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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
 
FORM 10-K
     
þ   ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended September 30, 2006
OR
     
o   TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                      to                     
Commission file number: 1-10596
ESCO Technologies Inc.
(Exact name of registrant as specified in its charter)
     
Missouri
(State or other jurisdiction
of incorporation or organization)
  43-1554045
(I.R.S. Employer
Identification No.)
     
9900A Clayton Road
St. Louis, Missouri
(Address of principal executive offices)
  63124-1186
(Zip Code)
Registrant’s telephone number, including area code:
(314) 213-7200
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
     
Title of Each Class   Name of Each Exchange on Which Registered
Common Stock, par value $0.01 per share
  New York Stock Exchange, Inc.
 
   
Preferred Stock Purchase Rights
  New York Stock Exchange, Inc.
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes þ No o
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. o
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. þ
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.
Large accelerated filer þ                    Accelerated filer o                    Non-accelerated filer o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes o No þ
Aggregate market value of the Common Stock held by non-affiliates of the registrant as of the close of business on March 31, 2006: $1,277,229,653*.
 
*   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 shares of Common Stock outstanding at December 11, 2006: 25,889,335.
DOCUMENTS INCORPORATED BY REFERENCE:
1.   Portions of the registrant’s Annual Report to Stockholders for fiscal year ended September 30, 2006 (the “2006 Annual Report”) (Parts I and II).
 
2.   Portions of the registrant’s Proxy Statement dated December 20, 2006 (the “2007 Proxy Statement”) (Part III).
 
 


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ESCO TECHNOLOGIES INC.
INDEX TO ANNUAL REPORT ON FORM 10-K
             
Item   Description   Page  
   
 
       
Part I  
 
       
   
 
       
1.       1  
   
 
       
        1  
        2  
        2  
        4  
        4  
        5  
        5  
        6  
        6  
        7  
        7  
        7  
        7  
        7  
        8  
   
 
       
1A.       8  
   
 
       
        11  
   
 
       
1B.       12  
   
 
       
2.       12  
   
 
       
3.       14  
   
 
       
4.       14  
   
 
       
Executive Officers of the Registrant     14  
   
 
       
Part II  
 
       
   
 
       
5.       14  
   
 
       
6.       15  
   
 
       
7.       15  
   
 
       
7A.       15  
   
 
       
8.       15  

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Item   Description   Page  
   
 
       
9.       15  
   
 
       
9A.       16  
   
 
       
9B.       16  
   
 
       
Part III  
 
       
   
 
       
10.       16  
   
 
       
11.       16  
   
 
       
12.       16  
   
 
       
        17  
   
 
       
13.       18  
   
 
       
14.       18  
   
 
       
Part IV  
 
       
   
 
       
15.  
Exhibits, Financial Statement Schedules
    19  
   
 
       
SIGNATURES     25
   
 
       
   
 
       
INDEX TO EXHIBITS     26
 Second Amendment to 2001 Stock Incentive Plan
 First Amendment to 2004 Incentive Compensation Plan
 Employment Agreement with C.J. Kretschmer
 Annual Report Sections
 Subsidiaries of ESCO
 Consent of Independent Registered Public Accounting Firm
 Certification of Chief Executive Officer
 Certification of Chief Financial Officer
 Certification of CEO and CFO

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PART I
Item 1. Business
THE COMPANY
     ESCO Technologies Inc. (“ESCO”) is a producer of engineered products and systems sold to customers worldwide, primarily for industrial and commercial applications. ESCO operates in three operating segments which, together with the operating subsidiaries within each segment, are as follows:
Filtration/Fluid Flow:
Filtertek Inc. (including its Tek Packaging Division)
Filtertek BV
Filtertek do Brasil Industria E Commercio Ltda.
Filtertek SA
PTI Technologies Inc. (“PTI”)
VACCO Industries (“VACCO”)
ESCO Electronica De Mexico, S.A. de C.V. (“ESCOMEX”)
Communications:
Distribution Control Systems, Inc. (“DCSI”)
Distribution Control Systems Caribe, Inc.
Hexagram, Inc. (“Hexagram”)
Nexus Energy Software, Inc. (“Nexus”)
Comtrak Technologies, L.L.C. (“Comtrak”)
Test:
ETS-Lindgren L.P. (“ETS”)
Lindgren RF Enclosures, Inc. (“Lindgren”)
Euroshield OY
Ray Proof Limited
Beijing Lindgren ElectronMagnetic Technology Co., Ltd. (“Beijing Lindgren”)
ETS-Lindgren Japan, Inc.
     All of the Filtertek entities listed above and ESCOMEX are hereinafter collectively referred to as “Filtertek”. All of the Test segment entities listed above are hereinafter collectively referred to as “ETS-Lindgren”.
     The above operating subsidiaries are engaged primarily in the research, development, manufacture, sale and support of the products and systems described below, and are subsidiaries of ESCO Technologies Holding Inc., a wholly-owned direct subsidiary of ESCO. ESCO and its direct and indirect subsidiaries are hereinafter referred to collectively as the “Company”. The Company’s businesses are subject to a number of risks and uncertainties, including without limitation those discussed in Item 1A below. See also “Management’s Discussion and Analysis” appearing in the 2006 Annual Report, which is herein incorporated by reference, and “Forward-Looking Information” below.
     Effective November 29, 2005, ESCO acquired Nexus for a purchase price of approximately $29 million plus contingent consideration based on future sales. Nexus, with headquarters in Wellesley, Massachusetts, is primarily a producer of software for energy meter applications.
     Effective February 1, 2006, ESCO acquired Hexagram for a purchase price of approximately $66 million plus contingent consideration based on future sales. Hexagram, located in Cleveland, Ohio, is a producer of radio frequency (“RF”) fixed network automatic meter reading (“AMR”) systems.

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DISCONTINUED OPERATIONS
     The Company’s former microfiltration and separations businesses (“MicroSep Business”) consisted of PTI Advanced Filtration Inc. (Oxnard, California), PTI Technologies Limited (Sheffield, England) and PTI S.p.A. (Milan, Italy). The MicroSep Business produced membrane-based microfiltration and separation products and systems for use in process filtration and separation applications. In fiscal 2004, the MicroSep Business accounted for approximately $29 million in net sales.
     Effective April 2, 2004, the Company completed the sale of PTI Advanced Filtration Inc. and PTI Technologies Limited to domnick hunter group plc for $18 million in cash. On June 8, 2004, the Company completed the sale of PTI S.p.A. to a group of investors comprised of that subsidiary’s senior management for $5.3 million. The MicroSep Business is accounted for as a discontinued operation in the Consolidated Financial Statements in the 2004 period in accordance with SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets”.
     The following sections of this Item 1 refer to the Company’s continuing operations, except where noted. Accordingly, dollar amounts and percentages presented below in this Item 1 for all periods reflect continuing operations by excluding the MicroSep Business. See Note 3 of the Notes to Consolidated Financial Statements in the 2006 Annual Report, which Note is herein incorporated by reference.
PRODUCTS
     The Company’s products are described below. See Note 15 of the Notes to Consolidated Financial Statements in the 2006 Annual Report for financial information regarding segments, which Note is herein incorporated by reference.
FILTRATION/FLUID FLOW
     The Filtration/Fluid Flow segment accounted for approximately 38%, 40% and 41% of the Company’s total revenue in fiscal years 2006, 2005 and 2004, respectively.
     Filtertek develops and manufactures a broad range of specialized filtration and fluid/flow products at its facilities in North America, South America and Europe. Filtertek’s products, which are centered around its insert injection-molding technology wherein a filter medium is inserted into the tooling prior to injection-molding of the filter housing, have widespread applications in the medical and healthcare, automotive fluid system, consumer appliance and other commercial and industrial markets. Typical Filtertek customers may require daily production of thousands of units, at very high levels of quality, that are generally produced in highly-automated manufacturing cells. Many of Filtertek’s products are produced utilizing patented designs or proprietary product or process design, or both. Filtertek’s products are typically supplied to original equipment manufacturers under long-term contracts. The Tek Packaging Division of Filtertek Inc. produces highly engineered thermal-formed and security packaging products for medical, food and electronics products.
     PTI is a leading supplier of filtration products serving the commercial aerospace, military aerospace and various industrial markets. The industrial markets include chemical processing, automotive and mobile equipment. Products include filter elements, assemblies, modules, indicators and other related components. All products must meet stringent quality requirements and withstand severe operating conditions. Product applications include aircraft and mobile equipment hydraulic systems, aircraft engines, plant equipment and automotive transmissions. PTI supplies product worldwide to original equipment manufacturers and the U.S. government under long term contracts, and to the commercial aftermarkets through distribution channels.
     VACCO supplies flow control products to the aerospace industry for use in aircraft, satellite propulsion systems, satellite launch vehicles and the space shuttle. VACCO also uses its etched disc technology to produce quiet valves and manifolds for U.S. Navy applications.

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COMMUNICATIONS
     The Communications segment accounted for approximately 34%, 32% and 33% of the Company’s total revenue in fiscal years 2006, 2005 and 2004, respectively.
     DCSI is a leading manufacturer of two-way power line communication systems for the electric utility industry (the “TWACS® systems”), which are composed of equipment (primarily meter modules and equipment for central stations and substations), software and support services. The TWACS Next Generation (“TNG”) software is being developed jointly with a third-party contractor. This development continued in fiscal 2006, leading to the commercial release of its second version, which was delivered to a second customer location and underwent operational testing. Currently, additional versions of the TNG software are under development and are scheduled for commercial release in fiscal 2007. The TWACS systems provide electric utilities with a patented communication technology for automatic meter reading, load control, interval data, outage assessment/restoration monitoring, remote service disconnect/connect, time-of-use data for critical peak pricing, tamper/theft detection and pre-paid metering. Revenue from the TWACS systems, which may be considered a class of similar products, accounted for approximately 26%, 28% and 31% of the Company’s total revenue in fiscal years 2006, 2005 and 2004, respectively. In November 2005, DCSI received a contract from Pacific Gas and Electric Company (“PG&E”) in support of the electric portion of PG&E’s Advanced Metering Infrastructure (“AMI”) Project. The current AMI program plan provides for the coverage of up to approximately five million electric endpoints over the five-year full deployment period. System testing of a small test system was successfully completed in fiscal year 2006, and PG&E received approval from the California Public Utility Commission for the entire AMI project. DCSI has agreed to deliver to PG&E versions of its newly developed TNG software as they become available and are tested. Delivery of the final version, for which DCSI has committed, is currently anticipated in the fourth quarter of fiscal 2007. The contract provides for remedies including, but not limited to, liquidated damages in the event of DCSI’s delayed development or delivery of hardware and software. The total anticipated contract value from commencement through the five-year full deployment period is approximately $310 million. Equipment will be purchased by PG&E only upon issuance of purchase orders. See Item 1.A Risk Factors.
     Hexagram provides, through its STAR® network, wireless RF data communications systems primarily to gas and water utilities for automatic meter reading applications. In November 2005, Hexagram received a contract from PG&E to provide its communications system for the gas meter portion of PG&E’s AMI Project. The total anticipated contract revenue through the full five-year deployment is approximately $225 million. This contract is subject to contingencies and uncertainties similar to those associated with the DCSI — PG&E contract described above except that the TNG software is not applicable to this contract.
     Nexus provides energy companies with software solutions that add value to their existing billing and metering infrastructure to allow both the energy company and its customers to better manage energy-driven transactions and decision-making. Nexus’ analytics-based software applications are used by over 85 major energy organizations worldwide. In fiscal 2006, Nexus implemented a Meter Data Management System for PPL Electric Utilities that integrates with the TWACS® system, and processes and manages hourly data collected from 1.375 million meters.
     Comtrak manufactures advanced video security monitoring systems for commercial and industrial applications. Comtrak is continuing to work jointly with ADT Security Services, Inc., who is selling this system under its SecurVision® trademark to a variety of markets.
TEST
     The Test segment accounted for approximately 28%, 28% and 26% of the Company’s total revenue in fiscal years 2006, 2005 and 2004, respectively.
     ETS-Lindgren designs and manufactures products to measure and contain magnetic, electromagnetic and acoustic energy. It supplies customers with a broad range of isolated environments including RF test enclosures, acoustic test enclosures, RF and magnetically shielded rooms, secure communication facilities and broadcast and recording studios. Many of these facilities include proprietary features such as shielded doors and windows. ETS-Lindgren also provides the design, program management, installation and

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integration services required to successfully complete these types of facilities.
     ETS-Lindgren also supplies customers with a broad range of components including RF absorptive materials, RF filters, active compensation systems, antennas, antenna masts, turntables and electric and magnetic probes, RF test cells, proprietary measurement software and other test accessories required to perform a variety of tests. ETS-Lindgren also offers a variety of services including calibration for antennas and field probes, chamber certification, field surveys, customer training and a variety of product tests. ETS-Lindgren operates the following accredited test labs: American Association for Laboratory Accreditation (“A2LA”), National Voluntary Laboratory Accreditation Program (“NAVLAP”) and CTIA-The Wireless Association (“CTIA”). In addition, ETS-Lindgren serves the acoustics, medical, health and safety, electronics, wireless communications, automotive and defense markets.
MARKETING AND SALES
     The Filtration/Fluid Flow and Test segments’ products generally are distributed to customers through a domestic and foreign network of distributors, sales representatives and in-house salespersons. DCSI’s sales to investor-owned utilities are primarily made directly to the utilities. DCSI primarily utilizes distributors and sales representatives to sell its systems to the electric utility cooperative and municipal markets. Hexagram has an exclusive agreement with Neptune Technology Group, Inc. for the distribution of its products to its water utility customers, and utilizes in-house salespersons to cover electric, gas and combination utilities. Nexus markets its products utilizing its in-house sales force.
     The Company’s international sales accounted for approximately 22%, 24% and 22% of the Company’s total sales in the fiscal years ended September 30, 2006, 2005 and 2004, respectively. See Note 15 of the Notes to Consolidated Financial Statements in the 2006 Annual Report for financial information regarding geographic areas, which Note is herein incorporated by reference.
     Some of the Company’s products 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 6%, 8% and 8% of the Company’s total sales in the fiscal years ended September 30, 2006, 2005 and 2004, respectively.
INTELLECTUAL PROPERTY
     The Company owns or has other rights in various forms of intellectual property (i.e., patents, trademarks, service marks, copyrights, mask works, trade secrets and other items). As a major supplier of engineered products to growing industrial and commercial markets, the Company emphasizes developing intellectual property and protecting its rights therein. However, the scope of protection afforded by intellectual property rights, including those of the Company, is often uncertain and involves complex legal and factual issues. Some intellectual property rights, such as patents, have only a limited term. Also, there can be no assurance that third parties will not infringe or design around the Company’s intellectual property. Policing unauthorized use of intellectual property is difficult, and copyright infringement is a persistent problem for many companies, particularly in some international markets. In addition, the Company may not elect to pursue an unauthorized user due to the high costs and uncertainties associated with litigation. Further, there can be no assurance that courts will ultimately hold issued patents valid and enforceable. See Item 1.A Risk Factors.
     With respect to the Filtration/Fluid Flow segment, an increasing number of products are based on patented or otherwise proprietary technology that sets them apart from the competition. Of particular importance to Filtertek is a U.S. patent covering certain transmission sump filters, which will expire in 2009. Also, Filtertek receives significant income from licensing and cost recovery efforts concerning its U.S. patent on certain needle-free medical connection devices, having claims which will expire on various dates between 2011 and 2013. VACCO’s proprietary quieting technology, which it protects as trade secrets, is a significant differentiator for products supplied to the U.S. Navy submarine fleet. In June 2005, the Company abandoned its plans to commercialize certain PTI sensor products, resulting in the abandonment of certain related patents and a related license agreement. See “Management’s Discussion and Analysis”—“Asset Impairment-2005” appearing in the 2006 Annual Report.

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     In the Communications segment, many of the products are based on patented or otherwise proprietary technology, including the Company’s TWACS technology. The TWACS systems are protected primarily by a number of patents expiring on various dates ending in 2017. Patents covering significant aspects of the TWACS technology will expire in 2007 and 2010 for outbound signal reception, 2007 for inbound signal detection, and 2017 for inbound signal generation. The Communications segment policy is to seek patent and/or other forms of intellectual property protection on new and improved products, components of products and methods of operation for its businesses, as such developments are made. The Company plans to protect the TNG software as trade secrets. Hexagram holds two significant patents which cover the operation of its STAR® network communications systems. These will expire in 2015 and 2016.
     In the Test segment, patent protection has been sought for significant inventions. Examples of such inventions include novel designs for window and door assemblies used in shielded enclosures and anechoic chambers as well as improved acoustic techniques for sound isolation.
     The Company considers its patent and other intellectual property to be of significant value in each of its segments. The Communications segment owns intellectual property, including its TWACS technology, which it deems necessary or desirable for the manufacture, use or sale of its products. See the references to the TNG software above in this section and in “Communications” on page 3 of this report. No other segment is materially dependent on any single patent, group of patents or other intellectual property.
BACKLOG
     Total Company backlog at September 30, 2006 was $253.4 million, representing an increase of $20.3 million (8.7%) from the beginning of the fiscal year backlog of $233.1 million. The backlog of firm orders at September 30, 2006 and September 30, 2005, respectively, was: $78.6 million and $80.5 million for Filtration/Fluid Flow; $119.0 million and $87.8 million for Communications; and $55.8 million and $64.8 million for Test. As of September 30, 2006, it is estimated that domestic customers accounted for approximately 81% of the Company’s total firm orders, and international customers accounted for approximately 19%. Of the Company’s total backlog of orders at September 30, 2006, approximately 77% is expected to be completed in the fiscal year ending September 30, 2007.
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 materials requirements, certain components and raw materials 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. However, in each of the Company’s segments, there are instances of some risk of shortages of materials or components due to reliance on sole or limited source of supply. See Item 1.A Risk Factors.
     The Filtration/Fluid Flow segment purchases supplies from a wide array of vendors. In most instances, multiple vendors of raw materials are screened during a qualification process to ensure that there will not be an interruption of supply should one of them discontinue operations. Nonetheless, in some situations, there is a risk of shortages due to reliance on a limited number of suppliers or because of price fluctuations due to the nature of the raw materials, as in the case of petroleum-based resins utilized by Filtertek.
     In the Communications segment, DCSI has arrangements with three independent manufacturers which produce and supply substantially all of DCSI’s end-products. Two of these manufacturers are industry leaders with world-wide operations. Each of these manufacturers is directed by DCSI to purchase certain unique raw material components from suppliers designated by DCSI. DCSI also has contracts with certain of the raw material suppliers, directing them to supply such raw materials to DCSI’s manufacturers. Hexagram has a contract with an independent manufacturer which produces and supplies substantially all of Hexagram’s

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end-products, as well as contracts with several of the suppliers of the raw materials that are incorporated into such end-products. Hexagram is in the process of finalizing a new contract with one of the primary suppliers used by DCSI, which will be a second source for the production of Hexagram’s end-products. The Company believes that the above-described manufacturers and suppliers will be reliable sources for DCSI’s and Hexagram’s end-products for the foreseeable future.
     The Test segment is a vertically integrated supplier of EM shielding products, producing most of its critical RF components. However, this segment purchases significant quantities of raw materials such as steel, copper, nickel and wood. Accordingly, the segment is subject to price fluctuations in the worldwide raw materials markets. In fiscal 2006, this segment experienced significant price increases in the metal markets as compared to the prior year.
COMPETITION
     Competition in the Company’s major markets is broadly based and global in scope. The Company faces intense competition from a large number of companies for nearly all of its products. Competition can be particularly intense during periods of economic slowdown, and this has been experienced in the past in some of the Filtration/Fluid Flow markets. Although the Company is a leading supplier in several of the markets it serves, it maintains a relatively small share of the business in many of the other markets it serves. Individual competitors range in size from annual revenues of less than $1 million to billion dollar enterprises. Because of the specialized nature of the Company’s products, its competitive position with respect to its products cannot be precisely stated. However, DCSI is believed to be a leading supplier in the fixed network segment of the automatic meter reading (“AMR”) market. This fixed network segment comprises a substantial part of the electric portion of the total AMR market for electric utilities. Substantial efforts are required in order to maintain existing business levels. In the Company’s major served markets, competition is driven primarily by quality, technology, price and delivery performance. See Item 1.A Risk Factors.
     Pall Corporation, SPX Filtran and SoFrance are the primary competitors in the Filtration/Fluid Flow markets. Other significant competitors in these markets include Clarcor Inc., Cummins Filtration and Moog Inc.
     Primary competitors of the Communications segment in the utility communications market include Itron, Inc., Hunt Technologies Inc., Cellnet Technology Inc., Cannon Technologies Inc., Sensus Metering Systems Inc., Elster Electricity, L.L.C, Comverge, Inc. and Lodestar Corporation.
     The Test segment is the global leader in the EM shielding market. Significant competitors in this served market include TDK RF Solutions Inc., Albatross GmbH, IMEDCO AG and Cuming Corporation.
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 enhance their commercial potential.
     The Company performs research and development at its own expense, and also engages in research and development funded by customers. For the fiscal years ended September 30, 2006, 2005 and 2004, total Company-sponsored research and development expenses were approximately $20.0 million, $16.8 million and $12.2 million, respectively. Total customer-sponsored research and development expenses were approximately $6.3 million, $5.7 million and $6.1 million for the fiscal years ended September 30, 2006, 2005 and 2004, respectively. All of the foregoing expense amounts exclude certain engineering costs primarily associated with product line extensions, modifications and maintenance, which amounted to approximately $9.1 million, $7.8 million and $9.6 million for the fiscal years ended September 30, 2006, 2005 and 2004, respectively.

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ENVIRONMENTAL MATTERS
     The Company is involved in various stages of investigation and cleanup relating to environmental matters. 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 any of its environmental matters will have a material adverse effect on the Company’s financial statements.
GOVERNMENT CONTRACTS
     The Company’s contracts with the U.S. Government and subcontracts with prime contractors of the U.S. Government are primarily firm fixed-price contracts under which 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 Company. 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 Company is normally entitled to receive equitable compensation. See “Marketing And Sales” in this Item 1 and Item 1.A Risk Factors for additional information regarding Government contracts.
EMPLOYEES
     As of November 30, 2006, the Company employed approximately 2,685 persons.
FINANCING
     On October 6, 2004, the Company entered into a $100 million five-year revolving credit facility with a $50 million increase option. This facility is available for direct borrowings and/or the issuance of letters of credit, and is provided by a group of six banks, led by Wells Fargo Bank as agent, with a maturity of October 6, 2009. The facility is secured by the unlimited guaranty of the Company’s material domestic subsidiaries and a 65% pledge of the material foreign subsidiaries’ share equity. See “Management’s Discussion and Analysis — Capital Resources and Liquidity” in the 2006 Annual Report, and Note 10 of the Notes to Consolidated Financial Statements in the 2006 Annual Report, which information is 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 indirect holding company for several Emerson subsidiaries, which were primarily in the defense business. Ownership of ESCO and its subsidiaries was distributed on October 19, 1990 by Emerson to its shareholders through a special distribution. Since that time, through a series of acquisitions and divestitures, the Company has shifted its primary focus from defense contracting to the supply of engineered products marketed to industrial and commercial users. Effective July 10, 2000, ESCO changed its name from ESCO Electronics Corporation to ESCO Technologies Inc.
     The MicroSep Business, which was divested in fiscal 2004, is discussed under “Discontinued Operations” in this Item 1.

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AVAILABLE INFORMATION
     The Company makes available free of charge through its Internet website, www.escotechnologies.com, its annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, as soon as reasonably practicable after such material is electronically filed with or furnished to the Securities and Exchange Commission.
Item 1A. Risk Factors
This Form 10-K, including Item 1 “Business,” Item 2 “Properties”, Item 3 “Legal Proceedings” and Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations” (incorporated by reference to “Management’s Discussion and Analysis” appearing in the 2006 Annual Report), contains “forward-looking statements” within the meaning of the safe harbor provisions of the federal securities laws. In addition to the risks and uncertainties discussed elsewhere in this Form 10-K, the following are important risk factors which could cause actual results and events to differ materially from those contained in any forward-looking statements.
A SIGNIFICANT PORTION OF COMMUNICATIONS SEGMENT REVENUES IS GENERATED BY A LIMITED NUMBER OF LARGE CONTRACTS.
     A significant portion of the Communications segment’s business is dependent on several large contracts with customers. The largest of these are two contracts to sell electric and gas automatic meter reading systems to PG&E over a period of approximately five years. These projects, which represent a potential high source of revenue, are subject to cancellation or reduction in volume by PG&E, delays, regulatory actions and the Company’s ability to develop advanced products and successfully perform the contracts. The loss of revenue which would result from cancellations, delays, reductions, regulatory actions or the Company’s failure to perform in connection with these projects could have a material adverse effect on the Company’s business, results of operations and financial condition as a whole.
FAILURE OR DELAY IN NEW PRODUCT DEVELOPMENT COULD REDUCE THE COMPANY’S FUTURE SALES.
     Much of the Company’s business is dependent on the continuous development of new products and technologies to meet the changing needs of the Company’s markets on a cost-effective basis. Many of these markets are highly technical from an engineering standpoint, and the relevant technologies are subject to rapid change. For example, the continued development of the TWACS Next Generation (“TNG”) software is critical to the continued sales growth of DCSI. Failure to deliver the final version of TNG, to which DCSI has committed under the PG&E contract, could constitute an event of default and adversely impact expected revenues.
     If the Company fails to timely enhance existing products or develop new products, sales opportunities could be lost, which would adversely affect business. In addition, in some existing contracts with customers, the Company has made commitments to develop and deliver new products. If the Company fails to meet these commitments, the default could result in the imposition of contractual penalties including termination. The inability to enhance existing products in a timely manner could make the products less competitive, while the inability to successfully develop new products may limit growth opportunities. Delays in product development may also require greater investment in research and development. Increased costs associated with new product development and product enhancements could adversely affect operating results. The costs of new product development may not be recoverable if demand for the products is not as anticipated.
CERTAIN MANUFACTURING OPERATIONS ARE DEPENDENT ON A SMALL NUMBER OF THIRD-PARTY SUPPLIERS
     A significant part of the Communications segment’s manufacturing operations relies on a small number of third-party manufacturers to supply the segment’s products. For example, DCSI has arrangements with three manufacturers which produce and supply substantially all of DCSI’s end-products. Two of these suppliers are located in Mexico. A significant disruption (for example, a strike) in the supply of those products

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could negatively affect the timely delivery of DCSI’s products to customers and future sales. Comtrak currently relies on a single source for a major portion of its products.
     Certain of the Company’s other businesses are dependent upon sole source or a limited number of third-party manufacturers of parts and components. Many of these suppliers are small businesses. Since alternative supply sources are limited, this increases the risk of adverse impacts on the Company’s production schedules and profits if the Company’s suppliers default in fulfilling their price, quality or delivery obligations.
MOST COMMUNICATIONS SEGMENT SALES ARE TO OR FOR THE UTILITY INDUSTRY, KNOWN FOR LONG SALES CYCLES AND UNCERTAINTY, WHICH COULD AFFECT THE TIMING OF REVENUE
     Most of the Communications segment’s sales are to or for the utility industry, where sales cycles are long and unpredictable. Most sales involve large dollar amounts, and are marked by extended and complex competitive procurements. These factors often cause delays in the timing of sales, and such delays could result in order postponement, reduction in size or cancellation, thereby reducing the Company’s future revenue.
PRODUCT DEFECTS COULD RESULT IN COSTLY FIXES, LITIGATION AND DAMAGES
     If there are claims related to defective products (under warranty or otherwise), particularly in a product recall situation, the Company could be faced with significant expenses in replacing or repairing the product. For example, the DCSI and Hexagram meter modules are installed in thousands of residences and other buildings. The replacement/repair costs for such problems could have a material adverse effect on the Company’s financial condition. In addition, if a dispute over product claims cannot be settled, arbitration or litigation may result, involving attorneys’ fees and the potential of damage awards.
INCREASES IN RAW MATERIAL PRICES AND AVAILABILITY OF RAW MATERIALS COULD ADVERSELY AFFECT THE COMPANY’S BUSINESS.
     The cost of raw materials is a major element of the total cost of many of the Company’s products. For example, Filtertek’s petroleum-based resins and the Test segment’s critical components rely on purchases of raw materials from third parties. Increases in the prices of raw materials (such as steel, copper, nickel, zinc, wood and petrochemical products) could have an adverse impact on business by, among other things, increasing costs and reducing margins.
     In addition, the Company’s reliance on sole or limited sources of supply of raw materials in each of its segments could adversely affect the business. For example, there are a limited number of suppliers of Filtertek’s petroleum-based raw materials. Certain refineries that produce these materials are concentrated in hurricane areas. Weather-created disruptions in supply, in addition to affecting costs, could impact the Company’s ability to procure an adequate supply of these raw materials and delay or prevent deliveries of products to customers. Also, many petroleum supplies come from countries with unstable political environments. Supplies of base petroleum could be impacted by events such as embargoes and regional conflicts.
CHANGES IN TEST STANDARDS COULD ADVERSELY IMPACT TEST SEGMENT SALES
     A significant portion of the Test segment’s business involves sales to technology customers, which results from these customers needing to meet specific international and domestic test standards. If demand for product testing from these customers decreases, the Company’s business could be adversely affected. Likewise, if regulatory agencies eliminate or reduce certain domestic or international test standards, the Company’s sales could be adversely affected. For example, if it were determined that there is no need to include Wi-Fi technology in mobile phones, there may be no need for certain testing on mobile phones. Also, if a regulatory authority relaxes the test standards for certain electronic devices because they do not interfere with the broadcast spectrum, sales of certain Test products could be reduced.

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DIMINISHING MARKET SHARE OF AUTOMOTIVE CUSTOMERS COULD AFFECT FILTRATION/FLUID FLOW SEGMENT SALES.
     Filtertek relies heavily on sales of its products for use in the North American automotive industry. The North American automotive manufacturers are losing market share to foreign competition, most of which do not currently use Filtertek products. This loss of market share could reduce the number of products that Filtertek will sell.
ECONOMIC, POLITICAL AND OTHER RISKS OF THE COMPANY’S INTERNATIONAL OPERATIONS COULD ADVERSELY AFFECT BUSINESS
     In fiscal 2006, approximately 22% of the Company’s sales were made to international customers. An economic downturn or an adverse change in the political situation in certain foreign countries in which the Company does business could cause a decline in revenues and adversely affect the Company’s financial condition. For example, the Test segment does significant business in Asia. Changes in the Asian political climate or political changes in specific Asian countries could negatively affect the Company’s business. Filtertek has significant operations in Europe. Softness in the European economy could have a significant adverse effect on the Company’s European revenues, which represented approximately 9% of the Company’s total revenues in fiscal 2006.
     The Company’s international sales are also subject to other risks inherent in foreign commerce, including currency fluctuations and devaluations, the risk of war and terrorism, differences in foreign laws, uncertainties as to enforcement of contract rights, and difficulties in negotiating and resolving disputes with foreign customers.
SALES OF GOVERNMENT PRODUCTS DEPEND UPON CONTINUED GOVERNMENT FUNDING.
     During the past three years, from 6% to 8% of the Company’s revenues has been generated from sales to the U.S. Government or its contractors. These sales are dependent on continuous government funding of its programs. There could be reductions or terminations of the government funding on programs which are applicable to the Company or its customers. These funding effects could severely affect the Company’s sales and profit, and could bring about a major restructuring of Company operations, which could result in an adverse effect on its financial results.
     For example, a significant part of VACCO’s sales involve major government defense and space programs. Government reduction in spending on these programs could have a significant adverse impact on Company financial results.
THE END OF CUSTOMER PRODUCT LIFE CYCLES COULD NEGATIVELY AFFECT FILTRATION/FLUID FLOW SEGMENT RESULTS.
     Many of the Company’s filtration products are sold to be components in the customers’ end-products. If a customer discontinues a certain end-product line, the ability of the Company to continue to sell those components will be reduced or eliminated. The result could be a significant decrease in Company sales and revenue.
     For example, a substantial portion of PTI’s revenue is generated from commercial aviation aftermarket sales. As certain aircraft are retired and replaced by newer aircraft, there could be a corresponding decrease in sales and revenue associated with the Company’s current products. Such a decrease could adversely affect the Company’s operating results. In addition, if the Government cuts back the space program, VACCO’s sales of space products would be reduced, and its revenues could be adversely affected. Further, if the market for large motor vehicles softens, the demand for Filtertek’s automotive products will decline, which may cause an impact on revenues.
DISPUTES WITH CONTRACTORS COULD ADVERSELY AFFECT THE TEST SEGMENT’S COSTS.
     A major portion of the Test segment’s business involves working in conjunction with contractors to produce the end-product, such as an electronic test chamber. If there are performance problems caused by either the Company or a contractor, these often result in cost overruns and may lead to a dispute as to which

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party is responsible. The resolution of such disputes can result in arbitration or litigation, and could involve significant expense including attorneys’ fees. In addition, these disputes may result in reduction in revenue or even a loss to the Company on a particular project.
ACQUISITIONS OF OTHER COMPANIES CARRY RISK.
     Acquisitions of other companies involve numerous risks, including difficulties in the integration of the operations, technologies and products of the acquired companies, the potential exposure to unanticipated and undisclosed liabilities, the potential that expected benefits or synergies are not realized and that operating costs increase, the potential loss of key personnel, suppliers or customers of acquired businesses and the diversion of management’s time and attention from other business concerns. Although management will attempt to evaluate the risks inherent in any particular transaction, no assurances can be made that the Company will properly ascertain all such risks.
DESPITE ITS EFFORTS, THE COMPANY MAY BE UNABLE TO ADEQUATELY PROTECT ITS INTELLECTUAL PROPERTY.
     Despite the Company’s efforts to protect its intellectual property, unauthorized parties or competitors may copy or otherwise obtain and use the Company’s products and technology, particularly in foreign countries where the laws may not protect the Company’s proprietary rights as fully as in the United States. Current and future actions to enforce the Company’s proprietary rights may result in substantial costs and diversion of resources. No assurances can be made that any such actions will be successful. In addition, the Company may not elect to pursue an unauthorized user due to the high costs and uncertainties associated with litigation. The Company may also face exposure to claims by others challenging its intellectual property rights.
CHANGES IN ENVIRONMENTAL OR REGULATORY REQUIREMENTS COULD INCREASE EXPENSES AND ADVERSELY AFFECT PROFITABILITY.
     The Company’s operations and properties are subject to U.S. and foreign environmental laws and regulations governing, among other things, the generation, storage, emission, discharge, transportation, treatment and disposal of hazardous materials and the clean up of contaminated properties. Changes in such requirements could increase the cost of compliance. Failure to comply could result in the imposition of significant fines, suspension of production, alteration of product processes, cessation of operations or other actions, which could materially and adversely affect the Company’s business, financial condition and results of operations.
COMPETITION IS BROADLY BASED AND GLOBAL IN SCOPE.
     The Company faces competition from a large number of manufacturers and distributors for nearly all of its products. Some of the Company’s competitors are larger, more diversified corporations with greater financial, marketing, production and research and development resources. If the Company cannot compete successfully against current or future competitors, it could have a material adverse effect on the Company’s business, financial condition and results of operations.
FORWARD-LOOKING INFORMATION
Statements contained in this Form 10-K regarding future events and the Company’s future results that are based on current expectations, estimates, forecasts and projections about the Company’s performance and the industries in which the Company operates, the Company’s ability to utilize NOLs, completion of backlog, adequacy of the Company’s credit facility and future cash flows, estimates of anticipated contract costs and revenues, the timing, amount and success of claims for research credits, the success of software development efforts and resulting costs, acceptance by PG&E of the final version of DCSI’s TNG software, growth in the AMR market, potential customer contracts, the anticipated value of the PG&E contracts, the outcome of current litigation, claims and charges, recoverability of deferred tax assets, continued reinvestment of foreign earnings, the impact of SFAS 158, future costs relating to environmental matters, share repurchases, investments, sustained performance improvement, performance improvement

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initiatives, growth opportunities, new product development, the Company’s ability to increase stockholder value, acquisitions, and other statements contained herein which are not strictly historical are considered “forward-looking statements” within the meaning of the safe harbor provisions of the federal securities laws. Words such as expects, anticipates, targets, goals, projects, intends, plans, believes, estimates, variations of such words, and similar expressions are intended to identify such forward-looking statements. Investors are cautioned that such statements are only predictions, speak only as of the date of this report, and the Company undertakes no duty to update. 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: those described in this Item 1A. Risk Factors; actions by the California Public Utility Commission; PG&E’s Board of Directors or PG&E’s management impacting PG&E’s AMI projects; the timing and success of DCSI’s software development efforts; the timing and content of purchase order releases under the PG&E contracts; and DCSI’s and Hexagram’s successful performance of the PG&E contracts; the timing and execution of real estate sales; termination for convenience of customer contracts; timing and magnitude of future contract awards; weakening of economic conditions in served markets; the success of the Company’s competitors; changes in customer demands or customer insolvencies; competition; intellectual property rights; technical difficulties; the availability of selected acquisitions; the timing, pricing and availability of shares offered for sale; delivery delays or defaults by customers; performance issues with key customers, suppliers and subcontractors; material changes in the costs of certain raw materials; the successful sale of the Company’s Puerto Rico facility; collective bargaining and labor disputes; changes in laws and regulations including but not limited to changes in accounting standards and taxation requirements; costs relating to environmental matters; litigation uncertainty; and the Company’s successful execution of internal operating plans.
Item 1B. Unresolved Staff Comments
     None
Item 2. Properties
     The Company’s principal buildings contain approximately 1,258,450 square feet of floor space. Approximately 737,300 square feet are owned by the Company and approximately 521,150 square feet are leased. See Note 8 of the Notes to Consolidated Financial Statements in the 2006 Annual Report, which information is herein incorporated by reference. The principal plants and offices are as follows*:
                     
                Lease Expiration   Principal Use
Location   Size (Sq. Ft.)   Sq. Ft. Owned/Leased   Date   (Operating Segment)
South El Monte, CA
    132,100     Owned-100,100 Leased — 32,000   1-2-2008   Management, Engineering and Manufacturing (Filtration/Fluid Flow)
Oxnard, CA
    127,400     Owned       Management, Engineering and Manufacturing (Filtration/Fluid Flow)
Hebron, IL
    104,200     Owned       Management, Engineering and Manufacturing (Filtration/Fluid Flow)
Durant, OK
    100,000     Owned       Manufacturing (Test)
St. Louis, MO
    91,800     Leased   3-31-2008 (two 5-year renewal options)   Management and Engineering (Communications)
Huntley, IL
    85,000     Owned       Manufacturing (Filtration/Fluid Flow)

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                Lease Expiration   Principal Use
Location   Size (Sq. Ft.)   Sq. Ft. Owned/Leased   Date   (Operating Segment)
Austin, TX
    75,200     Leased   12-31-2007 (two 5-year renewal options)   Management, Engineering and Manufacturing (Test)
Cedar Park, TX
    70,000     Owned       Management, Engineering and Manufacturing (Test)
Cleveland, OH
    59,600     Leased   1-31-2011 (four 3-year renewal options)   Management, Engineering and Manufacturing (Communications)
Glendale Heights, IL
    59,400     Leased   3-31-2010 (three 3-year renewal options)   Management, Engineering and Manufacturing (Test)
Sao Paulo, Brazil
    52,500     Leased   7-31-2007   Manufacturing (Filtration/Fluid Flow)
Eura, Finland
    40,900     Owned       Management, Engineering and Manufacturing (Test)
Newcastle West, Ireland
    37,500     Owned       Manufacturing (Filtration/Fluid Flow)
Plailly, France
    37,200     Owned       Engineering and Manufacturing (Filtration/Fluid Flow)
St. Louis, MO
    35,000     Owned       Management and Engineering(Communications)
Juarez, Mexico
    34,400     Leased   12-31-2007   Engineering and Manufacturing (Filtration/Fluid Flow)
Minocqua, WI
    30,200     Leased   3-31-2010 (three 3-year renewal options)   Engineering and Manufacturing (Test)
Beijing, China
    26,200     Leased   4,600 sq. ft. Office 8-30-2007. 21,700 sq. ft. Plant 12-31-2006   Manufacturing (Test)
Stevenage, England
    25,650     Leased   8-11-2017 (option to terminate on 8-12-2007)   Management, Engineering and Manufacturing (Test)
St. Louis, MO
    19,000     Leased   8-31-2015 (one 5-year renewal option)   ESCO Headquarters
Wellesley, MA
    15,100     Leased   9-30-2012   Management and Engineering (Communications)
 
*   The table does not include an owned vacant facility in Patillas, Puerto Rico, consisting of approximately 110,000 square feet, that was formerly used as a Filtration/Fluid Flow manufacturing facility. The Company ceased operations in this facility in March 2004, and is currently marketing it for sale.
     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.

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Item 3. Legal Proceedings
As a normal incident of the businesses in which the Company is engaged, various claims, charges and litigation are asserted or commenced from time to time against the Company. Lindgren is arbitrating a contract dispute with a prime contractor involving the assertion of certain construction delay damages of approximately $3.7 million. The project was completed in 2005. Lindgren vigorously denies responsibility for this delay and for these damages, and has asserted a claim against the prime contractor of $0.9 million based on damages suffered by Lindgren. Lindgren continues to aggressively defend its position and pursue its right to affirmative damages; however, there can be no assurance of the outcome at this time. With respect to claims and litigation asserted or commenced against the Company, it is the opinion of management, that final judgments, if any, which might be rendered against the Company are adequately reserved, covered by insurance and are not likely to have a material adverse effect on its financial condition or results of operation
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, 2006 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)
 
           
Victor L. Richey, Jr.*
    49     Chairman, President, Chief Executive Officer and Director
 
           
Gary E. Muenster
    46     Senior Vice President and Chief Financial Officer
 
           
Alyson S. Barclay
    47     Vice President, Secretary and General Counsel
 
*   Also Chairman of the Executive Committee of the Board of Directors.
     There are no family relationships among any of the executive officers and directors.
     Mr. Richey was President and Chief Operating Officer of ESCO from August 2001 until October 2002. Since October 2002, he has been Chief Executive Officer, and since April 2003, he has also been Chairman. Since October 2006, he has also been President.
     Mr. Muenster was Vice President and Controller of ESCO from May 1998 until October 2002. He was Vice President and Chief Financial Officer from October 2002 until November 2005. Since the latter date, he has been Senior Vice President and Chief Financial Officer.
     Ms. Barclay has been Vice President, Secretary and General Counsel of ESCO since October 1999.
PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
     The information required by this item is incorporated herein by reference to Notes 11 and 12 of the Notes

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to Consolidated Financial Statements, “Common Stock Market Price” and “Shareholders’ Summary—Capital Stock Information” appearing in the 2006 Annual Report. As of December 6, 2006, there were approximately 1,815 registered holders of Common Stock (not including Company employees holding shares under the Employee Stock Purchase Plan). 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. See Item 12 for equity compensation plan information.
ISSUER PURCHASES OF EQUITY SECURITIES*:
                                 
                    Total Number of   Maximum Number of
                    Shares Purchased as   Shares that May Yet
                    Part of Publicly   Be Purchased Under
    Total Number of   Average Price Paid   Announced Plans or   the Plans or
Period   Shares Purchased   per Share   Programs   Programs
July 1-31, 2006
    0       N.A.       0       0  
August 1-31, 2006
    0       N.A.       0       0  
Sep. 1-30, 2006
    0       N.A.       0       0  
 
                               
Total
    0       N.A.       0       1,200,000  
 
                               
 
*   A common stock repurchase program (the “2001 Program”) was first approved by the Company’s Board of Directors on February 8, 2001 for a maximum of 2,600,000 shares. On August 7, 2003, this program was extended to September 30, 2004. On August 10, 2004, it was announced that the program was extended to September 30, 2006. On August 3, 2006, the Board of Directors cancelled the 2001 Program, and replaced it with a new common stock repurchase program (the “2006 Program”) for a maximum of 1,200,000 shares. The 2006 Program will expire September 30, 2008. There currently is no repurchase program which the Company has determined to terminate prior to expiration, or under which the Company does not intend to make further purchases.
Item 6. Selected Financial Data
     The information required by this item is incorporated herein by reference to “Five-Year Financial Summary” and Notes 2 and 3 of the Notes to Consolidated Financial Statements appearing in the 2006 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 2006 Annual Report.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
     The information required by this item is incorporated herein by reference to “Management’s Discussion and Analysis — Market Risk Analysis” appearing in the 2006 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 25 through 45 and the report thereon of KPMG LLP, an independent registered public accounting firm, appearing on page 48 of the 2006 Annual Report.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
     None.

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Item 9A. Controls and Procedures
     The Company carried out an evaluation, under the supervision and with the participation of the Company’s management, including the Company’s Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures, as defined in Rules 13A-15(e) and 15d—15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”) as of September 30, 2006. Based upon that evaluation, the Company’s Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures are effective. Disclosure controls and procedures are controls and procedures that are designed to ensure that information required to be disclosed in Company reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms. Management’s Report on Internal Control Over Financial Reporting and the attestation report thereon of KPMG LLP are incorporated herein by reference to pages 47 and 49, respectively, in the 2006 Annual Report.
     There were no changes in the Company’s internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) during the fiscal quarter ended September 30, 2006 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
Item 9B. Other Information
     None.
PART III
Item 10. Directors and Executive Officers of the Registrant
     Information regarding nominees and directors appearing under “Nominees and Continuing Directors” in the 2007 Proxy Statement is hereby incorporated by reference. Information regarding executive officers is set forth in Part I of this Form 10-K. Information regarding the Audit and Finance Committee and its members appearing under “Board of Directors and Committees” in the 2007 Proxy Statement is hereby incorporated by reference.
     Information appearing under “Section 16(a) Beneficial Ownership Reporting Compliance” in the 2007 Proxy Statement is hereby incorporated by reference.
     The Company has adopted codes of ethics which apply to its chief executive officer, its chief financial officer and all other senior executives, as well as all Company employees. The following documents are available free of charge through the Company’s internet website at www.escotechnologies.com and in print to any person who requests them: Corporate Governance Guidelines; Charters of the Audit and Finance Committee, Human Resources and Compensation Committee, and Nominating and Corporate Governance Committee; Code of Business Conduct and Ethics; and Code of Ethics for Senior Financial Officers.
Item 11. Executive Compensation
     Information appearing under “Board of Directors and Committees” and “Executive Compensation” (except for the “Report of the Human Resources And Compensation Committee On Executive Compensation” and the “Performance Graph”) in the 2007 Proxy Statement is hereby incorporated by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
     The information regarding beneficial ownership of shares of common stock by nominees and directors, by executive officers, by directors and executive officers as a group and by any known five percent stockholders appearing under “Security Ownership of Directors and Executive Officers” and “Security Ownership of Certain Beneficial Owners” in the 2007 Proxy Statement is hereby incorporated by reference.

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Equity Compensation Plan Information:
     The following table summarizes certain information regarding Common Shares that may be issued by the Company pursuant to its equity compensation plans existing as of September 30, 2006.
                         
                    Number of securities
    Number of           remaining available
    securities to be           for future issuance
    issued upon   Weighted-average   under equity
    exercise of   exercise price of   compensation plans
    outstanding   outstanding   (excluding
    options, warrants   options, warrants   securities reflected
Plan Category   and rights(1)   and rights   in column (a))(1)
    (a)   (b)   (c)
Equity compensation plans approved by security holders (2)
    1,543,078 (3)   $ 26.6004 (4)     2,076,773 (5)(6)
 
                       
Equity compensation plans not approved by security holders
    0       N/A       278,758 (7)
 
                       
Total
    1,543,078     $ 26.6004       2,355,531  
 
(1)   Number of Common Shares is subject to adjustment for any future changes in capitalization for stock splits, stock dividends and similar events.
 
(2)   Consists of the Company’s 1990, 1994 and 1999 Stock Option Plans, the 2001 Stock Incentive Plan and the 2004 Incentive Compensation Plan. Each of the above-cited Plans has been amended without Stockholder approval in accordance with its terms, as follows: the Company’s 1990, 1994 and 1999 Stock Option Plans have been amended to provide for tax withholding, to provide for adjustment upon a special distribution and in certain other respects; the 1994 and 1999 Stock Option Plans have been amended to reflect the change of the Company’s name and the elimination of the Company’s common stock trust receipts; the 1994 Stock Option Plan was amended to authorize the Human Resources and Compensation Committee (the “Committee”), in its discretion, to: (i) permit an optionee who terminates employment with the approval of the Company to exercise his stock option at any time within three months after termination, but before ten years from the date of grant, and (ii) direct that an option award agreement may permit an optionee who terminates employment on account of retirement on or after age 60 to exercise his stock option up to five years after retirement, but before ten years from the date of grant; the 1990, 1994 and 1999 Stock Option Plans and the 2001 Stock Incentive Plan were amended to authorize the Committee to delegate to any employee the power to extend a stock option beyond termination of employment for persons who are not “officers” as defined in Rule 16a-1 under the Exchange Act; the 1994 and 1999 Stock Option Plans and the 2001 Stock Incentive Plan have been amended to authorize the Committee to delegate to the Chief Executive Officer the power to grant stock options to persons who are not such “officers”, with the limitation of 10,000 shares per award and 100,000 shares awarded in the aggregate in any fiscal year; the 2001 Stock Incentive Plan and the 2004 Incentive Compensation Plan were amended with respect to Performance Share distributions to: (i) eliminate the participant’s option to pay cash for tax withholding and receive all shares due, and (ii) eliminate the participant’s option to defer the distribution; and the 2004 Incentive Compensation Plan was amended with respect to Performance Share distributions to eliminate the Committee’s discretion to determine the percentage of the distribution to be made in shares or to be withheld for tax payments.
 
(3)   Includes 155,730 Common Shares issuable in connection with the vesting and distribution of outstanding performance-accelerated restricted share awards under the Company’s 2001 Stock Incentive Plan.

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(4)   Does not include 155,730 Common Shares issuable in connection with the vesting and distribution of outstanding performance-accelerated restricted share awards under the 2001 Stock Incentive Plan, for which there are no exercise prices.
 
(5)   Comprises 15,475 Common Shares under the 1999 Stock Option Plan, 334,178 Common Shares under the 2001 Stock Incentive Plan and 1,227,120 Common Shares under the 2004 Incentive Compensation Plan.
 
(6)   Does not include shares that may be purchased on the open market pursuant to the Company’s Employee Stock Purchase Plan (the “ESPP”). Under the ESPP, participants may elect to have up to 10% of their current salary or wages withheld and contributed to one or more independent trustees for the purchase of Common Shares. At the discretion of an officer of the Company, the Company or a domestic subsidiary or division may contribute cash in an amount not to exceed 20% of the amounts contributed by participants. The total number of Common Shares purchased with the Company’s matching contributions, however, may not exceed 183,446. As of September 30, 2006, 25,310 shares had been purchased with the Company’s matching funds.
 
(7)   Represents Common Shares issuable pursuant to the Compensation Plan for Non-Employee Directors (the “Compensation Plan”), which provides for each director to be paid (in addition to other fees) an annual retainer fee payable partially in cash and partially in Common Shares. Periodically, the Human Resources and Compensation Committee of the Board of Directors determines the amount of the retainer fee and the allocation of the fee between cash and Common Shares. The maximum number of Common Shares available for distribution under the Compensation Plan is 400,000 shares. The stock portion of the retainer fee is distributable in quarterly installments. Directors may elect to defer receipt of all of their cash compensation and/or all of the stock portion of the retainer fee. The deferred amounts are credited to the director’s deferred compensation account in stock equivalents. Deferred amounts are distributed in Common Shares or cash at such future dates as specified by the director unless distribution is accelerated in certain circumstances, including a change in control of the Company. The stock portion which has been deferred may only be distributed in Common Shares.
Item 13. Certain Relationships and Related Transactions
     None.
Item 14. Principal Accounting Fees and Services
     Information regarding the Company’s independent auditors, their fees and services, and the Company’s Audit and Finance Committee’s pre-approval policies and procedures regarding such fees and services appearing under “III. Independent Auditors” in the 2007 Proxy Statement is hereby incorporated by reference.

18


Table of Contents

PART IV
Item 15. Exhibits and Financial Statement Schedules
     (a)   Documents filed as a part of this report:
1.   The Consolidated Financial Statements of the Company on pages 25 through 45 and the Report of Independent Registered Public Accounting Firm thereon of KPMG LLP appearing on page 48 of the 2006 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.

19


Table of Contents

3.   Exhibits:
         
        Filed Herewith or Incorporated by
Exhibit       Reference to Document Indicated By
Number   Description   Footnote
 
       
3.1
  Restated Articles of Incorporation   Incorporated by Reference, Exhibit 3(a)[1]
 
       
3.2
  Amended Certificate of Designation, Preferences and Rights of Series A Participating Cumulative Preferred Stock of the Registrant   Incorporated by Reference, Exhibit 4(e)[2]
 
       
3.3
  Articles of Merger effective July 10, 2000   Incorporated by Reference, Exhibit
3(c)[3]
 
       
3.4
  Bylaws, as amended and restated   Incorporated by Reference, Exhibit 3.4[4]
 
       
4.1
  Specimen Common Stock Certificate   Incorporated by Reference, Exhibit 4(a)[3]
 
       
4.2
  Specimen Rights Certificate   Incorporated by Reference, Exhibit B to Exhibit 4.1[5]
 
       
4.3
  Rights Agreement dated as of September 24, 1990 (as amended and restated as of February 3, 2000) between the Registrant and Registrar and Transfer Company, as successor Rights Agent   Incorporated by Reference, Exhibit 4.1[5]
 
       
4.4
  Credit Agreement dated as of October 6, 2004, among the Registrant, Wells Fargo Bank, N.A., as agent, and the lenders listed therein   Incorporated by Reference, Exhibit 4.4[6]
 
       
10.1
  Form of Indemnification Agreement with each of ESCO’s directors.   Incorporated by Reference, Exhibit 10(k)[7]
 
       
10.2
  Supplemental Executive Retirement Plan as amended and restated as of August 2, 1993*   Incorporated by Reference, Exhibit 10(n)[8]
 
       
10.3
  Second Amendment to Supplemental Executive Retirement Plan effective May 1, 2001*   Incorporated by Reference, Exhibit 10.4[9]
 
       
10.4
  Directors’ Extended Compensation Plan*   Incorporated by Reference, Exhibit 10(o)[8]
 
       
10.5
  First Amendment to Directors’ Extended Compensation Plan effective January 1, 2000*   Incorporated by Reference, Exhibit 10.11[10]

20


Table of Contents

         
10.6
  Second Amendment to Directors’ Extended Compensation Plan effective April 1, 2001*   Incorporated by Reference, Exhibit 10.7[9]
 
       
10.7
  1994 Stock Option Plan (as amended and restated effective October 16, 2000)*   Incorporated by Reference, Exhibit 10.1[11]
 
       
10.8
  Amendment to 1994 Stock Option Plan effective July 18, 2002*   Incorporated by Reference, Exhibit 10(b)[12]
 
       
10.9
  Form of Incentive Stock Option Agreement*   Incorporated by Reference, Exhibit 10.15[10]
 
       
10.10
  Severance Plan adopted as of August 10, 1995 (as restated February 5, 2002)*   Incorporated by Reference, Exhibit 10[13]
 
       
10.11
  Amendment to 1994 Stock Option Plan effective August 7, 2003*   Incorporated by Reference, Exhibit 10.12[4]
 
       
10.12
  1999 Stock Option Plan (as amended and restated effective October 16, 2000)*   Incorporated by Reference, Exhibit 10.2[11]
 
       
10.13
  Form of Incentive Stock Option Agreement*   Incorporated by Reference, Exhibit 10.3[11]
 
       
10.14
  Amendment to 1999 Stock Option Plan effective August 7, 2003*   Incorporated by Reference, Exhibit 10.15[4]
 
       
10.15
  Employment Agreement with Executive
Officer*[14]
  Incorporated by Reference, Exhibit 10(bb)[1]
 
       
10.16
  Amendment to Employment Agreement with Executive Officer*[15]   Incorporated by Reference, Exhibit 10.18[9]
 
       
10.17
  Executive Stock Purchase Plan*   Incorporated by Reference, Exhibit 10.24[10]
 
       
10.18
  Compensation Plan For Non-Employee
Directors*
  Incorporated by Reference, Exhibit 10.22[9]
 
       
10.19
  2001 Stock Incentive Plan*   Incorporated by Reference, Exhibit B[16]
 
       
10.20
  Form of Incentive Stock Option Agreement*   Incorporated by Reference, Exhibit 10.24[17]
 
       
10.21
  Form of Non-qualified Stock Option Agreement*   Incorporated by Reference, Exhibit 10.25[17]
 
       
10.22
  Form of Notice of Award—Performance— Accelerated Restricted Stock *   Incorporated by Reference, Exhibit 10.26[17]
 
       
10.23
  Form of Supplemental Executive Retirement Plan Agreement *   Incorporated by Reference, Exhibit 10.28[17]
 
       
10.24
  Amendment to 2001 Stock Incentive Plan effective August 7, 2003*   Incorporated by Reference, Exhibit 10.29[4]

21


Table of Contents

         
10.25
  Sixth Amendment and Restatement of Employee Stock Purchase Plan effective as of October 15, 2003*   Incorporated by Reference, Appendix C[18]
 
       
10.26
  Second Amendment to Employment Agreement with V.L. Richey, Jr. (identical document with C.J. Kretschmer)*   Incorporated by Reference, Exhibit 10.1[19]
 
       
10.27
  Second Amendment to Employment Agreement with G.E. Muenster (identical document with A.S. Barclay)*   Incorporated by Reference, Exhibit 10.2[19]
 
       
10.28
  Notice of Award — restricted stock award to V.L. Richey, Jr. (identical documents except for number of shares awarded for:   Incorporated by Reference, Exhibit 10.3[19]
 
  C.J. Kretschmer — 4,750 shares; G.E. Muenster — 2,400 shares; A.S. Barclay — 1,800 shares)*    
 
       
10.29
  2004 Incentive Compensation Plan*   Incorporated by Reference, Appendix B[18]
 
       
10.30
  Summary of Non-Employee Directors’ Compensation*   Incorporated by Reference, Exhibit 10.1[20]
 
       
10.31
  Performance Compensation Plan Amended and Restated as of November 25, 2002*   Incorporated by Reference, Exhibit 10.2[20]
 
       
10.32
  2005 Performance Measures and Evaluation Criteria under Performance Compensation Plan*   Incorporated by Reference, Exhibit 10.3[20]
 
       
10.33
  Awards to Executive Officers Not Reported on Form 8-K, October 4, 2004*   Incorporated by Reference, Exhibit 10.4[20]
 
       
10.34
  Form of Notice of Award-Performance-Accelerated Restricted-Stock under 2001 Stock Incentive Plan*   Incorporated by Reference, Exhibit 10.5[20]
 
       
10.35
  Form of Incentive Stock Option Agreement under 2004 Incentive Compensation Plan*   Incorporated by Reference, Exhibit 10.6[20]
 
       
10.36
  Form of Nonqualified Stock Option Agreement under 2004 Incentive Compensation Plan*   Incorporated by Reference, Exhibit 10.7[20]
 
       
10.37
  Form of Incentive Stock Option Agreement under 2001 Stock Incentive Plan*   Incorporated by Reference, Exhibit 10.8[20]
 
       
10.38
  Form of Nonqualified Stock Option Agreement under 2001 Stock Incentive Plan*   Incorporated by Reference, Exhibit 10.9[20]
 
       
10.39
  Second Amendment to 2001 Stock Incentive Plan effective August 3, 2006*    
 
       
10.40
  First Amendment to 2004 Incentive Compensation Plan effective August 3, 2006*    
 
       
10.41
  Employment Agreement with C.J. Kretschmer effective October 1, 2006*    

22


Table of Contents

         
13
  The following-listed sections of the Annual Report to Stockholders for the year ended September 30, 2006:  
 
  Five-Year Financial Summary (p. 50)  
 
  Management’s Discussion and Analysis (pgs. 13-24)  
 
  Consolidated Financial Statements (pgs. 25-45 ) and Report of Independent Registered Public Accounting Firm (p. 48)  
 
  Management’s Report on Internal Control over Financial Reporting (p.47)  
 
  Report of Independent Registered Public Accounting Firm (p.49)  
 
  Shareholders’ Summary—Capital Stock Information (p. 51)  
 
  Common Stock Market Price (p. 50)  
 
       
21
  Subsidiaries of ESCO  
 
       
23
  Consent of Independent Registered Public Accounting Firm  
 
       
31.1
  Certification of Chief Executive Officer  
 
       
31.2
  Certification of Chief Financial Officer  
 
       
32
  Certification of Chief Executive Officer and Chief Financial Officer  
 
    [1] Incorporated by reference to Form 10-K for the fiscal year ended September 30, 1999, at the Exhibit indicated.
 
 
    [2] Incorporated by reference to Form 10-Q for the fiscal quarter ended March 31, 2000, at the
 
    Exhibit indicated.
 
 
    [3] Incorporated by reference to Form 10-Q for the fiscal quarter ended June 30, 2000, at the Exhibit indicated.
 
 
    [4] Incorporated by reference to Form 10-K for the fiscal year ended September 30, 2003, at the Exhibit indicated.
 
 
    [5] Incorporated by reference to Current Report on Form 8-K dated February 3, 2000, at the Exhibit indicated.
 
 
    [6] Incorporated by reference to Form 10-K for the fiscal year ended September 30, 2004, at the Exhibit indicated.
 
 
    [7] Incorporated by reference to Form l0-K for the fiscal year ended September 30, l991, at the Exhibit indicated.
 
    [8] Incorporated by reference to Form 10-K for the fiscal year ended September 30, 1993, at the Exhibit indicated.
 
 
    [9] Incorporated by reference to Form 10-K for the fiscal year ended September 30, 2001, at the Exhibit indicated.
 
 
    [10] Incorporated by reference to Form 10-K for the fiscal year ended September 30, 2000, at the

23


Table of Contents

    Exhibit indicated.
 
 
    [11] Incorporated by reference to Form 10-Q for the fiscal quarter ended December 31, 2000, at the Exhibit indicated.
 
 
    [12] Incorporated by reference to Form 10-Q for the fiscal quarter ended June 30, 2002, at the Exhibit indicated.
 
 
    [13] Incorporated by reference to Form 10-Q for the fiscal quarter ended March 31, 2002, at the Exhibit indicated.
 
 
    [14] Identical Employment Agreements between ESCO and executive officers A.S. Barclay, G.E. Muenster and V.L. Richey, Jr., except that in the cases of Ms. Barclay and Mr. Muenster the minimum annual salary is $94,000 and $108,000, respectively.
 
 
    [15] Identical Amendments to Employment Agreements between ESCO and executive officers A.S. Barclay, G.E. Muenster and V.L. Richey, Jr.
 
 
    [16] Incorporated by reference to Notice of Annual Meeting of the Stockholders and Proxy Statement dated December 11, 2000, at the Exhibit indicated.
 
 
    [17] Incorporated by reference to Form 10-K for the fiscal year ended September 30, 2002, at the Exhibit indicated.
 
 
    [18] Incorporated by reference to Notice of Annual Meeting of the Stockholders and Proxy Statement dated December 29, 2003, at the Appendix indicated.
 
 
    [19] Incorporated by reference to Form 10-Q for the fiscal quarter ended June 30, 2004, at the Exhibit indicated.
 
 
    [20] Incorporated by reference to Form 10-Q for the fiscal quarter ended December 31, 2004, at the Exhibit indicated.
 
 
*   Represents a management contract or compensatory plan or arrangement required to be filed as an exhibit to this Form 10-K pursuant to Item 15(c) of this Part IV.
NOTE: C.J. Kretschmer’s participation in the Severance Plan (Exhibit No. 10.10), his Employment Agreement, as amended, (Exhibit Nos. 10.15, 10.16 and 10.26) and his restricted stock award (Exhibit 10.33) were terminated and/or cancelled effective September 30, 2006.
(b) Exhibits: Reference is made to the list of exhibits in this Part IV, Item 15(a)3 above.
(c) Financial Statement Schedules: Reference is made to Part IV, Item 15(a)2 above.

24


Table of Contents

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 TECHNOLOGIES INC.
 
 
Date: December 13, 2006  By /s/ V.L. Richey, Jr.    
  V.L. Richey, Jr.   
  Chief Executive Officer   
 
     Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below effective December 13, 2006, by the following persons on behalf of the registrant and in the capacities indicated.
     
SIGNATURE   TITLE
/s/ V.L. Richey, Jr.
 
V.L. Richey, Jr.
  Chairman, President, Chief Executive Officer and Director
/s/ G.E. Muenster
 
G.E. Muenster
  Senior Vice President and Chief Financial Officer,
Principal Accounting Officer
 
 
W.S. Antle III
  Director
/s/ J.M. McConnell
 
J.M. McConnell
  Director
/s/ L.W. Solley
 
L.W. Solley
  Director
/s/ J.M. Stolze
 
J.M. Stolze
  Director
/s/ D.C. Trauscht
 
D.C. Trauscht
  Director
 
 
J.D. Woods
  Director

25


Table of Contents

INDEX TO EXHIBITS
Exhibits are listed by numbers corresponding to the Exhibit Table of Item 601 in Regulation S-K.
     
Exhibit No.   Exhibit
 
   
10.39
  Second Amendment to 2001 Stock Incentive Plan effective August 3, 2006
 
   
10.40
  First Amendment to 2004 Incentive Compensation Plan effective August 3, 2006
 
   
10.41
  Employment Agreement with C.J. Kretschmer effective October 1, 2006
 
   
13
  The following-listed sections of the Annual Report to Stockholders for the year ended September 30, 2006:
    Five-year Financial Summary (p. 50)
 
    Management’s Discussion and Analysis (pgs. 13-24)
 
    Consolidated Financial Statements (pgs. 25-45) and Report of Independent Registered Public Accounting Firm (p. 48)
 
    Management’s Report on Internal Control over Financial Reporting (p. 47)
 
    Report of Independent Registered Public Accounting Firm (p.49)
 
    Shareholders’ Summary—Capital Stock Information (p. 51)
 
    Common Stock Market Price (p. 50)
     
21
  Subsidiaries of ESCO
 
   
23
  Consent of Independent Registered Public Accounting Firm
 
   
31.1
  Certification of Chief Executive Officer
 
   
31.2
  Certification of Chief Financial Officer
 
   
32
  Certification of Chief Executive Officer and Chief Financial Officer
See Item 15(a)3 for a list of exhibits incorporated by reference

26

exv10w39
 

EXHIBIT: 10.39
SECOND AMENDMENT TO THE ESCO TECHNOLOGIES INC.
2001 STOCK INCENTIVE PLAN
WHEREAS, ESCO Technologies Inc. (“Company”) adopted the ESCO Technologies Inc. 2001 Stock Incentive Plan (“Plan”) for the benefits of eligible employees; and
WHEREAS, the Company retained the right to amend the Plan pursuant to Section 13 thereof; and
WHEREAS, the Company desires to amend the Plan effective as of August 3, 2006:
NOW, THEREFORE, effective as of August 3, 2006, the Plan is amended as follows:
1. The following is added at the end of section 11(iv):
Provided, however, that the previous sentence shall not apply to the distribution under a Performance Share Award.
2. Section 9(d) is deleted in its entirety and Sections 9(e)-9(g) are renumbered Sections 9(d)-9(f) respectively.
IN WITNESS WHEREOF, the foregoing Amendment was adopted on the 3rd day of August, 2006.

 

exv10w40
 

EXHIBIT 10.40
FIRST AMENDMENT TO THE ESCO TECHNOLOGIES INC.
2004 INCENTIVE COMPENSATION PLAN
WHEREAS, ESCO Technologies Inc. (“Company”) adopted the ESCO Technologies Inc. 2004 Incentive Compensation Plan (“Plan”) for the benefits of eligible employees; and
WHEREAS, the Company retained the right to amend the Plan pursuant to Section 15 thereof; and
WHEREAS, the Company desires to amend the Plan effective as of August 3, 2006:
NOW, THEREFORE, effective as of August 3, 2006, the Plan is amended as follows:
1. The last two sentences of section 9(c) are deleted.
2. . Section 9(d) is deleted in its entirety and Sections 9(e) and 9(f) are renumbered Sections 9(d) and 9(e) respectively.
3. The following is added at the end of Section 13(d):
     Provided, however, that the previous sentence shall not apply to the distribution under a Performance Share Award.
IN WITNESS WHEREOF, the foregoing Amendment was adopted on the 3rd day of August, 2006.

 

exv10w41
 

EXHIBIT: 10.41
August 3, 2006
Mr. Charles J. Kretschmer
President & Chief Operating Officer
ESCO Technologies Inc.
9900A Clayton Road
St. Louis, MO 63124
Dear Chuck,
With regard to your letter of resignation dated August 3, 2006, the following provisions have been mutually agreed to:
  1.   Your current compensation, benefits and all agreements between you and ESCO shall remain in effect through September 30, 2006, the effective date of your resignation as President and Chief Operating Officer of ESCO.
 
  2.   Effective October 1, 2006 and for the duration of your employment with ESCO:
  a.   You are appointed Vice President of ESCO, as an “at will” employee. Your salary shall be $250,000 per year. You are not guaranteed any performance compensation (bonus), except that you will be entitled to receive a bonus for fiscal year 2006 which is consistent with those paid to the Executive Officers, pursuant to ESCO’s standard practice.
 
  b.   You are not guaranteed the right to receive any stock option awards, performance-accelerated restricted stock awards, restricted stock awards or any other similar awards.
 
  c.   You will continue to receive a car allowance of $1,500 per month, the current allowances attributable to your country club membership and financial planning, in addition to standard ESCO employee benefits.
 
  d.   Stock option awards granted to you prior to the date hereof shall remain in full force and effect.
 
  e.   The Performance-Accelerated Restricted Stock Award of 9,500 (post stock-split) ESCO shares, dated May 4, 2004 (scheduled to be paid out on March 31, 2007 contingent on your continued employment with ESCO), shall remain in full force and effect. However, any and all other Performance-Accelerated Restricted Stock Awards granted to you at any time are hereby terminated and are null and void.

 


 

August 2, 2006
Page 2 of 2
  f.   Your primary duties shall include:
    Acquisition / divestiture activity
 
    Contract Manufacturing for the Communications Segment
 
    Selected major contract negotiations
 
    Profit improvement initiatives
 
    Other tasks as assigned
  3.   The above agreements are made in mutual consideration of each other and your “at will” employment with ESCO as stated above.
Chuck, please indicate your agreement to the foregoing by signing and returning the attached copy of this letter.
         
  Sincerely,


ESCO Technologies Inc.
 
 
  /s/ Victor L. Richey, Jr    
  Victor L. Richey, Jr.   
  Chairman and Chief Executive Officer   
 
Agreed:
/s/ Charles J. Kretschmer
Charles J. Kretschmer
Date: 8-5-06

 

<PAGE>

                                                                      Exhibit 13


MANAGEMENT'S DISCUSSION AND ANALYSIS

The following discussion should be read in conjunction with the consolidated
financial statements and notes thereto. The years 2006, 2005 and 2004 represent
the fiscal years ended September 30, 2006, 2005 and 2004, respectively, and are
used throughout the document. During 2005, the Company had a 2-for-1 stock split
which was effected as a 100 percent stock dividend and was paid on September 23,
2005 to shareholders of record as of September 9, 2005. The 2004 common stock
and per share amounts have been adjusted to reflect the stock split.

INTRODUCTION

ESCO Technologies Inc. and its wholly owned subsidiaries (ESCO, the Company) are
organized into three reporting units: Communications, Filtration/Fluid Flow, and
RF Shielding and Test (Test). The Company's business segments are comprised of
the following primary operating entities:

-    Communications: Distribution Control Systems, Inc. (DCSI), Hexagram, Inc.
     (Hexagram), Nexus Energy Software, Inc. (Nexus), and Comtrak Technologies,
     L.L.C. (Comtrak),

-    Filtration/Fluid Flow: PTI Technologies Inc. (PTI), VACCO Industries
     (VACCO), and the Filtertek companies (Filtertek), 

-    Test: EMC Group companies consisting primarily of ETS-Lindgren
 L.P. (ETS)
     and Lindgren RF Enclosures, Inc. (Lindgren). 

The Communications unit is a proven supplier of special purpose fixed network
communications systems for electric, gas and water utilities, including hardware
and software to support advanced metering applications. DCSI's Two-Way Automatic
Communications System, known as TWACS(R), is currently used for automatic meter
reading (AMR) and related advanced metering functions serving approximately 200
utilities, as well as having load management capabilities. Hexagram's STAR(R)
system, the premier wireless Advanced Metering Infrastructure (AMI), delivers
two-way and one-way operation on secure licensed radio frequencies for more than
100 utilities serving electric, gas and water customers. Nexus provides
best-in-class information solutions to more than 85 leading energy companies
that add value to existing billing and metering infrastructure to allow both the
utilities and their customers to better manage energy-driven transactions and
decision making. Comtrak's SecurVision(R) product line provides digital video
surveillance and security functions for large commercial enterprises and alarm
monitoring companies. The Filtration/Fluid Flow unit develops, manufactures and
markets a broad range of filtration products used in the purification and
processing of liquids and gases. These engineered filtration products utilize
membrane, precision screen and other technologies to protect critical processes
and equipment from contaminants. Major applications include the removal of
contaminants in fuel, lubrication and hydraulic systems, various health care
applications, industrial processing, satellite propulsion systems, and oil
processing. The Test unit is the industry leader in providing its customers with
the ability to identify, measure and contain magnetic, electromagnetic and
acoustic energy.

The divestiture of the Microfiltration and Separations businesses (MicroSep) was
completed during the third quarter of fiscal 2004. The MicroSep businesses
(previously included in the Filtration/Fluid Flow segment) included PTI Advanced
Filtration Inc. (PTA), PTI Technologies Limited (PTL) and PTI S.p.A. (PTB). The
MicroSep businesses are accounted for as "discontinued operations" in fiscal
2004.

ESCO continues to operate with meaningful growth prospects in its primary served
markets and with considerable financial flexibility. The Company continues to
focus on new products that incorporate proprietary design and process
technologies. Management is committed to delivering shareholder value through
internal growth, ongoing performance improvement initiatives, and selective
acquisitions.

HIGHLIGHTS OF 2006 OPERATIONS

-    Sales, net earnings and earnings per share were $458.9 million, $31.3
     million and $1.19 per share, respectively.

-    Net cash provided by operating activities was $58.6 million.

-    At September 30, 2006, cash on hand was $36.8 million with no debt
     outstanding.

-    The Company acquired Hexagram and Nexus for approximately $92 million in
     cash.

-    DCSI's AMR product sales to TXU Electric Delivery Company (TXU) increased
     to $27.1 million in 2006


<PAGE>

     from $7.2 million in 2005.

-    In November 2005, DCSI and Hexagram signed agreements to deliver AMI
     equipment, software and services to Pacific Gas & Electric Company (PG&E)
     for approximately nine million electric and gas customers over a five year
     deployment period beginning in 2007. The total anticipated contract value
     is expected to be up to approximately $535 million assuming full
     deployment.

-    Successful deployment of upgraded TWACS system software called "TNG"
     Versions 1.5 through 1.6.2 at PG&E.


<PAGE>

RESULTS OF OPERATIONS

The following discussion refers to the Company's results from continuing
operations, except where noted. The MicroSep businesses are accounted for as
discontinued operations in 2004 in accordance with SFAS No. 144, "Accounting for
the Impairment or Disposal of Long-Lived Assets." Accordingly, amounts in the
financial statements and related notes for 2004 presented reflect discontinued
operations.

ACQUISITIONS

Effective February 1, 2006, the Company acquired the capital stock of Hexagram
for a purchase price of approximately $66 million. The acquisition agreement
also provides for contingent consideration of up to $6.3 million over a five
year period following the acquisition if Hexagram exceeds certain sales targets.
Hexagram is a radio-frequency (RF) fixed network AMR company headquartered in
Cleveland, Ohio. Hexagram broadens the Company's served market and provides an
RF based AMI system serving primarily gas and water utilities. Hexagram's annual
revenue over the past three years has been in the range of $20 million to $35
million. The operating results for Hexagram, since the date of acquisition, are
included within the Communications unit. The Company recorded approximately $51
million of goodwill and $3.5 million of trademarks as a result of the
transaction. The Company also recorded $6.6 million of identifiable intangible
assets consisting primarily of patents and proprietary know-how, customer
contracts, and order backlog which are being amortized on a straight-line basis
over periods ranging from six months to seven years.

Effective November 29, 2005, the Company acquired Nexus through an all cash for
shares merger transaction for approximately $29 million in cash plus contingent
cash consideration over the four year period following the merger if Nexus
exceeds certain sales targets. Nexus is a software company headquartered in
Wellesley, Massachusetts with annual revenues of approximately $10 million.
Nexus broadens the Company's served market and provides software solutions that
allow utilities to fully utilize the information produced by the Company's AMI
systems. The operating results for Nexus, since the date of acquisition, are
included within the Communications unit. The Company recorded approximately $24
million of goodwill as a result of the transaction. The Company also recorded
$2.7 million of identifiable intangible assets consisting of customer contracts
and backlog value which are being amortized on a straight-line basis over
periods ranging from one year to three years.

All of the Company's acquisitions have been accounted for using the purchase
method of accounting, and accordingly, the respective purchase prices were
allocated to the assets (including intangible assets) acquired and liabilities
assumed based on estimated fair values at the date of acquisition. The financial
results from these acquisitions have been included in the Company's financial
statements from the date of acquisition.

NET SALES


<TABLE>
<CAPTION>
                           Fiscal year ended      CHANGE     Change
                        ----------------------     2006       2005
(Dollars in millions)    2006     2005    2004   VS. 2005   vs. 2004
                        ------   -----   -----   --------   --------
<S>                     <C>      <C>     <C>     <C>        <C>
Communications          $156.2   138.0   137.8     13.2%      0.1%
Filtration/Fluid Flow    174.1   171.7   173.9      1.4%     (1.3)%
Test                     128.6   119.4   110.4      7.7%      8.2%
                        ------   -----   -----      ----      ----
Total                   $458.9   429.1   422.1      6.9%      1.7%
                        ======   =====   =====      ====      ====
</TABLE>


COMMUNICATIONS

The $18.2 million or 13.2% increase in net sales in 2006 as compared to the
prior year was due to: Hexagram and Nexus sales of $18.6 million and $9.6
million, respectively; partially offset by an $8.6 million decrease in sales of
Comtrak's video security products; and $1.5 million of lower shipments of DCSI's
AMR products.

The $1.5 million decrease in sales of DCSI's AMR products in 2006 as compared to
2005 was due to: an increase in sales to TXU of $19.9 million and other investor
owned utilities (IOUs) of $3.0 million; offset by $16.2 million of lower AMR
product sales to the electric utility cooperative (COOP) market due to the
decrease in orders received during the second half of fiscal 2005; and an $8.1
million decrease in sales to Puerto Rico Electric Power Authority (PREPA) as the
contract nears


<PAGE>

completion.

Comtrak's sales were $7.5 million, $16.1 million, and $5.6 million in 2006, 2005
and 2004, respectively. The decrease in sales in 2006 as compared to the prior
year was due to an acceleration of shipments in 2005 to meet the customer's
schedule. The increase in sales in 2005 versus 2004 was due to a delay in
deliveries in 2004 as a result of a significant customer requesting Comtrak to
modify its software operating system to provide enhanced "virus" protection
within the product.

The $0.2 million or 0.1% increase in Communications net sales in 2005 as
compared to the prior year was due to $10.5 million of higher shipments of
SecurVision(R) products. This increase was almost entirely offset by a $10.3
million decrease in sales of AMR products. The decrease in sales of AMR products
in 2005 versus 2004 was mainly due to the wind-down of a contract with PPL
Electric Utilities Corporation (PPL). Sales to PPL decreased $19.3 million in
2005 to $2.4 million from $21.6 million in 2004. Sales to other IOUs, such as
Bangor Hydro-Electric Company, Idaho Power Company, and PREPA decreased $17.9
million in 2005 versus 2004, and were partially offset by $7.2 million in sales
to TXU and $19.8 million of additional sales to the COOP market and other
customers.


<PAGE>

FILTRATION/FLUID FLOW

Net sales in 2006 increased $2.4 million or 1.4% compared to 2005 primarily as a
result of higher commercial aerospace shipments at PTI of $5.6 million, a net
sales increase at Filtertek of $3.3 million driven by higher commercial
shipments, partially offset by lower defense spares and T-700 shipments at VACCO
of $6.6 million.

Net sales in 2005 decreased $2.2 million or 1.3% compared to 2004 primarily as a
result of lower defense spares shipments at VACCO of $4.3 million, a net sales
decrease at Filtertek of $0.5 million driven by lower automotive shipments,
partially offset by higher commercial and military aerospace shipments at PTI of
$2.6 million.

TEST

The net sales increase of $9.2 million or 7.7% in 2006 as compared to the prior
year was mainly due to: a $10.2 million increase in net sales from the Company's
U.S. operations driven by sales of additional test chambers and higher component
sales, a $0.6 million increase in net sales from the Company's Asian operations;
partially offset by a $1.6 million decrease in net sales from the Company's
European operations due to the prior year completion of several test chamber
projects.

The net sales increase of $9.0 million or 8.2% in 2005 as compared to 2004 was
mainly due to: an $11.5 million increase in net sales from the Company's U.S.
operations driven by the successful completion of the design on a large aircraft
chamber project, additional test chamber installations, higher component sales,
and the installation of several government shielding projects; a $4.3 million
increase in sales from the Company's Asian operations; partially offset by a
$6.9 million decrease in net sales from the Company's European operations due to
the completion of two large test chamber projects in 2004.

ORDERS AND BACKLOG

New orders received in 2006 were $479.2 million, resulting in an order backlog
of $253.4 million at September 30, 2006 as compared to an order backlog of
$233.1 million at September 30, 2005. In 2006, the Company recorded $187.5
million of new orders related to Communications products (including $19.0
million of new orders and $6.0 million of acquired backlog from Hexagram and
$16.7 million of new orders and $9.0 million of acquired backlog from Nexus),
$172.1 million related to Filtration products, and $119.6 million related to
Test products.

Within the Communications segment, DCSI received $129.3 million, $105.1 million
and $106.3 million of new orders for its AMR products in 2006, 2005 and 2004,
respectively. DCSI received $19.2 million of new orders from TXU in 2006. In
addition, in November 2005, DCSI signed an agreement to provide equipment,
software and services to PG&E with a potential contract value of up to
approximately $310 million covering up to five million electric endpoints over a
five-year deployment period beginning in 2007. DCSI received orders totaling
$4.2 million from PG&E under this agreement during 2006. Also, in November 2005,
Hexagram entered into a contract to provide equipment, software and services to
PG&E in support of the gas utility portion of PG&E's AMI project. The total
potential contract revenue from commencement through the five-year full
deployment is up to approximately $225 million. Hexagram received orders
totaling $0.7 million from PG&E under this agreement during 2006. See further
discussion under "Pacific Gas & Electric."

In 2005, the Company recorded $117.2 million of new orders related to
Communications products, $174.4 million related to Filtration products, and
$121.5 million related to Test products.

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES

Selling, general and administrative expenses (SG&A) were $106.9 million, or
23.3% of net sales in 2006, $84.2 million, or 19.6% of net sales in 2005, and
$77.3 million, or 18.3% of net sales in 2004.

The increase in SG&A expenses in 2006 as compared to the prior year was
primarily due to: $7.5 million of SG&A expenses related to Nexus; $6.8 million
of SG&A expenses related to Hexagram; $2.3 million of stock option expense and
higher costs related to engineering and new product development.

The increase in SG&A expenses in 2005 as compared to 2004 was primarily due to
an increase of $4.9 million associated with engineering, marketing and new
product development within the Communications segment in pursuit of the IOU
market.

AMORTIZATION OF INTANGIBLE ASSETS

Amortization of intangible assets was $6.9 million in 2006, $2.0 million in 2005
and $2.1 million in 2004. Amortization of intangible assets in 2006 included
$2.7 million of amortization of


<PAGE>

acquired intangible assets related to the Hexagram and Nexus acquisitions, as
described in Note 2 to the Consolidated Financial Statements. The amortization
of acquired intangible assets related to Hexagram and Nexus are included in the
Corporate operating segment's results. The remaining amortization expenses
consist of other identifiable intangible assets (primarily software, patents and
licenses). In March 2006, the Company began amortizing DCSI's TNG software and
during 2006, the Company recorded $2.2 million of amortization related to its
TNG software.

OTHER (INCOME) AND EXPENSES, NET

Other (income) and expenses, net, were $(2.8) million, $(1.6) million and $0.6
million in 2006, 2005 and 2004, respectively. Other (income) and expenses, net,
in 2006 consisted primarily of the following items: $(1.8) million non-cash gain
representing the reversal of a liability related to an indemnification
obligation with respect to a previously divested subsidiary; $(2.3) million of
royalty income; partially offset by a $0.2 million charge related to the
termination of a subcontract manufacturer.

Other (income) and expenses, net, in 2005 consisted primarily of: $(2.2) million
of royalty income; and a $0.5 million charge related to the termination of a
supply agreement with a medical device customer.

Other (income) and expenses, net, in 2004 consisted primarily of: $0.8 million
of exit costs related to the Puerto Rico facility; a $(0.6) million gain from
the settlement of a claim related to a former defense subsidiary divested in
1999; and a $0.4 million charge for the settlement of a claim involving a former
defense subsidiary divested in 1996.

ASSET IMPAIRMENT -- 2005

In June 2005, the Company abandoned its plans to commercialize certain sensor
products within the Filtration/Fluid Flow segment. This action resulted in an
asset impairment charge of $0.8 million to write off certain patents and a
related licensing agreement to their respective fair market values. The Company
ended its development efforts on this program after it determined that the
market was not developing as quickly as anticipated and the expected costs and
time frame to fully commercialize the products were not acceptable.

EARNINGS BEFORE INTEREST AND TAXES (EBIT)

The Company evaluates the performance of its operating segments based on EBIT,
which the Company defines as earnings from continuing operations before interest
and taxes.

EBIT is not a defined GAAP measure. However, the Company believes that EBIT
provides investors and Management with a valuable and alternative method for
assessing the Company's operating results. Management evaluates the performance
of its operating segments based on EBIT and believes that EBIT is useful to
investors to demonstrate the operational profitability of the Company's business
segments by excluding interest and taxes, which are generally accounted for
across the entire company on a consolidated basis. EBIT is also one of the
measures Management uses to determine resource allocations and incentive
compensation.


<TABLE>
<CAPTION>
                           Fiscal year ended      CHANGE     Change
                        ----------------------     2006       2005
(Dollars in millions)    2006     2005    2004   VS. 2005   vs. 2004
                        ------   -----   -----   --------   --------
<S>                     <C>      <C>     <C>     <C>        <C>
Communications          $ 28.3    38.8    38.4    (27.1)%      1.0%
   % of net sales         18.1%   28.1%   27.9%   (10.0)%      0.2%
Filtration/Fluid Flow     19.5    22.4    21.8    (12.9)%      2.8%
   % of net sales         11.2%   13.1%   12.5%    (1.9)%      0.6%
Test                      15.0    12.2    11.3     23.0%       8.0%
   % of net sales         11.7%   10.2%   10.2%     1.5%        --%
Corporate                (15.2)  (11.4)  (11.8)    33.3%      (3.4)%
                        ------   -----   -----    -------     -----
Total                   $ 47.6    62.0    59.7    (23.2)%      3.9%
   % of net sales         10.4%   14.4%   14.1%    (4.0)%      0.3%
                        ======   =====   =====    =======     =====
</TABLE>


The reconciliation of EBIT to a GAAP financial measure is as follows:



<PAGE>


<TABLE>
<CAPTION>
(dollars in millions)       2006     2005    2004
                           ------   -----   -----
<S>                        <C>      <C>     <C> 
EBIT                       $ 47.6    62.0    59.7
Add: Interest income          1.3     1.9     0.8
Less: Income taxes          (17.6)  (20.4)  (22.7)
                           ------   -----   -----
Net earnings from
   continuing operations   $ 31.3    43.5    37.8
                           ======   =====   =====
</TABLE>


COMMUNICATIONS

The decrease in EBIT in 2006 as compared to 2005 was due to: a $7.8 million
decrease at DCSI due to changes in product mix (IOU vs. COOP), charges related
to a terminated subcontract manufacturer, warranty costs and amortization of TNG
software; a $3.8 million decrease at Comtrak due to lower shipments; a $0.7
million loss at Nexus due to the timing of customer deployments and additional
SG&A spending related to engineering and new product initiatives; partially
offset by a $1.8 million contribution from Hexagram.

The increase in EBIT in 2005 as compared to the prior year was due to: a $4.6
million increase at Comtrak due to significantly higher shipments; partially
offset by a $4.2 million decrease at DCSI, which continued to increase its
engineering and new product development expenditures in order to accommodate the
growth in the AMR/AMI markets, and to further differentiate its technology from
the competition.

FILTRATION/FLUID FLOW

EBIT decreased in 2006 as compared to 2005 primarily due to: a $4.3 million
decrease at VACCO due to significantly lower defense spares shipments; a $1.4
million decrease at Filtertek partially due to increasing raw material costs on
petroleum based resins; partially offset by a $2.8 million increase at PTI due
to higher shipments of aerospace products. The 2005 operating results for
Filtertek included a $1.9 million gain related to the termination of a supply
agreement with a medical device customer that was not repeated in 2006.

EBIT increased in 2005 as compared to the prior year primarily due to: a $2.5
million increase at Filtertek, which included a $1.9 million gain related to the
termination of a supply agreement with a medical device customer; a $1.4 million
increase at PTI due to higher shipments of aerospace products; partially offset
by the $0.8 million asset impairment charge at PTI; and a $3.3 million decrease
at VACCO due to significantly lower defense spares shipments. In 2005, Filtertek
experienced an increase in its raw material costs on petroleum based resins
which negatively impacted EBIT.

TEST

The increase in EBIT in 2006 as compared to the prior year was mainly due to: a
$2.1 million increase in EBIT from the Company's U.S. operations driven by sales
of additional test chambers and higher component sales, a $0.4 million increase
in EBIT from the Company's European operations, and a $0.3 million increase in
EBIT from the Company's Asian operations.

EBIT in 2005 included: a $0.9 million increase in EBIT from the Company's U.S.
operations driven by favorable changes in sales mix resulting from additional
sales of antennas and other components partially offset by installation cost
overruns incurred on certain government shielding projects, as well as increased
material costs for steel and copper.

CORPORATE

Corporate office operating charges included in consolidated EBIT increased by
$3.8 million in 2006 as compared to 2005 mainly due to: $2.7 million of pre-tax
amortization of acquired intangible assets related to Nexus and Hexagram; $2.3
million of pre-tax stock option expense; partially offset by a $1.8 million
non-cash gain representing the reversal of a liability related to an
indemnification obligation with respect to a previously divested subsidiary.
Corporate office operating charges included in consolidated EBIT decreased by
$0.4 million in 2005 as compared to 2004. Fiscal 2005 included an increase of
$0.5 million for professional fees and 2004 included $0.9 million of severance
related costs not repeated in 2005. The "Reconciliation to Consolidated Totals
(Corporate)" in note 15 to the consolidated financial statements represents
Corporate office operating charges.

INTEREST INCOME

Interest income was $1.3 million in 2006, $1.9 million in 2005 and $0.8 million
in 2004. The decrease in interest income in 2006 as compared to 2005 was due to
lower average cash balances on hand resulting from the 2006 acquisitions. The
increase in interest income in 2005 as compared to the prior year was due to
higher average cash balances on hand during the year and a $0.2 million


<PAGE>

refund of look back interest related to income taxes.

INCOME TAX EXPENSE

The effective tax rate for continuing operations in 2006 was 36.0% compared to
31.9% in 2005 and 37.6% in 2004. The increase in the effective tax rate in 2006
as compared to the prior year was due to: the effect of the foreign earnings
repatriation increased 2006 income tax expense by $2.4 million and the effective
rate by 4.8%; the adoption of SFAS 123(R) increased tax expense by $0.7 million
and the effective rate by 1.4%; the lower volume of profit contributions of the
Company's foreign operations (primarily Puerto Rico due to the lower sales to
PREPA) adversely impacted the tax rate; partially offset by the effect of a
favorable change in tax contingencies not related to the research tax credit
which decreased tax expense by $1.4 million and the effective tax rate by 2.9%
and the net effect of the research tax credit which favorably impacted tax
expense by $2.5 million and the effective tax rate by 5%. The decrease in the
effective tax rate for continuing operations in 2005 as compared to 2004 was due
to the timing and volume of profit contributions of DCSI's foreign operations
(Puerto Rico), which resulted in a 4.6% favorable adjustment to the Company's
foreign tax rate differential.

During 2006, the Company determined that state tax expense had not been
accurately recorded in the financial statements for years 2001 through 2005. The
effect in any individual prior year was not material to the Company's results of
operations, financial position or cash flows. The Company adopted the provisions
of SEC Staff Accounting Bulletin No. 108, "Considering the Effects of Prior Year
Misstatements when Quantifying Misstatements in Current Year Financial
Statements" and recorded $2.4 million as a cumulative credit adjustment to 2006
beginning retained earnings.

CAPITAL RESOURCES AND LIQUIDITY

Working capital (current assets less current liabilities) decreased to $131.4
million at September 30, 2006 from $197.2 million at September 30, 2005. During
2006, cash and cash equivalents decreased $67.7 million, primarily due to the
$92 million spent on acquisitions.

The $15.0 million increase in accounts receivable at September 30, 2006 is
mainly due to: $8.3 million related to Nexus and Hexagram; and $5.7 million
related to the Filtration segment due to timing and volume of sales. The $2.3
million increase in inventories at September 30, 2006 is mainly due to a $4.4
million increase related to Hexagram, partially offset by a $3.8 million
decrease at DCSI. Accounts payable increased by $10.2 million at September 30,
2006, of which $3.0 million related to Nexus and Hexagram and $4.6 million
related to the timing of vendor payments at DCSI.

Net cash provided by operating activities was $58.6 million, $68.6 million and
$61.0 million in 2006, 2005 and 2004, respectively. The decrease in 2006 is
related to lower net earnings in the current year. The increase in 2005 as
compared to 2004 is the result of higher earnings and lower cash requirements
related to MicroSep.

Capital expenditures for continuing operations were $9.1 million, $8.8 million
and $10.8 million in 2006, 2005 and 2004, respectively. Major expenditures
included manufacturing equipment and facility modifications used in the
Filtration segment. There were no commitments outstanding that were considered
material for capital expenditures at September 30, 2006.

At September 30, 2006, intangible assets, net, of $59.2 million included $45.2
million of capitalized software. Approximately $40.0 million of the capitalized
software balance represents external development costs on software development
called "TNG" within the Communications segment to further penetrate the IOU
market. TNG is being deployed to efficiently handle the additional levels of
communications dictated by the size of the service territories and the frequency
of reads that are required under time-of-use or critical peak pricing scenarios
to meet the requirements of large IOUs. At September 30, 2006, the Company had
approximately $5 million of commitments related to TNG version 1.6.3 which is
expected to be spent over the next six months. The Company expects to spend up
to approximately $10 million in fiscal 2007 on TNG. Amortization of TNG is on a
straight-line basis over seven years and began in March 2006. The Company
recorded $2.2 million in amortization expense related to TNG during 2006.

At September 30, 2006, the Company had an available net operating loss (NOL)
carryforward for U.S. federal tax purposes of approximately $15 million. This
NOL will expire between 2019 and 2025, and will be available to reduce future
Federal income tax cash payments.

The closure and relocation of the Filtertek Puerto Rico facility was completed
in March 2004. The Puerto Rico facility is included in other current assets with
a carrying value of $3.6 million at


<PAGE>

September 30, 2006. The facility is being marketed for sale.

During 2005, the Company reached a settlement in the defense of a certain
revenue-generating patent used in the Filtration business. Under the terms of
the agreement, the Company received a cash payment of $1.5 million, and in 2005
the Company recognized a gain of $0.3 million, after deducting $0.2 million of
professional fees related to the settlement. The unrecognized gain is being
recorded on a straight-line basis in Other (income) and expenses, net, over the
remaining patent life, through 2011.

In 2004, the Company received $2.1 million as final payment on the note
receivable from the sale of the Riverhead, NY, property which was sold in 1999.

PACIFIC GAS & ELECTRIC

In November 2005, DCSI entered into a contract to provide equipment, software
and services to Pacific Gas & Electric (PG&E) in support of the electric portion
of PG&E's Advanced Metering Infrastructure (AMI) project. PG&E's current AMI
project plan calls for the purchase of TWACS communication equipment for up to
approximately five million electric customers over a five-year period after the
commencement of full deployment. The total anticipated contract value from
commencement through the five-year full deployment period is expected to be up
to approximately $310 million. PG&E also has the right to purchase additional
equipment and services to support existing and new customers through the 20-year
term of the contract. Equipment will be purchased by PG&E only upon issuance of
purchase orders and release authorizations. PG&E will continue to have the right
to purchase products or services from other suppliers for the electric portion
of the AMI project. On July 20, 2006, the California Public Utilities Commission
approved PG&E's AMI project. DCSI has agreed to deliver to PG&E versions of its
newly developed TNG software as they become available and are tested. Delivery
of the final version for which DCSI has committed is currently anticipated in
the fourth quarter of fiscal 2007. In accordance with U.S. generally accepted
accounting standards, the Company will defer all revenue related to the DCSI
arrangement until all software is delivered and acceptance criteria have been
met. The contract provides for liquidated damages in the event of DCSI's late
development or delivery of hardware and software, and includes indemnification
and other customary provisions. The contract may be terminated by PG&E for
default, for its convenience and in the event of a force majeure lasting beyond
certain prescribed periods. The Company has guaranteed the obligations of DCSI
under the contract. If PG&E terminates the contract for its convenience, DCSI
will be entitled to recover certain costs.

In November 2005, Hexagram entered into a contract to provide equipment,
software and services to PG&E in support of the gas utility portion of PG&E's
AMI project. The total anticipated contract revenue from commencement through
the five-year full deployment is expected to be approximately $225 million. As
with DCSI's contract with PG&E, equipment will be purchased only upon issuance
of purchase orders and release authorizations, and PG&E will continue to have
the right to purchase products or services from other suppliers for the gas
utility portion of the AMI project. On July 20, 2006, the California Public
Utilities Commission approved PG&E's AMI project. The contract provides for
liquidated damages in the event of late deliveries, includes indemnification and
other customary provisions, and may be terminated by PG&E for default, for its
convenience and in the event of a force majeure lasting beyond certain
prescribed periods. The Company has guaranteed the performance of the contract
by Hexagram.

DIVESTITURES

Effective April 2, 2004, the Company completed the sale of PTI Advanced
Filtration Inc. (Oxnard, California) and PTI Technologies Limited (Sheffield,
England) to domnick hunter group plc for $18.0 million in cash. On June 8, 2004,
the Company completed the sale of PTI S.p.A. (Milan, Italy) to a group of
investors comprised of the subsidiary's senior management for $5.3 million. An
after-tax gain of $1.6 million related to the sale of these MicroSep businesses
is reflected in the Company's 2004 results in discontinued operations. These
businesses are accounted for as a discontinued operation in accordance with SFAS
144, "Accounting for the Impairment or Disposal of Long-Lived Assets," and
accordingly, amounts in the financial statements and related notes for 2004,
reflect discontinued operations presentation.

BANK CREDIT FACILITY

Effective October 6, 2004, the Company entered into a $100 million five-year
revolving bank credit facility with a $50 million increase option that has a
final maturity and expiration date of October 6, 2009. The credit facility is
available for direct borrowings and/or the issuance of letters of credit, and is
provided by a group of six banks, led by Wells Fargo Bank as agent.


<PAGE>

The credit facility requires, as determined by certain financial ratios, a
commitment fee ranging from 17.5 to 27.5 basis points per annum on the unused
portion. The terms of the facility provide that interest on borrowings may be
calculated at a spread over the LIBOR or based on the prime rate, at the
Company's election. The credit facility is secured by the unlimited guaranty of
the Company's material domestic subsidiaries and a 65% pledge of the material
foreign subsidiaries' share equity. The financial covenants of the credit
facility include limitations on leverage, minimum consolidated EBITDA and
minimum net worth.

At September 30, 2006, the Company had approximately $99.2 million available to
borrow under the credit facility in addition to its $36.8 million cash on hand.
At September 30, 2006, the Company had no borrowings, and outstanding letters of
credit of $1.5 million ($0.8 million outstanding under the credit facility). As
of September 30, 2006, the Company was in compliance with all bank covenants.

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.

CONTRACTUAL OBLIGATIONS

The following table shows the Company's contractual obligations as of September
30, 2006:

(dollars in millions) Payments due by period


<TABLE>
<CAPTION>
                                 Less                        More
Contractual                      than    1 to 3   3 to 5     than
Obligations             Total   1 year    years    years   5 years
-----------             -----   ------   ------   ------   -------
<S>                     <C>     <C>      <C>      <C>      <C>
Long-Term Debt
   Obligation           $  --      --       --       --       --
Capital Lease
   Obligations            0.9     0.4      0.3      0.2       --
Operating Lease
   Obligations           22.3     7.1      7.9      4.0      3.3
Purchase
   Obligations(1)         5.0     5.0       --       --       --
                        -----    ----      ---      ---      ---
Total                   $28.2    12.5      8.2      4.2      3.3
                        =====    ====      ===      ===      ===
</TABLE>


(1)  A purchase obligation is defined as a legally binding and enforceable
     agreement to purchase goods and services that specifies all significant
     terms. Since the majority of the Company's purchase orders can be
     cancelled, they are not included in the table above. TNG software
     development costs through version 1.6.3 are included.

The Company has no off balance sheet arrangements outstanding at September 30,
2006.

SHARE REPURCHASES

In August 2006, the Company's Board of Directors authorized an open market
common stock repurchase program for up to 1.2 million shares, subject to market
conditions and other factors which covers the period through September 30, 2008.
There were no stock repurchases during fiscal 2006. The Company repurchased
670,072 and 312,400 shares in 2005 and 2004, respectively, under a previously
authorized program.

PENSION FUNDING REQUIREMENTS

The minimum cash funding requirements related to the Company's defined benefit
pension plans are zero in 2007, approximately $1 million in 2008 and
approximately $1 million in 2009. The Company made a voluntary cash contribution
of $1.4 million in 2006.

OTHER

Management believes that, for the periods presented, inflation has not had a
material effect on the Company's results of operations.

The Company is currently involved in various stages of investigation and
remediation 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.


<PAGE>

MARKET RISK ANALYSIS

MARKET RISK EXPOSURE

Market risks relating to the Company's operations result primarily from changes
in interest rates and changes in foreign currency exchange rates.

At September 30, 2006 and 2005, the Company had no obligations related to
interest rate swaps. During 2004, in conjunction with the sale of PTI S.p.A.,
the Company repaid its $8.0 million Euro-denominated debt, and at the same time,
the Company terminated its $5.0 million interest rate swap obligation, resulting
in a cash payment of $0.1 million by the Company.

The Company is also subject to foreign currency exchange rate risk inherent in
its sales commitments, anticipated sales, anticipated purchases and assets and
liabilities denominated in currencies other than the U.S. dollar. The foreign
currency most significant to the Company's operations is the Euro. Net sales to
customers outside of the United States were $103.0 million, $103.8 million, and
$91.5 million in 2006, 2005 and 2004, respectively. The Company hedges certain
foreign currency commitments by purchasing foreign currency forward contracts.
The estimated fair value of open forward contracts at September 30, 2006 was not
material.

CRITICAL ACCOUNTING POLICIES

The preparation of financial statements in conformity with GAAP requires
Management to make estimates and assumptions in certain circumstances that
affect amounts reported in the accompanying consolidated financial statements.
In preparing these financial statements, Management has made its best estimates
and judgments of certain amounts included in the financial statements, giving
due consideration to materiality. The Company does not believe there is a great
likelihood that materially different amounts would be reported under different
conditions or using different assumptions related to the accounting policies
described below. However, application of these accounting policies involves the
exercise of judgment and use of assumptions as to future uncertainties and, as a
result, actual results could differ from these estimates. The Company's senior
Management discusses the critical accounting policies described below with the
Audit and Finance Committee of the Company's Board of Directors on a periodic
basis.

The following discussion of critical accounting policies is intended to bring to
the attention of readers those accounting policies which Management believes are
critical to the Consolidated Financial Statements and other financial
disclosure. It is not intended to be a comprehensive list of all significant
accounting policies that are more fully described in Note 1 of Notes to
Consolidated Financial Statements.

REVENUE RECOGNITION

COMMUNICATIONS UNIT: Within the Communications unit, approximately 95% of the
unit's revenue arrangements (approximately 30% of consolidated revenues) contain
software components. Revenue under these arrangements is recognized in
accordance with Statement of Position 97-2 (SOP 97-2), "Software Revenue
Recognition," as amended by SOP 98-9, "Modification of SOP 97-2, Software
Revenue Recognition, with Respect to Certain Transactions." The application of
software revenue recognition requires judgment, including the determination of
whether a software arrangement includes multiple elements and estimates of the
fair value of the elements, or vendor-specific objective evidence of fair value
("VSOE"). Changes to the elements in a software arrangement, and the ability to
identify VSOE for those elements could materially impact the amount of earned
and/or deferred revenue. There have been no material changes to these estimates
for the financial statement periods presented and the Company believes that
these estimates generally should not be subject to significant variation in the
future. The remaining 5% of the unit's revenues represent products sold under a
single element arrangement and are recognized when products are delivered to
unaffiliated customers.

FILTRATION/FLUID FLOW UNIT: Within the Filtration/Fluid Flow operating unit,
approximately 75% of operating unit revenues (approximately 30% of consolidated
revenues) are recognized when products are delivered (when title and risk of
ownership transfers) or when services are performed for unaffiliated customers.

Approximately 25% of operating unit revenues (approximately 10% of consolidated
revenues) are recorded under the percentage-of-completion provisions of SOP
81-1, "Accounting for Performance of Construction-Type and Certain
Production-Type Contracts" because the Company manufactures complex products for
aerospace and military customers under production contracts. The
percentage-of-completion method of accounting involves the use of various
estimating techniques to project costs at completion. These estimates involve
various assumptions and projections relative to the outcome


<PAGE>

of future events over a period of several years, including future labor
productivity and availability, the nature and complexity of the work to be
performed, availability of materials, the impact of delayed performance, and the
timing of product deliveries. These estimates are based on Management's judgment
and the Company's substantial experience in developing these types of estimates.
Changes in underlying assumptions/estimates may adversely affect financial
performance if they increase estimated project costs at completion, or
positively affect financial performance if they decrease estimated project costs
at completion. Due to the nature of these contracts and the operating unit's
cost estimating process, the Company believes that these estimates generally
should not be subject to significant variation in the future. There have been no
material changes to these estimates for the financial statement periods
presented. The Company regularly reviews its estimates to assess revisions in
contract values and estimated costs at completion.

TEST UNIT: Within the Test unit, approximately 60% of revenues (approximately
20% of consolidated revenues) are recognized when products are delivered (when
title and risk of ownership transfers) or when services are performed for
unaffiliated customers. Certain arrangements contain multiple elements which are
accounted for under the provisions of EITF 00-21, "Revenue Arrangements with
Multiple Deliverables." The application of EITF 00-21 requires judgment as to
whether the deliverables can be divided into more than one unit of accounting
and whether the separate units of accounting have value to the customer on a
stand-alone basis. Changes to these elements could affect the timing of revenue
recognition. There have been no material changes to these elements for the
financial statement periods presented.

Approximately 40% of the unit's revenues (approximately 10% of consolidated
revenues) are recorded under the percentage-of-completion provisions of SOP
81-1, "Accounting for the Performance of Construction-Type and Certain
Production-Type Contracts" due to the complex nature of the enclosures that are
designed and produced under these contracts. As discussed above, this method of
accounting involves the use of various estimating techniques to project costs at
completion, which are based on Management's judgment and the Company's
substantial experience in developing these types of estimates. Changes in
underlying assumptions/estimates may adversely or positively affect financial
performance. Due to the nature of these contracts and the operating unit's cost
estimating process, the Company believes that these estimates generally should
not be subject to significant variation in the future. There have been no
material changes to these estimates for the financial statement periods
presented. The Company regularly reviews its contract estimates to assess
revisions in contract values and estimated costs at completion.

INVENTORY

Inventories are valued at the lower of cost (first-in, first-out) or market
value. Management regularly reviews inventories on hand compared to historical
usage and estimated future usage and sales. 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 unliquidated progress payments. 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
may not be realized within one year.

INCOME TAXES

The Company operates in numerous taxing jurisdictions and is subject to
examination by various U.S. Federal, state and foreign jurisdictions for various
tax periods. Additionally, the Company has retained tax liabilities and the
rights to tax refunds in connection with various divestitures of businesses in
prior years. The Company's income tax positions are based on research and
interpretations of the income tax laws and rulings in each of the jurisdictions
in which the Company does business. Due to the subjectivity of interpretations
of laws and rulings in each jurisdiction, the differences and interplay in tax
laws between those jurisdictions, as well as the inherent uncertainty in
estimating the final resolution of complex tax audit matters, Management's
estimates of income tax liabilities may differ from actual payments or
assessments.

While the Company has support for the positions taken on its tax returns, taxing
authorities are increasingly asserting alternate interpretations of laws and
facts, and are challenging cross jurisdictional transactions. Cross
jurisdictional transactions between the Company's subsidiaries involving
transfer prices for products and services, as well as various U.S. federal,
state and foreign tax matters, comprise the Company's income tax exposures.
Management regularly assesses the Company's position with regard to tax
exposures and records liabilities for these uncertain tax positions and related
interest and penalties, if any, according to the principles of SFAS No. 5,
"Accounting for Contingencies." The Company has recorded an accrual that
reflects Management's


<PAGE>

estimate of the likely outcome of current and future audits. A final
determination of these tax audits or changes in Management's estimates may
result in additional future income tax expense or benefit.

At the end of each interim reporting period, Management estimates the effective
tax rate expected to apply to the full fiscal year. The estimated effective tax
rate contemplates the expected jurisdiction where income is earned, as well as
tax planning strategies. Current and projected growth in income in higher tax
jurisdictions may result in an increasing effective tax rate over time. If the
actual results differ from Management's estimates, Management may have to adjust
the effective tax rate in the interim period such determination is made.

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 may be reduced by a valuation
allowance if it is more likely than not that some portion of 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. The Company regularly reviews its deferred tax
assets for recoverability and establishes a valuation allowance when Management
believes it is more likely than not such assets will not be recovered, taking
into consideration historical operating results, expectations of future
earnings, tax planning strategies, and the expected timing of the reversals of
existing temporary differences.

GOODWILL AND OTHER LONG-LIVED ASSETS

In accordance with SFAS 142, Management annually reviews goodwill and other
long-lived assets with indefinite useful lives for impairment or whenever events
or changes in circumstances indicate the carrying amount may not be recoverable.
If the Company determines that the carrying value of the long-lived asset may
not be recoverable, a permanent impairment charge is recorded for the amount by
which the carrying value of the long-lived asset exceeds its fair value. Fair
value is measured based on a discounted cash flow method using a discount rate
determined by Management to be commensurate with the risk inherent in the
Company's current business model. The estimates of cash flows and discount rate
are subject to change due to the economic environment, including such factors as
interest rates, expected market returns and volatility of markets served.
Management believes that the estimates of future cash flows and fair value are
reasonable; however, changes in estimates could result in impairment charges.
SFAS 142 also requires that intangible assets with estimable useful lives be
amortized over their respective estimated useful lives to their estimated
residual values, and reviewed for impairment in accordance with SFAS 144.

PENSION PLANS AND OTHER POSTRETIREMENT BENEFIT PLANS

The measurement of liabilities related to pension plans and other
post-retirement benefit plans is based on Management's assumptions related to
future events including interest rates, return on pension plan assets, rate of
compensation increases, and health care cost trend rates. Actual pension plan
asset performance will either decrease or increase unamortized pension losses
that will affect net earnings in future years. Depending upon the performance of
the equity and bond markets in 2007, the Company could be required to record a
charge to equity. In addition, if the discount rate was decreased by 25 basis
points from 5.75% to 5.50%, the accumulated benefit obligation for the defined
benefit plan would increase by approximately $1.6 million and result in an
additional after-tax charge to shareholders' equity of approximately $1.0
million. The discount rate used in measuring the Company's pension and
postretirement welfare obligations was developed by matching yields of actual
high-quality corporate bonds to expected future pension plan cash flows (benefit
payments). Over 500 Aa-rated, non-callable bonds with a wide range of maturities
were used in the analysis. After using the bond yields to determine the present
value of the plan cash flows, a single representative rate that resulted in the
same present value was developed.

OTHER MATTERS

CONTINGENCIES

As a normal incident of the businesses in which the Company is engaged, various
claims, charges and litigation are asserted or commenced against the Company.
Lindgren is involved in a contract dispute with a prime contractor involving the
assertion of certain construction delay damages of


<PAGE>

approximately $3.7 million. The project was completed in 2005. Lindgren
vigorously denies responsibility for this delay and for these damages, and has
asserted a claim against the prime contractor of $0.9 million based on damages
suffered by Lindgren. Lindgren continues to aggressively defend its position and
pursue its right to affirmative damages however, there can be no assurance of
the outcome at this time. In the opinion of Management, final judgments, if any,
which might be rendered against the Company are adequately reserved, covered by
insurance, or are not likely to have a material adverse effect on its financial
statements.

<PAGE>

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Market risks relating to the Company's operations result primarily from changes
in interest rates and changes in foreign currency exchange rates. At September
30, 2006 and 2005, the Company had no obligations related to interest rate
swaps. During 2004, in conjunction with the sale of PTI S.p.A., the Company
repaid its $8.0 million Euro-denominated debt and at the same time, the Company
terminated its $5.0 million interest rate swap obligation resulting in a cash
payment of $0.1 million by the Company. See further discussion in "Management's
Discussion and Analysis -- Market Risk Analysis" regarding the Company's market
risks.

CONTROLS AND PROCEDURES

The Company carried out an evaluation under the supervision of and with the
participation of Management, including the Company's Chief Executive Officer and
Chief Financial Officer, of the effectiveness of the design and operation of the
Company's disclosure controls and procedures as of the end of the period covered
by this report. Based upon that evaluation, the Company's Chief Executive
Officer and Chief Financial Officer concluded that the Company's disclosure
controls and procedures are effective excluding the Hexagram and Nexus
acquisitions. Disclosure controls and procedures are controls and procedures
that are designed to ensure that information required to be disclosed in company
reports filed or submitted under the Securities Exchange Act of 1934 is
recorded, processed, summarized and reported within time periods specified in
the Securities and Exchange Commission's rules and forms. There have been no
significant changes in the Company's internal controls or in other factors
during the period covered by this report that have materially affected, or are
reasonably likely to materially affect those controls and procedures.

NEW ACCOUNTING PRONOUNCEMENTS

In December 2004, the FASB issued SFAS No. 123(R), "Share-Based Payment" (SFAS
123(R)). This Statement replaces SFAS No. 123, "Accounting for Stock-Based
Compensation" and supersedes APB No. 25, "Accounting for Stock Issued to
Employees." SFAS 123(R) requires all stock-based compensation to be recognized
as an expense in the financial statements and that such cost be measured
according to the fair value of stock options. The Company adopted the provisions
of this Statement in the first quarter of fiscal 2006 on a prospective basis. 

In December 2004, the FASB issued FASB Staff Position FAS 109-2, "Accounting and
Disclosure Guidance for the Foreign Earnings Repatriation Provision within the
American Jobs Creation Act of 2004 (FSP 109-2)." The American Jobs Creation Act
of 2004, (the "Act") provides for a special one-time deduction of 85 percent of
certain foreign earnings repatriated into the U.S. from non-U.S. subsidiaries
through September 30, 2006. During fiscal 2006, the Company repatriated $39.5
million of foreign earnings which qualify for the special one-time deduction.
Tax expense of $2.4 million was recorded in fiscal 2006 as a result of this
repatriation.

In June 2006, the FASB issued FASB Interpretation No. 48, "Accounting for
Uncertainty in Income Taxes, an Interpretation of FASB Statement No. 109." This
Interpretation is effective for ESCO beginning October 1, 2007. This
Interpretation prescribes a recognition threshold and measurement process for
the financial statement recognition and measurement of a tax position taken or
expected to be taken in a tax return. The Company is currently evaluating the
adoption of this Interpretation and does not currently have an estimate of the
impact on the consolidated financial statements.

In September 2006, the FASB issued SFAS No. 158, "Employer's Accounting for
Defined Benefit Pension and Other Postretirement Plans" (SFAS 158), which amends
SFAS 87 and SFAS 106 to require recognition of the overfunded or underfunded
status of pension and other postretirement benefit plans on the balance sheet.
Under SFAS 158, gains and losses, prior service costs and credits, and any
remaining transition amounts under SFAS 87 and SFAS 106 that have not yet been
recognized through net periodic benefit cost will be recognized in accumulated
other comprehensive income, net of tax effects. The measurement date -- the date
at which the benefit obligation and plan assets are measured -- is required to
be the Company's fiscal year-end, which is the date the Company currently uses.
SFAS 158 is effective for publicly held companies for fiscal years ending after
December 15, 2006. The adoption of SFAS 158 is not expected to have a material
impact to the Company's financial position or results of operations.

In September 2006, the SEC issued Staff Accounting Bulletin No. 108,
"Considering the Effects of Prior Year Misstatements when Quantifying
Misstatements in Current Year Financial Statements" (SAB No. 108), which
addresses the diversity in practice in quantifying financial statement


<PAGE>

misstatements and provides interpretative guidance regarding the consideration
given to prior year misstatements when determining materiality in current year
financial statements. During 2006, the Company adopted the provisions of SAB No.
108 and recorded $2.4 million as a cumulative credit adjustment to 2006
beginning retained earnings.

In September 2006, the FASB issued SFAS No. 157, "Fair Value Measurements" (SFAS
157), which defines fair value in generally accepted accounting principles and
expands disclosures about fair value measurements. This Statement is effective
for financial statements issued for fiscal years beginning after November 15,
2007. The adoption of SFAS 157 is not expected to have a material impact to the
Company's financial position or results of operations.

FORWARD-LOOKING INFORMATION

Statements regarding future events and the Company's future results that are
based on current expectations, estimates, forecasts and projections about the
Company's performance and the industries in which the Company operates, the
Company's ability to utilize NOLs, adequacy of the Company's credit facility and
future cash flows, estimates of anticipated contract costs and revenues, the
timing, amount and success of claims for research credits, the success of
software development efforts and resulting costs, acceptance by PG&E of the
final version of DCSI's TNG software, growth in the AMR market, potential
customer contracts, the anticipated value of the PG&E contract, the outcome of
current litigation, claims and charges, recoverability of deferred tax assets,
continued reinvestment of foreign earnings, the impact of SFAS 158, future costs
relating to environmental matters, share repurchases, investments, sustained
performance improvement, performance improvement initiatives, growth
opportunities, new product development, the Company's ability to increase
shareholder value, acquisitions, and the beliefs and assumptions of Management
contained in the Letter to Our Shareholders (pages 1-2), the Report of the Chief
Financial Officer (page 12), and Management's Discussion and Analysis and other
statements contained herein which are not strictly historical are considered
"forward-looking statements" within the meaning of the safe harbor provisions of
the federal securities laws. Words such as expects, anticipates, targets, goals,
projects, intends, plans, believes, estimates, variations of such words, and
similar expressions are intended to identify such forward-looking statements.
Investors are cautioned that such statements are only predictions, speak only as
of the date of this report, and the Company undertakes no duty to update. 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: actions by the California Public Utility Commission; PG&E's Board of
Directors or PG&E's management impacting PG&E's AMI projects; the timing and
success of DCSI's software development efforts; the timing and content of
purchase order releases under the PG&E contracts; and DCSI's and Hexagram's
successful performance of the PG&E contracts; the timing and execution of real
estate sales; termination for convenience of customer contracts; timing and
magnitude of future contract awards; weakening of economic conditions in served
markets; the success of the Company's competitors; changes in customer demands
or customer insolvencies; competition; intellectual property rights; technical
difficulties; the availability of selected acquisitions; the timing, pricing and
availability of shares offered for sale; delivery delays or defaults by
customers; performance issues with key customers, suppliers and subcontractors;
material changes in the costs of certain raw materials; the successful sale of
the Company's Puerto Rico facility; collective bargaining and labor disputes;
changes in laws and regulations including but not limited to changes in
accounting standards and taxation requirements; costs relating to environmental
matters; litigation uncertainty; and the Company's successful execution of
internal operating plans.


<PAGE>

CONSOLIDATED STATEMENTS OF OPERATIONS


<TABLE>
<CAPTION>
(Dollars in thousands, except per share amounts)
Years ended September 30,                             2006       2005      2004
                                                    --------   -------   -------
<S>                                                 <C>        <C>       <C>
Net sales                                           $458,865   429,115   422,085
Costs and expenses:
   Cost of sales                                     300,309   281,654   282,369
   Selling, general and administrative expenses      106,882    84,241    77,296
   Amortization of intangible assets                   6,872     1,973     2,122
   Interest income, net                               (1,286)   (1,900)     (844)
   Other (income) and expenses, net                   (2,814)   (1,550)      578
   Asset impairment                                       --       790        --
                                                    --------   -------   -------
Total costs and expenses                             409,963   365,208   361,521
                                                    --------   -------   -------
Earnings before income tax                            48,902    63,907    60,564
Income tax expense                                    17,622    20,363    22,748
                                                    --------   -------   -------
Net earnings from continuing operations               31,280    43,544    37,816
Loss from discontinued operations,
   net of tax benefit: 2004, $(1,295)                     --        --    (3,737)
Gain on sale of discontinued operations,
   net of tax benefit: 2004, $(1,186)                     --        --     1,592
                                                    --------   -------   -------
Net loss from discontinued operations                     --        --    (2,145)
                                                    --------   -------   -------
Net earnings                                        $ 31,280    43,544    35,671
                                                    --------   -------   -------
Earnings per share:
   Basic:
      Continuing operations                         $   1.22      1.71      1.47
      Discontinued operations                             --        --     (0.09)
                                                    --------   -------   -------
      Net earnings                                  $   1.22      1.71      1.38
                                                    --------   -------   -------
   Diluted:
      Continuing operations                         $   1.19      1.66      1.42
      Discontinued operations                             --        --     (0.08)
                                                    --------   -------   -------
      Net earnings                                  $   1.19      1.66      1.34
                                                    --------   -------   -------
Average common shares outstanding (in thousands):
   Basic                                              25,718    25,511    25,803
   Diluted                                            26,386    26,306    26,648
                                                    ========   =======   =======
</TABLE>


See accompanying notes to consolidated financial statements.


<PAGE>

CONSOLIDATED BALANCE SHEETS


<TABLE>
<CAPTION>
(Dollars in thousands)
Years ended September 30,                                              2006       2005
                                                                     --------   -------
<S>                                                                  <C>        <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents                                            $ 36,819   104,484
Accounts receivable, less allowance for doubtful accounts of
   $798 and $585 in 2006 and 2005, respectively                        83,816    68,819
Costs and estimated earnings on long-term contracts, less progress
   billings of $4,405 and $7,033 in 2006 and 2005, respectively         1,345     4,392
Inventories                                                            50,984    48,645
Current portion of deferred tax assets                                 24,251    25,271
Other current assets                                                   10,042     8,394
                                                                     --------   -------
   Total current assets                                               207,257   260,005
                                                                     --------   -------
PROPERTY, PLANT AND EQUIPMENT:
   Land and land improvements                                           5,497     5,493
   Buildings and leasehold improvements                                46,089    42,918
   Machinery and equipment                                             86,312    76,741
   Construction in progress                                             1,444     1,108
                                                                     --------   -------
                                                                      139,342   126,260
   Less accumulated depreciation and amortization                      70,588    59,070
                                                                     --------   -------
      Net property, plant and equipment                                68,754    67,190
Goodwill                                                              143,450    68,880
Intangible assets, net                                                 59,202    21,545
Other assets                                                           10,031     6,152
                                                                     --------   -------
                                                                     $488,694   423,772
                                                                     ========   =======     
</TABLE>


See accompanying notes to consolidated financial statements.


<PAGE>

CONSOLIDATED BALANCE SHEETS


<TABLE>
<CAPTION>
(Dollars in thousands)
Years ended September 30,                                                        2006       2005
                                                                               --------   -------
<S>                                                                            <C>        <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Short-term borrowings and current maturities of long-term debt                 $     --        --
Accounts payable                                                                 39,496    29,299
Advance payments on long-term contracts, less costs incurred of $19,532 and
   $10,949 in 2006 and 2005, respectively                                         7,367     6,773
Accrued salaries                                                                 13,932    12,024
Accrued other expenses                                                           15,100    14,661
                                                                               --------   -------
   Total current liabilities                                                     75,895    62,757
                                                                               --------   -------
Deferred revenue                                                                  7,458     3,134
Pension obligations                                                              13,143    17,481
Other liabilities                                                                15,764     9,376
Long-term debt                                                                       --        --
                                                                               --------   -------
   Total liabilities                                                            112,260    92,748
                                                                               --------   -------
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 29,030,995 and 28,738,958 shares in 2006 and 2005, respectively        290       287
   Additional paid-in capital                                                   236,390   228,317
   Retained earnings                                                            193,046   159,363
   Accumulated other comprehensive loss                                          (2,070)   (5,566)
                                                                               --------   -------
                                                                                427,656   382,401
   Less treasury stock, at cost (3,166,026 and 3,175,626 common shares in
      2006 and 2005, respectively)                                              (51,222)  (51,377)
                                                                               --------   -------
Total shareholders' equity                                                      376,434   331,024
                                                                               --------   -------
                                                                               $488,694   423,772
                                                                               ========   =======
</TABLE>


See accompanying notes to consolidated financial statements.


<PAGE>

CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY


<TABLE>
<CAPTION>
                                                                                      Accumulated
                                             Common Stock    Additional                  Other
(In thousands)                             ---------------     Paid-In    Retained   Comprehensive   Treasury
Years ended September 30,                  Shares   Amount     Capital    Earnings   Income (Loss)     Stock     Total
                                           ------   ------   ----------   --------   -------------   --------   -------
<S>                                        <C>      <C>      <C>          <C>        <C>             <C>        <C>
Balance, September 30, 2003                13,933    $139      216,506     80,292       (4,982)      (16,566)   275,389
Comprehensive income:
   Net earnings                                --      --           --     35,671           --            --     35,671
   Translation adjustments                     --      --           --         --        2,703            --      2,703
   Minimum pension liability, net of tax
      of $815                                  --      --           --         --       (1,514)           --     (1,514)
   Interest rate swap adjustment
      net of tax benefit of $(51)              --      --           --         --           95            --         95
                                                                                                                -------
Comprehensive income                                                                                             36,955
                                                                                                                -------
Stock options and stock compensation
   plans, net of tax benefit of $(1,939)      216       3        5,205         --           --            45      5,253
Purchases into treasury                        --      --           --         --           --        (9,981)    (9,981)
                                           ------    ----      -------    -------       ------       -------    -------
Balance, September 30, 2004                14,149     142      221,711    115,963       (3,698)      (26,502)   307,616
                                                                                                                -------
Comprehensive income:
   Net earnings                                --      --           --     43,544           --            --     43,544
   Translation adjustments                     --      --           --         --          680            --        680
   Minimum pension liability, net of tax
      of $1,372                                --      --           --         --       (2,548)           --     (2,548)
                                                                                                                -------
Comprehensive income                                                                                             41,676
                                                                                                                -------
Stock options and stock compensation
   plans, net of tax benefit of $(3,032)      222       1        6,606         --           --            53      6,660
Purchases into treasury                        --      --           --         --           --       (24,928)   (24,928)
100 percent stock dividend                 14,368     144           --       (144)          --            --         --
                                           ------    ----      -------    -------       ------       -------    -------
Balance, September 30, 2005                28,739     287      228,317    159,363       (5,566)      (51,377)   331,024
                                                                                                                -------
SAB 108 Cumulative effect adjustment           --      --           --      2,403           --            --      2,403
Comprehensive income:
   Net earnings                                --      --           --     31,280           --            --     31,280
   Translation adjustments                     --      --           --         --        1,448            --      1,448
   Minimum pension liability, net of tax
      of $(1,103)                              --      --           --         --        2,048            --      2,048
                                                                                                                -------
Comprehensive income                                                                                             34,776
                                                                                                                -------
Stock options and stock compensation
   plans, net of tax benefit of $(3,173)      292       3        8,073         --           --           155      8,231
                                           ------    ----      -------    -------       ------       -------    -------
Balance, September 30, 2006                29,031    $290      236,390    193,046       (2,070)      (51,222)   376,434
                                           ======    ====      =======    =======       ======       =======    =======
</TABLE>


See accompanying notes to consolidated financial statements.


<PAGE>

CONSOLIDATED STATEMENTS OF CASH FLOW


<TABLE>
<CAPTION>
(Dollars in thousands)
Years ended September 30,                                                  2006       2005      2004
                                                                        ---------   -------   -------
<S>                                                                     <C>         <C>       <C>
Cash flows from operating activities:
   Net earnings                                                         $  31,280    43,544    35,671
   Adjustments to reconcile net earnings to net cash provided by
      operating activities:
      Loss from discontinued operations, net of tax                            --        --     3,737
      Gain on sale of discontinued operations, net of tax                      --        --    (1,592)
      Asset impairment                                                         --       790        --
      Depreciation and amortization                                        17,303    12,184    11,888
      Stock compensation expense                                            4,790     2,649     1,766
      Changes in operating working capital                                  1,162    (4,634)   (2,349)
      Effect of deferred taxes on tax provision                             3,596    15,221    14,056
      Pension contributions                                                (1,350)       --      (900)
      Change in deferred revenue and costs, net                             1,133       396        --
      Other                                                                   712    (1,594)    1,485
                                                                        ---------   -------   -------
   Net cash provided by operating activities -- continuing operations      58,626    68,556    63,762
   Net cash used by discontinued operations                                    --        --    (2,735)
                                                                        ---------   -------   -------
   Net cash provided by operating activities                               58,626    68,556    61,027
                                                                        ---------   -------   -------
Cash flows from investing activities:
   Acquisition of businesses, net of cash acquired                        (91,968)       --      (294)
   Proceeds from divestiture of businesses                                     --        --    23,275
   Proceeds from note receivable                                               --        --     2,120
   Capital expenditures -- continuing operations                           (9,117)   (8,848)  (10,823)
   Capital expenditures -- discontinued operations                             --        --    (1,390)
   Additions to capitalized software                                      (27,977)   (8,342)   (8,299)
                                                                        ---------   -------   -------
   Net cash provided (used) by investing activities                      (129,062)  (17,190)    4,589
                                                                        ---------   -------   -------
Cash flows from financing activities:
   Proceeds from long-term debt                                            52,000        --       378
   Principal payments on long-term debt -- continuing operations          (52,000)     (519)     (516)
   Principal payments on long-term debt -- discontinued operations             --        --    (9,024)
   Net decrease in short-term borrowings                                       --        --   (10,000)
   Purchases of common stock into treasury                                     --   (24,928)   (9,981)
   Excess tax benefit from stock options exercised                          1,569        --        --
   Proceeds from exercise of stock options                                  2,761     3,037     3,027
   Other                                                                   (1,559)    3,247     1,496
                                                                        ---------   -------   -------
   Net cash provided (used) by financing activities                         2,771   (19,163)  (24,620)
                                                                        ---------   -------   -------
Net (decrease) increase in cash and cash equivalents                      (67,665)   32,203    40,996
Cash and cash equivalents at beginning of year                            104,484    72,281    31,285
                                                                        ---------   -------   -------
Cash and cash equivalents at end of year                                $  36,819   104,484    72,281
                                                                        ---------   -------   -------
Changes in operating working capital:
   Accounts receivable, net                                             $ (10,029)    8,910    (8,350)
   Costs and estimated earnings on long-term contracts, net                 3,047    (1,916)    2,187
   Inventories                                                              1,822    (4,358)    4,145
   Other current assets and current portion of deferred tax assets            737    (1,856)   (2,405)
   Accounts payable                                                         7,675    (3,156)   (2,485)
   Advance payments on long-term contracts, net                               594     2,468     3,161
   Accrued expenses                                                        (2,684)   (4,726)    1,398
                                                                        ---------   -------   -------
                                                                        $   1,162    (4,634)   (2,349)
                                                                        ---------   -------   -------
Supplemental cash flow information:
   Interest paid                                                        $     456        33       402
   Income taxes paid (including state, foreign & AMT)                      10,768     6,269     4,974
                                                                        =========   =======   =======
</TABLE>


See accompanying notes to consolidated financial statements.

<PAGE>


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1.   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

A. PRINCIPLES OF CONSOLIDATION

The consolidated financial statements include the accounts of ESCO Technologies
Inc. (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 2006
presentation.

B. BASIS OF PRESENTATION

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, 2006 and
2005.

C. NATURE OF OPERATIONS

The Company has three industry operating units: Communications, Filtration/Fluid
Flow and Test. The Communications unit is a proven supplier of special purpose
communications systems for electric, gas and water utilities, including hardware
and software to support advanced metering applications. The Filtration/Fluid
Flow unit develops, manufactures and markets a broad range of filtration
products used in the purification and processing of liquids and gases. The Test
unit is an industry leader in providing its customers with the ability to
identify, measure and contain magnetic, electromagnetic and acoustic energy.

D. USE OF ESTIMATES

The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America (GAAP) requires Management to
make estimates and assumptions, including estimates of anticipated contract
costs and revenues utilized in the earnings process, 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. REVENUE RECOGNITION

COMMUNICATIONS UNIT: Within the Communications unit, approximately 95% of the
unit's revenue arrangements (approximately 30% of consolidated revenues) contain
software components. Revenue under these arrangements is recognized in
accordance with Statement of Position 97-2 (SOP 97-2), "Software Revenue
Recognition," as amended by SOP 98-9, "Modification of SOP 97-2, Software
Revenue Recognition, with Respect to Certain Transactions." The unit's software
revenue arrangements generally include multiple products and services, or
"elements" consisting of meter and substation hardware, meter reading system
software, program management support during the deployment period and software
support (post-contract customer support, "PCS"). These arrangements typically
require the Company to deliver software at the inception of the arrangement
while the hardware, and program management support are delivered over the
contractual deployment period. Software support is provided during deployment
and subsequent thereto. The software element included in such arrangements is
essential to the functionality of the hardware and, therefore, the hardware is
considered to be software-related. Hardware is considered a specified element in
the software arrangement and vendor-specific objective evidence of fair value
("VSOE") has been established for this element. VSOE for the hardware element is
determined based on the price when sold separately to customers. These revenue
arrangements are divided into separate units of accounting if the delivered
item(s) has value to the customer on a stand-alone basis, there is objective and
reliable evidence of the fair value of the undelivered item(s) and
delivery/performance of the undelivered item(s) is probable. For multiple
element arrangements, revenue is allocated to the individual elements based on
VSOE of the individual elements.

The application of these principles requires judgment, including the
determination of whether a software arrangement includes multiple elements and
estimates of the fair value of the elements. The VSOE of the undelivered
elements is determined based on the historical evidence of stand-alone sales of
these elements to customers. Hardware revenues are generally recognized at the
time of shipment or receipt by customer depending upon contract terms. VSOE
generally does not exist for the software element, therefore, the Company uses
the residual method to recognize revenue when


<PAGE>

VSOE exists for all other undelivered elements. Under the residual method, the
fair value of the undelivered elements is deferred and the remaining portion of
the arrangement fee is recognized as revenue.

SOP 97-2 requires the seller of software that includes post-contract customer
support (PCS) to establish VSOE of the undelivered element of the contract in
order to account separately for the PCS revenue. The Company determines VSOE by
a consistent pricing of PCS and PCS renewals as a percentage of the software
license fees or by reference to contractual renewals, when the renewal terms are
substantive. Revenues for PCS are recognized ratably over the maintenance term
specified in the contract (generally in 12 monthly increments). Revenues for
program management support are recognized when services have been provided. The
Company determines VSOE for program management support based on hourly rates
when services are performed separately.

In November 2005, DCSI and Hexagram entered into arrangements with a large
utility company to provide software, program management services, training and
PCS that includes an option for the customer to purchase a significant quantity
of hardware over an initial deployment period of approximately five years and
subsequently over the remaining initial contract term of up to fifteen years.
The software, program management services and training will be delivered over
the initial hardware deployment period of approximately five years. PCS will be
provided at no charge during the first year of the initial deployment period,
after which it will be provided over subsequent annual periods throughout the
contract term if the customer chooses to continue PCS. Because the program
management services are based on a fixed price per month rather than on a time
and materials basis, the Company is unable to establish VSOE for the program
management services in this arrangement. The Company is able to establish VSOE
for the PCS based on contractual renewal rates that are consistent with other
arrangements and for the training based on pricing when sold separately. For the
DCSI arrangement, the pricing for the optional hardware includes a discount that
the Company has determined to be more-than-insignificant. In accordance with
applicable software revenue recognition guidance, the Company will defer all
revenue related to the DCSI arrangement until all software is delivered and
acceptance criteria have been met. At that time, revenue otherwise allocable to
the software, program management services, training and initial bundled PCS will
be reduced by the rate of the significant incremental discount offered on the
hardware products. The portion of the arrangement consideration allocated to the
significant incremental discount will be recognized ratably over the discount
period (up to twenty years) similar to a subscription. The remaining arrangement
consideration will be recognized ratably over the period the program management
services will be performed (the initial deployment period of approximately five
years). Additional annual fees are payable in each subsequent year that PCS is
provided and will be recognized over the respective PCS period. The amount paid
by the customer for optional purchases of hardware during the deployment period
related to both the DCSI and Hexagram arrangements will be recognized upon
delivery and acceptance, if applicable, assuming all other revenue recognition
criteria have been met.

Approximately 5% of unit revenues are recognized when products are delivered
(when title and risk of ownership transfers) or when services are performed for
unaffiliated customers. Products include the SecurVision(R) digital video
surveillance systems.

FILTRATION/FLUID FLOW UNIT: Within the Filtration/Fluid Flow operating unit,
approximately 75% of operating unit revenues (approximately 30% of consolidated
revenues) are recognized when products are delivered (when title and risk of
ownership transfers) or when services are performed for unaffiliated customers.

Approximately 25% of operating unit revenues (approximately 10% of consolidated
revenues) are recorded under the percentage-of-completion provisions of SOP
81-1, "Accounting for Performance of Construction-Type and Certain
Production-Type Contracts." Products accounted for under SOP 81-1 include the
design, development and manufacture of complex fluid control products, quiet
valves, manifolds and systems primarily for the aerospace and military markets.
For arrangements that are accounted for under SOP 81-1, the Company estimates
profit as the difference between total estimated revenue and total estimated
cost of a contract and recognizes these revenues and costs based on units
delivered. The percentage-of-completion method of accounting involves the use of
various techniques to estimate expected costs at completion.

TEST UNIT: Within the Test unit, approximately 60% of revenues (approximately
20% of consolidated revenues) are recognized when products are delivered (when
title and risk of ownership transfers) or when services are performed for
unaffiliated customers. Certain arrangements contain multiple elements which are
accounted for under the provisions of EITF 00-21, "Revenue Arrangements with


<PAGE>

Multiple Deliverables." The multiple elements generally consist of materials and
installation services used in the construction and installation of standard
shielded enclosures to measure and contain magnetic and electromagnetic energy.
The installation process does not involve changes to the features or
capabilities of the equipment and does not require proprietary information about
the equipment in order for the installed equipment to perform to specifications.
There is objective and reliable evidence of fair value for each of the units of
accounting, as a result, the arrangement revenue is allocated to the separate
units of accounting based on their relative fair values. Typically, fair value
is the price of the deliverable when it is regularly sold on a stand-alone
basis.

Approximately 40% of the unit's revenues (approximately 10% of consolidated
revenues) are recorded under the percentage-of-completion provisions of SOP
81-1, "Accounting for the Performance of Construction-Type and Certain
Production-Type Contracts" due to the complex nature of the enclosures that are
designed and produced under these contracts. Products accounted for under SOP
81-1 include the construction and installation of complex test chambers to a
buyer's specifications that provide its customers with the ability to measure
and contain magnetic, electromagnetic and acoustic energy. As discussed above,
for arrangements that are accounted for under SOP 81-1, the Company estimates
profit as the difference between total estimated revenue and total estimated
cost of a contract and recognizes these revenues and costs based on either (a)
units delivered or (b) contract milestones.

If a reliable measure of output cannot be established (which applies in less
than 8% of Test unit revenues or 2% of consolidated revenues), input measures
(e.g., costs incurred) are used to recognize revenue. Given the nature of the
Company's operations related to these contracts, costs incurred represent an
appropriate measure of progress towards completion. 

The percentage-of-completion method of accounting involves the use of various
techniques to estimate expected costs at completion. These estimates are based
on Management's judgment and the Company's substantial experience in developing
these types of estimates.

F. CASH AND CASH EQUIVALENTS

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

G. ACCOUNTS RECEIVABLE

Accounts receivable have been reduced by an allowance for amounts that the
Company estimates are uncollectible in the future. This estimated allowance is
based on Management's evaluation of the financial condition of the customer and
historical write-off experience.

H. COSTS AND ESTIMATED EARNINGS ON LONG-TERM CONTRACTS

Costs and estimated earnings on long-term contracts represent unbilled revenues,
including accrued profits, accounted for under the percentage-of-completion
method, net of progress billings.

I. INVENTORIES

Inventories are valued at the lower of cost (first-in, first-out) or market
value. 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 unliquidated progress
payments. 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.

J. PROPERTY, PLANT AND EQUIPMENT

Property, plant and equipment are recorded at cost. Depreciation and
amortization are computed primarily on a straight-line basis 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.

K. GOODWILL AND OTHER LONG-LIVED ASSETS

Goodwill represents the excess of purchase costs over the fair value of net
identifiable assets acquired in business acquisitions. The Company accounts for
goodwill as required by Statement of Financial Accounting Standards (SFAS) 142,
"Goodwill and Other Intangible Assets." Management annually reviews goodwill and
other long-lived assets with indefinite useful lives for impairment or whenever
events or changes in circumstances indicate the carrying amount may not be
recoverable.


<PAGE>

If the Company determines that the carrying value of the long-lived asset may
not be recoverable, a permanent impairment charge is recorded for the amount by
which the carrying value of the long-lived asset exceeds its fair value. Fair
value is measured based on a discounted cash flow method using a discount rate
determined by Management to be commensurate with the risk inherent in the
Company's current business model. Other intangible assets represent costs
allocated to identifiable intangible assets, principally capitalized software,
patents, trademarks, and technology rights. See Note 5 regarding goodwill and
other intangible assets activity.

L. CAPITALIZED SOFTWARE

The costs incurred for the development of computer software that will be sold,
leased, or otherwise marketed are charged to expense when incurred as research
and development until technological feasibility has been established for the
product. Technological feasibility is typically established upon completion of a
detailed program design. Costs incurred after this point are capitalized on a
project-by-project basis in accordance with SFAS No. 86, "Accounting for the
Costs of Computer Software to be Sold, Leased or Otherwise Marketed." Costs that
are capitalized primarily consist of external development costs. Upon general
release of the product to customers, the Company ceases capitalization and
begins amortization, which is calculated on a project-by-project basis as the
greater of (1) the ratio of current gross revenues for a product to the total of
current and anticipated future gross revenues for the product or (2) the
straight-line method over the estimated economic life of the product. The
Company generally amortizes the software development costs over a three to seven
year period based upon the estimated future economic life of the product.
Factors considered in determining the estimated future economic life of the
product include anticipated future revenues, and changes in software and
hardware technologies. The carrying values of capitalized costs are evaluated
for impairment on an annual basis to determine if circumstances exist which
indicate the carrying value of the asset may not be recoverable. If expected
cash flows are insufficient to recover the carrying amount of the asset, then an
impairment loss is recognized to state the asset at its net realizable value.

M. IMPAIRMENT OF LONG-LIVED ASSETS AND LONG-LIVED ASSETS TO BE DISPOSED OF

Recoverability of assets to be held and used is measured by a comparison of the
carrying amount of an asset to future cash flows expected to be generated by the
asset. If such assets are considered to be impaired, the impairment to be
recognized is measured by the amount by which the carrying amount of the assets
exceeds the fair value of the assets. Assets to be disposed of are reported at
the lower of the carrying amount or fair value less costs to dispose.

N. 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 may be 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. The Company regularly reviews its deferred tax
assets for recoverability and establishes a valuation allowance when Management
believes it is more likely than not such assets will not be recovered, taking
into consideration historical operating results, expectations of future
earnings, tax planning strategies, and the expected timing of the reversals of
existing temporary differences.

O. RESEARCH AND DEVELOPMENT COSTS

Company-sponsored research and development costs include research and
development and bid and proposal efforts related to the Company's 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.
Customer-sponsored research and development costs refer to certain situations
whereby customers provide funding to support specific contractually defined
research and development costs. As the Company incurs costs under these specific
funding contracts, the costs are "inventoried" until billed to the customer for
reimbursement, consistent with other program costs. Once billed/invoiced, these
costs are transferred to accounts receivable until the cash is received from the
customer. All research and development costs incurred in excess of the
contractual funding amount, or costs


<PAGE>

incurred outside the scope of the contractual research and development project,
are expensed as incurred.

P. FOREIGN CURRENCY TRANSLATION

The financial statements of the Company's foreign operations are translated into
U.S. dollars in accordance with SFAS 52 "Foreign Currency Translation" (SFAS
52). The resulting translation adjustments are recorded as a separate component
of accumulated other comprehensive income.

Q. EARNINGS PER SHARE

Basic earnings per share is calculated using the weighted average number of
common shares outstanding during the period. Diluted earnings per share is
calculated using the weighted average number of common shares outstanding during
the period plus shares issuable upon the assumed exercise of dilutive common
share options and vesting of performance-accelerated restricted shares using the
treasury stock method. On August 5, 2005, the Company's Board of Directors
approved a 2-for-1 stock split which was effected as a 100 percent stock
dividend and was paid on September 23, 2005 to shareholders of record as of
September 9, 2005. The 2004 common stock and per share amounts have been
adjusted to reflect the stock split.

The number of shares used in the calculation of earnings per share for each year
presented is as follows:


<TABLE>
<CAPTION>
(In thousands)                       2006     2005     2004
                                    ------   ------   ------
<S>                                 <C>      <C>      <C>
Weighted Average Shares
   Outstanding -- Basic             25,718   25,511   25,803
Dilutive Options and performance-
   accelerated restricted stock        668      795      845
                                    ------   ------   ------
Adjusted Shares -- Diluted          26,386   26,306   26,648
                                    ======   ======   ======
</TABLE>


Options to purchase 264,430 shares at prices ranging from $42.99 - $54.88 were
outstanding during the year ended September 30, 2006, but were not included in
the respective computation of diluted EPS because the options' exercise price
was greater than the average market price of the common shares. Options to
purchase 34,967 shares at prices ranging from $35.18 - $50.26 were outstanding
during the year ended September 30, 2005, but were not included in the
respective computation of diluted EPS because the options' exercise price was
greater than the average market price of the common shares. Options to purchase
212,228 shares at prices ranging from $22.68 - $32.33 were outstanding during
the year ended September 30, 2004, but were not included in the respective
computation of diluted EPS because the options' exercise price was greater than
the average market price of the common shares. These options expire in various
periods through 2013. Approximately 9,000, 36,000 and 14,000 restricted shares
were outstanding but unearned at September 30, 2006, 2005 and 2004,
respectively, and, therefore, were not included in the respective years'
computations of diluted EPS.

R. SHARE-BASED COMPENSATION

Prior to October 1, 2005, the Company accounted for its stock option plans using
the intrinsic value method of accounting provided under APB Opinion No. 25,
"Accounting for Stock Issued to Employees," (APB 25) and related
interpretations, as permitted by FASB Statement No. 123, "Accounting for
Stock-Based Compensation," (SFAS 123) under which no compensation expense was
recognized for stock option grants. Accordingly, share-based compensation for
stock options was included as a pro forma disclosure in the financial statement
footnotes for periods prior to fiscal 2006.

Effective October 1, 2005, the Company adopted the fair value recognition
provisions of FASB Statement No. 123(R), "Share-Based Payment," (SFAS 123(R))
using the modified-prospective transition method. Under this transition method,
compensation cost recognized in fiscal 2006 includes:

a) compensation cost for all share-based payments granted through September 30,
2005, for which the requisite service period had not been completed as of
September 30, 2005, based on the grant date fair value estimated in accordance
with the original provisions of SFAS 123, and

b) compensation cost for all share-based payments granted subsequent to
September 30, 2005, based on the grant date fair value estimated in accordance
with the provisions of SFAS 123(R). Results for prior periods have not been
restated.


<PAGE>

As a result of adopting SFAS 123(R) on October 1, 2005, the Company's net
earnings for the year ended September 30, 2006 were $2.3 million lower than if
it had continued to account for share-based compensation under APB 25.

The Company has various share-based plans which allow the Company to grant key
officers, managers and professional employees (1) options to purchase shares of
the Company's common stock, (2) stock appreciation rights with respect to all or
any part of the number of shares covered by the options, or (3)
performance-accelerated restricted shares (restricted shares) and other full
value awards. No stock appreciation rights have been awarded to date. In
addition, the Company provides compensation benefits to non-employee directors
under a non-employee directors compensation plan.

S. COMPREHENSIVE INCOME (LOSS)

SFAS 130, "Reporting Comprehensive Income" requires the Company to report
separately the translation adjustments of SFAS 52 defined above, and changes to
the minimum pension liability, as components of comprehensive income or loss.
Management has chosen to disclose the requirements of this Statement within the
Consolidated Statements of Shareholders' Equity.

Accumulated other comprehensive loss as shown on the consolidated balance sheet
of $(2.1) million and $(5.6) million at September 30, 2006 and 2005,
respectively, consisted of $4.5 million and $3.0 million related to currency
translation adjustments; $(6.6) million and $(8.6) million related to the
minimum pension liability, respectively.

T. DEFERRED REVENUE

Deferred revenue is recorded for products or services that have not been
provided but have been invoiced under contractual agreements or paid for by a
customer, or when products or services have been provided but the criteria for
revenue recognition have not been met. If there is a customer acceptance
provision or there is uncertainty about customer acceptance, revenue is deferred
until the customer has accepted the product or service. The current portion of
approximately $3.0 million is classified in accrued expenses on the Consolidated
Balance Sheet.

Deferred revenue also includes the long-term portion of unearned income related
to two intellectual property agreements. The amount is being amortized into
income on a straight-line basis over the remaining patent life through 2011. The
current portion of approximately $0.6 million is classified in accrued expenses
on the Consolidated Balance Sheet.

U. NEW ACCOUNTING STANDARDS

In December 2004, the FASB issued SFAS No. 123(R), "Share-Based Payment" (SFAS
123(R)). This Statement replaces SFAS No. 123, "Accounting for Stock-Based
Compensation" and supersedes APB No. 25, "Accounting for Stock Issued to
Employees." SFAS 123(R) requires all stock-based compensation to be recognized
as an expense in the financial statements and that such cost be measured
according to the fair value of stock options. The Company adopted the provisions
of this Statement in the first quarter of fiscal 2006 on a prospective basis.

In December 2004, the FASB issued FASB Staff Position FAS 109-2, "Accounting and
Disclosure Guidance for the Foreign Earnings Repatriation Provision within the
American Jobs Creation Act of 2004" (FSP 109-2). The American Jobs Creation Act
of 2004, (the "Act") provides for a special one-time deduction of 85 percent of
certain foreign earnings repatriated into the U.S. from non-U.S. subsidiaries
through September 30, 2006. During fiscal 2006, the Company repatriated $39.5
million of foreign earnings which qualify for the special one-time deduction.
Tax expense of $2.4 million was recorded in fiscal 2006 as a result of this
repatriation.

In June 2006, the FASB issued FASB Interpretation No. 48, "Accounting for
Uncertainty in Income Taxes, an Interpretation of FASB Statement No. 109." This
Interpretation is effective for ESCO beginning October 1, 2007. This
Interpretation prescribes a recognition threshold and measurement process for
the financial statement recognition and measurement of a tax position taken or
expected to be taken in a tax return. The Company is currently evaluating the
adoption of this Interpretation and does not currently have an estimate of the
impact on the consolidated financial statements.

In September 2006, the FASB issued SFAS No. 158, "Employer's Accounting for
Defined Benefit Pension and Other Postretirement Plans" (SFAS 158), which amends
SFAS 87 and SFAS 106 to require recognition of the overfunded or underfunded
status of pension and other postretirement benefit plans on the balance sheet.
Under SFAS 158, gains and losses, prior service costs and credits, and any
remaining transition amounts under SFAS 87 and SFAS 106 that have not yet been
recognized through net periodic benefit cost will be recognized in accumulated
other comprehensive income, net


<PAGE>

of tax effects. The measurement date -- the date at which the benefit obligation
and plan assets are measured -- is required to be the Company's fiscal year-end,
which is the date the Company currently uses. SFAS 158 is effective for
publicly-held companies for fiscal years ending after December 15, 2006. The
adoption of SFAS 158 is not expected to have a material impact to the Company's
financial position or results of operations.

In September 2006, the SEC issued Staff Accounting Bulletin No. 108,
"Considering the Effects of Prior Year Misstatements when Quantifying
Misstatements in Current Year Financial Statements" (SAB No. 108), which
addresses the diversity in practice in quantifying financial statement
misstatements and provides interpretative guidance regarding the consideration
given to prior year misstatements when determining materiality in current year
financial statements. During 2006, the Company adopted the provisions of SAB No.
108 and recorded $2.4 million as a cumulative credit adjustment to 2006
beginning retained earnings.

In September 2006, the FASB issued SFAS No. 157, "Fair Value Measurements" (SFAS
157), which defines fair value in generally accepted accounting principles and
expands disclosures about fair value measurements. This Statement is effective
for financial statements issued for fiscal years beginning after November 15,
2007. The adoption of SFAS 157 is not expected to have a material impact to the
Company's financial position or results of operations.

2. ACQUISITIONS

Effective February 1, 2006, the Company acquired the capital stock of Hexagram,
Inc. (Hexagram) for a purchase price of approximately $66 million. The
acquisition agreement also provides for contingent consideration of up to $6.25
million over the five year period following the acquisition if Hexagram exceeds
certain sales targets. Hexagram is an RF fixed network automatic meter reading
(AMR) company headquartered in Cleveland, Ohio. Hexagram broadens the Company's
served market and provides an RF based AMI system serving primarily gas and
water utilities. Hexagram's annual revenue over the past three years has been in
the range of $20 million to $35 million. The operating results for Hexagram,
since the date of acquisition, are included within the Communications unit. The
Company recorded $6.6 million of amortizable identifiable intangible assets
consisting primarily of patents and proprietary know-how, customer contracts,
and order backlog which are being amortized on a straight-line basis over
periods ranging from six months to seven years. 

The following table summarizes the Company's estimates of the fair values of the
assets acquired and liabilities assumed at the date of acquisition and includes
subsequent adjustments to the allocation of purchase price.


<PAGE>

Hexagram, Inc.
Assets Acquired and Liabilities Assumed
February 1, 2006


<TABLE>
<CAPTION>
(Dollars in thousands)
<S>                             <C>
Cash                            $ 2,128
Accounts receivable, net          3,267
Inventory                         4,161
Other current assets                276
Property, plant and equipment     2,223
Deferred tax assets                 735
Other assets                         60
Intangible assets:
   Trademarks                     3,485
   Patents                        3,468
   Customer contracts             2,378
   Other                            727
                                -------
                                 10,058
Goodwill                         51,202
Current liabilities              (4,149)
Deferred tax liabilities         (3,774)
Other long-term liabilities        (116)
                                -------
Aggregate purchase price        $66,071
                                =======
</TABLE>


Effective November 29, 2005, the Company acquired Nexus Energy Software, Inc.
(Nexus) through an all cash for shares merger transaction for approximately $29
million in cash plus contingent cash consideration over the four year period
following the merger if Nexus exceeds certain sales targets. Nexus is a software
company headquartered in Wellesley, Massachusetts with annual revenues in the
past in excess of $10 million. Nexus broadens the Company's served market and
provides software solutions that allow utilities to fully utilize the
information produced by the Company's AMI systems. The operating results for
Nexus, since the date of acquisition, are included within the Communications
unit. The Company recorded $2.7 million of identifiable intangible assets
consisting primarily of customer contracts and order backlog which are being
amortized on a straight-line basis over periods ranging from one year to three
years. In connection with the acquisition of Nexus, the Company acquired
approximately $13 million of net operating loss carryforward that will expire
between 2017 and 2025 and is subject to a Section 382 limitation.

The following table summarizes the Company's estimates of the fair values of the
assets acquired and liabilities assumed at the date of acquisition and includes
subsequent adjustments to the allocation of purchase price.

Nexus Energy Software, Inc.
Assets Acquired and Liabilities Assumed
November 29, 2005


<TABLE>
<CAPTION>
(Dollars in thousands)
<S>                             <C>
Cash                            $   440
Accounts receivable, net          1,701
Other current assets                228
Property, plant and equipment       965
Deferred tax assets               4,469
Other assets                        176
Intangible assets:
   Contracts/software             1,497
   Backlog                        1,064
   Other                            162
                                -------
                                  2,723
Goodwill                         23,434
Current liabilities              (3,862)
</TABLE>



<PAGE>


<TABLE>
<S>                             <C>
Deferred tax liabilities         (1,095)
Other long-term liabilities        (180)
                                -------
Aggregate purchase price        $28,999
                                =======
</TABLE>


All of the Company's acquisitions have been accounted for using the purchase
method of accounting and accordingly, the respective purchase prices were
allocated to the assets (including intangible assets) acquired and liabilities
assumed based on estimated fair values at the date of acquisition. The financial
results from these acquisitions have been included in the Company's financial
statements from the date of acquisition. Pro forma financial information related
to the Nexus and Hexagram acquisitions was not presented as it was not
significant to the Company's results of operations. None of the goodwill
recorded as part of the Nexus or Hexagram acquisitions is expected to be
deductible for U.S. federal or state income tax purposes.

3. DISCONTINUED OPERATIONS

The MicroSep businesses consisted of PTI Advanced Filtration Inc., PTI
Technologies Limited, and PTI S.p.A. Effective April 2, 2004, the Company
completed the sale of PTI Advanced Filtration Inc. (Oxnard, California) and PTI
Technologies Limited (Sheffield, England) to domnick hunter group plc for $18
million in cash. On June 8, 2004, the Company completed the sale of PTI S.p.A.
(Milan, Italy) to a group of investors comprised of the subsidiary's senior
management for $5.3 million. An after-tax gain of $1.6 million related to the
sale of the MicroSep businesses is reflected in the Company's 2004 results in
discontinued operations.

The MicroSep businesses are accounted for as a discontinued operation in
accordance with SFAS 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets" (SFAS 144) and, accordingly, amounts in the financial
statements and related notes for all periods shown, reflect discontinued
operations presentation. The net sales from the MicroSep businesses were $29.4
million for the year ended September 30, 2004. The pre-tax loss from operations
from the MicroSep businesses was $5.0 million for the year ended September 30,
2004.

4. ASSET IMPAIRMENT

In June 2005, the Company abandoned its plans to commercialize certain sensor
products within the Filtration/Fluid Flow segment. This action resulted in an
asset impairment charge of $0.8 million to write off certain patents and a
related licensing agreement to their respective fair market values. The Company
ended its development efforts on this program after it determined that the
market was not developing as quickly as anticipated and the expected costs and
time frame to fully commercialize the products were not acceptable.

5. GOODWILL AND OTHER INTANGIBLE ASSETS

Included on the Company's Consolidated Balance Sheet at September 30, 2006 and
2005 are the following intangible assets gross carrying amounts and accumulated
amortization:


<TABLE>
<CAPTION>
(Dollars in millions)                           2006    2005
                                               ------   ----
<S>                                            <C>      <C>
Goodwill:
   Gross carrying amount                       $152.4   77.8
   Less: accumulated amortization                 8.9    8.9
                                               ------   ----
         Net                                   $143.5   68.9
                                               ------   ----
Intangible assets with determinable lives:
   Patents
      Gross carrying amount                    $ 17.6   17.5
      Less: accumulated amortization             13.9   13.1
                                               ------   ----
         Net                                   $  3.7    4.4
                                               ------   ----
   Capitalized software
      Gross carrying amount                    $ 55.3   23.9
      Less: accumulated amortization             10.1    6.8
                                               ------   ----
</TABLE>



<PAGE>


<TABLE>
<S>                                            <C>      <C>
         Net                                   $ 45.2   17.1
                                               ------   ----
   Other
      Gross carrying amount                    $  9.5    0.4
      Less: accumulated amortization              2.8    0.3
                                               ------   ----
         Net                                   $  6.7    0.1
                                               ------   ----
Intangible assets with indeterminable lives:
   Trademarks                                  $  3.5     --
                                               ======   ====
</TABLE>


<PAGE>

The Company performed its annual evaluation of goodwill for impairment during
the fourth quarter of fiscal 2006 and concluded no impairment existed at
September 30, 2006. The changes in the carrying amount of goodwill attributable
to each business segment for the years ended September 30, 2006 and 2005 are as
follows:


<TABLE>
<CAPTION>
                                                        Filtration/
(Dollars in millions)                  Communications    Fluid Flow   Test
                                       --------------   -----------   ----
<S>                                    <C>              <C>           <C>
Balance as of September 30, 2005            $  --           39.8      29.1
   Acquisitions (Hexagram and Nexus)         74.6             --        --
                                            -----           ----      ----
Balance as of September 30, 2006            $74.6           39.8      29.1
                                            =====           ====      ====
</TABLE>


Amortization expense related to intangible assets with determinable lives was
$6.9 million, $2.0 million and $2.1 million in 2006, 2005 and 2004,
respectively. The increase in amortization expense in 2006 as compared to the
prior year was due to $2.7 million of amortization related to the Nexus and
Hexagram acquired intangible assets and $2.2 million of amortization related to
the Company's TNG software. Patents are amortized over the life of the patents,
generally 17 years. Capitalized software is amortized over the estimated useful
life of the software, generally 3-7 years. Estimated intangible assets
amortization for fiscal year 2007 is approximately $11 million. Estimated
intangible asset amortization for fiscal years 2008 through 2011 is estimated at
approximately $12 million to $13 million per year. The increase in intangible
asset amortization is related to the additional costs associated with the TNG
software.

6. ACCOUNTS RECEIVABLE

Accounts receivable, net of the allowance for doubtful accounts, consist of the
following at September 30, 2006 and 2005:


<TABLE>
<CAPTION>
(Dollars in thousands)                    2006     2005
                                        -------   ------
<S>                                     <C>       <C>
Commercial                              $81,986   66,871
U.S. Government and prime contractors     1,830    1,948
                                        -------   ------
   Total                                $83,816   68,819
                                        =======   ======
</TABLE>


7. INVENTORIES

Inventories consist of the following at September 30, 2006 and 2005:


<TABLE>
<CAPTION>
(Dollars in thousands)                    2006     2005
                                        -------   ------
<S>                                     <C>       <C>
Finished goods                          $12,834   14,361
Work in process -- including
   long-term contracts                   13,211   12,512
Raw materials                            24,939   21,772
                                        -------   ------
   Total                                $50,984   48,645
                                        =======   ======
</TABLE>


8. PROPERTY, PLANT AND EQUIPMENT

Depreciation expense from continuing operations of property, plant and equipment
for the years ended September 30, 2006, 2005 and 2004 was $10.4 million, $10.1
million and $9.5 million, respectively. 

The closure and relocation of the Filtertek Puerto Rico facility was completed
in March 2004. The Puerto Rico facility is included in other current assets with
a carrying value of $3.6 million at September 30, 2006. The facility is being
marketed for sale.

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, 2006, 2005 


<PAGE>

and 2004 was $7.3 million, $6.3 million and $5.8 million, 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,
2006 are:


<PAGE>

(Dollars in thousands)


<TABLE>
<CAPTION>
Years ending September 30:
--------------------------
<S>                          <C>
2007                         $ 7,112
2008                           4,789
2009                           3,128
2010                           2,310
2011 and thereafter            4,935
                             -------
   Total                     $22,274
                             =======
</TABLE>


9. INCOME TAX EXPENSE

Total income tax expense for the years ended September 30, 2006, 2005 and 2004
was allocated as follows:


<TABLE>
<CAPTION>
(Dollars in thousands)                            2006     2005     2004
                                                -------   ------   ------
<S>                                             <C>       <C>      <C>
Income tax expense from continuing operations   $17,622   20,363   22,748
Discontinued operations                              --       --   (2,481)
                                                -------   ------   ------
   Total income tax expense                     $17,622   20,363   20,267
                                                =======   ======   ======
</TABLE>


For the year ended September 30, 2006, pretax earnings related to United States
(U.S.) and foreign tax jurisdictions were $43.9 million and $5.0 million,
respectively. For the year ended September 30, 2005, pretax earnings related to
U.S. and foreign tax jurisdictions were $52.5 million and $11.4 million,
respectively. For the year ended September 30, 2004, pretax earnings related to
U.S. and foreign tax jurisdictions was $46.3 million and $9.6 million,
respectively.

The principal components of income tax expense from continuing operations for
the years ended September 30, 2006, 2005 and 2004 consist of:


<TABLE>
<CAPTION>
(Dollars in thousands)                             2006     2005     2004
                                                 -------   ------   ------
<S>                                              <C>       <C>      <C>
Federal
   Current (including Alternative Minimum Tax)   $ 3,571      874   14,153
   Deferred                                       10,291   15,313    3,641
State and local:
   Current                                         2,673    2,414    3,259
   Deferred                                         (518)     (21)      76
Foreign:
   Current                                         1,213    1,854    1,752
   Deferred                                          392      (71)    (133)
                                                 -------   ------   ------
   Total                                         $17,622   20,363   22,748
                                                 =======   ======   ======
</TABLE>


The actual income tax expense from continuing operations for the years ended
September 30, 2006, 2005 and 2004 differs from the expected tax expense for
those years (computed by applying the U.S. Federal corporate statutory rate) as
follows:


<TABLE>
<CAPTION>
                                           2006   2005   2004
                                           ----   ----   ----
<S>                                        <C>    <C>    <C>
Federal corporate statutory rate           35.0%  35.0%  35.0%
State and local, net of Federal benefits    2.4    2.4    3.5
Foreign -- Puerto Rico                      0.5   (4.6)  (3.1)
Foreign -- Other                           (0.5)  (1.6)    --
Foreign earnings repatriation               4.8     --     --
Research credit                            (5.0)    --     --
SFAS 123(R)                                 1.4     --     --
Change in tax contingencies                (2.9)    --     --
</TABLE>



<PAGE>


<TABLE>
<S>                                        <C>    <C>    <C>
Other, net                                  0.3    0.7    2.2
                                           -----  -----  -----
Effective income tax rate                  36.0%  31.9%  37.6%
                                           =====  =====  =====
</TABLE>


The tax effects of temporary differences that give rise to significant portions
of the deferred tax assets and liabilities at September 30, 2006, and 2005 are
presented below.


<TABLE>
<CAPTION>
(Dollars in thousands)                                2006       2005
                                                    --------   -------
<S>                                                 <C>        <C>
Deferred tax assets:
   Inventories, long-term contract accounting,
      contract cost reserves and others             $  1,858     3,159
   Pension and other postretirement benefits           5,449     6,981
   Net operating loss carryforward -- domestic         5,103    15,695
   Net operating loss carryforward -- foreign          2,895     1,715
   Capital loss carryforward                           7,381     7,381
   Other compensation-related costs
      and other cost accruals                         18,484    11,687
   Research credit carryforward                        6,635        --
                                                    --------   -------
      Total deferred tax assets                       47,805    46,618

Deferred tax liabilities:
   Plant and equipment, depreciation methods,
      acquisition asset allocations, and other       (17,028)  (12,926)
                                                    --------   -------
Net deferred tax asset before valuation allowance     30,777    33,692
Less valuation allowance                             (10,276)   (9,096)
                                                    --------   -------
Net deferred tax assets                             $ 20,501    24,596
                                                    ========   =======
</TABLE>


Net deferred tax assets are classified in the Consolidated Balance Sheets as set
forth below.


<TABLE>
<CAPTION>
(Dollars in thousands)                        2006     2005
                                            -------   ------
<S>                                         <C>       <C>
Current portion of deferred tax assets      $24,251   25,271
Deferred tax liabilities (non-current) --
   Included in Other Liabilities             (3,750)    (675)
                                            -------   ------
   Net deferred tax assets                  $20,501   24,596
                                            =======   ======
</TABLE>


Management believes that, based on the Company's historical pretax income
together with the projection of future taxable income, and after consideration
of the valuation allowance, it is more likely than not that the Company will
realize the benefits of the net deferred tax assets existing at September 30,
2006. In order to realize this net deferred tax asset, the Company will need to
generate future taxable income of approximately $59 million, of which $15
million is required to be realized prior to the expiration of the NOL
carryforward in the United States. The expiration of the NOL carryforward is
between 2019 and 2025. The Company anticipates being able to utilize the NOL
carryforward to reduce future Federal income tax cash payments.

The Company has established a valuation allowance of $7.4 million against the
capital loss carryforward generated in 2004, as such loss carryforward may not
be realized in future periods. In addition, the Company has established a
valuation allowance against certain NOL carryforwards in foreign jurisdictions
which may not be realized in future periods. The valuation allowance established
against the foreign NOL carryforwards was $2.9 million and $1.7 million at
September 30, 2006 and 2005, respectively. The Company classifies its valuation
allowance related to deferred taxes on a pro rata basis. The Company
reclassified the current and long-term portion of its valuation allowance as of
September 30, 2005 to be consistent with the current year presentation.

On October 22, 2004, the President of the United States signed into law the
American Jobs Creation Act of 2004 (the "2004 Jobs Act"). The 2004 Jobs Act
repeals the extraterritorial income exclusion and provides for (i) a new
deduction for domestic manufacturing and production income, (ii) international
tax reforms, (iii) a temporary incentive for U.S. multinational companies to
reinvest


<PAGE>

foreign earnings in the U.S., and (iv) numerous other business tax relief
provisions. The foreign earnings repatriation provision provides an 85%
dividends received deduction for certain dividends received from controlled
foreign corporations. In addition, in December 2004, the FASB issued FASB Staff
Position FAS 109-2, "Accounting and Disclosure Guidance for the Foreign Earnings
Repatriation Provision within the American Jobs Creation Act of 2004" (2004 Jobs
Act). The Company repatriated $39.5 million of funds to reinvest in the U.S.
under the 2004 Jobs Act. Federal income taxes on the repatriated amounts were
based on the 5.25% effective statutory rate as provided in the 2004 Jobs Act,
plus applicable state income and foreign withholding taxes. Federal income taxes
and applicable withholding taxes of $2.4 million have been provided for in the
current year provision.

Under current law, the research credit expired for research expenditures
incurred after December 31, 2005. The Company began an analysis of available
research credits for the period beginning in 2000 and ending with the three
month period ended December 31, 2005. The Company expects that these research
credit claims will be approximately $2.5 million.

No deferred taxes have been provided on the accumulated unremitted earnings of
the Company's foreign subsidiaries as of September 30, 2006. The Company's
intention is to reinvest these earnings indefinitely. In the event these foreign
entities' earnings were distributed, it is estimated that U.S. taxes, net of
available foreign tax credits, of approximately $3.2 million would be due, which
would correspondingly reduce the Company's net earnings.

During 2006, the Company determined that state tax expense had not been
accurately recorded in the financial statements for years 2001 through 2005. The
effect in any individual prior year was not material to the Company's results of
operations, financial position or cash flows. The Company adopted the provisions
of SEC Staff Accounting Bulletin No. 108, "Considering the Effects of Prior Year
Misstatements when Quantifying Misstatements in Current Year Financial
Statements" and recorded $2.4 million as a cumulative credit adjustment to 2006
beginning retained earnings.

The Company operates within multiple taxing jurisdictions and is subject to
audit in these jurisdictions. These audits can involve complex issues which may
require an extended period of time to resolve. The Company regularly reviews its
potential tax liabilities for tax years subject to audit. Changes in the
Company's potential tax liability occurred during the year ended September 30,
2006, and may occur in the future as the Company's assessment changes based on
examinations in various jurisdictions and/or changes in tax laws, regulations
and case law. Accordingly, the Company's estimate of income tax liabilities may
differ from actual payments or assessments.

10. DEBT

At September 30, 2006 and 2005, there were no outstanding borrowings under the
revolving credit facility. Effective October 6, 2004, the Company entered into a
$100 million five-year revolving bank credit facility with a $50 million
increase option that has a final maturity and expiration date of October 6,
2009. The credit facility is available for direct borrowings and/or the issuance
of letters of credit, and is provided by a group of six banks, led by Wells
Fargo Bank as agent. At September 30, 2006, the Company had approximately $99.2
million available to borrow under the credit facility in addition to $36.8
million cash on hand. At September 30, 2006, the Company had outstanding letters
of credit of $1.5 million ($0.8 million outstanding under the credit facility).
On February 1, 2006, the Company borrowed $47 million to partially fund the
acquisition of Hexagram which was subsequently repaid from the foreign cash
repatriation by March 31, 2006. The interest rate on this debt was approximately
5.3%. During April 2006, the Company borrowed $5 million which was subsequently
repaid prior to April 30, 2006. The interest rate on this debt was 7.75%.

The credit facility requires, as determined by certain financial ratios, a
commitment fee ranging from 17.5 to 27.5 basis points per annum on the unused
portion. The terms of the facility provide that interest on borrowings may be
calculated at a spread over the London Interbank Offered Rate (LIBOR) or based
on the prime rate, at the Company's election. The facility is secured by the
unlimited guaranty of the Company's material domestic subsidiaries and a 65%
pledge of the material foreign subsidiaries' share equity. The financial
covenants of the credit facility include limitations on leverage, minimum
consolidated EBITDA and minimum net worth.

During 2006 and 2005, the maximum aggregate short-term borrowings at any
month-end were $47 million and zero, respectively; the average aggregate
short-term borrowings outstanding based on month-end balances were $3.9 million
and zero, respectively; and the weighted average interest rates were 5.25%, not
applicable in 2005, and 1.87% in 2004. The letters of credit issued and
outstanding under the credit facility totaled $0.8 million and $1.4 million at
September 30, 2006, and 2005, respectively.


<PAGE>

11. CAPITAL STOCK

The 29,030,995 and 28,738,958 common shares as presented in the accompanying
Consolidated Balance Sheets at September 30, 2006 and 2005 represent the actual
number of shares issued at the respective dates. The Company held 3,166,026 and
3,175,626 common shares in treasury at September 30, 2006 and 2005,
respectively. 

In August 2006, the Company's Board of Directors authorized an open market
common stock repurchase program for up to 1.2 million shares, subject to market
conditions and other factors which covers the period through September 30, 2008.
There were no stock repurchases during fiscal 2006. The Company repurchased
670,072 and 312,400 shares in 2005 and 2004, respectively, under a previously
authorized program.

12. SHARE-BASED COMPENSATION

Prior to October 1, 2005, the Company accounted for its stock option plans using
the intrinsic value method of accounting provided under APB Opinion No. 25,
"Accounting for Stock Issued to Employees," (APB 25) and related
interpretations, as permitted by FASB Statement No. 123, "Accounting for
Stock-Based Compensation," (SFAS 123) under which no compensation expense was
recognized for stock option grants. Accordingly, share-based compensation for
stock options was included as a pro forma disclosure in the financial statement
footnotes for periods prior to fiscal 2006.

Effective October 1, 2005, the Company adopted the fair value recognition
provisions of FASB Statement No. 123(R), "Share-Based Payment," (SFAS 123(R))
using the modified-prospective transition method. Under this transition method,
compensation cost recognized in fiscal 2006 includes:

c) compensation cost for all share-based payments granted through September 30,
2005, for which the requisite service period had not been completed as of
September 30, 2005, based on the grant date fair value estimated in accordance
with the original provisions of SFAS 123, and

d) compensation cost for all share-based payments granted subsequent to
September 30, 2005, based on the grant date fair value estimated in accordance
with the provisions of SFAS 123(R). Results for prior periods have not been
restated.


<PAGE>

As a result of adopting SFAS 123(R) on October 1, 2005, the Company's net
earnings for the year ended September 30, 2006 were $2.3 million lower than if
it had continued to account for share-based compensation under APB 25.

The Company has various share-based plans which allow the Company to grant key
officers, managers and professional employees (1) options to purchase shares of
the Company's common stock, (2) stock appreciation rights with respect to all or
any part of the number of shares covered by the options, or (3)
performance-accelerated restricted shares and other stock based awards. No stock
appreciation rights have been awarded to date. In addition, the Company provides
compensation benefits to non-employee directors under a non-employee directors
compensation plan. During fiscal 2004, the Board of Directors authorized and the
shareholders approved, the 2004 Incentive Compensation Plan, which states, in
part, that on February 5, 2004, there shall be added to the authorized shares
allocated 2,000,000 shares for the grant of stock options, stock appreciation
rights, performance-accelerated restricted stock, or other full value awards. Of
these, shares up to 600,000 may be utilized for performance-accelerated
restricted stock or other full value awards. At September 30, 2006, the maximum
number of full value shares available for issue under the 2004 Incentive
Compensation Plan and the 2001 Stock Incentive Plan was 600,000 and 330,032
shares, respectively.

STOCK OPTION PLANS

The Company's stock option awards are generally subject to graded vesting over a
three year service period. All outstanding options were granted at prices equal
to fair market value at the date of grant. The options granted prior to
September 30, 2003 have a ten-year contractual life from date of issuance,
expiring in various periods through 2013. Beginning in fiscal 2004, the options
granted have a five-year contractual life from date of issuance. Beginning with
fiscal 2006 awards, the Company recognizes compensation cost on a straight-line
basis over the requisite service period for the entire award. Prior to fiscal
2006, the Company calculated the pro forma compensation cost using the graded
vesting method (FIN 28 approach).

The fair value of each option award is estimated as of the date of grant using a
Black-Scholes option pricing model. The weighted average assumptions for the
periods indicated are noted below. Expected volatility is based on historical
volatility of ESCO's stock calculated over the expected term of the option. The
expected term was calculated in accordance with Staff Accounting Bulletin No.
107 using the simplified method for "plain-vanilla" options. The risk-free rate
for the expected term of the option is based on the U.S. Treasury yield curve in
effect at the date of grant. The fair value of each option grant is estimated on
the date of grant using the Black-Scholes option-pricing model with the
following weighted-average assumptions used for grants in 2006, 2005 and 2004,
respectively: expected dividend yield of 0% in all periods; expected volatility
of 28.0%, 23.5% and 21.4%; risk-free interest rate of 4.6%, 3.9% and 4.2%; and
expected term of 3.50 years, 3.58 years and 4.25 years.

Information regarding stock options awarded under the option plans is as
follows:


<TABLE>
<CAPTION>
                                       FY2006                   FY2005                   FY2004
                               ----------------------   ----------------------   ----------------------
                                            ESTIMATED                Estimated                Estimated
                                            WEIGHTED                 Weighted                 Weighted
                                 SHARES    AVG. PRICE     Shares    Avg. Price     Shares    Avg. Price
                               ---------   ----------   ---------   ----------   ---------   ----------
<S>                            <C>         <C>          <C>         <C>          <C>         <C>
October 1                      1,324,548     $20.48     1,356,094     $13.63     1,529,192     $10.89
   Granted                       328,080     $44.63       376,200     $35.55       291,600     $24.15
   Exercised                    (232,371)    $15.95      (388,340)    $10.94      (385,166)    $10.13
   Cancelled                     (32,909)    $35.77       (19,406)    $24.96       (79,532)    $16.26
                               ---------     ------     ---------     ------     ---------     ------
September 30,                  1,387,348     $26.60     1,324,548     $20.48     1,356,094     $13.63

At September 30,
   Reserved for future grant   1,146,741                1,428,032                1,665,238
   Exercisable                   753,415     $16.46       755,612     $12.29       818,824     $ 9.71
                               =========     ======     =========     ======     =========     ======
</TABLE>


The aggregate intrinsic value of options exercised during 2006, 2005 and 2004
was $7.9 million, $12.4 million and $6.2 million, respectively. The aggregate
intrinsic value of stock options outstanding and exercisable at September 30,
2006 was $32.1 million and $22.7 million, respectively. The weighted-average
contractual life of stock options outstanding at September 30, 2006 was 3.75
years. The weighted-average fair value of stock options granted in 2006, 2005,
and 2004 was $12.17, $11.28, and $6.84, respectively.

<PAGE>

Summary information regarding stock options outstanding at September 30, 2006 is
presented below:


<TABLE>
<CAPTION>
                            Options Outstanding
                  ---------------------------------------
                                    Weighted-
                                     Average     Weighted
                      Number        Remaining     Average
Range of          Outstanding at   Contractual   Exercise
Exercise Prices   Sept. 30, 2006       Life        Price
---------------   --------------   -----------   --------
<S>               <C>              <C>           <C>
$ 4.59 - $10.72        215,244      3.0 years     $ 7.21
$12.59 - $14.52        292,912      5.5 years     $13.71
$17.16 - $32.32        229,371      2.7 years     $23.34
$35.18 - $42.10        327,241      3.0 years     $35.29
$42.99 - $54.88        322,580      4.2 years     $44.74
                     ---------      ---------     ------
                     1,387,348      3.8 years     $26.60
                     =========      =========     ======
</TABLE>



<TABLE>
<CAPTION>
                  Exercisable Options Outstanding
                  -------------------------------
                                      Weighted
                         Number        Average
Range of             Exercisable at   Exercise
Exercise Prices      Sept. 30, 2006     Price
---------------      --------------   --------
<S>               <C>                 <C>
$ 4.59 - $10.72          215,244       $ 7.21
$12.59 - $14.52          292,912       $13.71
$17.16 - $32.32          148,150       $22.88
$35.18 - $50.10           97,109       $35.42
                         -------       ------
                         753,415       $16.46
                         =======       ======
</TABLE>


PERFORMANCE-ACCELERATED RESTRICTED SHARE AWARDS

The performance-accelerated restricted shares (restricted shares) vest over five
years with accelerated vesting if certain performance targets are achieved. In
these cases, if it is probable that the performance condition will be met, the
Company recognizes compensation cost on a straight-line basis over the shorter
performance period; otherwise, it will recognize compensation cost over the
longer service period. Compensation cost for all outstanding restricted share
awards is being recognized over the shorter performance period as it is probable
the performance condition will be met. The restricted share award grants were
valued at the stock price on the date of grant. Pre-tax compensation expense
related to the restricted share awards was $1.5 million, $1.9 million and $1.4
million for fiscal years ended September 30, 2006, 2005 and 2004, respectively.

The following summary presents information regarding outstanding restricted
share awards as of September 30, 2006 and changes during the period then ended:


<TABLE>
<CAPTION>
                                              Weighted
                                   Shares    Avg. Price
                                  --------   ----------
<S>                               <C>        <C>
Nonvested at October 1, 2005       238,436     $23.78
Granted                             64,130     $43.02
Vested                            (118,736)    $17.41
Cancelled                          (28,100)    $36.16
                                  --------     ------
Nonvested at September 30, 2006    155,730     $34.33
                                  ========     ======
</TABLE>


NON-EMPLOYEE DIRECTORS PLAN

The non-employee directors compensation plan provides to each non-employee
director a retainer of 800 common shares per quarter. Compensation expense
related to the non-employee director grants was $1.0 million, $0.7 million and
$0.4 million for the years ended September 30, 2006, 2005 and 2004,
respectively.

The total share-based compensation cost that has been recognized in results of
operations and


<PAGE>

included within SG&A was $4.8 million, $2.6 million and $1.8 million for the
years ended September 30, 2006, 2005 and 2004, respectively. The total income
tax benefit recognized in results of operations for share-based compensation
arrangements was $1.2 million, $1.0 million and $0.7 million for the years ended
September 30, 2006, 2005 and 2004, respectively. The Company has elected to use
tax law ordering rules when calculating the income tax benefit associated with
its share-based payment arrangements. In addition, the Company elected to use
the simplified method of calculating the pool of excess tax benefits available
to absorb tax deficiencies recognized subsequent to the adoption of SFAS No.
123(R)-3, "Transition Election related to Accounting for the Tax Effects of
Share-Based Payment Awards." As of September 30, 2006, there was $8.4 million of
total unrecognized compensation cost related to share-based compensation
arrangements. That cost is expected to be recognized over a weighted-average
period of 3.5 years.

PRO FORMA NET EARNINGS

The following table provides pro forma net earnings and earnings per share had
the Company applied the fair value method of SFAS 123 for the years ended
September 30, 2005 and 2004:

Pro forma (Unaudited)


<TABLE>
<CAPTION>
(Dollars in thousands,
except per share amounts)                         2005     2004
                                                -------   ------
<S>                                             <C>       <C>
Net earnings, as reported                       $43,544   35,671
Add: stock-based employee
   compensation expense included
   in reported net earnings, net of tax           1,165      866
Less: total stock-based employee
   compensation expense determined
   under fair value based methods, net of tax    (3,476)  (1,910)
                                                -------   ------
Pro forma net earnings                          $41,233   34,627
                                                -------   ------
Net earnings per share:
   Basic -- as reported                         $  1.71     1.38
   Basic -- pro forma                              1.62     1.34
   Diluted -- as reported                          1.66     1.34
   Diluted -- pro forma                            1.57     1.30
                                                =======   ======
</TABLE>


13. RETIREMENT AND OTHER BENEFIT PLANS

Substantially all employees are covered by defined contribution pension plans
maintained by the Company for the benefit of its employees. Effective December
31, 2003, the Company's defined benefit plan was frozen and no additional
benefits will be accrued after that date. As a result, the accumulated benefit
obligation and projected benefit obligation are equal. These frozen retirement
income benefits are provided to employees under defined benefit pay-related and
flat-dollar plans, which are noncontributory. The annual contributions to
retirement plans equal or exceed the minimum funding requirements of the
Employee Retirement Income Security Act or applicable local regulations. 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. 

The Company uses a measurement date of September 30 for its pension and other
postretirement benefit plans. The Company has an accrued benefit liability of
$1.8 million and $1.9 million at September 30, 2006 and 2005, respectively,
related to its other postretirement benefit obligations. All other information
related to its postretirement benefit plans is not considered material to the
Company's results of operations or financial condition.

The following tables provide a reconciliation of the changes in the pension
plans and fair value of assets over the two-year period ended September 30,
2006, and a statement of the funded status as of September 30, 2006 and 2005:


<PAGE>


<TABLE>
<CAPTION>
                                              Pension Benefits
                                              ----------------
(Dollars in millions)                            2006   2005
                                                -----   ----
<S>                                           <C>       <C>
RECONCILIATION OF BENEFIT OBLIGATION
Net benefit obligation at beginning of year     $50.2   45.0
Service cost                                       --     --
Interest cost                                     2.6    2.6
Actuarial (gain) loss                            (2.9)   4.2
Plan amendments                                   0.1     --
Plan participant contributions                     --     --
Gross benefits paid                              (1.8)  (1.6)
                                                -----   ----
Net benefit obligation at end of year           $48.2   50.2
                                                =====   ====
</TABLE>


<PAGE>


<TABLE>
<CAPTION>
                                                    Pension
                                                    Benefits
                                                 --------------
(Dollars in millions)                             2006    2005
                                                 ------   -----
<S>                                              <C>      <C>
RECONCILIATION OF FAIR VALUE OF PLAN ASSETS
Fair value of plan assets at beginning of year   $32.7    31.1
Actual return on plan assets                       2.6     3.0
Employer contributions                             1.6     0.2
Plan participant contributions                      --      --
Gross benefits paid                               (1.8)   (1.6)
                                                 -----    ----
Fair value of plan assets at end of year         $35.1    32.7
                                                 =====    ====
</TABLE>


Employer contributions and benefits paid under the pension plans include $0.2
million paid from employer assets in 2006 and 2005.


<TABLE>
<CAPTION>
                                                    Pension
                                                    Benefits
                                                 --------------
(Dollars in millions)                             2006    2005
                                                 ------   -----
<S>                                              <C>      <C>
Funded Status
Funded status at end of year                     $(13.1)  (17.5)
Unrecognized prior service cost                     0.1      --
Unrecognized net actuarial (gain) loss             10.1    13.3
                                                 ------   -----
   Accrued benefit cost                            (2.9)   (4.2)
                                                 ------   -----
Amounts recognized in the Balance Sheet
   consist of:
Accrued benefit cost                               (2.9)   (4.2)
Additional minimum liability                      (10.3)  (13.3)
Intangible asset                                    0.1      --
Accumulated other comprehensive income
   (before tax effect)                             10.2    13.3
                                                 ------   -----
   Accrued benefit liability                     $ (2.9)   (4.2)
                                                 ======   =====
</TABLE>


A decrease of $3.0 million was included in other comprehensive income during
2006 arising from a change in the additional minimum liability. 

The following table provides the components of net periodic benefit cost for the
plans for the years ended September 30, 2006, 2005 and 2004:


<TABLE>
<CAPTION>

                                  Pension Benefits
                                 ------------------
(Dollars in millions)            2006   2005   2004
                                 ----   ----   ----
<S>                              <C>    <C>    <C>
Service cost                     $ --     --    0.6
Interest cost                     2.6    2.6    2.5
Expected return on plan assets   (2.7)  (2.9)  (2.9)
Amortization of service costs      --     --     --
Net actuarial (gain) loss         0.4    0.2    0.1
Net amortization and deferral      --     --     --
                                 ----   ----   ----
   Net periodic benefit cost      0.3   (0.1)   0.3
Defined contribution plans        2.9    2.4    1.9
                                 ----   ----   ----
   Total                         $3.2    2.3    2.2
                                 ====   ====   ====
</TABLE>


The following weighted-average assumptions were used to
determine the net periodic benefit cost for the pension plans:


<PAGE>


<TABLE>
<CAPTION>
                             2006   2005   2004
                             ----   ----   ----
<S>                          <C>    <C>    <C>
Discount rate                5.25%  6.00%  6.00%
Rate of increase in
   compensation levels        N/A    N/A   4.00%
Expected long-term rate of
   return on assets          8.25%  8.25%  8.25%
</TABLE>


The following weighted-average assumptions were used to determine the net
periodic benefit obligations for the pension plans:


<TABLE>
<CAPTION>
                         2006   2005
                         ----   ----
<S>                      <C>    <C>
Discount rate            5.75%  5.25%
Rate of increase in
   compensation levels     --     --
</TABLE>


The assumed rate of increase in compensation levels is not applicable in 2005
and 2004 as the plan was frozen as of December 31, 2003.

The asset allocation for the Company's pension plans at the end of 2006 and
2005, the Company's acceptable range and the target allocation for 2007, by
asset category, follows:


<TABLE>
<CAPTION>
                          Target     Acceptable     Percentage of
                        Allocation     Range      Plan at Year-end
                        ----------   ----------   ----------------
ASSET CATEGORY             2007                      2006   2005
--------------             ----                      ----   ----
<S>                     <C>          <C>             <C>    <C>
Equity securities           60%        50-70%         66%    65%
Fixed income                40%        30-50%         32%    31%
Cash/cash equivalents        0%         0-5%           2%     4%
</TABLE>


The Company's pension plan assets are managed by outside investment managers and
assets are rebalanced when the target ranges are exceeded. Pension plan assets
consist principally of marketable securities including common stocks, bonds, and
interest-bearing deposits. The Company's investment strategy with respect to
pension assets is to achieve a total rate of return (income and capital
appreciation) that is sufficient to accomplish the purpose of providing
retirement benefits to all eligible and future retirees of the pension plans.
The Company regularly monitors performance and compliance with investment
guidelines.

EXPECTED CASH FLOWS

Information about the expected cash flows for the pension and other
postretirement benefit plans follows:


<TABLE>
<CAPTION>

                                           Pension     Other
(Dollars in millions)                     Benefits   Benefits
                                          --------   --------
<S>                                       <C>        <C>
Expected Employer Contributions -- 2007               $0.20.1
Expected Benefit Payments
2007                                                   2.20.1
2008                                                   2.30.1
2009                                                   2.30.1
2010                                                   2.40.1
2011                                                   2.50.1
2012-2016                                   $14.3         0.6
</TABLE>


14.  OTHER FINANCIAL DATA

Items charged to operations during the years ended September 30, 2006, 2005 and
2004 included the following:


<TABLE>
<CAPTION>
(Dollars in thousands)          2006       2005     2004
                              --------   -------   ------
<S>                           <C>        <C>       <C>
Salaries and wages
   (including fringes)        $119,286   100,372   93,536
Maintenance and repairs          4,719     3,897    4,326
                              --------   -------   ------
Research and development
   (R&D) costs:
</TABLE>



<PAGE>


<TABLE>
<S>                           <C>        <C>       <C>
   Company-sponsored          $ 20,043    16,829   12,201
   Customer-sponsored            6,323     5,687    6,064
                              --------   -------   ------
   Total R&D                  $ 26,366    22,516   18,265
   Other engineering costs       9,069     7,763    9,636
                              --------   -------   ------
   Total R&D and other
      engineering costs       $ 35,435    30,279   27,901
                              --------   -------   ------
   As a % of net sales             7.7%      7.1%     6.6%
                              ========   =======   ======
</TABLE>


The increase in salaries and wages in 2006 compared to the prior years is mainly
due to the current year acquisitions of Nexus and Hexagram and the addition of
personnel at DCSI to support the near-term sales growth. 

Customer-sponsored R&D is defined in note 1(O) of notes to consolidated
financial statements.

A reconciliation of the changes in accrued product warranty liability for the
years ended September 30, 2006, 2005, and 2004 is as follows:


<TABLE>
<CAPTION>
                                2006      2005     2004
                               -------   ------   ------
<S>                            <C>       <C>      <C>
Balance as of October 1        $ 1,487    2,147    1,374
Additions charged to expense     2,357    1,108    3,206
Deductions                      (2,422)  (1,768)  (2,433)
                               -------   ------   ------
Balance as of September 30     $ 1,422    1,487    2,147
                               =======   ======   ======
</TABLE>


15.  BUSINESS SEGMENT INFORMATION

The Company is organized based on the products and services that it offers.
Under this organizational structure, the Company has three reporting units:
Communications, Filtration/Fluid Flow and RF Shielding and Test (Test). The
Communications unit is a proven supplier of special purpose fixed network
communications systems for electric, gas and water utilities, including hardware
and software to support advanced metering applications. DCSI's Two-Way Automatic
Communications System, known as TWACS(R), is currently used for automatic meter
reading (AMR) and related advanced metering functions serving approximately 200
utilities, as well as having load management capabilities. Hexagram's STAR(R)
system, the premier wireless Advanced Metering Infrastructure, delivers two-way
and one-way operation on secure licensed radio frequencies for more than 100
utilities serving electric, gas and water customers. Nexus provides
best-in-class information solutions to more than 85 leading energy companies
that add value to existing billing and metering infrastructure to allow both the
utilities and their customers to better manage energy-driven transactions and
decision making. Comtrak's SecurVision(R) product line provides digital video
surveillance and security functions for large commercial enterprises and alarm
monitoring companies. Filtration/Fluid Flow primary operations consist of: PTI
Technologies Inc. (PTI), VACCO Industries (VACCO) and Filtertek Inc.
(Filtertek). PTI and VACCO develop and manufacture a wide range of filtration
products and are leading suppliers of filters to the commercial and defense
aerospace, satellite and industrial markets. Filtertek develops and manufactures
a broad range of high-volume, original equipment manufacturer (OEM) filtration
products at its facilities in North America, South America and Europe. Each of
the components of the Filtration/Fluid Flow segment is presented separately due
to differing long-term economics. Test segment operations represent the EMC
Group, consisting primarily of EMC Test Systems, L.P. (ETS) and Lindgren RF
Enclosures, Inc. (Lindgren). The EMC Group is principally involved in the design
and manufacture of EMC test equipment, test chambers, and electromagnetic
absorption materials. The EMC Group also manufactures radio frequency (RF)
shielding products and components used by manufacturers of medical equipment,
communications systems, electronic products, and shielded rooms for high
security data processing and secure communication. Accounting policies of the
segments are the same as those described in the summary of significant
accounting policies in note 1 to the Consolidated Financial Statements. 

In accordance with SFAS 131, the Company evaluates the performance of its
operating units based on EBIT, which is defined as: Earnings Before Interest and
Taxes. Intersegment sales and transfers are not significant. Segment assets
consist primarily of customer receivables, inventories, capitalized software and
fixed assets directly associated with the production processes of the segment.
Segment


<PAGE>

depreciation and amortization is based upon the direct assets listed above.

NET SALES

(Dollars in millions)


<TABLE>
<CAPTION>
Year ended September 30,             2006     2005    2004
------------------------            ------   -----   -----
<S>                                 <C>      <C>     <C>
Communications                      $156.2   138.0   137.8
                                    ------   -----   -----
PTI                                   46.4    40.7    38.1
VACCO                                 32.3    38.9    43.2
Filtertek                             95.4    92.1    92.6
                                    ------   -----   -----
   Filtration/Fluid Flow subtotal    174.1   171.7   173.9
Test                                 128.6   119.4   110.4
                                    ------   -----   -----
Consolidated totals                 $458.9   429.1   422.1
                                    ======   =====   =====
</TABLE>


No customers exceeded 10% of net sales in the periods presented.

<PAGE>

EBIT

(Dollars in millions)


<TABLE>
<CAPTION>
Year ended September 30,             2006     2005    2004
------------------------            ------   -----   -----
<S>                                 <C>      <C>     <C>
Communications                      $ 28.3    38.8    38.4
                                    ------   -----   -----
PTI                                    6.6     3.8     2.4
VACCO                                  6.1    10.4    13.7
Filtertek                              6.8     8.2     5.7
                                    ------   -----   -----
   Filtration/Fluid Flow subtotal     19.5    22.4    21.8
Test                                  15.0    12.2    11.3
Reconciliation to consolidated
   totals (Corporate)                (15.2)  (11.4)  (11.8)
                                    ------   -----   -----
Consolidated EBIT                     47.6    62.0    59.7
   Add: interest income                1.3     1.9     0.8
                                    ------   -----   -----
   Earnings before income tax       $ 48.9    63.9    60.5
                                    ======   =====   =====
</TABLE>


IDENTIFIABLE ASSETS

(Dollars in millions)


<TABLE>
<CAPTION>
Year ended September 30,             2006     2005    2004
------------------------            ------   -----   -----
<S>                                 <C>      <C>     <C>
Communications                      $ 97.9    52.4    51.3
                                    ------   -----   -----
PTI                                   32.0    36.7    39.7
VACCO                                 15.7    19.7    21.8
Filtertek                             62.9    91.5    93.0
                                    ------   -----   -----
   Filtration/Fluid Flow subtotal    110.6   147.9   154.5
Test                                  50.3    80.7    75.1
Reconciliation to consolidated
   totals (Corporate assets)         229.9   142.8   121.5
                                    ------   -----   -----
Consolidated totals                 $488.7   423.8   402.4
                                    ======   =====   =====
</TABLE>


Corporate assets consist primarily of goodwill, deferred taxes, acquired
intangible assets and cash balances.

CAPITAL EXPENDITURES

(Dollars in millions)


<TABLE>
<CAPTION>
Year ended September 30,            2006   2005   2004
------------------------            ----   ----   ----
<S>                                 <C>    <C>    <C>
Communications                      $3.4    1.9    1.5
                                    ----    ---   ----
PTI                                  0.2    1.0    1.1
VACCO                                1.0    0.7    0.6
Filtertek                            3.8    4.0    6.7
                                    ----    ---   ----
   Filtration/Fluid Flow subtotal    5.0    5.7    8.4
Test                                 0.7    1.2    0.9
                                    ----    ---   ----
Consolidated totals                 $9.1    8.8   10.8
                                    ====    ===   ====
</TABLE>



<PAGE>

DEPRECIATION AND AMORTIZATION

(Dollars in millions)


<TABLE>
<CAPTION>
Year ended September 30,             2006   2005   2004
------------------------            -----   ----   ----
<S>                                 <C>     <C>    <C>
Communications                      $ 5.0    2.0    1.7
                                    -----   ----   ----
PTI                                   1.5    1.5    1.7
VACCO                                 0.7    0.7    0.7
Filtertek                             6.0    6.2    6.0
                                    -----   ----   ----
   Filtration/Fluid Flow subtotal     8.2    8.4    8.4
Test                                  1.3    1.4    1.4
Reconciliation to consolidated
   totals (Corporate)                 2.8    0.4    0.4
                                    -----   ----   ----
Consolidated totals                 $17.3   12.2   11.9
                                    =====   ====   ====
</TABLE>


GEOGRAPHIC INFORMATION

NET SALES

(Dollars in millions)


<TABLE>
<CAPTION>
Year ended September 30,             2006     2005    2004
------------------------            ------   -----   -----
<S>                                 <C>      <C>     <C>
United States                       $355.9   325.3   330.6
Europe                                40.2    56.0    58.3
Far East                              36.1    29.6    18.8
Other                                 26.7    18.2    14.4
                                    ------   -----   -----
Consolidated totals                 $458.9   429.1   422.1
                                    ======   =====   =====
</TABLE>


LONG-LIVED ASSETS

(Dollars in millions)


<TABLE>
<CAPTION>
Year ended September 30,             2006   2005   2004
------------------------            -----   ----   ----
<S>                                 <C>     <C>    <C>
United States                       $51.3   50.3   53.5
Europe                               10.6   10.9   11.6
Other                                 6.9    6.0    4.0
                                    -----   ----   ----
Consolidated totals                 $68.8   67.2   69.1
                                    =====   ====   ====
</TABLE>


Net sales are attributed to countries based on location of customer. Long-lived
assets are attributed to countries based on location of the asset.

16. COMMITMENTS AND CONTINGENCIES

At September 30, 2006, the Company had $1.5 million in letters of credit
outstanding as guarantees of contract performance. As a normal incidence of the
businesses in which the Company is engaged, various claims, charges and
litigation are asserted or commenced against the Company. Lindgren is involved
in a contract dispute with a prime contractor involving the assertion of certain
construction delay damages of approximately $3.7 million. The project was
completed in 2005. Lindgren vigorously denies responsibility for this delay and
for these damages, and has asserted a claim against the prime contractor of $0.9
million based on damages suffered by Lindgren. Lindgren continues to
aggressively defend its position and pursue its right to affirmative damages
however, there can be no assurance of the outcome at this time. With respect to
claims and litigation asserted or commenced against the Company, it is the
opinion of Management, that final judgments, if any, which might be rendered
against the Company are adequately reserved, covered by insurance, or are not
likely to have a material adverse effect on its financial condition or results
of operation.


<PAGE>

17. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)


<TABLE>
<CAPTION>
                                                     FIRST     SECOND    THIRD     FOURTH    FISCAL
(Dollars in thousands, except per share amounts)    QUARTER   QUARTER   QUARTER   QUARTER     YEAR
                                                   --------   -------   -------   -------   -------
<S>                                                <C>        <C>       <C>       <C>       <C>
2006
Net sales                                          $ 90,586   122,884   123,626   121,769   458,865
Net earnings                                          2,204     7,343    11,163    10,570    31,280
                                                   --------   -------   -------   -------   -------
Basic earnings per share:
   Net earnings                                         .09       .29       .43       .41      1.22
Diluted earnings per share:
   Net earnings                                    $    .08       .28       .42       .40      1.19
                                                   ========   =======   =======   =======   =======
2005
Net sales                                          $104,375   106,160   108,800   109,780   429,115
Net earnings                                         10,523    10,427    12,401    10,193    43,544
                                                   --------   -------   -------   -------   -------
Basic earnings per share:
   Net earnings                                         .41       .41       .49       .40      1.71
Diluted earnings per share:
   Net earnings                                    $    .40       .40       .47       .39      1.66
                                                   ========   =======   =======   =======   =======
</TABLE>


<PAGE>

MANAGEMENT'S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING

The Company's Management is responsible for establishing and maintaining
adequate internal control over financial reporting (as defined in the Securities
Exchange Act Rule 13a-15(f)). Our internal control over financial reporting is
designed to provide reasonable assurance regarding the reliability of financial
reporting and the preparation of financial statements for external purposes in
accordance with generally accepted accounting principles in the United States of
America.

Because of its inherent limitations, any system of internal control over
financial reporting, no matter how well designed, may not prevent or detect
misstatements due to the possibility that a control can be circumvented or
overridden or that misstatements due to error or fraud may occur that are not
detected. Also, because of changes in conditions, internal control effectiveness
may vary over time.

Management assessed the effectiveness of the Company's internal control over
financial reporting as of September 30, 2006 using criteria established in
Internal Control -- Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO) and concluded that the Company
maintained effective internal control over financial reporting as of September
30, 2006 based on these criteria, subject to the scope limitation with respect
to Nexus and Hexagram as discussed in the following paragraph.

The Company acquired Nexus Energy Software, Inc. (Nexus) on November 29, 2005
and Hexagram, Inc. (Hexagram) on February 1, 2006. As permitted by SEC guidance,
Management excluded from its assessment of the effectiveness of the Company's
internal control over financial reporting as of September 30, 2006, Nexus' and
Hexagram's internal control over financial reporting. Total assets related to
Nexus as of September 30, 2006 were $3.7 million and revenues for the ten-month
period subsequent to the acquisition (November 29, 2005 to September 30, 2006)
were $9.6 million. Total assets related to Hexagram as of September 30, 2006
were $13.1 million and revenues for the eight-month period subsequent to the
acquisition (February 1, 2006 to September 30, 2006) were $18.6 million.

Our internal control over financial reporting as of September 30, 2006, as well
as our assessment of the effectiveness of our internal control over financial
reporting as of September 30, 2006, have been audited by KPMG LLP, an
independent registered public accounting firm, as stated in the report which is
included herein.


-------------------------------------   ----------------------------------------
Victor L. Richey                        Gary E. Muenster
Chairman, Chief Executive Officer,      Senior Vice President
and President                           and Chief Financial Officer


<PAGE>

R
EPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Directors and Shareholders
ESCO Technologies Inc.:

We have audited the accompanying consolidated balance sheets of ESCO
Technologies Inc. and subsidiaries (the Company) as of September 30, 2006 and
2005, 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, 2006. 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 the standards of the Public Company
Accounting Oversight Board (United States). 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 previously
present fairly, in all material respects, the financial position of ESCO
Technologies Inc. and subsidiaries as of September 30, 2006 and 2005, and the
results of their operations and their cash flows for each of the years in the
three-year period ended September 30, 2006, in conformity with U.S. generally
accepted accounting principles.

As discussed in Note 1 to the consolidated financial statements, the Company
adopted Statement of Financial Accounting Standards No. 123(R), "Share-Based
Payment" effective October 1, 2005 and the Company changed its method of
quantifying errors in 2006. 

We also have audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the effectiveness of ESCO
Technologies Inc.'s internal control over financial reporting as of September
30, 2006, based on criteria established in the Internal Control -- Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO), and our report dated December 11, 2006, expressed an
unqualified opinion on management's assessment of, and the effective operation
of, internal control over financial reporting.

St. Louis, Missouri
December 11, 2006



<PAGE>


REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Directors and Shareholders
ESCO Technologies Inc.:

We have audited management's assessment, included in the accompanying
Management's Report on Internal Control Over Financial Reporting, that ESCO
Technologies Inc. (the Company) maintained effective internal control over the
financial reporting as of September 30, 2006, based on criteria established in
the Internal Control -- Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission (COSO). ESCO Technologies
Inc.'s management is responsible for maintaining effective internal control over
financial reporting and for its assessment of the effectiveness of internal
control over financial reporting. Our responsibility is to express an opinion on
management's assessment and an opinion on the effectiveness of the Company's
internal control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards required that we
plan and perform the audit to obtain reasonable assurance about whether
effective internal control over financial reporting was maintained in all
material respects. Our audit included obtaining an understanding of internal
control over financial reporting, evaluating management's assessment, testing
and evaluating the design and operating effectiveness of internal control, and
performing such other procedures as we considered necessary in the
circumstances. We believe that our audit provides a reasonable basis for our
opinion.

A company's internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company's internal control over
financial reporting includes those policies and procedures that (1) pertain to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and the receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company's
assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting
may not prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.

In our opinion, management's assessment that ESCO Technologies Inc. maintained
effective internal control over financial reporting as of September 30, 2006, is
fairly stated, in all material respects, based on criteria established in the
Internal Control -- Integrated Framework issued by COSO. Also, in our opinion,
ESCO Technologies Inc. maintained, in all material respects, effective internal
control over financial reporting as of September 30, 2006, based on criteria
established in the Internal Control -- Integrated Framework issued by COSO.

The Company acquired Nexus Energy Software, Inc. (Nexus) on November 29, 2005
and Hexagram, Inc. (Hexagram) on February 1, 2006, and management excluded from
its assessment of the effectiveness of the Company's internal control over
financial reporting as of September 30, 2006, Nexus' and Hexagram's internal
control over financial reporting. Total assets related to Nexus as of September
30, 2006 of $3.7 million and revenues for the ten-month period subsequent to the
acquisition (November 29, 2005 to September 30, 2006) of $9.6 million and total
assets related to Hexagram as of September 30, 2006 of $13.1 million and
revenues for the eight-month period subsequent to the acquisition (February 1,
2006 to September 30, 2006) of $18.6 million were included in the consolidated
financial statements of ESCO Technologies Inc. and subsidiaries as of and for
the year ended September 30, 2006. Our audit of internal control over financial
reporting of ESCO Technologies Inc. also excluded an evaluation of the internal
control over financial reporting of Nexus and Hexagram.

We also have audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the consolidated balance sheets of
ESCO Technologies Inc. and subsidiaries


<PAGE>

as of September 30, 2006 and 2005, 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, 2006, and our report dated December 11,
2006, expressed an unqualified opinion on those consolidated financial
statements.

St. Louis, Missouri
December 11, 2006

<PAGE>

FIVE-YEAR FINANCIAL SUMMARY


<TABLE>
<CAPTION>
(Dollars in millions, except per share amounts)          2006     2005    2004    2003    2002
                                                        ------   -----   -----   -----   -----
<S>                                                     <C>      <C>     <C>     <C>     <C>
For years ended September 30:
   Net sales                                            $458.9   429.1   422.1   396.7   316.6
   Net earnings from continuing operations                31.3    43.5    37.8    26.7    23.3
   Net earnings (loss) from discontinued operations         --      --    (2.1)  (66.5)   (1.6)
   Net earnings (loss) before accounting change           31.3    43.5    35.7   (39.7)   21.8
   Net earnings (loss)                                    31.3    43.5    35.7   (41.1)   21.8

Earnings (loss) per share:
Basic:
   Continuing operations                                  1.22    1.71    1.47    1.05    0.93
   Discontinued operations                                  --      --   (0.09)  (2.62)  (0.06)
   Cumulative effect of accounting change, net of tax       --      --      --   (0.06)     --
                                                        ------   -----   -----   -----   -----
   Net earnings (loss)                                    1.22    1.71    1.38   (1.63)   0.87

Diluted:
   Continuing operations                                  1.19    1.66    1.42    1.02    0.90
   Discontinued operations                                  --      --   (0.08)  (2.53)  (0.06)
   Cumulative effect of accounting change, net of tax       --      --      --   (0.06)     --
                                                        ------   -----   -----   -----   -----
   Net earnings (loss)                                    1.19    1.66    1.34   (1.57)   0.84

As of September 30:
   Working capital                                       131.4   197.2   165.2   120.5   112.6
   Total assets                                          488.7   423.8   402.4   393.4   407.7
   Long-term debt                                           --      --     0.4     0.5     0.5
   Shareholders' equity                                 $376.4   331.0   307.6   275.4   306.3
                                                        ======   =====   =====   =====   =====
</TABLE>


See notes 2 and 3 of notes to consolidated financial statements for discussion
of acquisition and divestiture activity.

COMMON STOCK MARKET PRICE

ESCO's 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 of the
common stock for each quarter of fiscal 2006 and 2005. The prior year amounts
have been adjusted to reflect the 2-for-1 stock split which occurred on
September 23, 2005.


<TABLE>
<CAPTION>
               2006             2005
          --------------   --------------
Quarter    HIGH     LOW     High     Low
-------   ------   -----   ------   -----
<S>       <C>      <C>     <C>      <C>
First     $50.75   32.57   $39.48   32.25
Second     52.76   43.84    42.43   34.49
Third      58.03   47.65    53.25   35.40
Fourth     58.42   45.30    56.23   47.18
</TABLE>


ESCO historically has not paid cash dividends on its common stock. Management
continues to evaluate its cash dividend policy. There are no current plans to
initiate a dividend.


<PAGE>

SHAREHOLDERS' SUMMARY

SHAREHOLDERS' ANNUAL MEETING

The Annual Meeting of the shareholders of ESCO Technologies Inc. will be held at
9:30 a.m. Friday, February 2, 2007, at the Company's Corporate headquarters,
9900A Clayton Road, St. Louis, Missouri 63124. Notice of the meeting and a proxy
statement were sent to shareholders with this Annual Report.


CERTIFICATIONS

Pursuant to New York Stock Exchange (NYSE) requirements, the Company submitted
to the NYSE the annual certifications, dated February 27, 2006 and March 3,
2005, by the Company's chief executive officer that he was not aware of any
violations by the Company of NYSE's corporate governance listing standards. In
addition, the Company filed with the Securities and Exchange Commission the
certifications by the Company's chief executive officer and chief financial
officer required under Section 302 of the Sarbanes-Oxley Act of 2002 as exhibits
to the Company's Forms 10-K for its fiscal years ended September 30, 2006 and
September 30, 2005.

10-K REPORT

A copy of the Company's 2006 Annual Report on Form 10-K filed with the
Securities and Exchange Commission is available to shareholders without charge.
Direct your written request to the Investor Relations Department, ESCO
Technologies Inc., 9900A Clayton Road, St. Louis, Missouri 63124. The Form 10-K
is also available on the Company's web site at www.escotechnologies.com.

INVESTOR RELATIONS

Additional investor-related information may be obtained by contacting the
Director of Investor Relations at (314) 213-7277 or toll free at (888) 622-3726.
Information is also available through the Company's web site at
www.escotechnologies.com or via e-mail to pmoore@escotechnologies.com.

TRANSFER AGENT AND REGISTRAR

Shareholder inquiries concerning lost certificates, transfer of shares or
address changes should be directed to:

Registrar and Transfer Company
10 Commerce Drive
Cranford, NJ 07016-3572
1 (800) 368-5948
E-mail: info@rtco.com

CAPITAL STOCK INFORMATION

ESCO Technologies Inc. common stock shares (symbol ESE) are listed on the New
York Stock Exchange. There were approximately 2,500 holders of record of shares
of common stock at September 30, 2006.


INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

KPMG LLP
10 South Broadway, Suite 900
St. Louis, Missouri 63102

exv21
 

EXHIBIT 21
SUBSIDIARIES OF
ESCO TECHNOLOGIES INC.
         
    STATE OR JURISDICTION OF    
    INCORPORATION OR   NAME UNDER WHICH
NAME   ORGANIZATION   IT DOES BUSINESS
 
       
Beijing Lindgren ElectronMagnetic Technology Co., Ltd.
  People’s Republic of China        Same
 
       
Comtrak Technologies, L.L.C.
       Missouri        Same
 
       
Distribution Control Systems Caribe, Inc.
       Puerto Rico        Same
 
       
Distribution Control Systems, Inc.
       Missouri        Same
 
       
ETS-Lindgren, L.P.
       Texas        Same and Acoustics Systems
 
       
ETS-Lindgren Japan, Inc.
       Japan        Same
 
       
ESCO Electronica De Mexico, S.A. de C.V.
       Mexico        Same
 
       
ESCO Technologies Holding Inc.
       Delaware        Same
 
       
Euroshield OY
       Finland        Same
 
       
Filtertek Inc. (including its Tek Packaging Division)
       Delaware        Same
 
       
Filtertek BV
       Netherlands        Same
 
       
Filtertek do Brasil Industria E
       Brazil        Same
 
       
Commercio LTDA
Filtertek SA
       France        Same
 
       
Hexagram, Inc.
       Ohio        Same
 
       
Lindgren R.F. Enclosures, Inc.
       Illinois        Same and ETS-Lindgren
 
       
Nexus Energy Software, Inc.
       Massachusetts        Same
 
       
PTI Technologies Inc.
       Delaware        Same
 
       
Ray Proof Limited
       England        Same
 
       
VACCO Industries
       California        Same

 

exv23
 

EXHIBIT 23
Consent of Independent Registered Public Accounting Firm
The Board of Directors
ESCO Technologies Inc.:
We consent to the incorporation by reference in the registration statements (Nos. 33-39737, 33-47916, 33-98112, 333-92945, 333-77887, 333-96309, 333-63930, 333-85268, and 333-117953) on Form S-8 of ESCO Technologies Inc. (the Company) of our reports dated December 11, 2006, with respect to the consolidated balance sheets of ESCO Technologies Inc. and subsidiaries as of September 30, 2006 and 2005 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, 2006; management’s assessment of the effectiveness of internal control over financial reporting as of September 30, 2006 and the effectiveness of internal control over financial reporting as of September 30, 2006, which reports appear in the Annual Report to Stockholders for the fiscal year ended September 30, 2006 and is incorporated by reference in the September 30, 2006 annual report on Form 10-K of the Company.
Our report dated December 11, 2006 on the consolidated financial statements refers to the adoption of Statement of Financial Accounting Standards No. 123(R), “Share-Based Payment” and change in the method of quantifying errors.
The Company acquired Nexus Energy Software, Inc. (Nexus) on November 29, 2005 and Hexagram, Inc. (Hexagram) on February 1, 2006, and management excluded from its assessment of the effectiveness of the Company’s internal control over financial reporting as of September 30, 2006, Nexus’ and Hexagram’s internal control over financial reporting. Total assets related to Nexus as of September 30, 2006 of $3.7 million and revenues for the ten-month period subsequent to the acquisition (November 29, 2005 to September 30, 2006) of $9.6 million and total assets related to Hexagram as of September 30, 2006 of $13.1 million and revenues for the eight-month period subsequent to the acquisition (February 1, 2006 to September 30, 2006) of $18.6 million were included in the consolidated financial statements of the Company as of and for the year ended September 30, 2006. Our audit of internal control over financial reporting of the Company also excluded an evaluation of the internal control over financial reporting of Nexus and Hexagram.
/s/ KPMG LLP
St. Louis, Missouri
December 11, 2006

 

exv31w1
 

EXHIBIT 31.1
CERTIFICATION
     I, V.L. Richey, Jr., certify that:
1.   I have reviewed this annual report on Form 10-K of ESCO Technologies Inc.;
 
2.   Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
 
3.   Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report.
 
4.   The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant, and have:
  a)   Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
 
  b)   Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
 
  c)   Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
 
  d)   Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5.   The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit and finance committee of the registrant’s board of directors (or persons performing the equivalent functions):
  a)   All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
 
  b)   Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
Date: December 11, 2006
         
     
  /s/ V.L. Richey, Jr.    
  V.L. Richey, Jr.   
  Chairman, President and
Chief Executive Officer 
 
 

 

exv31w2
 

EXHIBIT 31.2
CERTIFICATION
     I, G.E. Muenster, certify that:
1.   I have reviewed this annual report on Form 10-K of ESCO Technologies Inc.;
 
2.   Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
 
3.   Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report.
 
4.   The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant, and have:
  a)   Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
 
  b)   Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
 
  c)   Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
 
  d)   Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5.   The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit and finance committee of the registrant’s board of directors (or persons performing the equivalent functions):
  a)   All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
  b)   Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
Date: December 11, 2006
         
     
  /s/ G.E. Muenster    
  G.E. Muenster   
  Sr. Vice President and Chief Financial Officer   
 

 

exv32
 

EXHIBIT 32
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
     In connection with the annual report of ESCO Technologies Inc. (the “Company”) on Form 10-K for the period ended September 30, 2006 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), we, V. L. Richey, Jr., Chairman and Chief Executive Officer of the Company, and G. E. Muenster, Vice President and Chief Financial Officer of the Company, certify, to the best of our knowledge, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that:
     The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
     The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
Dated: December 13, 2006
         
     
  /s/ V.L. Richey, Jr.    
  V.L. Richey, Jr.   
  Chairman, President and Chief Executive Officer   
 
         
     
  /s/ G.E. Muenster    
  G.E. Muenster   
  Sr. Vice President and Chief Financial Officer