional defense markets. Further, the U.S. Government's adoption of
the Foreign Comparison Test program, wherein the Government evaluates
foreign products as a potential alternative to products developed by U.S.
suppliers, is also expected to increase competitive pressures in these
markets. These factors have all contributed to a highly competitive
marketplace for defense products. In the international defense markets,
the continuing decline in business in most areas in which the Company
participates together with the globalization of competition have resulted
in a highly competitive environment. The Company has formed alliances
with several foreign companies in order to strengthen its competitive position
in these markets. Political factors also enter into foreign sales, including a
foreign government's evaluation of the Company's willingness to subcontract work
content to companies located in the foreign country involved.

For most of its defense products and many of its commercial products,
the Company's competitors are larger and have greater financial resources
than the Company. As budgets decline, larger prime contractors

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may retain work which previously would have been subcontracted. Although
the Company is a leading supplier in several of the markets it serves,
the Company maintains a relatively small share of the business in many
of the markets in which it participates. Because of the diversity and
specialized nature of the Company's products, it is impossible to state
precisely its competitive position with respect to each of its products.
Substantial efforts are required in order to maintain existing business
levels.

The Company recognizes that domestic and international defense markets
may continue to decline, which would result in even stronger competitive
pressures. This trend could adversely affect the Company's future results
unless offset by greater foreign sales or new programs or products. The
Company's on-going commercial diversification program should allow the
Company to continue to reduce its overall dependence on its defense
business and may alleviate some of the downward pressure on sales from the
increased defense market competition.

RESEARCH AND DEVELOPMENT

Research and development and the Company's technological expertise are
important factors in the Company's business. Research and development
programs are designed to develop technology for new products or to extend
or upgrade the capability of existing products and to assess their
commercial potential.

In addition to its work under development contracts, the Company
performs research and development at its own expense. For the fiscal years
ended September 30, 1996, 1995 and 1994, total Company-sponsored research
and development expenses were approximately $11.9 million, $15.1 million
and $14.7 million, respectively, and Company-sponsored research and development
expenses attributable to Hazeltine were approximately $6.1 million, $9.3 million
and $8.8 million, respectively. Total customer-sponsored research and
development expenses were approximately $3.9 million, $10.1 million and $9.7
million for those years, respectively, and customer-sponsored such expenses
attributable to Hazeltine were approximately $3.9 million, $9.1 million and $8.3
million, respectively. The decrease in fiscal year 1996 research and
development expenses was due to lower spending at Hazeltine prior to its
divestiture.

ENVIRONMENTAL MATTERS

The Company is involved in various stages of investigation and cleanup
relating to environmental matters. These matters relate to Company
facilities located in Newbury Park, California and Riverhead, New York.
Textron, Inc. has indemnified the Company in respect of the cleanup
expenses at the Newbury Park facility. In connection with the sale of
Hazeltine, the Company retained ownership of the Riverhead facility (which
is currently vacant), and agreed to indemnify Hazeltine and GEC-Marconi
against certain environmental remediation expenses related to Hazeltine's
facilities at Greenlawn, New York and Quincy, Massachusetts. The Company
is also involved in the remediation of off-site waste disposal facilities
located in Winter Park, Florida and Jackson County, Arkansas, with regard
to both of which the Company is one of a number of potentially responsible
parties and thus bears a proportionate share of the total remediation
expenses. It is very difficult to estimate the potential costs of such
matters and the possible impact of these costs on the Company at this time
due in part to: the uncertainty regarding the extent of pollution; the
complexity of Government laws and regulations and their interpretations;
the varying costs and effectiveness of alternative cleanup technologies and
methods; the uncertain level of insurance or other types of cost recovery;
and in the case of off-site waste disposal facilities, the uncertain level
of the Company's relative involvement and the possibility of joint and
several liability with other contributors under applicable law. Based on
information currently available, the Company does not believe that the
aggregate costs involved in the resolution of these environmental matters
will have a material adverse effect on the Company's financial statements.
See Item 3. "Legal Proceedings".

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EMPLOYEES

As of November 30, l996, the Company employed approximately 2,400
persons. Approximately 300 of the Company's employees are covered by a
collective bargaining agreement, which expires in fiscal year 1997.

FINANCING

The Company has a credit agreement, which has been amended and restated
as of September 29, 1995, and further amended as of June 6, 1996 and as of
August 2, 1996, for a $13 million term loan, amortizing at $325,000 per
quarter, and an $80 million revolving credit facility (together the "Credit
Facilities") with a group of seven banks agented by Morgan Guaranty Trust
Company of New York. The Credit Facilities will mature and expire on
September 30, 1998, and contain customary events of default, including
change in control of the Company. In addition, under the Credit Facilities
an event of default would occur if, for any reason other than payment or
performance in accordance with the terms of one of the Company's contracts
guaranteed by Emerson as referenced in the following section, Emerson shall
cease to be liable under its guarantees with respect to any such contract.
See "History Of The Business" below, "Management's Discussion and Analysis--
Capital Resources and Liquidity" in the 1996 Annual Report, and Notes 7 and 12
of the Notes to Consolidated Financial Statements in the 1996 Annual Report,
which Notes are herein incorporated by reference.

HISTORY OF THE BUSINESS

ESCO was incorporated in Missouri in August 1990 as a wholly-owned
subsidiary of Emerson Electric Co. ("Emerson") to be the holding company
for Electronics & Space Corp. ("E&S"), Hazeltine, Southwest Mobile Systems
Corporation ("Southwest"), Rantec, Vacco and DCSI, which were then Emerson
subsidiaries. Ownership of ESCO and its subsidiaries was distributed on
October 19, 1990 (the "Distribution Date") by Emerson to its shareholders
through a special distribution (the "Distribution"). On September 30,
1992, ESCO acquired ownership of Textron Filtration Systems, Inc. from
Textron, Inc. and renamed the entity "PTI Technologies Inc." On March 12,
1993, ESCO acquired The Electro-Mechanics Company, a privately held
company, from its shareholders. On December 1, 1993, ESCO acquired all
outstanding stock of Schumacher Filters Limited (located in England) from
Kraftanlagen, AG of Germany, and renamed this entity "PTI Technologies
Limited". On December 29, 1994, ESCO acquired the assets of Ray Proof
North America, a division of Shielding Systems Corporation, a subsidiary of
Bairnco Corporation. See Note 2 of the Notes to Consolidated Financial
Statements in the 1996 Annual Report, which Note is herein incorporated by
reference.

Effective September 30, 1995, E&S was merged into Southwest.
Subsequently, the latter entity's name was changed to Systems & Electronics
Inc.

Effective October 19, 1995, the assets of EMCO, the assets acquired
from Ray Proof North America, and the assets comprising Rantec's California
and Oklahoma radio/frequency anechoics business were transferred to a
newly-formed Texas limited partnership, EMC Test Systems, L.P. ("ETS").
The sole general partner of ETS is Rantec Commercial, Inc., a wholly-owned
subsidiary of Rantec. The sole limited partner of ETS is Rantec Holdings,
Inc., a wholly-owned subsidiary of Defense Holding Corp.

On July 22, 1996, ESCO sold 100% of the capital stock of Hazeltine to
GEC-Marconi. See Note 2 of the Notes to Consolidated Financial Statements
in the 1996 Annual Report.

By means of the Distribution, Emerson distributed one share of ESCO's
common stock, par value $0.01 per share (the "Common Stock"), for every 20
shares of Emerson common stock owned on October 5, 1990. Pursuant to a Deposit
and Trust Agreement (the "Deposit and Trust Agreement") by and among Emerson,
ESCO and Boatmen's Trust Company, as voting trustee, in lieu of receiving a
share of Common Stock on the

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Distribution Date, each Emerson shareholder received a Common Stock
trust receipt (a "Receipt") representing the Common Stock and its
associated preferred stock purchase rights.

In connection with the Distribution, Emerson, ESCO and ESCO's
subsidiaries entered into various agreements which deal with, among other
things: (A) Emerson's guarantee of certain contracts of ESCO's
subsidiaries existing at September 30, 1990 pursuant to which ESCO paid
Emerson a guarantee fee of $7.4 million per year during the subsequent five
(5) year period, which ended September 30, 1995 (as of September 30, 1996,
the aggregate backlog of firm orders received by the Company was
approximately $246.7 million which included guaranteed contracts totaling
approximately $8.8 million, and there were open letters of credit with an
aggregate value of approximately $2.4 million related to foreign advance
payments in support of various contracts guaranteed by Emerson); (B) the
lease by E&S (which lease was guaranteed by ESCO) from Emerson of real
property in St. Louis County, Missouri which formerly comprised ESCO's
headquarters and E&S' primary manufacturing facility, and which terminated
on September 30, 1995; (C) the allocation between ESCO and Emerson of
certain rights and obligations relating to outstanding litigation,
pre-Distribution tax liabilities and certain other matters; and (D) the
provision of certain services by ESCO to Emerson and by Emerson to ESCO,
which terminated on September 30, 1995. See Note 12 of the Notes to
Consolidated Financial Statements in the 1996 Annual Report. Copies of
certain of these agreements, as well as the Deposit and Trust Agreement,
are incorporated by reference as exhibits to this Form 10-K.

Pursuant to the Deposit and Trust Agreement, if ESCO should fail in
certain circumstances to collateralize its obligation to indemnify Emerson
with respect to contracts that are directly or indirectly guaranteed by
Emerson, Emerson would have the right to direct the voting of the ESCO
Common Stock represented by the Receipts with respect to the election of
directors (including changing the size of the Board or removing directors
and filling any vacancies). Emerson has the right to require ESCO to
provide collateral upon: (A) the occurrence of certain events relating to
such guaranteed contracts, including defaults; (B) ESCO's failure to
provide certain information, notices or consultation to Emerson or to
maintain certain financial ratios and covenants; or (C) the acquisition of
beneficial ownership of 20% or more of the voting power of ESCO's
outstanding capital stock by any person or group. If Emerson requires such
collateral, it is unlikely that ESCO will be able to provide it in light
of, among other things, the amount of collateral which would be required to
secure its obligations under the guaranteed contracts, which obligations
may continue even after completion of the contract, and restrictions in its
financing arrangements unless a waiver is obtained from its lenders. See
"Financing" above and Note 8 of the Notes to Consolidated Financial
Statements in the 1996 Annual Report, which Note is herein incorporated by
reference.

Effective September 30, 1993, ESCO's Board of Directors authorized an
accounting readjustment of the Company's balance sheet in accordance with
the accounting provisions applicable to a "quasi-reorganization," an
elective accounting procedure intended to restate assets and liabilities to
fair values and to eliminate any accumulated deficit in retained earnings.
See Note 1(b) of the Notes to Consolidated Financial Statements in the 1996
Annual Report, which Note is herein incorporated by reference.

During fiscal year 1995, the Company changed its method of accounting
from amortizing the Emerson guarantee fee over the expected duration of the
guaranteed contracts (estimated benefit period of seven years) on a
straight-line basis to amortizing it based upon the related guaranteed
contract revenues generated to date and the expected future revenues. This
change in accounting principle, which is inseparable from a change in
accounting estimate, was retroactively implemented effective October 1,
1994. See Note 1(e) of the Notes to Consolidated Financial Statements in
the 1996 Annual Report, which Note is herein incorporated by reference.

ITEM 2. PROPERTIES
- ------------------

The Company's principal buildings contain approximately 1,482,000
square feet of floor space. Approximately 1,134,200 square feet are owned
by the Company and approximately 347,800 square feet are leased. Substantially
all of the Company's owned properties are encumbered in connection with the

9
14
Company's Credit Facilities. See Item 1. "Business--Financing" and Note 7 of
the Notes to Consolidated Financial Statements in the 1996 Annual Report. The
principal plants and offices are as follows:

SIZE SQ. FT. PRINCIPAL USE
LOCATION (SQ. FT.) OWNED/LEASED (INDUSTRY SEGMENT)
-------- --------- ------------ ------------------

West Plains, MO 417,000 355,000 Owned Manufacturing
62,000 Leased (Defense and Commercial)

St. Louis, MO 260,500 Owned Management and Engineering
(Defense and Commercial)

Sanford, FL 172,200 Owned Manufacturing (Defense and
Commercial)

Newbury Park, CA 144,600 Leased Management, Engineering and
Manufacturing (Defense and
Commercial)

South El Monte, CA 112,000 Owned Management, Engineering and
Manufacturing (Defense and
Commercial)

Durant, OK 102,300 Owned Manufacturing (Commercial)

Calabasas, CA 61,700 Owned Management, Engineering and
Manufacturing (Defense and
Commercial)

Austin, TX 50,000 Leased Management, Engineering and
Manufacturing (Commercial)

Los Osos, CA 40,000 Owned Engineering and Manufacturing
(Defense and Commercial)

St. Louis, MO 35,000 Leased Management, Engineering and
Manufacturing (Commercial)

Juarez, Mexico 34,400 Leased Manufacturing (Defense and
Commercial)

Sheffield, England 30,500 Owned Management, Manufacturing and
Distributor (Commercial)

St. Louis, MO 21,800 Leased ESCO Headquarters (Defense and
Commercial)

The Company believes its buildings, machinery and equipment have been
generally well maintained, are in good operating condition and are adequate
for the Company's current production requirements.

10
15

ITEM 3. LEGAL PROCEEDINGS
- -------------------------

On August 11, 1994, a class action lawsuit was filed by Ronald and
Angela Aprea and other persons against Hazeltine in the Supreme Court of
the State of New York, Suffolk County, alleging personal injury and
property damage caused by Hazeltine's purported releases of hazardous
materials at Hazeltine's facility at Greenlawn, New York. In connection
with the sale of Hazeltine, the Company indemnified Hazeltine and
GEC-Marconi against expenses and potential liability related to this
suit. The suit seeks compensatory and punitive damages, and an order
enjoining Hazeltine from discharging further hazardous materials and for
Hazeltine to remediate all damage to the property of the plaintiffs.
The Company believes that no one and no property has been injured by any
release of hazardous materials from Hazeltine's facility. In fiscal
year 1995, the Court dismissed two counts of the complaint as a result
of Hazeltine's motion to dismiss, and the plaintiffs filed an amended
complaint. In fiscal year 1996, the plaintiffs filed a motion to be
certified as a class. The Court recently denied this motion. Based upon
current facts, the Company is not able to estimate the probable outcome.
Therefore, no provision for this litigation has been made in the
consolidated financial statements in the 1996 Annual Report. Management
believes the Company will be successful in defending this action and
that the outcome will not have a material adverse effect on the
Company's financial statements. See Note 13 of the Notes to
Consolidated Financial Statements in the 1996 Annual Report, which Note
is herein incorporated by reference. See also Item 1. "Business--
Government Defense Contracts" and "Business--Environmental Matters".

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- ------------------------------------------------------------

None.

EXECUTIVE OFFICERS OF THE REGISTRANT.
- -------------------------------------

The following sets forth certain information as of December 13, 1996 with
respect to ESCO's executive officers. These officers have been elected to terms
which expire at the first meeting of the Board of Directors after the next
annual meeting of stockholders.

Name Age Position(s)
---- --- -----------

Dennis J. Moore 58 Chairman, President and Chief Executive
Officer

Philip M. Ford 56 Senior Vice President and Chief Financial
Officer

Walter Stark 53 Senior Vice President, Secretary and General
Counsel

Philip A. Hutchison 55 Senior Vice President, Human Resources and
Administration

- -------------
Also a director and Chairman of the Executive Committee of the Board of
Directors.

There are no family relationships among any of the executive officers
and directors.

Mr. Moore was President of Electronics & Space Corp. ("E&S"), a former
subsidiary of ESCO, from October 1987 to October l991. From October 1,
1990 to October 16, 1992, he was President and Chief

11
16
Operating Officer of ESCO. Since the latter date, he has been Chairman,
President and Chief Executive Officer of ESCO.

Mr. Ford has been Senior Vice President and Chief Financial Officer of
ESCO since October 1, l990.

Mr. Hutchison was Vice President-Human Resources and Administration of
E&S from October 1988 to October 1991. From October l990 to October
1992, he was Vice President, Human Resources and Administration of ESCO.
Since October 1992, he has been Senior Vice President, Human Resources
and Administration of ESCO.

Mr. Stark was Vice President, Secretary and General Counsel of ESCO
from October 1990 to October 1992. Since October 1992, he has been Senior
Vice President, Secretary and General Counsel of ESCO.

PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
- ------------------------------------------------------------------------------

The information required by this item is incorporated herein by reference
to Notes 7 and 8 of the Notes to Consolidated Financial Statements, "Common
Stock Market Prices" and "Shareholders' Summary--Capital Stock Information"
appearing in the 1996 Annual Report. A special cash distribution of $3.00 per
share was paid to Stockholders in September 1996. No other cash dividends have
been declared on the Common Stock underlying the Receipts, and ESCO does not
anticipate, currently or in the foreseeable future, paying cash dividends on the
Common Stock, although it reserves the right to do so to the extent permitted by
applicable law and agreements. ESCO's dividend policy will be reviewed by the
Board of Directors at such future time as may be appropriate in light of
relevant factors at that time, based on ESCO's earnings and financial position
and such other business considerations as the Board deems relevant at that time.

ITEM 6. SELECTED FINANCIAL DATA
- --------------------------------

The information required by this item, with respect to selected
financial data, is incorporated herein by reference to "Five-Year Financial
Summary" and Note 2 of the Notes to Consolidated Financial Statements
appearing in the 1996 Annual Report.

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
- --------------------------------------------------------------------------------
OF OPERATIONS
-------------

The information required by this item is incorporated herein by
reference to "Management's Discussion and Analysis" appearing in the 1996
Annual Report.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
- ----------------------------------------------------

The information required by this item is incorporated herein by
reference to the Consolidated Financial Statements of the Company on
pages 15 through 32 and the report thereon of KPMG Peat Marwick LLP,
independent certified public accountants, appearing on page 34 of the 1996
Annual Report.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
- ------------------------------------------------------------------------
FINANCIAL DISCLOSURE
--------------------

None.

12
17
PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
- ------------------------------------------------------------

Information regarding nominees and directors appearing under "Nominees
and Continuing Directors" in ESCO's Notice of the Annual Meeting of the
Stockholders and Proxy Statement dated December 6, 1996 (the "1997 Proxy
Statement") is hereby incorporated by reference. Information regarding
executive officers is set forth in Part I of this Form 10-K.

ITEM 11. EXECUTIVE COMPENSATION
- ---------------------------------

Information appearing under "Board of Directors and Committees" and
"Executive Compensation" (except for the "Report of the Human Resources And
Ethics Committee On Executive Compensation" and the "Performance Graph") in
the 1997 Proxy Statement is hereby incorporated by reference.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
- ------------------------------------------------------------------------

The information regarding beneficial ownership of Receipts representing
shares of Common Stock by nominees and directors, by executive officers, by
directors and executive officers as a group and by any five percent stockholders
appearing under "Security Ownership of Management" and "Security Ownership of
Certain Beneficial Owners" in the 1997 Proxy Statement is hereby incorporated by
reference.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
- --------------------------------------------------------

None.

PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
- --------------------------------------------------------------------------

(a) Documents filed as a part of this report:

1. The Consolidated Financial Statements of the Company on
pages 15 through 32 and the Independent Auditors' Report
thereon of KPMG Peat Marwick LLP appearing on page 34 of
the 1996 Annual Report.

2. Financial statement schedules have been omitted because
the subject matter is disclosed elsewhere in the financial
statements and notes thereto, not required or not applicable, or
the amounts are not sufficient to require submission.

3. Exhibits

Filed Herewith or Incorporated by
Exhibit Reference to Document Indicated By
Number Description Footnote
- ------- ----------- --------

2(a)(i) Stock Purchase Agreement dated as of May
23, 1996 between ESCO and GEC-Marconi Incorporated by Reference, Exhibit 2

13
18
2(a)(ii) First Amendment Agreement dated as of July
19, 1996 to Stock Purchase Agreement listed
as Exhibit 2(a)(i) above Incorporated by Reference, Exhibit 2

3(a) Restated Articles of Incorporation of ESCO Incorporated by Reference, Exhibit 3.1

3(b) Bylaws of ESCO, as amended Incorporated by Reference, Exhibit 3(b)
4(a) Specimen certificate for ESCO's Common
Stock Trust Receipts Incorporated by Reference, Exhibit 4(a)

4(b) Rights Agreement dated as of September 24,
1990 between ESCO and Boatmen's Trust
Company, as Rights Agent Incorporated by Reference, Exhibit 4.2

4(c)(i) Credit Agreement dated as of
September 23, 1990 (as amended and
restated as of December 30, 1992,
amended as of January 15, 1993, October 15,
1993 and November 29, 1993, amended and
restated as of May 27, 1994, amended as of
August 5, 1994, and amended and restated as
of September 29, 1995) among ESCO,
Defense Holding Corp., the Banks listed
therein and Morgan Guaranty Trust Company
of New York, as Agent Incorporated by Reference, Exhibit 4(c)

4(c)(ii) Amendment dated as of June 6, 1996 to
Credit Agreement listed as Exhibit 4(c)(i) above

4(c)(iii) Amendment dated as of August 2, 1996 to Credit
Agreement listed as Exhibit 4(c)(i) above

No other long-term debt instruments are filed
since the total amount of securities authorized
under any such instrument does not exceed ten
percent of the total assets of ESCO and its
subsidiaries on a consolidated basis. ESCO agrees
to furnish a copy of such instruments to the
Securities and Exchange Commission upon request.

4(d) Deposit and Trust Agreement dated as of
September 24, 1990 among ESCO, Emerson Electric Co.,
Boatmen's Trust Company, as Trustee, and the holders
of Receipts from time to time Incorporated by Reference, Exhibit 4.3

14
19
10(a) Distribution Agreement dated as of September 24, 1990
by and among ESCO, Emerson Electric Co., and ESCO's
direct and indirect subsidiaries Incorporated by Reference, Exhibit 2.1

10(b) Tax Agreement dated as of September 24, 1990 by and
among ESCO, Emerson Electric Co., and ESCO's direct
and indirect subsidiaries Incorporated by Reference, Exhibit 2.2

10(c)(i) 1990 Stock Option Plan Incorporated by Reference,Exhibit 10.3

10(c)(ii) Amendment to 1990 Stock Option Plan dated as of
September 4, 1996

10(d) Form of Incentive Stock Option Agreement Incorporated by Reference, Exhibit 10(g)

10(e) Form of Incentive Stock Option Agreement -
Alternative Incorporated by Reference, Exhibit 10(h)

10(f) Form of Non-Qualified Stock Option Agreement Incorporated by Refrence, Exhibit 10(i)

10(g) Form of Split Dollar Agreement Incorporated by Reference, Exhibit 10(j)

10(h) Form of Indemnification Agreement with each
of ESCO's directors. Incorporated by Reference, Exhibit 10(k)

10(i) Stock Purchase Agreement dated as of August 20,
1992 by and between Textron, Inc. and ESCO Incorporated by Reference, Exhibit 10(l)

10(j)(i) Performance Share Plan Incorporated by Reference

10(j)(ii) Amendment to Performance Share Plan dated as
of September 4,1996

10(k) Supplemental Executive Retirement Plan as amended
and restated as of August 2, 1993 Incorporated by Reference, Exhibit 10(n)

10(l)(i) Directors' Extended Compensation Plan Incorporated by Reference, Exhibit 10(o)

10(l)(ii) Compensatory Arrangement with former ESCO director

10(m)(i) 1994 Stock Option Plan Incorporated by Reference

10(m)(ii) Amendment to 1994 Stock Option Plan dated as of
September 4, 1996

10(n) Form of Incentive Stock Option Agreement Incorporated by Reference, Exhibit 10(n)

15
20
10(o) Form of Non-Qualified Stock Option Agreement Incorporated by Reference, Exhibit 10(o)

10(p) Severance Plan Incorporated by Reference, Exhibit 10(p)

10(q) Performance Compensation Plan dated as of August 2,
1993 (as amended and restated as of October 1,
1995)

13 The following-listed sections of the Annual Report
to Stockholders for the year ended September 30, 1996:
Five-Year Financial Summary (p. 2)
Management's Discussion and Analysis
(pgs. 10-14)
Consolidated Financial Statements (pgs.
15-32) and Independent Auditors' Report
(p. 34)
Shareholders' Summary--Capital Stock
Information (p. 35)
Common Stock Market Prices (p. 35)

21 Subsidiaries of ESCO

23 Independent Auditors' Consent

27 Financial Data Schedule

- ---------------

Incorporated by reference to Current Report on Form 8-K--date of
earliest event reported: July 22, 1996, at the Exhibit indicated

Incorporated by reference to Registration Statement on Form 10,
as amended on Form 8 filed September 27, l990, at the Exhibit indicated

Incorporated by reference to Form l0-K for the fiscal year ended
September 30, l991, at the Exhibit indicated

Incorporated by reference to Form 10-K for the fiscal year ended
September 30, 1990, at the Exhibit indicated

Incorporated by Reference to Form 10-K for the fiscal year ended
September 30, 1995, at the Exhibit indicated.

Incorporated by reference to Form 10-K for the fiscal year ended
September 30, 1992, at the Exhibit indicated

Incorporated by reference to Notice of the Annual Meeting of the
Stockholders and Proxy Statement dated December 9, 1992

Incorporated by reference to Form 10-K for the fiscal year ended
September 30, 1993, at the Exhibit indicated

16
21
Incorporated by reference to Notice of the Annual Meeting of the
Stockholders and Proxy Statement dated December 8, 1994

Represents a management contract or compensatory plan or
arrangement required to be filed as an exhibit to this Form 10-K pursuant to
Item 14(c) of this Part IV.

(b) The Company filed a Current Report on Form 8-K during the quarter
ended September 30, 1996, which reported "Item 2. Acquisition or
Disposition of Assets" and "Item 7. Financial Statements and Exhibits".
Financial statements filed with the Report were" "Unaudited Pro Forma
Consolidated Statement of Operations--Year Ended September 30, 1995";
"Unaudited Pro Forma Consolidated Statement Of Income--Six Months Ended
March 31, 1996;" and "Unaudited Pro Forma Consolidated Balance Sheet--
March 31, 1996". The date of the Report (date of earliest event
reported) was July 22, 1996.

17
22

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.

ESCO ELECTRONICS CORPORATION

By D. J. Moore
--------------------------
Chairman, President and
Chief Executive Officer

Dated: December 13, 1996

Pursuant to the requirements of the Securities Exchange Act of l934,
this report has been signed below effective December 13, 1996, by the
following persons on behalf of the registrant and in the capacities
indicated.

Signature Title
---------- -----

D. J. Moore Chairman, President, Chief Executive Officer and
Director

P.M. Ford Senior Vice President, Chief Financial Officer
(Principal Accounting Officer)

J.J. Adorjan Director

J.J. Carey Director

J.M. McConnell Director

D.C. Trauscht Director

INDEX TO EXHIBITS

Exhibits are listed by numbers corresponding to the Exhibit Table of Item 601
in Regulation S-K.

EXHIBIT NO. EXHIBIT
- ----------- -------

4(c)(ii) Amendment dated as of June 6, 1996 to Credit Agreement listed
as Exhibit 4(c)(i) in the list of exhibits in Item 14(a)(3)

4(c)(iii) Amendment dated as of August 2, 1996 to Credit Agreement
listed as Exhibit 4(c)(i) in the list of exhibits in
Item 14(a)(3)

10(c)(ii) Amendment to 1990 Stock Option Plan dated as of September 4,
1996

10(j)(ii) Amendment to Performance Share Plan dated as of September 4,
1996

10(l)(ii) Compensatory Arrangement with former ESCO director

10(m)(ii) Amendment to 1994 Stock Option Plan dated as of September 4,
1996

10(q) Performance Compensation Plan dated as of August 2, 1993 (as
amended and restated as of October 1, 1995)

13 The following-listed sections of the Annual Report to
Stockholders for the year ended September 30, 1996:

Five-year Financial Summary (p. 2)
Management's Discussion and Analysis (pgs. 10-14)
Consolidated Financial Statements (pgs. 15-32) and
Independent Auditors' Report (p. 34)
Shareholders' Summary--Capital Stock Information (p. 35)
Common Stock Market Prices (p. 35)

21 Subsidiaries of ESCO

23 Independent Auditors' Consent

27 Financial Data Schedule

See Item 14(a)3 for a list of exhibits incorporated by reference

 1

                    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



 2
                                                                     2

          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



 3
                                                                     3
          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
            --------



 4
                                                                     4

          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



 5
                                                                     5

          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:



 6
                                                                     6

     "(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)".



 7
                                                                     7

          (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.



 8
                                                                     8

          (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.



 9
                                                                     9

          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



 10
                                                                              10

                                       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



 11
                                                                              11

                                       SANWA BUSINESS CREDIT
                                       CORPORATION

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

 1


                    AMENDMENT dated as of August 2, 1996, to
               the Credit Agreement dated as of
               September 23, 1990 (as amended and restated
               as of September 29, 1995, and subsequently
               amended) (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
certain provisions of the Credit Agreement be amended as set
forth herein.  The Banks are willing to so amend the Credit
Agreement 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.  Amendments.  (a)  Section 1.01 of the
                      -----------
Credit Agreement is hereby amended to include the following
definition in its appropriate alphabetical order:

          "Excluded Items" means (i) an after-tax, non-
           --------------
recurring charge attributable to cost growth in System &
Electronics, Inc.'s 60K Loader contract, not to exceed
$18,800,000, (ii) an after-tax, non-recurring, non-cash
charge attributable to the write-off of certain of the
Borrower's and its Subsidiaries' inventory, not to exceed
$14,300,000, (iii) an after-tax, non-recurring charge
attributable to the reduction of the anticipated claim
receivable of System and Electronics, Inc. against the
United States government under the M1000 program, not to
exceed $8,500,000, and (iv) the after-tax, non-recurring
gain attributable to the Hazeltine Transaction; provided
                                                --------
that Excluded Items shall not include any charge taken after
September 30, 1996.


 2
                                                                     2
          (b)  Section 5.21 of the Credit Agreement is
hereby amended to add the following proviso at the end of
such Section:  "; provided that, for purposes of determining
                  --------
such ratio for any period that includes either or both of
the two fiscal quarters ended June 30 and September 30,
1996, Consolidated Adjusted EBIT shall be determined
excluding (to the extent otherwise included therein) the
Excluded Items".

          SECTION 2.  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)  After giving effect to this Amendment, no
Default has occurred and is continuing.

          SECTION 3.  Effectiveness.  This Amendment shall
                      -------------
become effective upon receipt by the Agent of counterparts
hereof signed by each of ESCO, the Borrower and the Required
Banks.

          SECTION 4.  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.


 3
                                                                     3
          (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 Pres. & Treas.


                                     DEFENSE HOLDING CORP.

                                      by

                                         /s/ Philip M. Ford
                                         ------------------------------
                                         Name:  Philip M. Ford
                                         Title: Sr. Vice Pres. & CFO


 4
                                                                     4
                                     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. Jasma
                                         ------------------------------
                                         Name:  Debra G. Jasma
                                         Title: Vice President


                                     THE BANK OF NEW YORK

                                      by
                                         /s/ R. Wes Towns
                                         ------------------------------
                                         Name:  R. Wes Towns
                                         Title: VP & Division Head


                                     THE BANK OF NOVA SCOTIA

                                      by
                                         /s/ F.C.H. Ashby
                                         ------------------------------
                                         Name:  F.C.H. Ashby
                                         Title: Senior Manager Loan
                                         Operations


 5
                                                                     5
                                     THE SUMITOMO BANK, LIMITED

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

                                         /s/ Jayleen R.P. Hague
                                         ------------------------------
                                         Name:  Jayleen R.P. Hague
                                         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:  Lawrence J. Placek
                                         Title: Vice President

 1

                       AMENDMENT TO THE ESCO ELECTRONICS
                      CORPORATION 1990 STOCK OPTION PLAN


            WHEREAS, ESCO Electronics Corporation ("Company") adopted the
ESCO Electronics 1990 Stock Option Plan for the benefit of eligible employees
("Plan"); and

            WHEREAS, the Company retained the right to amend the Plan
pursuant to Paragraph 16 thereof; and

            WHEREAS, the Company desires to amend the Plan effective as of
September 4, 1996:

            NOW, THEREFORE, effective as of September 4, 1996, the Plan is
amended as follows:

            1.  The following is added at the end of Paragraph 8:

            "Upon exercise of an option the Committee shall
            withhold a sufficient number of shares to satisfy the Company's
            withholding obligations for any taxes incurred as a result of
            such exercise; provided, that in lieu of all or part of such
            withholding, the optionee may pay an equivalent amount of cash
            to the Company."

            2.  The following is added at the end of Paragraph 15:

            "In the event of a special, non-recurring distribution with
            respect to the Company's Common Stock, the Committee may adjust
            the number of shares subject to each option and the option
            price per share in such manner as the Committee deems just and
            equitable to reflect such distribution, but in no event shall
            the total number of shares used under the Plan exceed the
            number authorized under Paragraph 2."

            IN WITNESS WHEREOF, the foregoing amendment was adopted this 4th
day of September, 1996.

 1

                 AMENDMENT TO THE ESCO ELECTRONICS CORPORATION
                            PERFORMANCE SHARE PLAN


            WHEREAS, ESCO Electronics Corporation ("Company") adopted the
ESCO Electronics Corporation Performance Share Plan for the benefit of
eligible employees ("Plan"); and

            WHEREAS, the Company retained the right to amend the Plan
pursuant to Section 11 thereof; and

            WHEREAS, the Company desires to amend the Plan effective as of
September 4, 1996:

            NOW, THEREFORE, effective as of September 4, 1996, the Plan is
amended as follows:

            1.    The first sentence of Section 7 is deleted and replaced
with the following:

            "Payment may be made in shares of the Company's Common Stock
            (which may include stock with certain restrictions attached),
            in cash, or any combination thereof as determined by the
            Committee; provided, however, that in no event shall the value
            of the total payments under the Plan exceed the value of the
            shares reserved under Section 3 of the Plan (or as said number
            may be adjusted as hereinabove provided, or as Section 13(c)
            may otherwise permit special action as a result of a special,
            non-recurring distribution with respect to Common Stock of the
            Company)."

            2.    The following is added at the end of Section 13(c):

            "In the event of a special, non-recurring distribution with
            respect to the Company's Common Stock, the Committee may pay
            such special bonus or take such other action with respect to
            Performance Shares awarded as it deems just and equitable to
            reflect such distribution."

            IN WITNESS WHEREOF, the foregoing amendment was adopted this 4th
day of September, 1996.

 1




                                               Exhibit 10(l)(ii)





     On November 14, 1996, the Human Resources and Ethics Committee of the
Board of Directors of the Company approved a cash payment of $34,724 to
Arthur F. Golden, a former director of the Company, in full settlement of
amounts payable to him under the Company's Directors' Extended Compensation
Plan for non-employee directors.  The amount of the payment was based upon
the present value of his benefit as determined by an independent actuarial
firm.

 1

                      AMENDMENT TO THE ESCO ELECTRONICS
                      CORPORATION 1994 STOCK OPTION PLAN


            WHEREAS, ESCO Electronics Corporation ("Company") adopted the
ESCO Electronics 1994 Stock Option Plan for the benefit of eligible employees
("Plan"); and

            WHEREAS, the Company retained the right to amend the Plan
pursuant to Paragraph 16 thereof; and

            WHEREAS, the Company desires to amend the Plan effective as of
September 4, 1996:

            NOW, THEREFORE, effective as of September 4, 1996, the Plan is
amended as follows:

            1.  The following is added at the end of Paragraph 8:

            "Upon exercise of an option the Committee shall withhold a
            sufficient number of shares to satisfy the Company's
            withholding obligations for any taxes incurred as a result of
            such exercise; provided, that in lieu of all or part of such
            withholding, the optionee may pay an equivalent amount of cash
            to the Company;"

            2.  The following is added at the end of Paragraph 15:

            "In the event of a special, non-recurring distribution with
            respect to the Company's Common Stock, the Committee may adjust
            the number of shares subject to each option and the option
            price per share in such manner as the Committee deems just and
            equitable to reflect such distribution, but in no event shall
            the total number of shares used under the Plan exceed the
            number authorized under Paragraph 2."

            IN WITNESS WHEREOF, the foregoing amendment was adopted this 4th
day of September, 1996.

 1
                         ESCO ELECTRONICS CORPORATION
                         PERFORMANCE COMPENSATION PLAN
                         FOR CORPORATE, SUBSIDIARY AND
                      DIVISION OFFICERS AND KEY MANAGERS
                      ----------------------------------

                     Adopted August 2, 1993
                     Amended and Restated Effective
                     As of October 1, 1995

I.  PURPOSE
    -------

             The purpose of this ESCO Electronics Corporation Performance
Compensation Plan for Corporate, Subsidiary and Division Officers and Key
Managers is to provide an annual incentive plan for selected corporate,
subsidiary and division officers and key managers which is based upon their
performance and the performance of the Company and its Subsidiaries and
Divisions during a Fiscal Year.  In particular, this plan is designed to (a)
pay such employees a portion of their total compensation on the basis of
their performance during a given Fiscal Year, (b) tie Subsidiary and Division
management into Corporate performance objectives for a given fiscal year, and
(c) stay competitive with general industry trends in executive compensation.

II.  DEFINITIONS
     -----------

             The following words shall have the following meanings unless the
context clearly requires otherwise:

             A.     "Board of Directors" means the Board of Directors of ESCO
                    Electronics Corporation.


 2
             B.     "Executive Compensation Executive" means the Executive
                    Compensation Executive of ESCO Electronics Corporation.

             C.     "Chief Executive Officer" means the Chief Executive
                    Officer of ESCO Electronics Corporation.

             D.     "Committee" means the Human Resources and Ethics
                    Committee of the Board of Directors of ESCO Electronics
                    Corporation which is comprised of members who are not
                    eligible to participate in the Plan.

             E.     "Company" means ESCO Electronics Corporation, a Missouri
                    Corporation.

             F.     "Division" means a division of the Company or of a
                    Subsidiary.

             G.     "Fiscal Year" means the fiscal year of the Company which
                    is currently the twelve-month period ending September 30.

             H.     "Participant" means an employee of the Company, a
                    Subsidiary or a Division eligible to receive a
                    Performance Compensation Award.

             I.     "Performance Compensation Award" means the amount payable
                    to a Participant under the Plan.

             J.     "Plan" means this ESCO Electronics Corporation
                    Performance Compensation Plan for Corporate, Subsidiary
                    and Division Officers and Key Managers.

                                    2
 3
             K.     "Subsidiary" means any corporation or partnership more
                    than 50% of which is owned directly or indirectly by the
                    Company.

III.  ELIGIBILITY
      -----------

             Participation in the Plan shall be limited to those employees of
the Company, Subsidiaries and Divisions as the Committee shall determine upon
recommendation by the Chief Executive Officer.  Additions or deletions to the
Plan during a Fiscal Year shall be made only in the event of an unusual
circumstance, such as a promotion or new hire.

IV.  DETERMINATION OF MINIMUM AMOUNT PAYABLE
     ---------------------------------------

             The Committee, after consultation with the Executive
Compensation Executive, shall make a recommendation to the Board of Directors
of the Company and to the Board of Directors of each Subsidiary of a minimum
aggregate payment under the Plan to be made by each such employer for each
Fiscal Year.  The final determination of the minimum aggregate payment under
the Plan for each Fiscal Year to be made by the Company and each Subsidiary
shall be made by its respective Board of Directors prior to the end of such
Fiscal Year.

                                    3
 4
V.  DETERMINATION OF PERFORMANCE COMPENSATION AWARDS
    ------------------------------------------------

             As soon as practicable after the end of each Fiscal Year,
Performance Compensation Awards for each Participant for such Fiscal Year
shall be determined.  The Chief Executive Officer shall submit proposed
Performance Compensation Awards for each Participant to the Committee based
upon that Participant's performance during the Fiscal Year; provided, that
the Committee may, following such submission, consider the further
recommendations of the Chief Executive Officer.  Final determination of the
amount of each Participant's Performance Compensation Award (if any) as well
as the total payment under the Plan for each Fiscal Year shall be the
responsibility of the Committee.  Recommended Performance Compensation Awards
to Participants may be denied, or adjusted upward or downward by the
Committee, as, in the Committee's sole judgment, is prudent based upon its
assessment of the Participant's performance and Corporate, Subsidiary or
Division performance during the Fiscal Year.  Performance Compensation Awards
for some Participants may be based upon predetermined Subsidiary, Division or
individual performance targets whereas Performance Compensation Awards for
other Participants may be totally discretionary as determined by the
Committee, except that Performance Compensation Awards for any executive
officer of the Company within the meaning of Rule 3b-7 promulgated under the
Securities Exchange Act of 1934, may only be discretionary.  However, total
Performance Compensation Awards under the Plan shall be no less than the

                                    4
 5
minimum determined by the Board of Directors of the Company and each
Subsidiary in accordance with Section IV.

             Upon approval by the Committee, the Executive Compensation
Executive shall make arrangements to ensure that each Participant is notified
of the amount of his or her Performance Compensation Award.

VI.  MANNER OF AND TIME FOR PAYMENTS
     -------------------------------

             Performance Compensation Awards will normally be paid in cash by
November 30th following the end of each Fiscal Year.  However, each
Participant shall have the right to elect to defer all or part of his or her
payment under the Award until the following January.  Such election must be
made no later than the December 31st of the Fiscal Year with respect to which
the Performance Compensation Award is granted by filing with the Executive
Compensation Executive an executed form supplied by the Company.  Except in
the case of hardship described below, such election may only be revoked prior
to the December 31st of the Fiscal Year with respect to which the Performance
Compensation Award is granted.  All elections (or revocations) hereunder must
be made by filing with the Executive Compensation Executive an executed form
supplied by the Company.

             An election to defer a Performance Compensation Award may impact
the calculation of a Participant's pension benefit because the calculation of
such benefit is based on the average

                                    5
 6
compensation received during the period used to calculate pension benefits
(e.g., highest five years of earnings).

             The Committee may direct, upon a showing of an emergency beyond
the Participant's control which results in severe financial hardship, that a
Participant who has elected to defer payment until the following January
receive so much of his or her payment prior to such time as will enable the
Participant to meet such emergency.

VII.  DESIGNATION OF BENEFICIARY
      --------------------------

             If a Participant dies prior to receiving the entire amounts due
under the Plan, the unpaid amounts will be paid in a lump sum to his or her
beneficiary within 90 days after the end of the Fiscal Year in which his
death occurs.

             Each Participant shall have the right to designate a
beneficiary, and to change such beneficiary from time to time, by filing a
request in writing with the Executive Compensation Executive.  In the event
the Participant shall not have so designated a beneficiary, or in the event a
beneficiary so designated shall predecease the Participant, the amounts
otherwise payable to such beneficiary shall be paid to the person in, or
divided equally among, the first of the following classes of successive
preference beneficiaries in which there shall be any person surviving such
Participant:

                    (a)   the Participant's spouse

                    (b)   the Participant's children

                                    6
 7
                    (c)   the Participant's parents

                    (d)   the Participant's brothers and sisters

                    (e)   the Participant's executors or administrators.

             The share payable to any minor pursuant to the provisions hereof
may be paid to such adult or adults as, in the opinion of the Executive
Compensation Executive, have assumed the custody and principal support of
such minor.

VIII.  ADMINISTRATION OF THE PLAN
       --------------------------

             The overall administration and control of the Plan, including
final determination of Performance Compensation Awards to each Participant is
the responsibility of the Committee.  The Executive Compensation Executive
shall be responsible for implementing the actions required under the Plan.

IX.  VESTING
     -------

             A Participant must be in the employ of the Company, Subsidiary
or Division through the last day of the Fiscal Year with respect to which a
Performance Compensation Award is granted in order to be considered for the
grant of such an Award by the Committee.  Such Participant must also (subject
to specific Committee action to the contrary as hereinafter set forth in this
Section IX) be an employee of the Company, Subsidiary or Division (1) on the
date the award is payable pursuant to Section VI hereof if payment is not
deferred pursuant to such Section, or (2) January 15 following the end of
such Fiscal Year, if payment

                                    7
 8
is deferred pursuant to Section VI.  The final determination as to Awards to be
granted, and if so, the amount of such Awards, shall be made by the Committee.
Notwithstanding any other provision hereof, and in accordance with this Section
IX, in the event a Participant terminates or is terminated by the Company,
Subsidiary or Division, before or after the end of the Fiscal Year for any
reason, including, but not limited to, retirement, disability, or death, the
Committee shall have the sole discretion as to whether any such Award shall be
granted, and, if so, the amount of such Award and the time such Award shall be
paid.

X.  AMENDMENT OR TERMINATION
    ------------------------

             The Plan may be amended or terminated at any time by action of
the Committee.

XI.  MISCELLANEOUS
     -------------

             A.     All payments under the Plan shall be made from the
general assets of the Company, Subsidiary or Division.  To the extent any
person acquires a right to receive payments under the Plan, such right shall
be no greater than that of an unsecured general creditor of the Company,
Subsidiary or Division.

             B.     Nothing contained in the Plan and no action taken
pursuant thereto shall create or be construed to create a trust of any kind,
or a fiduciary relationship between the Company, a Subsidiary or Division and
any other person.

                                    8
 9
             C.     No amount payable under the Plan shall be subject in any
manner to anticipation, alienation, sale, transfer, assignment, pledge,
encumbrance or charge, either voluntary or involuntary, and any attempt to so
alienate, anticipate, sell, transfer, assign, pledge, encumber or charge the
same shall be null and void.  No such amount shall be liable for or subject
to the debts, contracts, liabilities, engagements, or torts of any person to
whom such benefits or funds are or may be payable.

             D.     Nothing contained in the Plan shall be construed as
conferring upon any Participant the right to continue in the employ of the
Company, Subsidiary or Division nor to limit the right of his or her employer
to discharge the Participant at any time, with or without cause.

             E.     The Plan shall be construed and administered in
accordance with the laws of the State of Missouri.


                                    9

 1


FIVE-YEAR FINANCIAL SUMMARY


(Dollars in millions, except per share amounts)                   1996           1995           1994           1993          1992
- ----------------------------------------------------------------------------------------------------------------------------------
                                                                                                              
FOR YEARS ENDED SEPTEMBER 30:
  Net sales                                                      $438.5          441.0          473.9          459.7         406.3
  Nonrecurring charges                                             25.3           35.4             --             --            --
  Interest expense                                                  4.8            5.5            3.6            2.5           1.3
  Earnings (loss) before income taxes                              14.8          (29.5)          12.7            6.4           2.0
  Net earnings (loss)                                              26.1          (30.3)           8.3            5.2           1.4
  Earnings (loss) per share:
    Primary                                                        2.26          (2.76)           .72            .47           .12
    Fully diluted                                                  2.25          (2.76)           .72            .46           .12

AS OF SEPTEMBER 30:
  Working capital                                                  86.2           71.4           86.6           76.8         100.5
  Total assets                                                    307.8          378.0          347.5          335.3         541.7
  Long-term debt                                                   11.4           23.5           25.1            8.1           8.1
  Shareholders' equity                                            191.1          182.3          187.4          174.1         390.9
- ----------------------------------------------------------------------------------------------------------------------------------


2


 2
ESCO ELECTRONICS CORPORATION AND SUBSIDIARIES
Management's Discussion and Analysis



      The following discussion should be read in conjunction with the
consolidated financial statements and notes thereto.

 ..............
Business
Environment
 ..............

      ESCO Electronics Corporation (ESCO, the Company) primarily operates
within the increasingly competitive defense industry. As the overall defense
industrial base continues its rapid consolidation, ESCO has responded to this
competitive challenge by continuing to reposition itself to compete in the
global marketplace and to apply defense technologies to commercial products.
Management believes the Company's strong product diversification and
technology niches in its core defense businesses will enable it to compete
effectively in these shrinking defense markets.
      During 1996, management implemented one of the key elements of its
strategy to create shareholder value -- the sale of Hazeltine Corporation
(Hazeltine). 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.
The sale of Hazeltine enabled the Company to further strengthen its overall
financial position and to return a significant amount of the proceeds to
shareholders.
      Also during 1996, management continued to increase its investment in
commercial opportunities by selectively applying the Company's proven defense
technologies and capabilities to non-military applications. This success was
evidenced by the 43% increase in commercial sales in 1996 compared to 1995.
      During 1995, the Company enhanced its competitive repositioning by
implementing a facilities consolidation program which reduced the Company's
operating facilities' square footage by approximately 30%.
      Overall, 1996 was a challenging, yet rewarding year for ESCO. Mature
defense programs which were completed in the prior year were replaced by new
defense programs and new commercial opportunities. These new program
opportunities, in conjunction with the sale of Hazeltine, effectively
repositioned the Company's business base for the remainder of the decade.
This should allow ESCO to increase its commercial segment contribution while
continuing to reduce its overall dependence on its defense business.
      ESCO's improved financial position and strong balance sheet at
September 30, 1996 should allow the Company to continue its strategy of
deliberate diversification through internal product development and
acquisitions, thereby increasing shareholder value.

 ..............
Results of
Operations
 ..............

1996 Compared with 1995
      Net sales of $438.5 million in 1996 were $2.5 million (0.6%) lower than
net sales of $441 million in 1995. The decrease was primarily the result of
the sale of Hazeltine in July 1996. Hazeltine's sales for the ten-month
period of 1996 prior to its divestiture were $20.4 million lower than its
full year's sales in 1995. Net sales at the remainder of the Company's
operating units increased $17.9 million in 1996 compared to 1995 due to
increased sales volume at Systems & Electronics Inc. (SEI) and PTI
Technologies Inc. (PTI). In 1996, defense sales were $301 million and
commercial sales were $137.5 million compared with 1995 defense and
commercial sales of $345.1 million and $95.9 million, respectively.
Hazeltine's commercial sales were not significant in either period presented.
The increase in 1996 commercial sales reflects additional volume primarily at
SEI, PTI and EMC Test Systems. Management expects the Company's commercial
sales content as a percent of total sales will continue to increase in 1997.
      The Company is involved in the design, development and manufacture of
products for the defense and commercial markets.  The Company generally
manufactures products only upon receipt of firm customer orders and delivers
the products in accordance with the customer's schedule.  As a result, the
Company's beginning backlog of firm orders, the level of orders received
during the year and the mix of products to be produced all influence the
Company's operating results.
      The September 30, 1995 backlog of $530.9 million as previously reported
included $236.3 million related to Hazeltine. Firm order backlog was $246.7
million at September 30, 1996, compared to $294.6 million as adjusted to
remove Hazeltine's backlog at September 30, 1995. The decrease in backlog as

10


 3

ESCO ELECTRONICS CORPORATION AND SUBSIDIARIES
Management's Discussion and Analysis


adjusted reflects the timing of receipt of orders and related sales
throughout the various programs' life cycles, principally at SEI.
      Orders aggregating $373.6 million were received in 1996, compared with
$436.2 million in 1995. Orders received by Hazeltine prior to its sale were
$77.4 million and $160.1 million in 1996 and 1995, respectively. Adjusted to
remove Hazeltine from both periods, comparative orders for 1996 and 1995 were
$296.2 million and $276.1 million, respectively, reflecting a $20.1 million
(7.3%) increase. The largest increases in orders were recorded at PTI and EMC
Test Systems. The most significant orders in 1996 were for filtration/fluid
flow products; aircraft cargo loaders; EMC test equipment; M1000 tank
transporters; integrated mail handling and sorting systems; and airborne
radar systems.
      The gross profit margin in 1996 was 16.4% compared to 21.8% in 1995
primarily due to a $23 million adjustment of the estimate of the costs to
complete the 60K Loader program at SEI. The 1996 gross profit margin,
excluding the 60K Loader adjustment, was consistent with the gross margin
percentage in 1995. The gross profit percentage attributable to the
commercial segment increased slightly in 1996 compared to 1995.
      Selling, general and administrative expenses for 1996 were $70.5
million, or 16.1% of net sales, compared with $74.2 million, or 16.8% of net
sales, for 1995.  The decrease in 1996 is the result of successful cost
containment programs throughout the Company and the sale of Hazeltine.
      Interest expense decreased to $4.8 million in 1996 from $5.5 million in
1995, primarily as a result of lower average outstanding borrowings and lower
weighted average interest rates throughout 1996 compared to 1995. A
significant amount of the outstanding borrowings were repaid in July 1996
with a portion of the proceeds from the sale of Hazeltine.
      Other costs and expenses, net, decreased in 1996 to $5 million from
$10.7 million in 1995, primarily due to the absence in 1996 of approximately
$5 million in amortization of a contract guarantee fee previously paid to
Emerson Electric Co. (Emerson) in connection with the spin-off of ESCO in
1990.
      The gain on the sale of Hazeltine represents the net gain after
deducting selling costs and expenses and after deducting for certain assets
and liabilities retained by ESCO.
      Nonrecurring charges of $25.3 million in 1996 represent non-cash pretax
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
in a contract dispute.
      Nonrecurring charges of $35.4 million incurred during 1995 were related
to the facilities consolidation program implemented in 1995 and the change in
accounting estimates for certain prepaid assets.  The 1995 charges include:
an $11.1 million non-cash pretax charge relating to performance guarantees on
certain contracts; an $8.6 million pretax charge for a non-cash write-off
related to the accounting for the lease on the 8100 West Florissant, St.
Louis, Missouri facilities which were vacated; a $7.9 million non-cash pretax
charge associated with the disposition of inventories resulting from the
consolidation program and related restructuring of the Company's West Coast
operations; and a $7.8 million pretax charge for exit and relocation costs.
      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 a majority
of the benefits of the net deferred tax asset existing at September 30, 1996.
In order to realize the aforementioned net deferred tax asset, excluding the
capital loss carryforward, the Company will need to generate future taxable
income of approximately $189 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. As a result of the
sale of Hazeltine, the Company has generated a capital loss for tax purposes
of approximately $87 million. This capital loss may

                                                                            11


 4

ESCO ELECTRONICS CORPORATION AND SUBSIDIARIES
Management's Discussion and Analysis


be applied for a limited period towards future capital gains recognized by the
Company, at which time the Company may realize additional tax benefits. Any
unused capital loss carryforward will expire in 2001.
      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 1996 reduced its deferred tax
valuation allowance by $15.8 million. The remaining portion of the 1995
deferred tax valuation allowance of approximately $12.7 million represents
management's best estimate of the portion of the deferred tax asset
associated with temporary differences and NOLs which may not be realized. Due
to the 1993 Corporate Readjustment, $15.1 million of this reduction was
credited directly to additional paid-in capital. The remaining $.7 million
was credited directly to the tax provision. The Company has maintained a full
valuation reserve in the amount of $30.6 million for the portion of the
deferred tax asset represented by the capital loss. There can be no
assurance, however, that the Company will generate sufficient taxable income
or a specified level of continuing taxable income in order to fully utilize
the deferred tax assets in the future.
      Income tax expense for 1995 reflects foreign, state and local taxes,
net of a $.4 million benefit recognized in 1995.
      The effective tax rate in 1996 was (77%) compared with (2.6%) in 1995.
The tax provisions for both periods presented are impacted by the Corporate
Readjustment implemented in 1993. The income tax benefit recognized in 1995
of $25.2 million was accounted for as a credit to additional paid-in capital.
      In March 1995, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 121 (SFAS 121), "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to be
Disposed Of." SFAS 121 requires recognition of an impairment loss for
long-lived assets if the sum of the entity's expected future undiscounted
cash flow is less than the carrying amount of the respective assets. The
Company will adopt the provisions of SFAS 121 in 1997. The effect on 1997
results of operations is not expected to be material.
      In October 1995, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 123 (SFAS 123), "Accounting
for Stock-Based Compensation." SFAS 123, which is effective beginning in
1997, establishes financial accounting and reporting standards for
stock-based employee compensation plans. The Company will comply with SFAS
123 in 1997. The Company is currently evaluating which alternatives available
within the Standard will be adopted.

1995 Compared with 1994
      Net sales of $441 million in 1995 were $32.9 million (6.9%) lower than
net sales of $473.9 million in 1994. The decrease was primarily the result of
the completion of mature defense programs in 1994 at SEI and Hazeltine, which
were partially replaced by new defense programs entering production and new
commercial products. In 1995, defense sales were $345.1 million and
commercial sales were $95.9 million compared with 1994 defense and commercial
sales of $387.2 million and $86.7 million, respectively.  The increase in
1995 commercial sales reflects additional volume primarily at PTI and SEI.
      Firm order backlog was $530.9 million at September 30, 1995, a $4.8
million (.9%) decrease from the $535.7 million backlog at September 30, 1994.
Orders aggregating $436.2 million were received in 1995, compared with $418.7
million in 1994. The most significant orders in 1995 were for electronic
identification systems; aircraft cargo loaders; anti-missile system canisters
and the related M860 trailers; high power device testers; TOW missile
systems; and fire support systems used on the Bradley Fire Support Team
vehicle.
      The gross profit margin in 1995 increased to 21.8% from 21.2% in 1994,
primarily due to changes in sales mix throughout the Company. The 1994 gross
profit was negatively impacted by the revised estimate

12


 5

ESCO ELECTRONICS CORPORATION AND SUBSIDIARIES
Management's Discussion and Analysis

of the costs to complete the M1000 tank transporter program at SEI. The gross
profit percentages attributable to the defense and commercial segments
remained consistent within the comparable periods presented.
      Selling, general and administrative expenses for 1995 were $74.2
million, or 16.8% of net sales, compared with $76 million, or 16% of net
sales, for 1994.  The decrease in 1995 spending was the result of successful
cost containment programs throughout the Company. The increase in 1995
percentage of sales was primarily due to additional investment in start-up
commercial programs throughout the Company.
      Interest expense increased to $5.5 million in 1995 from $3.6 million in
1994, primarily as a result of the additional short-term borrowings
outstanding throughout 1995 needed to fund current working capital
requirements and higher market interest rates throughout 1995.
      Other costs and expenses, net, increased in 1995 to $10.7 million from
$8 million in 1994, primarily due to additional patent and royalty costs
incurred in 1995. Other costs and expenses, net, in both periods included
approximately $5 million in amortization of a contract guarantee fee paid to
Emerson.
      Nonrecurring charges of $35.4 million incurred during 1995 were related
to the facilities consolidation program implemented in 1995 and the change in
accounting estimates for certain prepaid assets.
      Income tax expense for 1995 reflects foreign, state and local taxes,
net of a $.4 million benefit recognized in 1995.
      The effective tax rate in 1995 was (2.6%) compared with 34.4% in 1994.
The tax provisions for both periods presented are impacted by the Corporate
Readjustment implemented in 1993. The income tax benefits recognized in 1995
and 1994 of $25.2 million and $4.2 million, respectively, were accounted for
as credits to additional paid-in capital.

 ..............
Capital
Resources
and Liquidity
 ..............

      The Company has been, and will continue to be, impacted by changes in
the defense industry brought about by the changing international political
environment and the U.S. Government's deficit reduction measures, including
procurement policies and tax reform. This operating environment requires
defense contractors to make significant capital commitments to programs for
extended periods of time.  The Company has been concentrating on shifting its
business from development programs to production programs and on increasing
the commercial content of its business base, resulting in lower working
capital requirements and thereby reducing the risk inherent in the defense
industry.
      Net cash provided by operating activities in 1996 was $1.0 million
compared to net cash used by operating activities of $8.1 million in 1995.
The 1996 net cash provided by operating activities improved compared to 1995
primarily due to lower investment in working capital in 1996. The 1996 net
cash provided by operating activities was favorably impacted by positive cash
generation from inventories versus the 1995 cash investment required for
inventories. This 1996 cash generation from inventories was partially offset
by the liquidation of advance payments on long-term contracts received in
1995.
      Net cash used by operating activities was $8.1 million in 1995,
compared to $11.4 million in 1994. The 1995 net cash used by operating
activities was significantly impacted by the $6.6 million cash requirement
necessary to fund operating working capital, primarily at SEI.  The 1995
operating working capital requirements were impacted by: an increase of $29
million in costs and estimated earnings on long-term contracts and
inventories primarily to satisfy near-term production and delivery
requirements; partially offset by a $9.2 million increase in advance payments
received on long-term contracts.
      The 1994 operating working capital requirements were adversely affected
by:  an increase in accounts receivable, primarily due to the timing and
volume of deliveries and cash receipts; and reductions in accounts payable,
advance payments on long-term contracts and accrued expenses resulting from
payments necessary to satisfy outstanding commitments throughout 1994.
      In 1996, capital expenditures of $8.6 million included capitalized
facility costs at SEI resulting from the 1995 facilities consolidation
program, and process equipment at PTI. The 1996 capital expenditures included
$1.5 million related to Hazeltine. In 1995, capital expenditures of $11.1
million included capitalized facility costs and production test equipment at
SEI and facility restoration costs at Rantec resulting

                                                                            13


 6

ESCO ELECTRONICS CORPORATION AND SUBSIDIARIES
Management's Discussion and Analysis


from the 1994 California earthquake. In 1994, the most significant
expenditures  included process equipment at PTI, facility restoration costs at
Rantec and production test equipment at Hazeltine.  There were no commitments
outstanding that were considered material for capital expenditures at
September 30, 1996.
      At September 30, 1996, the Company had available net operating loss
carryforwards (NOLs) for tax purposes of approximately $120 million. These
NOLs will expire beginning in year 2006 and ending in year 2010.  These NOLs
will be used to reduce future Federal income tax cash payments.
      On December 29, 1994, the Company purchased the assets of Ray Proof
North America, a division of Shielding Systems Corporation, a wholly owned
subsidiary of Bairnco Corporation, for approximately $1.6 million.  Ray Proof
was primarily involved in the development, production, installation and test
of anechoic absorber material and shielding room materials.
      On December 1, 1993, the Company acquired Schumacher Filters, Ltd.
(renamed PTI Technologies Limited) for approximately $7.6 million.
      In conjunction with the sale of Hazeltine in July 1996, the Company
amended its bank credit facility. The Company maintained its $80 million
revolving credit facility (subject to borrowing base asset limitations),
repaid all outstanding short-term borrowings and paid down the bank term loan
to $13 million. The $13 million term loan has scheduled amortization payments
of $325,000 per quarter commencing in the quarter ended September 30, 1996.
The maturity of the bank credit facility is September 30, 1998. The amended
bank agreement also allowed the Company to use a portion of the Hazeltine
sales proceeds to pay a special cash distribution to shareholders in 1996 and
to repurchase a significant amount of outstanding ESCO common shares in the
open market. The revolving credit facility is available for direct borrowings
and/or the issuance of letters of credit.  These credit facilities are
provided by a group of banks, led by Morgan Guaranty Trust Company of New
York.  At September 30, 1996, the Company had $64.2 million available under
this revolving credit facility. The $8 million subordinated term loan was
repaid in 1996.
      In 1996, the Company authorized an open market share repurchase program
for up to two million shares of common stock over a period ending September
30, 1998. No shares were repurchased in 1996.
      Cash flow from operations and borrowings under the bank credit facility
are expected to provide adequate resources to meet the Company's capital
requirements and operational needs for the foreseeable future.
      During 1995, Textron, Inc. returned and the Company has cancelled the
500,000 warrants previously issued in connection with the September 30, 1992
acquisition of PTI.
      Management believes that, for the periods presented, inflation has not
had a material effect on the Company's operations.
      The Company is currently involved in various stages of investigation,
remediation and litigation relating to environmental matters. Based on
current information available, management does not believe the aggregate
costs involved in the resolution of these matters will have a material
adverse effect on the Company's operating results, capital expenditures or
competitive position.

 ..............
Forward-
Looking
Information
 ..............

      The statements contained in the Chairman's message (pgs. 3-5), the
Commercial and Defense business summaries (pgs. 6-9), and this Management's
Discussion and Analysis concerning the Company's future revenues,
profitability, financial resources, product mix, market demand and product
development are forward-looking statements made pursuant to the safe harbor
provisions of the Private Securities Litigation Reform Act of 1995.  The
Company's actual results in the future may differ materially from those
projected in the forward-looking statements due to risks and uncertainties
that exist in the Company's operations and business environment including,
but not limited to:  changing priorities or reductions in the U.S. and
worldwide defense budgets; termination of government contracts due to
unilateral government action or the Company's failure to perform; delivery
delays or defaults by customers; performance issues with key suppliers and
subcontractors; the Company's successful execution of internal operating
plans; and collective bargaining labor disputes.

14


 7
ESCO ELECTRONICS CORPORATION AND SUBSIDIARIES
Consolidated Statements of Operations




Years ended September 30,
(Dollars in thousands, except per share amounts                     1996                    1995                 1994
- ---------------------------------------------------------------------------------------------------------------------
                                                                                                     
Net sales                                                       $438,543                 441,023              473,855

Costs and expenses:
   Cost of sales                                                 366,719                 344,781              373,580
   Selling, general and administrative expenses                   70,464                  74,162               75,989
   Interest expense                                                4,781                   5,549                3,646
   Other, net                                                      5,017                  10,665                7,984
   Gain on sale of Hazeltine                                     (48,500)                     --                   --
   Nonrecurring charges                                           25,300                  35,371                   --
                                                                --------                 -------              -------
      Total costs and expenses                                   423,781                 470,528              461,199
                                                                --------                 -------              -------

Earnings (loss) before income tax                                 14,762                 (29,505)              12,656

Income tax expense (benefit)                                     (11,374)                    755                4,348
                                                                --------                 -------              -------
      Net earnings (loss)                                       $ 26,136                 (30,260)               8,308
                                                                --------                 -------              -------

Earnings (loss) per share:
   Primary                                                      $   2.26                   (2.76)                 .72
   Fully diluted                                                $   2.25                   (2.76)                 .72
=====================================================================================================================

See accompanying notes to consolidated financial statements.


                                                                            15


 8

ESCO ELECTRONICS CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS


Years ended September 30,
(Dollars in thousands)                                                                            1996              1995
- ------------------------------------------------------------------------------------------------------------------------
                                                                                                           
ASSETS

CURRENT ASSETS:
  Cash and cash equivalents                                                                   $ 22,209               320
   Accounts receivable, less allowance for doubtful accounts of $273 and $242
       in 1996 and 1995, respectively                                                           34,664            48,224
   Costs and estimated earnings on long-term contracts, less progress
       billings of $70,671 and $72,194 in 1996 and 1995, respectively                           51,585            51,923
   Inventories                                                                                  51,187           107,421
   Other current assets                                                                          3,005             3,975
                                                                                              --------           -------
       Total current assets                                                                    162,650           211,863
                                                                                              --------           -------


PROPERTY, PLANT AND EQUIPMENT:
   Land and land improvements                                                                    6,586            14,996
   Buildings and leasehold improvements                                                         27,974            46,597
   Machinery and equipment                                                                      40,748            47,333
   Construction in progress                                                                      5,043             7,300
                                                                                              --------           -------
                                                                                                80,351           116,226
   Less accumulated depreciation and amortization                                               26,325            24,747
                                                                                              --------           -------
       Net property, plant and equipment                                                        54,026            91,479

Excess of cost over net assets of purchased businesses, less accumulated
   amortization of $1,597 and $1,051 in 1996 and 1995, respectively                             20,395            20,490
Deferred tax asset                                                                              53,326            25,637
Other assets                                                                                    17,435            28,532
                                                                                              --------           -------
                                                                                              $307,832           378,001
========================================================================================================================






See accompanying notes to consolidated financial statements.


16


 9

ESCO ELECTRONICS CORPORATION SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS


Years ended September 30,
(Dollars in thousands)                                                                            1996              1995
- ------------------------------------------------------------------------------------------------------------------------
                                                                                                           
LIABILITIES AND SHAREHOLDERS' EQUITY

CURRENT LIABILITIES:
   Short-term borrowings and current maturities of long-term debt                            $   1,300            39,000
   Accounts payable                                                                             40,057            42,327
   Advance payments on long-term contracts, less costs incurred
       of $5,478 and $2,816 in 1996 and 1995, respectively                                       8,336            19,617
Accrued expenses                                                                                26,771            39,510
                                                                                              --------           -------
       Total current liabilities                                                                76,464           140,454
                                                                                              --------           -------
Other liabilities                                                                               28,860            31,840
Long-term debt                                                                                  11,375            23,452
                                                                                              --------           -------
       Total liabilities                                                                       116,699           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 12,415,346 and 11,574,420 shares in 1996 and 1995, respectively                      124               116
   Additional paid-in capital                                                                  192,967           210,205
   Retained earnings (deficit) since elimination of deficit of $60,798 at
       September 30, 1993                                                                        4,184           (21,952)
   Cumulative foreign currency translation adjustments                                             107               292
   Minimum pension liability                                                                    (1,869)           (1,998)
                                                                                              --------           -------
                                                                                               195,513           186,663
   Less treasury stock, at cost (566,622 and 570,472 common shares in 1996
       and 1995, respectively)                                                                  (4,380)           (4,408)
                                                                                              --------           -------
       Total shareholders' equity                                                              191,133           182,255
                                                                                              --------           -------
                                                                                              $307,832           378,001
========================================================================================================================









See accompanying notes to consolidated financial statements.


                                                                            17


 10


ESCO ELECTRONICS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY


                                                                                                Cumulative
                                                                                                   Foreign
                                                 Common Stock       Additional     Retained       Currency       Minimum
                                            --------------------       Paid-in     Earnings    Translation       Pension  Treasury
Years ended September 30, (In thousands)     Shares      Amount        Capital    (Deficit)    Adjustments     Liability     Stock
- -----------------------------------------------------------------------------------------------------------------------------------
                                                                                                       
Balance, September 30, 1993                  11,387        $114        177,789           --           (161)           --    (3,643)
   Exercise of stock options                    133           1          1,657           --             --            --        --
   Net earnings                                  --          --             --        8,308             --            --        --
   Effect of Corporate Readjustment
       on taxes                                  --          --          4,177           --             --            --        --
   Purchases into treasury                       --          --             --           --             --            --      (795)
   Translation adjustments                       --          --             --           --            (34)           --        --
- -----------------------------------------------------------------------------------------------------------------------------------
Balance, September 30, 1994                  11,520         115        183,623        8,308           (195)           --    (4,438)

   Exercise of stock options                     54           1          1,343           --             --            --        30
   Net loss                                      --          --             --      (30,260)            --            --        --
   Effect of Corporate Readjustment
       on taxes                                  --          --         25,239           --             --            --        --
   Translation adjustments                       --          --             --           --            487            --        --
   Minimum pension liability                     --          --             --           --             --        (1,998)       --
- -----------------------------------------------------------------------------------------------------------------------------------
Balance, September 30, 1995                  11,574         116        210,205      (21,952)           292        (1,998)   (4,408)
   Exercise of stock options                    841           8          3,214           --             --            --        28
   Net earnings                                  --          --             --       26,136             --            --        --
   Effect of Corporate Readjustment
       on taxes                                  --          --         15,094           --             --            --        --
   Cash distribution ($3.00 per share)           --          --        (35,546)          --             --            --        --
   Translation adjustments                       --          --             --           --           (185)           --        --
   Minimum pension liability                     --          --             --           --             --           129        --
- -----------------------------------------------------------------------------------------------------------------------------------
Balance, September 30, 1996                  12,415        $124        192,967        4,184            107        (1,869)   (4,380)
===================================================================================================================================




See accompanying notes to consolidated financial statements.


18


 11


ESCO ELECTRONICS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOW


Years ended September 30,
(Dollars in thousands)                                                          1996              1995              1994
- ------------------------------------------------------------------------------------------------------------------------
                                                                                                         
Cash flows from operating activities:
   Net earnings (loss)                                                      $ 26,136           (30,260)            8,308
   Adjustments to reconcile net earnings (loss) to net cash
     provided (used) by operating activities:
       Depreciation and amortization                                          13,486            14,042            13,652
       Changes in operating working capital                                    5,852            (6,602)          (20,668)
       Write-off of certain assets                                            25,300            19,744                --
       Gain on sale of Hazeltine                                             (48,500)               --                --
       Effect of deferred taxes on tax provision                             (12,598)             (448)            4,177
       Other                                                                  (8,698)           (4,595)          (16,894)
                                                                            --------           -------            ------
     Net cash provided (used) by operating activities                            978            (8,119)          (11,425)
                                                                            --------           -------            ------

Cash flows from investing activities:
   Capital expenditures                                                       (8,558)          (11,146)          (10,131)
   Divestiture / (acquisition) of businesses                                 110,000            (1,596)           (7,648)
                                                                            --------           -------            ------
     Net cash provided (used) by investing activities                        101,442           (12,742)          (17,779)
                                                                            --------           -------            ------

Cash flows from financing activities:
   Proceeds from long-term debt                                                   --             4,490                --
   Principal payments on long-term debt                                      (15,386)           (2,217)           (1,046)
   Net increase (decrease) in short-term borrowings                          (33,000)           15,500            22,500
   Special cash distribution / purchases of common stock into treasury       (35,546)               --              (795)
   Other                                                                       3,401               752               695
                                                                            --------           -------            ------
     Net cash provided (used) by financing activities                        (80,531)           18,525            21,354
                                                                            --------           -------            ------
   Net increase (decrease) in cash and cash equivalents                       21,889            (2,336)           (7,850)
Cash and cash equivalents at beginning of year                                   320             2,656            10,506
                                                                            --------           -------            ------
Cash and cash equivalents at end of year                                    $ 22,209               320             2,656
                                                                            --------           -------            ------

Changes in operating working capital:
   Accounts receivable, net                                                 $  5,487             1,191           (14,255)
   Costs and estimated earnings on long-term contracts, net                  (14,382)           (7,140)            5,310
   Inventories                                                                20,730           (21,820)            5,272
   Other current assets                                                          (15)            2,625            (4,258)
   Accounts payable                                                              133             8,408            (8,623)
   Advance payments on long-term contracts, net                               (7,183)            9,180            (2,350)
   Accrued expenses                                                            1,082               954            (1,764)
                                                                            --------           -------            ------
                                                                            $  5,852            (6,602)          (20,668)
                                                                            --------           -------            ------
Supplemental cash flow information:
   Interest paid to third parties                                           $  4,765             5,495             3,411
   Income taxes paid                                                             673               972             1,143
========================================================================================================================


See accompanying notes to consolidated financial statements.


                                                                            19


 12
ESCO ELECTRONICS CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements

 .............................................
1. Summary of Significant Accounting Policies
 .............................................

(a)   Principles of Consolidation
      The consolidated financial statements include the accounts of ESCO
Electronics Corporation (ESCO) and its wholly owned subsidiaries (the
Company). All significant intercompany transactions and accounts have been
eliminated in consolidation. Certain prior year amounts have been
reclassified to conform with the 1996 presentation.

(b)   Basis of Presentation
      Effective September 30, 1990, Emerson Electric Co. (Emerson)
transferred the stock of certain of its subsidiaries, primarily related to
its government and defense business, to ESCO and distributed all of the
issued and outstanding ESCO common stock to Emerson shareholders (the
spin-off). Effective September 30, 1993, the Company implemented an
accounting readjustment in accordance with the accounting provisions
applicable to a "quasi-reorganization" which restated assets and liabilities
to fair values and eliminated the deficit in retained earnings.
      Fair values of the Company's financial instruments are estimated by
reference to quoted prices from market sources and financial institutions, as
well as other valuation techniques. The estimated fair value of each class of
financial instruments approximated the related carrying value at September
30, 1996 and 1995.

(c)   Nature of Operations
      The Company is engaged in the research, development, manufacture, sale
and support of a wide variety of defense and commercial systems and products.
Defense items principally are supplied to the United States Government under
prime contracts from the Army, Navy and Air Force and under subcontracts with
their prime contractors, and are also sold to foreign customers. Commercial
items are supplied to a variety of customers worldwide.
      The Company operates in two principal industry segments: defense and
commercial. The Company's main products include defense electronics, defense
systems, filtration/fluid flow, communications/test and other industrial and
government products.

(d)   Use of  Estimates
      The preparation of financial statements in conformity with generally
accepted accounting principles requires management 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 the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.

(e)   Change in Accounting -- 1995
      Emerson guaranteed the performance of most of the Company's contracts
which existed at the spin-off. In consideration of these performance
guarantees, the Company paid Emerson a guarantee fee of $7.4 million per year
during the five-year period ended September 30, 1995.
      During 1995, management reviewed the accounting for these performance
guarantees and determined the period and method of amortizing the guarantee
fee should take into consideration the expected future revenue stream from
the respective guaranteed contracts. Accordingly, management changed its
method of accounting from amortizing the guarantee fee over the expected
duration of the guaranteed contracts (estimated benefit period of seven
years) on a straight-line basis to amortizing it based upon the related
guaranteed contract revenues generated to date and the expected future
revenues.
      This change in accounting principle, which is inseparable from a change
in accounting estimate, was retroactively implemented effective October 1,
1994, which represents the beginning of the Company's fiscal year 1995. This
change resulted in an $11.1 million non-cash pretax charge.

20


 13

ESCO ELECTRONICS CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements


(f)   Revenue Recognition
      Revenue on production contracts is recorded when specific contract
terms are fulfilled, usually by delivery or acceptance (the units of delivery
method of accounting). The costs attributed to units delivered are based on
the estimated average costs of all units expected to be produced in a
contract or group of contracts. Revenue under long-term contracts for which
units of delivery is an inappropriate measurement of performance is
recognized on the percentage-of-completion method based upon incurred costs
compared to total estimated costs under the contract. Revenue under
engineering contracts is generally recognized as milestones are attained.
      Revenues from cost reimbursement contracts are recorded as costs are
incurred, plus fees earned. Estimated amounts for contract changes and claims
are included in contract revenues only when realization is probable.
Revisions to assumptions and estimates, primarily in contract value and
estimated costs used for recording sales and earnings, are reflected in the
accounting period in which the facts become known. Losses recognized on
contracts include a provision for the future selling, general and
administrative costs applicable to the respective contracts.
      Revenue is recognized on commercial sales when products are shipped or
when services are performed.

(g)   Cash and Cash Equivalents
      Cash equivalents include temporary investments that are readily
convertible into cash, such as certificates of deposit, commercial paper and
treasury bills with original maturities of three months or less.

(h)   Costs and Estimated Earnings on Long-Term Contracts
      Costs and estimated earnings on long-term contracts represent unbilled
revenues, including accrued profits on long-term contracts accounted for
under the percentage-of-completion method, net of progress billings.

(i)   Inventories
      Inventories under long-term contracts reflect accumulated production
costs, factory overhead, initial tooling and other related costs less the
portion of such costs charged to cost of sales and any progress payments
received. In accordance with industry practice, costs incurred on contracts
in progress include amounts relating to programs having production cycles
longer than one year, and a portion thereof will not be realized within one
year.
      Other inventories are carried at the lower of cost (first-in,
first-out) or market.

(j)   Property, Plant and Equipment
      Property, plant and equipment are recorded at cost when purchased.
Depreciation and amortization are computed on accelerated methods over the
estimated useful lives of the assets: buildings, 10-40 years; machinery and
equipment, 5-10 years; and office furniture and equipment, 5-10 years.
Leasehold improvements are amortized over the remaining term of the
applicable lease or their estimated useful lives, whichever is shorter. The
Company assesses the recoverability of property, plant and equipment by
determining whether the depreciation and amortization of the asset balance
over its remaining life can be recovered through undiscounted future
operating cash flows.

(k)   Excess of Cost Over Net Assets of Purchased Businesses
      Assets and liabilities related to business combinations accounted for
as purchase transactions are recorded at their respective fair values. Excess
of cost over the fair value of net assets purchased (goodwill) is amortized
on a straight-line basis over the periods estimated to be benefited, not
exceeding 40 years. The Company assesses the recoverability of this
intangible asset by determining whether the amortization of the asset balance
over its remaining life can be recovered through undiscounted future
operating cash flows.

                                                                            21


 14

ESCO ELECTRONICS CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements


(l)   Income Taxes
      Income taxes are accounted for under the asset and liability method.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted tax
rates expected to apply to taxable income in the years in which those
temporary differences are expected to be recovered or settled. Deferred tax
assets are reduced by a valuation allowance if it is more likely than not
that some portion or all of the deferred tax assets will not be realized. The
effect on deferred tax assets and liabilities of a change in tax rates is
recognized in income in the period that includes the enactment date.

(m)   Research and Development Costs
      Company-sponsored research and development costs include research and
development and bid and proposal efforts related to U.S. Government and
commercial products and services. Company-sponsored product development costs
are charged to expense when incurred. Customer-sponsored research and
development costs incurred pursuant to contracts are accounted for similar to
other program costs.

(n)   Foreign Currency Translation
      The financial statements of the Company's foreign operations are
translated into U.S. dollars in accordance with Statement of Financial
Accounting Standards No. 52 (SFAS 52), "Foreign Currency Translation." The
resulting translation adjustments are recorded as a separate component of
shareholders' equity.

(o)   Earnings (Loss) Per Share
      Loss per share is based on the weighted average number of common shares
outstanding. Earnings per share are based on the weighted average number of
common shares outstanding plus shares issuable upon the assumed exercise of
dilutive common share options, performance shares and warrants by using the
treasury stock method. For 1996, earnings per share is computed using
11,579,840 and 11,638,408 common shares and common share equivalents
outstanding for primary and fully diluted, respectively. For 1995, loss per
share is computed using 10,973,315 common shares outstanding. For 1994,
primary and fully diluted earnings per share are computed using 11,565,334
common shares and common share equivalents outstanding.

22


 15

ESCO ELECTRONICS CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements

 ........................................
2. Acquisitions/Divestitures (Unaudited)
 ........................................


      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,
resulting in a $48.5 million gain. Certain assets and liabilities of
Hazeltine were retained by the Company.
      The key financial statement accounts of Hazeltine which are included in
the audited consolidated balance sheet at September 30, 1995 are as follows:



(Dollars in thousands)
- ------------------------------------------------------------------------------------------------------------
                                                                                            
Assets                                                      Liabilities and Shareholders' Equity
Accounts receivable, net              $ 8,073               Current liabilities                      $24,070
Costs and estimated earnings
  on long-term contracts                9,720               Other liabilities                          1,181
Inventories                            21,204               Long-term debt                             1,452
Net property, plant and equipment      34,046               Shareholders' equity                      50,164
Other (current and noncurrent)          3,824                                                        -------
                                      -------
  Total                               $76,867                 Total                                  $76,867
- ------------------------------------------------------------------------------------------------------------


      Included in the 1996 and 1995 consolidated statements of operations are
the operating results of Hazeltine prior to its divestiture as follows:



(Dollars in thousands)                                              1996                    1995
- ------------------------------------------------------------------------------------------------
                                                                                   
Net sales                                                        $93,987                 114,196
Cost of sales                                                     75,598                  96,833
Selling, general and administrative expenses                      12,859                  14,198
Other costs and expenses, net                                        941                   1,650
                                                                 -------                 -------
Earnings before income taxes                                     $ 4,589                   1,515
- ------------------------------------------------------------------------------------------------


      On December 29, 1994, the Company purchased the assets of Ray Proof
North America, a division of Shielding Systems Corporation, a wholly owned
subsidiary of Bairnco Corporation for approximately $1.6 million. Ray Proof
was primarily involved in the development, production, installation and test
of anechoic absorber material and shielding room material.
      On December 1, 1993, the Company acquired all outstanding stock of
Schumacher Filters, Ltd. from Kraftanlagen, AG for approximately $7.6
million, and renamed the entity PTI Technologies Limited (PTI Ltd.). PTI Ltd.
manufactures a variety of pleated, precision wound, and activated carbon
filter cartridges for applications in the petrochemical, pharmaceutical, food
and beverage and electronics industries.
      These acquisitions have been accounted for using the purchase method of
accounting.

 ......................
3. Accounts Receivable
 ......................

       Accounts receivable consist of the following at September 30, 1996 and
1995:


(Dollars in thousands)                                              1996                    1995
- ------------------------------------------------------------------------------------------------
                                                                                    
U.S. Government and prime contractors                            $ 9,459                  15,169
Commercial                                                        17,596                  23,459
Other                                                              7,609                   9,596
                                                                 -------                  ------
  Total                                                          $34,664                  48,224
- ------------------------------------------------------------------------------------------------


                                                                            23


 16

ESCO ELECTRONICS CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements

 ..............
4. Inventories
 ..............

      Inventories consist of the following at September 30, 1996 and 1995:


(Dollars in thousands)                                              1996                    1995
- ------------------------------------------------------------------------------------------------
                                                                                   
Finished goods                                                   $ 5,927                   4,442
Work in process - including long-term contracts                   32,071                  92,559
Raw materials                                                     13,189                  10,420
                                                                 -------                 -------
  Total                                                          $51,187                 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 $1.2 million and $8.5 million at September 30, 1996 and 1995,
respectively.
      The 1996 nonrecurring charges of $25.3 million included $14.3 million
in expense related to obsolete inventories.

 ................................
5. Property, Plant and Equipment
 ................................

      Depreciation and amortization of property, plant and equipment for the
years ended September 30, 1996, 1995 and 1994 were $12,163,000, $12,695,000
and $12,367,000, respectively. As part of the 1993 Corporate Readjustment,
property, plant and equipment was adjusted to reflect fair value and the
balance of accumulated depreciation and amortization was eliminated.
      The Company leases certain real property, equipment and machinery under
noncancelable operating leases. Rental expense under these operating leases
for the years ended September 30, 1996, 1995 and 1994 amounted to $4,759,000,
$7,187,000 and $7,251,000, respectively. Future aggregate minimum lease
payments under operating leases that have initial or remaining noncancelable
lease terms in excess of one year as of September 30, 1996 are:



(Dollars in thousands)      Years ending September 30:
- ------------------------------------------------------------------------------------
                                                           
                            1997                              $ 3,196
                            1998                                2,575
                            1999                                1,878
                            2000                                1,599
                            2001 and thereafter                 3,480
                                                              -------
                              Total                           $12,728
- ------------------------------------------------------------------------------------


 ...............................
6. Income Tax Expense (Benefit)
 ...............................

      The principal components of income tax expense (benefit) for the years
ended September 30, 1996, 1995 and 1994 consist of:



(Dollars in thousands)                      1996              1995              1994
- ------------------------------------------------------------------------------------
                                                                     
Federal:
  Current                              $      --               133            (1,010)
  Deferred                               (12,598)             (448)            4,177
State, local and foreign                   1,224             1,070             1,181
                                        --------             -----             -----
  Total                                 $(11,374)              755             4,348
- ------------------------------------------------------------------------------------


24


 17

ESCO ELECTRONICS CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements


   The actual income tax expense for the years ended September 30, 1996, 1995
and 1994 differs from the expected tax expense for those years (computed by
applying the U.S. Federal statutory rate) as follows:



                                                                    1996              1995              1994
- ------------------------------------------------------------------------------------------------------------
                                                                                             
Federal corporate statutory rate                                    35.0%             35.0%             35.0%
Utilization of tax net operating loss carryforward                    --                --             (35.0)
Financial statement goodwill amortization
  not recognized for tax purposes                                    1.1              (1.5)              1.2
Effect of Corporate Readjustment on temporary differences          102.2             (85.5)             33.0
Net change in the balance of the tax valuation allowance           100.2              51.8                --
Effect of subsidiary divestiture on temporary differences         (314.0)               --                --
Non-taxable income items                                              --                --              (8.0)
Permanent effect of net interest income attributable
  to long-term contracts                                              --               0.5               2.8
Income taxes, net of Federal benefits:
  State and local                                                    4.3               1.4               4.5
  Foreign                                                            1.1               1.4               1.5
Other, net                                                          (6.9)             (5.7)             (0.6)
                                                                   -----             -----             -----
Effective income tax rate                                          (77.0)%            (2.6)%            34.4%
- ------------------------------------------------------------------------------------------------------------


      The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and liabilities at September 30, 1996,
1995 and 1994 are presented below:



(Dollars in thousands)                                             1996              1995              1994
- -----------------------------------------------------------------------------------------------------------
                                                                                           
Deferred tax assets:
 Inventories, long-term contract accounting, contract cost
   reserves and others                                          $14,538               601             7,118
 Pension and other postretirement benefits                        9,402             9,538            10,153
 Net operating loss carryforwards                                42,188            39,366            27,761
 Capital loss carryforwards                                      30,567                --                --
 Other compensation-related costs and other cost accruals         2,948            11,278             5,721
                                                                -------           -------           -------
   Total deferred tax assets                                     99,643            60,783            50,753
Deferred tax liabilities:
 Plant and equipment, depreciation methods
   and acquisition asset allocations                             (3,011)           (6,609)           (6,936)
                                                                -------           -------           -------
   Net deferred tax asset before valuation allowance             96,632            54,174            43,817
Less valuation allowance                                        (43,306)          (28,537)          (43,817)
                                                                -------           -------           -------
   Net deferred tax asset                                       $53,326            25,637                --
===========================================================================================================


      Based on the Company's historical pretax income, adjusted for
significant nonrecurring items, together with management's projections of
future taxable income, management believes it is more likely than not that
the Company will realize a significant portion of the benefits of the net
deferred tax asset existing at September 30, 1996.
      In order to fully realize the deferred tax assets existing at September
30, 1996, the Company will need to generate future taxable income of
approximately $120 million prior to the expiration of the net operating loss
(NOL) carryforwards, which will begin to expire in 2006. Also, the Company
will need to generate future capital gains of approximately $87 million prior
to 2001, at which time the capital loss carryforward will expire.

                                                                            25


 18

ESCO ELECTRONICS CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements


      Management believes that the Company will generate sufficient taxable
income to absorb a majority of the net operating loss carryforwards and
deductible temporary differences prior to expiration of the NOLs. There can
be no assurance, however, that the Company will generate any taxable income
or any specific level of continuing taxable income.
      During the year ended September 30, 1996, the Company reduced its 1995
net deferred tax asset valuation allowance by $15.8 million, leaving a
remaining balance of $12.7 million. Of the reduction, $15.1 million was
credited directly to additional paid in capital, while the remaining $.7
million was credited to the provision for taxes. A full valuation allowance
of $30.6 million was established against the deferred tax asset associated
with the 1996 recognition of $87.3 million of capital loss resulting from the
sale of Hazeltine.

 .......
7. Debt
 .......


      Long-term debt consists of the following at September 30, 1996 and 1995:



(Dollars in thousands)                      1996              1995
- ------------------------------------------------------------------
                                                      
Term loan                                $12,675            20,000
Subordinated term loan, 9.25%                 --             8,000
Other                                         --             1,452
                                         -------            ------
                                          12,675            29,452
Less current maturities                    1,300             6,000
                                         -------            ------
  Long-term debt                         $11,375            23,452
==================================================================


      In conjunction with the sale of Hazeltine in July 1996, the Company
amended its bank credit facility. The Company maintained its $80 million
revolving credit facility (subject to borrowing base asset limitations),
repaid all outstanding short-term borrowings and paid down the bank term loan
to $13 million. The $13 million term loan has scheduled amortization payments
of $325,000 per quarter commencing in the quarter ended September 30, 1996.
The maturity of the bank credit facility is September 30, 1998. The amended
bank agreement also allowed the Company to use a portion of the Hazeltine
sales proceeds to pay a special cash distribution to shareholders in 1996 and
to repurchase a significant amount of outstanding ESCO common shares in the
open market through the period ending September 30, 1998.
      The amended credit facility requires, as determined by certain
financial ratios, a commitment fee ranging from 5/16% to 7/16% per annum on
the unused portion. The terms of the credit facility provide that interest on
borrowings may be calculated at a spread over the London Interbank Offered
Rates (LIBOR), or certificate of deposit rates for various maturities, or
based on the prime rate, at the Company's election. Substantially all of the
assets of the Company are pledged under the credit facility. The most
restrictive financial covenants of the credit facility include minimum
interest coverage, limitations on leverage and minimum tangible net worth.
Dividends may not exceed 25% of the Company's consolidated net earnings.
      During 1996 and 1995, the maximum aggregate short-term borrowings at
any month-end were $50 million and $57 million, respectively; the average
aggregate short-term borrowings outstanding based on month-end balances were
$35.1 million and $40.8 million, respectively; and the weighted average
interest rates were 6.9% and 7.3%, respectively. The weighted average
interest rate throughout 1994 was 5.4%. The letters of credit issued and
outstanding under the credit facility totaled $6.4 million and $7.9 million
at September 30, 1996 and 1995, respectively. Borrowings under the revolving
credit facility were $33 million at September 30, 1995.
      The $8 million subordinated term loan payable to Textron, Inc. issued
in connection with the purchase of PTI was repaid in 1996. The "Other debt"
outstanding in 1995 was assumed by GEC.

26


 19

ESCO ELECTRONICS CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements


 ................
8. Capital Stock
 ................

      The 12,415,346 and 11,574,420 common shares as presented in the
accompanying consolidated balance sheets at September 30, 1996 and 1995
represent the actual number of shares issued at the respective dates. The
Company held 566,622 and 570,472 common shares in treasury at September 30,
1996 and 1995, respectively.
      Pursuant to a Deposit and Trust Agreement (the Trust Agreement), all of
the outstanding shares of the Company's common stock are held in trust by a
trustee on behalf of the persons otherwise entitled to hold the Company's
common stock, and such persons, instead, hold common stock trust receipts
(Receipts) representing the Company's common stock and associated preferred
stock purchase rights (the Rights). Although the trustee is the record holder
of the Company's common stock, each holder of a Receipt is generally entitled
to all of the rights of a holder of the Company's common stock (including the
right to vote and to receive dividends or other distributions), except in
certain circumstances. If the Company fails in certain circumstances to
collateralize its obligations to indemnify Emerson with respect to Emerson's
guarantees of certain of the Company's government contracts and for so long
as such failure continues, Emerson will have the right to direct the trustee
how to vote in the election of directors and certain related matters.
      During 1995, the Company adopted the 1994 Stock Option Plan, and in
1991, the Company adopted the 1990 Stock Option Plan (the Option Plans). The
Option Plans permit the Company to grant key management employees (1) options
to purchase shares of the Company's common stock (or Receipts representing
such shares) or (2) stock appreciation rights with respect to all or any part
of the number of shares covered by the options. As long as the Trust
Agreement is in effect, an optionee will receive Receipts in lieu of shares.
All outstanding options were granted at prices equal to fair market value at
the date of grant. As a result of the $3.00 per share special cash
distribution paid to shareholders in 1996 as a non-taxable return of capital,
unexercised stock options were repriced, and the number of options
outstanding were adjusted, using a method which resulted in no additional
compensation expense to the Company. Information regarding stock options
awarded under the Option Plans is as follows:




                                                                                 Option Price
                                                            Shares               Range per Share
- -------------------------------------------------------------------------------------------------
                                                                           
Outstanding at September 30, 1995                        1,135,301               $3.375 - $12.00
 Granted, before repricing                                 497,250               $8.063 - $12.688
 Exercised, before repricing                              (806,255)              $3.375 - $12.00
 Cancelled, before repricing                              (119,257)              $7.938 - $12.688
 Additional shares due to repricing                        182,891               $4.114 - $12.00
- -------------------------------------------------------------------------------------------------
Outstanding at September 30, 1996, as repriced             889,930               $4.114 - $12.00
At September 30, 1996:
 Reserved for future grant                                 339,424
 Exercisable                                               264,265               $4.114 - $12.00
=================================================================================================


      During 1996, the Company announced a stock repurchase program. Under
this program, the Company is authorized to purchase up to two million shares
of its common stock in the open market over a period ending September 30,
1998.
      During 1993, the Board of Directors authorized, and the shareholders
approved, the Performance Share Plan (the Plan). The maximum number of shares
available for issue under the Plan may not exceed 550,000 shares. At
September 30, 1996, 449,000 shares had been granted under the terms of the
Plan.

                                                                            27


 20


ESCO ELECTRONICS CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements


      The Company has a Preferred Stock Purchase Rights Plan pursuant to
which a dividend of one Right was declared for each outstanding share of the
Companys common stock. Each Right entitles the holder to purchase one
one-hundredth of a share of preferred stock at an initial purchase price of
$25. Approximately 120,000 preferred shares are reserved for issuance under
this plan. Under certain conditions involving the acquisition of, or an offer
for, 20% or more of the Companys common stock, all holders of Rights,
except an acquiring entity, would be entitled (1) to purchase, at a defined
price, common stock of the Company or an acquiring entity at a value twice
the defined price, or (2) at the option of the Board, to exchange each Right
for one share of common stock. The Rights remain in existence until September
30, 2000, unless redeemed earlier (at one cent per Right), exercised or
exchanged under the terms of the plan.

 .....................................
9. Retirement and Other Benefit Plans
 .....................................

      Substantially all employees are covered by defined benefit or defined
contribution pension plans maintained by the Company for the benefit of its
employees. Benefits are provided to employees under defined benefit
pay-related and flat-dollar plans which are primarily noncontributory. Annual
contributions to retirement plans equal or exceed the minimum funding
requirements of the Employee Retirement Income Security Act or applicable
local regulations. Pension expense for the years ended September 30, 1996,
1995 and 1994 is comprised of the following:



(Dollars in millions)                                   1996                    1995              1994
- ------------------------------------------------------------------------------------------------------
                                                                                         
Defined benefit plans:
   Service cost (benefits earned during the period)     $3.2                     3.1               4.2
   Interest cost                                         5.0                     4.9               4.2
   Actual return on plan assets                         (5.5)                   (5.0)             (3.3)
   Net amortization and deferral                          .8                      .7               (.6)
                                                        ----                    ----              ----
     Net periodic pension expense                        3.5                     3.7               4.5
Other                                                     --                      .1              (1.5)
Defined contribution plans                               2.1                     2.6               2.7
                                                        ----                    ----              ----
     Total                                              $5.6                     6.4               5.7
======================================================================================================


      During 1994, the Company recognized a $2.5 million pretax curtailment
gain resulting from a major reduction in staffing levels, and a $1 million
pretax loss due to an early retirement incentive program. The gain was
calculated under the provisions of Statement of Financial Accounting
Standards No. 88 (SFAS 88), "Employers' Accounting for Settlements and
Curtailments of Defined Benefit Pension Plans and for Termination Benefits."
      The funded status of the Company's defined benefit pension plans at
September 30, 1996 and 1995 is shown below:



(Dollars in millions)                                                                      1996         1995
- ------------------------------------------------------------------------------------------------------------
                                                                                                  
Accumulated benefit obligation, including vested benefit obligation of
  $53.7 and $50.0 at September 30, 1996 and 1995, respectively                            $57.3         53.8
                                                                                          -----         ----
Projected benefit obligation                                                               71.0         68.3
Plan assets at fair value, primarily corporate equity and fixed income securities          58.4         52.1
                                                                                          -----         ----
Projected benefit obligation in excess of plan assets                                      12.6         16.2
Unrecognized transition amount                                                               --           --
Unrecognized net loss                                                                      (2.9)        (6.5)
Unrecognized prior service costs                                                            (.3)         (.4)
Additional minimum liability                                                                1.8          2.1
                                                                                          -----         ----
  Net pension liability (included in other liabilities)                                   $11.2         11.4
============================================================================================================


28


 21

ESCO ELECTRONICS CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements


      The benefit obligations of the defined benefit plans as of September
30, 1996 and 1995 were both based on a discount rate of 7.5%, and an assumed
rate of increase in compensation levels of 4%. The 1996, 1995 and 1994
pension expense for the defined benefit plans was based on a 7.5%, 8.5% and
7.75% discount rate, respectively; a 4%, 4.75% and 4% increase in
compensation levels, respectively; and a 10% expected long-term rate of
return on plan assets.
      In addition to providing retirement income benefits, the Company
provides unfunded postretirement health and life insurance benefits to
certain retirees. To qualify, an employee must retire at age 55 or later and
the employee's age plus service must equal or exceed 75. Retiree
contributions are defined as a percentage of medical premiums. Consequently,
retiree contributions increase with increases in the medical premiums. The
life insurance plans are noncontributory and provide coverage of a flat
dollar amount for qualifying retired employees.
      Net periodic postretirement benefit cost is comprised of the following:



(Dollars in millions)                             1996           1995           1994
- ------------------------------------------------------------------------------------
                                                                       
Service cost                                      $ .2             .3             .4
Interest cost                                      1.3            1.4            1.4
Other                                               --            (.1)            --
                                                 -----           ----           ----
  Net periodic postretirement benefit cost        $1.5            1.6            1.8
====================================================================================


      Accumulated postretirement benefit obligation for 1996 and 1995 by
component is as follows:



(Dollars in millions)                                                           1996              1995
- ------------------------------------------------------------------------------------------------------
                                                                                            
Retirees                                                                       $13.2              14.2
Fully eligible active plan participants                                           .5                .6
Other active participants                                                        3.0               3.4
                                                                               -----              ----
   Total accumulated postretirement benefit obligation                          16.7              18.2
Plan assets                                                                       --                --
                                                                               -----              ----
   Accumulated postretirement benefit obligation in excess of plan assets       16.7              18.2
Unrecognized prior service cost                                                   .1                .1
Unrecognized net gain (loss)                                                      .1               (.7)
                                                                               -----              ----
   Accrued postretirement benefit obligation (included in other liabilities)   $16.9              17.6
======================================================================================================


      The accumulated postretirement benefit obligations of the plans as of
September 30, 1996 and 1995 were both based on a discount rate of 7.5%. The
September 30, 1995 accumulated postretirement benefit obligation was based on
a health care cost trend of 8.5% for fiscal 1996, gradually grading down to
an ultimate rate of 5.5% by fiscal 2002. The September 30, 1996 accumulated
postretirement benefit obligation was based on a health care cost trend of 8%
for fiscal 1997, gradually grading down to an ultimate rate of 5.5% by fiscal
2002. A 1% increase in the health care cost trend rate for each year would
increase the September 30, 1996 accumulated postretirement benefit obligation
by approximately $350,000.
      The 1996, 1995 and 1994 net periodic postretirement benefit costs were
based on a discount rate of 7.5%, 8.5% and 7.75%, respectively. The 1996 net
periodic postretirement benefit cost was based on an assumed health care cost
trend of 8.5% for fiscal 1996, gradually grading down to 5.5% by fiscal 2002.
The 1995 net periodic postretirement benefit cost was based on an assumed
health care cost trend of 9% for fiscal 1995, gradually grading down to 5.5%
by fiscal 2002. The 1994 net periodic postretirement benefit cost was based
on assumed health care cost trend of 9.5% for fiscal 1994, gradually grading
down to 5% by fiscal 2003. A 1% increase in the health care cost trend rate
for each year would increase the aggregate of the service cost and interest
cost components of the 1996 net periodic postretirement benefit cost by
approximately $30,000.

                                                                            29


 22

ESCO ELECTRONICS CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements


 ........................
10. Other Financial Data
 ........................


      Items charged to operations during the years ended September 30, 1996,
1995 and 1994 included
the following:



(Dollars in thousands)                            1996           1995           1994
- ------------------------------------------------------------------------------------
                                                                    
Maintenance and repairs                       $  5,826          5,664          6,908
Salaries and wages                             136,783        147,813        162,978
                                              --------        -------        -------
Research and development costs:
  Company-sponsored                             11,905         15,067         14,656
  Customer-sponsored                             3,894         10,056          9,721
                                              --------        -------        -------
    Total                                     $ 15,799         25,123         24,377
====================================================================================


      The decrease in 1996 research and development costs is due to lower
spending at Hazeltine prior to its divestiture.
      Accrued expenses included accrued employee compensation of $8,820,000
and $11,666,000 at September 30, 1996 and 1995, respectively.

 ................................
11. Business Segment Information
 ................................


      The Company's principal business segments are defense and commercial.
Summarized below is the Company's business segment information for the years
ended September 30, 1996, 1995 and 1994. Sales between segments have been
eliminated. Corporate expenses and assets have been allocated to the segment
data on a systematic basis. Hazeltine primarily operated within the defense
segment prior to its divestiture in 1996.



(Dollars in thousands)                                           1996        1995           1994
- ------------------------------------------------------------------------------------------------
                                                                                
Net sales:
  Defense                                                    $300,970     345,076        387,160
  Commercial                                                  137,573      95,947         86,695
                                                             --------     -------        -------
                                                             $438,543     441,023        473,855
- ------------------------------------------------------------------------------------------------
Operating profit (loss), excluding nonrecurring charges:
  Defense                                                    $ (6,542)     16,804         18,653
  Commercial                                                    7,902       5,276          5,633
                                                             --------     -------        -------
                                                             $  1,360      22,080         24,286
- ------------------------------------------------------------------------------------------------
Identifiable assets:
  Defense                                                    $191,588     283,617        257,445
  Commercial                                                  116,244      94,384         90,041
                                                             --------     -------        -------
                                                             $307,832     378,001        347,486
- ------------------------------------------------------------------------------------------------
Depreciation and amortization:
  Defense                                                    $  8,001       9,955          9,905
  Commercial                                                    5,485       4,087          3,747
                                                             --------     -------        -------
                                                             $ 13,486      14,042         13,652
- ------------------------------------------------------------------------------------------------
Capital expenditures:
  Defense                                                    $  5,204       7,859          6,191
  Commercial                                                    3,354       3,287          3,940
                                                             --------     -------        -------
                                                             $  8,558      11,146         10,131
================================================================================================


      Net sales derived from U.S. Government agencies, either through direct
sales or through other prime contractors, totaled $231,503,000, $307,970,000
and $352,545,000 for the years ended September 30, 1996, 1995 and 1994,
respectively.

30


 23

ESCO ELECTRONICS CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements


      International sales included in net sales for the years ended September
30, 1996, 1995 and 1994 are as follows:



(Dollars in thousands)                            1996           1995           1994
- ------------------------------------------------------------------------------------
                                                                    
Europe                                        $ 53,856         44,111         32,181
Middle East                                     19,223         27,314         45,031
Far East                                        48,391         32,362         20,095
Other                                           23,215         25,308         18,206
                                              --------        -------        -------
  Total                                       $144,685        129,095        115,513
====================================================================================


      Hazeltine's international sales for 1996, 1995 and 1994 were $58.6
million, $58.4 million and $41.4 million, respectively. The 1996 European
sales increase primarily reflects additional sales of Combined Interrogator
Transponders (CIT) at Hazeltine prior to divestiture and volume increases at
SEI and PTI Ltd.  The decrease in Middle East volume reflects lower sales due
to Hazeltines divestiture. The Far East increase is primarily attributable
to increased sales of defense systems at SEI.


 .............................
12. Transactions With Emerson
 .............................

(a)   Contract Guarantee Arrangement
      Emerson has directly or indirectly guaranteed or is otherwise liable
for the performance of most of the Company's contracts with its customers
which existed at September 30, 1990 (the Guaranteed Contracts). The
Guaranteed Contracts include substantially all U.S. Government contracts
entered into by SEI and selected U.S. Government contracts entered into by
Rantec Microwave & Electronics, Inc. and Hazeltine prior to September 30,
1990. As of September 30, 1996, the aggregate backlog of all firm orders
received by the Company included Guaranteed Contracts of $8,768,000. At
September 30, 1996, there were open letters of credit with an aggregate value
of $2,443,000 related to foreign advance payments in support of various
contracts that are directly or indirectly guaranteed by Emerson.
      In consideration of these guarantees, and in connection with the
spin-off, the Company paid Emerson a guarantee fee of $7,400,000 per year
during the five-year period ended September 30, 1995. See Note 1(e) for
discussion of the 1995 change in accounting related to the guarantee fee.

(b)   Lease and Building Services
      SEI, as tenant, entered into a building lease and a services agreement
with Emerson effective October 1, 1990. The building lease and services
agreement was terminated as of September 30, 1995, therefore, there was no
expense recorded in 1996. Rental expense under this lease and other expenses
for related building services aggregated $4,244,000 and $4,956,000 for the
years ended September 30, 1995 and 1994, respectively.

 .................................
13. Commitments and Contingencies
 .................................


      At September 30, 1996, the Company had $8,850,000 in letters of credit
outstanding as guarantees of contract performance.
      In 1994, an action was commenced against the Company's Hazeltine
subsidiary alleging injury caused by Hazeltine's purported release of
hazardous materials. The Company believes that no one and no property has
been injured by any release of hazardous substances from Hazeltine's plant.
In 1996, the plaintiffs filed a motion to be certified as a class. Hazeltine
has opposed this motion and the decision is pending. Based upon the current
facts, the Company is not able to estimate the probable outcome. Therefore,
no provision for this litigation has been made in the accompanying
consolidated financial statements. Management believes the Company will be
successful in defending this action and that the outcome will not have a
material adverse effect on the Company's financial statements. This
contingent liability was retained by the Company.

                                                                            31


 24

ESCO ELECTRONICS CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements

      As a normal incidence of the business in which the Company is engaged,
various claims, charges and litigation are asserted or commenced against the
Company. In the opinion of management, final judgments, if any, which might
be rendered against the Company in current litigation are adequately
reserved, covered by insurance, or would not have a material adverse effect
on its financial statements.

 ........................
14. Nonrecurring Charges
 ........................

      Nonrecurring charges of $25.3 million in 1996 represent non-cash pretax
charges to reflect recent events which impacted the value of certain assets
on the Company's balance sheet. The items affected include $14.3 million of
inventories which management has determined are obsolete, $6 million of costs
included in other assets incurred in anticipation of certain defense contract
awards which the Company no longer expects to receive, and a $5 million
adjustment in the Company's estimate of recoveries in a contract dispute.
      Nonrecurring charges of $35.4 million incurred during 1995 were related
to the facilities consolidation program implemented in 1995 and the change in
accounting estimates for certain prepaid assets.  The 1995 charges include:
an $11.1 million non-cash pretax charge relating to performance guarantees on
certain contracts; an $8.6 million pretax charge for a non-cash write-off
related to the accounting for the lease on the 8100 West Florissant, St.
Louis, Missouri facilities which were vacated; a $7.9 million non-cash pretax
charge associated with the disposition of inventories resulting from the
consolidation program and related restructuring of the Company's West Coast
operations; and a $7.8 million pretax charge for exit and
relocation costs.

 ...............................................
15. Quarterly Financial Information (Unaudited)
 ...............................................



(Dollars in thousands,                           First         Second          Third         Fourth         Fiscal
except per share amounts)                      Quarter        Quarter        Quarter        Quarter           Year
- ------------------------------------------------------------------------------------------------------------------
                                                                                            
1996
Net sales                                     $112,610        117,444        109,103         99,386        438,543
Gross profit                                    23,420         25,108          1,506         21,790         71,824
Gain on sale of Hazeltine                           --             --             --        (48,500)       (48,500)
Nonrecurring charges                                --             --         25,300             --         25,300
Net earnings (loss)                              1,922          2,414        (19,411)        41,211         26,136
Earnings (loss) per share:
  Primary                                     $    .17            .20          (1.72)          3.47           2.26
  Fully diluted                                    .17            .20          (1.72)          3.46           2.25
==================================================================================================================
1995
Net sales                                     $ 98,191        109,797        107,939        125,096        441,023
Gross profit                                    22,949         25,652         24,049         23,592         96,242
Nonrecurring charges                            10,914         17,362          1,968          5,127         35,371
Net loss                                        (9,052)       (15,048)        (1,233)        (4,927)       (30,260)

Loss per common share                         $   (.83)         (1.37)          (.11)          (.45)         (2.76)
==================================================================================================================


      The 1996 quarterly financial information (unaudited) reflects the
impact of the July 1996 sale of Hazeltine and the related gain.

32


 25

ESCO ELECTRONICS CORPORATION AND SUBSIDIARIES
Independent Auditors' Report


The Board of Directors and Shareholders
ESCO Electronics Corporation:

      We have audited the accompanying consolidated balance sheets of ESCO
Electronics Corporation and subsidiaries as of September 30, 1996 and 1995,
and the related consolidated statements of operations, shareholders' equity,
and cash flows for each of the years in the three-year period ended September
30, 1996. These consolidated financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on
these consolidated 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 financial position of ESCO
Electronics Corporation and subsidiaries as of September 30, 1996 and 1995,
and the results of their operations and their cash flows for each of the
years in the three-year period ended September 30, 1996, in conformity with
generally accepted accounting principles.
      As discussed in Note 1(e) to the consolidated financial statements, in
1995, the Company changed its method of accounting for certain guarantee
fees.

                                             /s/ KPMG Peat Marwick LLP

St. Louis, Missouri
November 13, 1996

34


 26

ESCO ELECTRONICS CORPORATION AND SUBSIDIARIES
Shareholders' Summary


Capital Stock Information
      ESCO Electronics Corporation common stock trust receipts (and the
underlying common stock and associated preferred stock purchase rights)
(symbol ESE) are listed on the New York Stock Exchange.
      There were approximately 9,700 holders of record of trust receipts
representing shares of common stock at November 1, 1996.


Common Stock Market Prices

      The Company's common stock trust receipts and the underlying common
stock and associated preferred stock purchase rights (subsequently referred
to as common  stock) are listed on the New York Stock Exchange under the
symbol "ESE." The following table summarizes the high and low prices
(excluding the impact of the $3.00 per share cash distribution paid September
27, 1996) of the Company's common stock for each quarter of 1996 and 1995:



                                          1996                                 1995
      ----------------------------------------------------------------------------------------
      Quarter                   High               Low              High               Low
      ----------------------------------------------------------------------------------------
                                                                             
      First                     9 3/4              7 7/8             10 5/8              6 1/2
      Second                   14                  8 7/8              8 7/8              6 5/8
      Third                    14 5/8             10 7/8              9 1/4              7 5/8
      Fourth                   13 1/4             10 1/4              9 3/8              8
      ----------------------------------------------------------------------------------------


                                                                            35

 1
                                                                 EXHIBIT 21



                               SUBSIDIARIES OF
                        ESCO ELECTRONICS CORPORATION
                        ----------------------------



                                       STATE OR JURISDICTION OF
                                           INCORPORATION OR       NAME UNDER WHICH
NAME                                         ORGANIZATION         IT DOES BUSINESS
- ----                                         ------------         ----------------
                                                                 
Defense Holding Corp.                          Delaware                Same

Distribution Control Systems, Inc.             Missouri                Same

EMC Test Systems, L.P.                         Texas                   Same

PTI Technologies Inc.                          Delaware                Same

PTI Technologies Limited                       England                 Same

Rantec Microwave & Electronics, Inc.           Delaware                Same

Systems & Electronics Inc.                     Delaware                Same

Vacco Industries                               California              Same





                                    14

 1
                                                               Exhibit 23





                   INDEPENDENT AUDITORS' CONSENT

The Board of Directors
ESCO Electronics Corporation:

We consent to incorporation by reference in the registration statements
(Nos. 33-39737, 33-47916, and 33-98112) on Form S-8 of ESCO Electronics
Corporation of our report dated November 13, 1996, relating to the consolidated
balance sheets of ESCO Electronics Corporation and subsidiaries as of September
30, 1996 and 1995, and the related consolidated statements of operations,
shareholders' equity, and cash flows for each of the years in the three-year
period ended September 30, 1996, which report is incorporated by reference in
the September 30, 1996 Annual Report on Form 10-K of ESCO Electronics
Corporation.  Our report refers to a change in the method of accounting for
certain guarantee fees in fiscal year 1995.



KPMG Peat Marwick LLP


St. Louis, Missouri
December 13, 1996


                                    15

 

           5
                    1,000
       
                             
                   12-MOS
                          SEP-30-1996
                             OCT-01-1995
                               SEP-30-1996
                                          22,209
                                         0
                                   34,937
                                       273
                                     51,187
                               162,650
                                          80,351
                                  26,325
                                 307,832
                           76,464
                                              0
                                           124
                                0
                                          0
                                     191,009
                   307,832
                                        438,543
                               487,043
                                          366,719
                                  437,183
                                 5,017
                                25,300
                               4,781
                                 14,762
                                   (11,374)
                             26,136
                                       0
                                      0
                                            0
                                    26,136
                                     2.26
                                     2.25

This number does not include 51.6 million of Costs and Estimated Earnings
on Long-Term Contracts.