ESCO Annual Report 2008 | Quarterlytics

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FY2008 Annual Report · ESCO

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eS Co

teCh n o l o g i eS

inC.

2 0 0 8 A n n uAl R e p oRt

E S C O A t A G l a n c e

U t i l i t y S o l u t i o n s

R F S h i e l d i n g & T e s t

F i l t r a t i o n / F l u i d F l o w

Table of Contents

To Our Shareholders

Company Overview

Utility Solutions

RF Shielding & Test

Filtration/Fluid Flow

Commitment To Communities

Financial Section

Management’s Discussion

and Analysis

Financial Statements

Notes to Consolidated

Financial Statements

Accountability Reports

Five-Year Financial Summary

Market Performance

Shareholders’ Summary

Management and Directors

T o O u r S h a r e h o l d e r s

We are pleased to report that while 2008 was a year of extraordinary global economic challenges, ESCO

was able to deliver outstanding financial results for our shareholders. Meaningful growth in sales across

all operating segments and geographic areas resulted in strong top and bottom line performance. We

believe ESCO’s growth and profitability over the last several years validates our belief that we are pursuing the

right core strategies to deliver on our steadfast commitment of increasing long-term shareholder value.

Financially, our success in 2008 was evident by the following: sales increased 40 percent; EBIT increased

116 percent; EBIT margin increased 460 basis points; EPS-Continuing Operations increased 57 percent; net cash

provided by operating activities increased 71 percent; and entered orders increased 35 percent.

Fiscal 2008 was also a transformational year for ESCO, as we significantly repositioned the Company by

expanding our focus on our fastest growing, highest margin business segment, the Utility Solutions Group (USG).

Through the acquisitions of Doble and LDIC, complemented by the divestiture of Filtertek, we became a more

growth oriented, higher operating margin business with a substantially increased international market presence.

In addition, we narrowed the focus of our Filtration segment to concentrate on our higher margin business units,

while eliminating our exposure to lower growth, profit-challenged end markets such as automotive.

An additional piece of our transformation in 2008 involved the strategic alignment of our three AMI busi-

nesses into the integrated Aclara™ brand. Aclara brought together the industry’s most proven fixed-network

AMI systems and the most advanced meter data management software to provide proven at scale, state of the

“Meaningful
growth in sales
across all oper-
ating segments
and geographic
areas resulted in
strong top and
bottom line per-
formance.”

Gary E. Muenster,
Executive Vice
President and Chief
Financial Officer (left);
Alyson S. Barclay,
Senior Vice Pres ident,
Secretary and General
Counsel; and Victor
L. Richey, Chairman,
Chief Executive
Officer, and President

art advanced metering solutions to customers worldwide. We aligned our organizational structure around our

distinct customer groups: investor owned utilities (IOUs); cooperative and municipals (COOPs/Munis); and

international. This integration was done to facilitate our customers’ success by offering them a comprehensive

suite of proven and tailored solutions to manage their utility communications and data information needs

today, and well into the future. The rebranding of Aclara has been extremely well received by our customers,

industry experts, and employees.

During 2008, we had numerous successes throughout the Company including:

• Sales at Aclara RF (formerly Hexagram) were greater than $100 million, reflecting a 400 percent increase from

the annual sales level recorded prior to its acquisition in 2006;

• Aclara RF gas AMI orders with PG&E in 2008 were 1.6 million units worth $93 million, bringing the cumulative

PG&E gas and electric AMI orders to 2.7 million units worth over $171 million since inception;

• Aclara AMI project wins at Idaho Power, New York City water, Toronto water, and continued strength in the

COOP/Muni markets where orders were well over $100 million;

• Significant inroads into the international AMI market with early success demonstrated by several pilot projects

in Central and South America, along with some initial technology evaluation activity in Asia;

• The immediate success of Doble, which exceeded our expectations of sales, profit and cash flow, and also sig-

nificantly expanded our international footprint;

• Sales growth and margin improvement realized in the Filtration segment by focusing on our profitable, well

managed businesses, along with the key win of a large aerospace filtration project with Airbus for the A350XWB

aircraft having a production value of $150 million; and,

• Significant Test segment international growth where we continued our market leadership position by winning

several key projects in India, including NATRIP.

T o O u r S h a r e h o l d e r s Continued

Summarizing 2008, despite the economic challenges we faced, ESCO’s multi-segment, diverse end market,

global operating platform showed resiliency and delivered meaningful year-over-year improvement, and most

importantly, positioned us for sustainable growth in the years to come.

Regarding the outlook for 2009 and beyond, our confidence about our future comes from an unwavering

belief in our core fundamental strategies, which are key to our ability to deliver superior financial performance.

By maintaining a strong focus and not frequently shifting strategic priorities, we believe we can execute our

business plan through varying economic business cycles.

Certainly, there will continue to be economic downturns and other negative events that will create chal-

lenges for ESCO in the coming years, but our success will be driven by our ability to anticipate these problems,

act swiftly to mitigate their impact, and execute on contingency plans, while continuing to maintain a long-

term perspective. Our rigorous planning processes and our attention to costs will provide us with the timely

insight to identify changing market dynamics and will allow us to respond accordingly.

We also believe the investments we continue to make in new products and acquisition partners will position

us for continued improvement in our financial performance. Our organic growth is driven by our belief that

winning new programs requires a significant investment in research and development. We have stood firmly

behind this principle by investing nearly $115 million, or eight percent of sales, over the last three years in R&D

and engineering. This level of investment is a testament to our focus on providing innovative solutions to our

customers, and reflects our intention to deliver leading-edge capabilities well into the future.

A large part of this investment in our USG segment has resulted in ESCO having the most capable, proven

AMI technologies and utility solutions available in the market whether used for electric, gas or water utility

applications. With that said, we will never stand still when it comes to new product development, as we remain

fully committed to this growing, and highly profitable market segment.

A few examples of our successful new AMI products recently introduced include interfaces with smart ther-

mostats and multiple-function in-home displays which will allow utilities and their customers to better manage

how and when energy is used, and other sophisticated demand response/load control products. Our full suite of

products provides the information necessary to allow the utilities to gain greater insight into and better control

over the management of their energy resources, which is the core tenet of AMI. Our AMI products allow utilities

to contribute favorably to facilitating a “greener,” more environmentally friendly world, while reducing their

overall carbon footprint.

On the international AMI front, we expanded our focus by adding senior business development staff to

address the fast moving dynamics currently being seen in numerous countries outside of North America. The

international AMI opportunities are substantial, and we feel we have the appropriate resources and product

offerings in place to capitalize on these.

Overall, we believe ESCO has the financial strength and flexibility, as well as the right products and tech-

nologies, to effectively achieve our growth plans in 2009 and beyond. We are grateful that we have solid man-

agement teams in place across the Company who understand our mission and are fully committed to delivering

exceptional results.

In closing, we want to thank our customers for the opportunity to serve them, our employees for their

effort and dedication, our Board of Directors for their leadership and guidance, and our shareholders for their

support and confidence.

Vic Richey

Chairman, Chief Executive Officer,

& President

December 1, 2008

Gary Muenster

Executive Vice President

& Chief Financial Officer

“Our rigorous plan-
ning processes and
our attention to
costs will provide
us with the timely
insight to identify
changing market
dynamics and will
allow us to respond
accordingly.”

C o m p a n y O v e r v i e w

ESCO Technologies Inc.
is a worldwide manufac-
turer of highly engineered
products operating in
three business segments:

Utility Solutions Companies of
the Utility Solutions segment
provide market and technology
leadership, employing the highest
caliber, proven Two-Way Fixed
Network solutions for advanced
metering (Aclara Power-Line
Systems and Aclara RF Systems),
along with enterprise software
that stands apart in its ability to
optimize what smart meter data
can accomplish for utilities and
their customers (Aclara Software).
With world-class fully automated
intelligent instrumentation
(Doble Engineering), ESCO is able
to provide diagnostics, testing
and monitoring capabilities,

making ESCO a total solution
provider to the utility industry.
ESCO’s SecurVision® product line
provides digital video surveil-
lance and security functions for
large commercial enterprises and
alarm monitoring companies.

Electric, Gas, and Water Utilities;
Security Industry

Filtration/Fluid Flow In this
segment, PTI Technologies and
VACCO Industries design and
manufacture specialty filtration
products including hydraulic fil-
ter elements used in commercial
aerospace applications, unique
filter mechanisms used in micro-

propulsion devices for satellites
and custom designed filters
for manned and unmanned
aircraft. ESCO’s TekPackaging
unit provides highly engineered
thermoforming products.

Aviation, Space, Medical,
Electronics, Consumer

RF Shielding & Test ETS-Lindgren,
in ESCO’s RF Shielding & Test
segment, is the industry leader
in providing customers with the
ability to identify, measure and
contain magnetic, electromag-
netic and acoustic energy.

Healthcare, Electronics,
Transportation

North America

Cedar Park, TX
Cleveland, OH
Durant, OK
Glendale Heights, IL
Huntley, IL

Indianapolis, IN
Marlboro, MA
Minocqua, WI
Morrisville, NC
Oxnard, CA
Raleigh, NC
South El Monte, CA
St. Louis, MO
Watertown, MA
Wellesley, MA

Europe

Dresden, Germany
Eura, Finland
Guildford, England
Stevenage, England
Trondheim, Norway

ESCO Operations
Markets Served

South America

São Paulo, Brazil

Africa

Pietermaritzburg,
South Africa

Asia

Beijing, China
Shenyang, China
Tokyo, Japan
Vadodara, India

Australia

Brendale,
Australia

U t i l i t y S o l u t i o n s

clara offers a complete set of Advanced Metering

Infrastructure (AMI) solutions for end-to-end data

capture, transfer, and processing. The Aclara

brand represents the utility industry’s leading fixed-

network AMI technologies as well as Meter Data and

Meter Device Management software serving water, gas,

and electric utilities globally. Aclara’s innovations in

advanced metering, demand response, and smart-grid

management provide customers with proven solu-

tions that enable choice, efficiency, information and

customer value. Capturing data. Only Aclara delivers

the system scalability necessary to serve municipali-

ties, rural-electric cooperatives and investor-owned

utilities. Aclara’s STAR® Network system and TWACS ®

technology provide advanced RF- and PLC-based fixed-

network technologies proven to meet the wide-rang-

ing data communications requirements of utilities

worldwide. Liberating knowledge. Utilities use

Aclara Software™ solutions to maximize

their AMI data and improve the quality of

customer services. Aclara Software applications add

value across the enterprise, addressing meter and

energy data management, distribution

planning and operations, customer service and reve-

nue management, and resource management. Aclara is

driven by its technologies, its people, and its experience.

The Aclara brand is revolutionizing the AMI industry

with innovative solutions that build on our 20-year his-

tory of excellence and market growth.

Aclara’s STAR®
ZoneScan RF-based
solution is the indus-
try’s only remotely
correlated acoustic
leak-detection
system that
cost effectively
identifies small
leaks before they
become major
problems.

Aclara‘s innova-
tive and proven
market and technol-
ogy leadership in
Advanced Utility
Communications
Infrastructure sup-
ports electric, water,
and gas utilities.

The Intelligence of Reliable
Utility Performance™

Aclara Software’s leading,
proven-at-scale solutions
allow customers to manage
their energy use, enable
service representatives to
better handle inquiries,
and empower utilities to
improve operations with
better data analysis.

World Leader in
Diagnostic Test
Instruments and
Knowledge Services
for Electric Power

On-line water–in-oil
sensor testing is
performed in Doble
Laboratories.

Doble Engineering, the newest member of ESCO’s

Utility Solutions segment, pioneered the design

and manufacture of the high voltage insula-

tion diagnostic test. Recognized as the “gold standard”

for high quality, performance and reliability, Doble’s

proprietary instruments and consulting services for

analyzing and interpreting test data enable power

system operators to make mission critical decisions.

With its Doble Test Assistant software, DTAWeb, Doble’s

utility clients can compare their Doble test results with

those of the industry via a state-of-the-art, web-based

data management and analysis system. Enhanced

to include Sweep Frequency Response Analysis (SFRA)

and Laboratory test results, the system exemplifies

Doble’s ongoing commitment to customer-focused solu-

tions. The recent acquisition of LDIC, GmbH in Europe,

positioned Doble to increase its portfolio of products

and significantly expand its distribution channels

throughout Europe. With LDIC, a leading supplier of

partial discharge testing instruments used to assess

the integrity of high voltage power delivery equipment,

both companies can deliver a complete suite of diagnos-

tic solutions to its customers worldwide.

With Doble’s M4000
analyzer, users can
compare their test
results with a sta-
tistically significant
on-line database.

The “Doble Test”
evaluates the condi-
tion of high voltage
power apparatus
as part of routine
maintenance checks
using the Doble
M4000 analyzer.

R F S h i e l d i n g & T e s t

ETS-Lindgren comprises ESCO’s RF Shielding & Test

(EMC) and RF measurement systems continue to

business. Sales of electromagnetic compatibility

be strong, particularly in Asia where consumer demand

shows explosive growth. ETS-Lindgren provides both full

compliance and pre-compliance test solutions and sys-

tem integration for a wide variety of products – from cell

phones to aircraft. With the recent completion of two

large acoustic chambers for noise control testing,

the company now offers test chambers and in-house

services to verify products meet both internal and

industry acoustic standards. Acoustic testing is critical

to manufacturers of automobiles, audio equipment, and

many consumer products, such as computers and hear-

ing aids, to assure desired sound transmission. In the

medical market, ETS-Lindgren’s innovative test solutions

include RF shielded MRI enclosures. The intra-operative

and interventional MRI suites, designed to reduce or elim-

inate multiple surgeries, require specialty RF shielding

that complies with the stringent sterile specifications of

a surgical suite. To maintain its leadership, ETS-Lindgren

engineers actively contribute to key technical standards

committees. The result? When new standards and regula-

tions are issued, ETS-Lindgren is well positioned to meet

new customer demand with innovative test and measure-

ment solutions.

Innovative new prod-
ucts are key to ETS-
Lindgren’s success. The
rugged antenna shown
is distinctive for its
accurate testing over a
wide frequency range.

ETS-Lindgren
Detect, Measure, Shield and
Control Electromagnetic,
Magnetic and Acoustic Energy

Solution-oriented strategies
contribute to unique product
offerings. This MRI intra-oper-
ative suite enables magnetic
resonance imaging before,
during, and after a surgical
procedure for rapid diagnosis
in a sterile environment.

Nowhere is new market
expansion more evident at
ETS-Lindgren than with its
wireless test chambers and
services. The company’s
unique test chambers con-
firm the electromagnetic
compatibility of wireless
devices found in an increas-
ing number of household
and business products.

F i l t r a t i o n / F l u i d F l o w

PTI Technologies Inc. (PTI) and VACCO Industries

(VACCO) comprise the Company’s Filtration/Fluid

Flow business. These two companies serve an

array of technically demanding, solution-oriented mar-

kets such as automotive, air transport, defense, medical

and satellite communications. Their technical knowl-

edge, experience and capabilities have enabled them to

provide winning solutions across all served markets.

Space and Aerospace Filtration. In practice, a solu-

tion-oriented strategy recognizes that success is

best measured by the solution which most compre-

hensively addresses the customer’s needs; one

which is best achieved through mutual com-

mitment and collaboration between parties.

PTI’s recent award of the main hydrau-

lics filtration system for the Airbus A350

XWB aircraft exemplifies the benefits of this approach.

Industrial Filtration. Commercial competitiveness is

the hallmark of this industry. Whether maintaining

an existing product position or tactically pursuing

new markets, technical superiority, increased value

and next generation innovations have been key to PTI’s

success. Engineered Fluid Controls. Taking a leading

role in the cooperative development of advanced solu-

tions with NASA, VACCO is ensuring that its fluid con-

trols components will best support the needs of Project

Constellation, the nation’s new manned space program.

PTI Technologies Inc.
Filtration and Fluid Flow
Products for Industrial and
Aerospace Markets

PTI’s filtration and fluid
flow products are the
result of custom develop-
ment of engineered solu-
tions for both commercial
and military platforms.

Whether produced for
ground, flight or beyond,
the Filtration/Fluid
Flow group continues to
innovate, produce and
support technically best
in class product.

VACCO

VACCO Industries
Engineered Fluid Controls
and Etched Products

Utilizing extensive
heritage from the Space
Shuttle, such as this
2-inch cryogenic ball
valve, VACCO has begun
the development of
innovative solutions for
Project Constellation.

C o m m i t m e n t T o C o m m u n i t i e s

children and families in need in areas where the Company has operations. With funding from the

In its second full year of operation, the ESCO Technologies Foundation expanded its reach supporting

Company, as well as generous donations from employees and other contributors, the Foundation

added a number of new grant recipients in 2008. A few of the recipients are highlighted below.

Circle of Concern provides food and emergency aid to needy families in the St. Louis area. Its food

pantry feeds as many as 1,000 people a month. A grant was made by the Foundation for the purchase

of perishable foods for approximately 200 families. In addition, employees at the Company’s corporate

headquarters participate in a monthly food drive to supply Circle of Concern families with non-perishable

items such as cereal and canned goods.

Kenneth Young Center, located in Elk Grove Village, Illinois, provides mental health and senior citizen

support services through counseling and other support services. In 2008, the Foundation made its largest

grant to-date in the amount of $15,000 to the Kenneth Young Center to provide training in parenting with

its new Peer Parent Mentoring Program.

Jennifer S. Fallick Center provides free support services to men, women and children who are affect-

ed by cancer in Chicago suburbs. This year’s grant from the Foundation was designated for the Kid’s Corner

Program which provides counseling for children

affected by the disease.

Casa Pacifica received a Foundation grant to

support the operation of its Crisis Care Shelter

To make a tax-deductible contribution or to learn more

about the Foundation, please call 314-213-7277 or visit

the Web site at www.escotechnologiesfoundation.org.

in the areas of Ventura and Santa Barbara County, California. The shelter offers a range of assessment,

trauma care, medical and educational services for abused and neglected children who have been removed

from their homes.

The Gathering Place is an organization offering a caring community for those touched by cancer in

the Cleveland area. The Foundation’s grant will provide general support to The Gathering Place in its

efforts to educate, support and empower individuals and families as they struggle with cancer.

The Littlest Heroes of Chesterland, Ohio, was the recipient of a grant from the Foundation

for its Littlest Heroes’ Complementary Medicine Therapy Program. Funding will be used to

train, screen and compensate the program’s practitioners as they provide spiritual,

emotional, social and physical activity for children with cancer.

R. M. Pyles Boys Camp in California, operates a wilderness camp for at-risk,

low-income boys from12 to 18 years of age. With a grant from the Foundation,

two boys from Ventura County, California were sponsored to attend the R. M.

Pyles Camp and funding was provided to help offset the high cost of fuel for

the generator that provides power for the facility.

Habitat For Humanity Valley of the Sun strives to eliminate sub-standard

housing. The Foundation’s grant will go toward the cost of materials to build a

home by the Habitat Arizona chapter.

Horizons for Homeless Children in the Boston area, strives to improve the lives of

children and parents living in homeless shelters. In 2008, the Foundation granted fund-

ing to be used to provide free day care services for homeless preschool-age children

while their parents are working. With this help, it is the hope that the families will

be able to eventually transition out of the homeless shelter.

Ready Readers and its
volunteer readers, inspire
at-risk St. Louis preschool
children to become readers.
New books for children in
the reading program were
purchased with a grant
from the Foundation.

Pioneer Center of
McHenry County, Illinois,
helps disabled children
and the homeless. In 2008,
a Foundation grant was
made to assist with win-
ter heating bills
at the Center’s
group homes.

F i n a n c i a l S e c t i o n

Table Of Contents

Management’s Discussion and Analysis

Consolidated Statements of Operations

Consolidated Balance Sheets

Consolidated Statements of Shareholders’ Equity

Consolidated Statements of Cash Flows

Notes to Consolidated Financial Statements

Management’s Statement of Financial Responsibility

Management’s Report on Internal Control Over Financial Reporting

Report of Independent Registered Public Accounting Firm

Five-Year Financial Summary

Market Performance

Shareholders’ Summary

Management and Board of Directors

E S C O TE Ch nOlOg iE S inC.

2 0 0 8 A n n u Al REpO R T

Management’s Discussion and Analysis

The following discussion should be read in conjunction with
the Consolidated Financial Statements and Notes thereto. The
years 2008, 2007 and 2006 represent the fiscal years ended
September 30, 2008, 2007 and 2006, respectively, and are used
throughout the document.

introduction

ESCO Technologies Inc. and its wholly owned subsidiaries
(ESCO, the Company) are organized into three reporting segments:
Utility Solutions Group (USG), RF Shielding and Test (Test),
and Filtration/Fluid Flow (Filtration). In conjunction with the
acquisition of Doble Engineering Company in November 2007,
the Company changed the name of the Communications segment to
the Utility Solutions Group segment. The renaming of this segment
more accurately describes the segment’s operating activities and
reflects the strategic alignment of the respective operating entities
to focus on a single goal of satisfying the expanding Advanced
Metering Infrastructure (AMI), Smart Grid, and other operational
requirements of electric, gas and water utilities worldwide. The
segment name change was done along with the Company’s strategic
integration and rebranding of its three AMI related technologies
under the unified brand name Aclara™, and renaming the AMI
businesses as follows: Distribution Control Systems, Inc. was
renamed Aclara Power-Line Systems Inc.; Hexagram, Inc. was
renamed Aclara RF Systems Inc.; and Nexus Energy Software, Inc.
was renamed Aclara Software Inc.

The Company’s business segments are comprised of the following
primary operating entities:

▶ USG: Aclara Power-Line Systems Inc. (Aclara PLS), Aclara RF

Systems Inc. (Aclara RF), Aclara Software Inc., Doble Engineering
Company (Doble), and Comtrak Technologies, L.L.C. (Comtrak),

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

▶ Filtration: PTI Technologies Inc. (PTI), VACCO Industries (VACCO),

and TekPackaging L.L.C. (TekPack).

The USG segment 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. Aclara’s STAR® Network system and TWACS®
technology provide advanced radio-frequency (RF) and power-line
(PLS) based fixed-network technologies proven to meet the
wide-ranging data communications requirements of utilities
worldwide. Aclara Software applications add value across the
utility enterprise, addressing meter and energy data management,
distribution planning and operations, customer service and revenue
management. Doble provides high-end, diagnostic test solutions for
the electric power delivery industry and is a leading supplier

E S C O TE Ch nOlOg iE S inC.

2 0 0 8 A n n u Al REpO R T

of partial discharge testing instruments used to assess the
integrity of high voltage power delivery equipment. Comtrak’s
SecurVision® product line provides digital video surveillance and
security functions for large commercial enterprises and alarm
monitoring companies.

The Test segment is an industry leader in providing its customers
with the ability to identify, measure and contain magnetic,
electromagnetic and acoustic energy.

The Filtration segment designs and manufactures specialty filtration
products including hydraulic filter elements used in commercial
aerospace applications, unique filter mechanisms used in micro
propulsion devices for satellites and custom designed filters for
manned and unmanned aircraft.

On November 25, 2007, the Company completed the sale of the
filtration portion of Filtertek Inc. (Filtertek); accordingly, the
Filtertek businesses are reflected as discontinued operations in the
financial statements and related notes for all periods presented.

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 2008 Continuing Operations

▶ Sales, net earnings and diluted earnings per share were

$623.8 million, $47.4 million and $1.80 per share, respectively.

▶ Net cash provided by operating activities was $81.0 million.

▶ At September 30, 2008, cash on hand was $28.7 million.

▶ On November 30, 2007, the Company acquired Doble and on
July 31, 2008, the Company acquired LDIC GmbH and LDIC AG
(collectively “LDIC”).

▶ In 2008, the Company received $111.8 million in orders and
recorded $110.2 million in sales from Pacific Gas & Electric
Company (PG&E) related to its electric and gas AMI deployment.

▶ Aclara RF received an order for a fixed network water AMR
project in New York City, with a value up to $68.3 million
over a three-year deployment period.

▶ Aclara PLS’s TWACS® AMI product was selected by Idaho Power
Company for its entire electric service territory. The Company
expects orders up to $25 million related to this three-year
deployment beginning in early fiscal 2009.

▶ Aclara PLS received $22.4 million in orders from the Puerto Rico

Electric Power Authority (PREPA).

Management’s Discussion and Analysis

Results of Continuing Operations

nET SAlES

(Dollars in millions)

2008

2007

Fiscal year ended

Change Change
2007
2008
2006 vs. 2007 vs. 2006

USG

Test

Filtration

Total

uSg

$362.9

197.6

156.2

83.7%

26.5%

144.8

141.5

128.6

2.3%

10.0%

116.1

105.6

97.6

9.9%

8.2%

$623.8

444.7

382.4

40.3%

16.3%

The 83.7% or $165.3 million increase in net sales in 2008 as
compared to the prior year was due to: the acquisition of Doble
with sales of $74.3 million; a $55.4 million increase in sales from
Aclara RF primarily due to higher gas and electric AMI deliveries
at PG&E; a $31.7 million increase in sales from Aclara PLS; and a
$3.0 million increase in sales from Comtrak. The Company’s total
sales to PG&E were $110.2 million in 2008 which represented
approximately 18% of the Company’s consolidated net sales.

The $31.7 million increase in Aclara PLS’s net sales in 2008
compared to 2007 was mainly due to: a $34.0 million increase
in sales to PG&E for the electric AMI deployment (due to the
recognition of previously deferred revenue from the hardware,
program management and software provided to PG&E), a
$16.8 million increase in sales to the Puerto Rico Electric Power
Authority (PREPA), partially offset by a $18.4 million decrease
in sales to other investor owned utilities (IOU) customers, such as
Duke Energy and Oncor Electric.

The 26.5% or $41.4 million increase in net sales in 2007 as
compared to the prior year was due to: an increase of $30.5 million
at Aclara RF; an increase of $6.5 million at Aclara PLS; an increase
in sales of $4.6 million at Aclara Software.

The $30.5 million increase in sales of Aclara RF’s AMI products in
2007 as compared to 2006 was due to: a $21.6 million increase in
sales to PG&E related to their gas deployment; and a $3.1 million
increase in sales from the advanced metering project in Kansas City,
Missouri. In addition, Aclara RF’s 2007 results represented twelve
months of sales compared to eight months in 2006.

Test

The net sales increase of $3.3 million or 2.3% in 2008 as compared
to the prior year was mainly due to: a $5.2 million increase in
net sales from the segment’s European operations; a $2.7 million
increase in net sales from the segment’s Asian operations; partially
offset by a $4.6 million decrease in net sales from the segment’s
U.S. operations due to the timing of test chamber sales and sales
of components.

The net sales increase of $12.9 million or 10.0% in 2007 as
compared to the prior year was mainly due to: a $10.6 million

increase in net sales driven by project milestones on a large
international aircraft chamber and completion of other test
chambers; a $3.2 million increase in net sales from the segment’s
Asian operations; partially offset by a $0.9 million decrease in net
sales from the segment’s European operations.

Filtration

Net sales in 2008 increased $10.5 million or 9.9% compared to the
prior year primarily due to a $5.5 million increase in commercial
aerospace shipments at PTI and a $3.5 million increase in net sales
at VACCO driven by higher space product shipments.

Net sales in 2007 increased $8.0 million or 8.2% compared to 2006
primarily as a result of higher commercial aerospace shipments at
PTI of $6.4 million; a sales increase of $4.9 million at VACCO driven
by higher defense spares and T-700 shipments; partially offset
by a $3.1 million net sales decrease at TekPack driven by lower
commercial product shipments.

pACiFiC gAS & ElECTRiC

Aclara plS

In November 2005, Aclara PLS (then named Distribution Control
Systems, Inc.) entered into a contract (the “Aclara PLS Contract”)
to provide equipment, software and services to Pacific Gas & Electric
(PG&E) in support of the electric portion of PG&E’s AMI project.
During the third quarter of 2007, PG&E announced its plans to
evaluate alternative electric AMI technologies for the electric
portion of its service territory currently included in the Aclara
PLS Contract.

In light of PG&E’s announcement and its subsequent purchase of
other technologies, including products from Aclara RF described
below, for the electric portion of its service territory, Aclara PLS
and PG&E entered into an amendment to the Aclara PLS Contract
effective September 30, 2008 (the “Aclara PLS Amendment”).
Execution of the Aclara PLS Amendment allowed the Company to
recognize approximately $11.0 million of revenue and $6.5 million
of profit during the fourth quarter of 2008. This revenue consisted
of deferred program management services, software license fees
and compensation for a shortfall in equipment purchases by PG&E,
as all remaining undelivered elements are elements for which the
Company has vendor-specific objective evidence. The Company now
believes that further purchases, if any, made by PG&E under the
Aclara PLS Contract will not be material. Total revenues under the
Aclara PLS Contract were $34.3 million for the year ended Septem-
ber 30, 2008.

Aclara RF

In November 2005, Aclara RF entered into a contract (the “Aclara RF
Contract”) to provide equipment, software and services to PG&E in
support of the gas utility portion of PG&E’s AMI project. The Aclara
RF Contract also provided PG&E the option to purchase an RF fixed
network electric product from Aclara RF. The total anticipated
contract revenue from the gas portion of the Aclara RF Contract

E S C O TE Ch nOlOg iE S inC.

2 0 0 8 A n n u Al REpO R T

Management’s Discussion and Analysis

from commencement through the five-year full deployment is
expected to be up to approximately $225 million. As with the
Aclara PLS Contract, 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 and electric utility portion of the
AMI project. The Aclara RF 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 Aclara RF.

Prior to PG&E’s announced decision in 2007 to evaluate
alternative electric AMI technologies mentioned above, Aclara RF
agreed to provide 2,000 of its RF fixed network electric units for
PG&E testing. Testing of Aclara RF’s prototype electric solution
began in the fourth quarter of 2007 and those units continue to
perform in the field. During fiscal 2008, PG&E ordered approximately
290,000 second generation Aclara RF fixed network electric units
which offer additional features and functionality. Also during this
period, PG&E purchased electric units from a competing AMI vendor.
Aclara RF and PG&E are negotiating an amendment to the Aclara RF
Contract (the “Aclara RF Contract Amendment”) which would
establish and define the technical specifications of Aclara RF’s
electric solution and define the terms applicable to PG&E’s purchase
of any additional RF fixed network electric units. Notwithstanding
the expected execution of the Aclara RF Contract Amendment, due
to the uncertainty regarding PG&E’s future plans for deployment
of electric units, the Company cannot estimate the total value or
the timing of orders, if any, that it may receive under the Aclara RF
Contract Amendment.

ORDERS AnD BACKlOg

New orders received in 2008 were $633.0 million, resulting in
order backlog from continuing operations of $266.8 million at Sep-
tember 30, 2008 as compared to an order backlog of $257.6 million
at September 30, 2007. In 2008, the Company recorded $365.3 mil-
lion of new orders related to USG products (including $7.0 million
of Doble acquired backlog), $154.5 million related to Test products,
and $113.2 million related to Filtration products.

The Company received orders totaling $111.8 million and
$49.1 million from PG&E under the Aclara PLS and RF Contracts
during 2008 and 2007, respectively.

In July 2008, ETS-Lindgren signed a $16.7 million contract with
the National Automotive Testing and R&D Infrastructure Project
(NATRIP) in India to provide two automotive chambers.

In July 2008, Aclara RF was selected by the City of New York to
provide its fixed network AMI solution for the city’s entire water
service territory. The total value of purchase orders anticipated to
be issued under this contract is up to $68.3 million and the system
is expected to be deployed over a three-year period with the initial
orders received during the fourth quarter of 2008.

12 E S C O TE Ch nOlOg iE S inC.

2 0 0 8 A n n u Al REpO R T

In July 2008, Aclara PLS’s TWACS® AMI product was selected by
Idaho Power Company for its entire electric service territory. The
total value of purchase orders anticipated to be issued under this
contract are up to $25 million and the system is expected to be
deployed over a three-year period beginning in early fiscal 2009.

In December 2007, Aclara PLS signed a contract with PREPA for
a total value expected to be up to $35 million for the purchase
of Aclara PLS products to be released through the placement of
purchase orders. The Company recorded $22.4 million in entered
orders related to this contract during 2008.

In 2007, the Company recorded $201.8 million of new orders
related to Utility Solutions products, $145.5 million related to
Test products and $122.9 million related to Filtration products.

SElling, gEnERAl AnD ADMiniSTRATiVE EXpEnSES

Selling, general and administrative expenses (SG&A) were
$151.2 million, or 24.2% of net sales in 2008, $111.6 million,
or 25.1% of net sales in 2007, and $95.9 million, or 25.1% of
net sales in 2006.

The increase in SG&A expenses in 2008 as compared to 2007 was
primarily due to: $24.8 million of SG&A expenses related to Doble
and an approximately $12.0 million increase in SG&A expenses
related to Aclara mainly due to an increase in sales, marketing,
and engineering head count.

The increase in SG&A expenses in 2007 as compared to the prior
year was primarily due to: a $12.0 million increase in SG&A related
to Aclara mainly due to an increase in engineering and software
development head count; and an increase of $2.1 million incurred
in the Test segment primarily to support new growth opportunities
in Asia. In addition, a full twelve months of SG&A expenses were
included in 2007 for Aclara RF and Aclara Software compared to
eight months and ten months, respectively, in 2006.

AMORTiZATiOn OF inTAngiBlE ASSETS

Amortization of intangible assets was $17.6 million in 2008,
$10.2 million in 2007 and $6.4 million in 2006. Amortization
of intangible assets included $4.2 million and $2.1 million of
amortization of acquired intangible assets related to the Company’s
acquisitions in 2008 and 2007, respectively. The amortization of
acquired intangible assets related to the Company’s acquisitions is
included in the Corporate operating segment’s results. The remain-
ing amortization expenses consist of other identifiable intangible
assets (primarily software, patents and licenses). The Company
recorded $11.0 million and $6.2 million in 2008 and 2007,
respectively, related to Aclara PLS’s TWACS NG capitalized software.

OThER EXpEnSES (inCOME), nET

Other expenses (income), net, were $0.1 million, $2.8 million and
$(2.7) million in 2008, 2007 and 2006, respectively. There were no
individually significant items included in other expenses (income),
net for the year ended September 30, 2008.

Management’s Discussion and Analysis

Other expenses (income), net, in 2007 consisted primarily of:
$2.6 million of expenses within the Test segment related to an
adverse arbitration award related to the delivery and installation
contract completed in 2005 for a shielded communication room
in an international location; partially offset by $(0.6) million of
royalty income. Other expenses (income), net, in 2006 consisted
primarily of: 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; and $(1.4) million
of royalty income.

EARningS BEFORE inTEREST AnD TAXES (EBiT)

The Company evaluates the performance of its operating segments
based on EBIT, which the Company defines as earnings 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 ac-
counted 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.

EBiT

(Dollars in millions)

2008

2007

Fiscal year ended

Change Change
2007
2008
2006 vs. 2007 vs. 2006

USG
% of net sales

Test
% of net sales

Filtration
% of net sales

$66.3

22.0
18.3% 11.1% 18.1%

28.3 201.4 % (22.3) %
(7.0) %
7.2 %

13.9

14.4

15.0

9.6% 10.2% 11.7%

(3.5) % (4.0) %
(0.6) % (1.5) %

18.4
21.2
18.3% 17.4% 15.3%

14.9

15.2 % 23.5 %
2.1 %

0.9 %

uSg

The $44.3 million increase in EBIT in 2008 as compared to 2007 was
due to: the EBIT contribution from Doble; and an increase in EBIT
from Aclara and Comtrak related to the increased sales volumes. See
“Pacific Gas & Electric” above.

The decrease in EBIT in 2007 as compared to 2006 was due to:
a decrease at Aclara PLS due to an increase in TWACS NG software
amortization expense of $4 million, an increase in SG&A expenses
mainly due to an increase in engineering head count, and an increase
in PG&E program support costs and TWACS NG software maintenance.

Test

The $0.5 million decrease in EBIT in 2008 as compared to the prior
year was mainly due to: a decrease in EBIT from the Company’s
U.S. operations due to changes in product mix and $0.9 million of
non-recurring costs associated with the facility consolidation in
Austin, Texas that was completed in January 2008; partially offset
by a $1.2 million increase in EBIT from the Company’s European and
Asian operations related to the increased sales volumes.

The decrease in EBIT in 2007 as compared to 2006 was mainly due
to: a $1.1 million decrease in EBIT from the Company’s European
operations as a result of lower sales volumes and U.K. facility move
costs. In addition, the Company’s 2007 U.S. operations were
negatively impacted by $2.6 million of total costs associated
with an arbitration judgment previously described.

Filtration

EBIT increased $2.8 million in 2008 as compared to 2007 mainly
due to: an increase at PTI due to higher commercial aerospace
shipments; and an increase at TekPack due to higher commercial
product shipments.

EBIT increased in 2007 as compared to 2006 primarily due to:
an increase at PTI due to higher commercial aerospace shipments;
and an increase at VACCO due to higher defense spares shipments.

Corporate

(20.6)

(17.4)

(14.7)

18.4 % 18.4 %

Corporate

Total
% of net sales

$80.8

37.4

13.0%

8.4% 11.4%

43.5 116.0 % (14.0) %
(3.0) %
4.6 %

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

(Dollars in millions)

2008

2007

2006

EBIT

Less: Interest expense

Add: Interest income —

Less: Income taxes

Net earnings from

$80.8

37.4

43.5

(9.8)

—

0.6

—

0.9

(23.6)

(7.6)

(15.2)

continuing operations

$47.4

30.4

29.2

Corporate office operating charges included in consolidated EBIT
increased by $3.2 million in 2008 as compared to 2007 mainly
due to: a $2.1 million increase in pretax amortization of acquired
intangible assets primarily due to the current year acquisition of
Doble and a $0.6 million decrease in royalty income.

Corporate office operating charges included in consolidated EBIT
increased by $2.7 million in 2007 as compared to 2006 mainly due
to: the 2007 absence of a $1.8 million non-cash gain recorded in
2006 related to an indemnification obligation with respect to a
previously divested subsidiary; a $0.5 million increase in pretax
stock compensation expense; $0.4 million of additional professional
fees incurred to support a research tax project; partially offset
by a $0.6 million decrease in pretax amortization of acquired
intangible assets.

E S C O TE Ch nOlOg iE S inC.

2 0 0 8 A n n u Al REpO R T

Management’s Discussion and Analysis

The “Reconciliation to Consolidated Totals (Corporate)” in Note 15
to the Consolidated Financial Statements represents Corporate office
operating charges.

inTEREST EXpEnSE (inCOME), nET

Interest expense was $9.8 million in 2008 compared to interest
income of $(0.6) million and $(0.9) million in 2007 and 2006,
respectively. The increase in interest expense in 2008 as compared
to the prior year periods was due to the outstanding borrowings
under the revolving credit facility related to the Doble acquisition.

inCOME TAX EXpEnSE

The 2008 effective tax rate from continuing operations was 33.3%
compared to 20.1% in 2007 and 34.3% in 2006. The increase in
the 2008 effective tax rate as compared to the prior year was due
to lower tax credits as compared to 2007. The research tax credit
reduced 2008 income tax expense by $1.0 million and the effec-
tive tax rate by 1.4% and 2007 income tax expense by $4.4 million
and the 2007 effective tax rate by 11.6%; the impact of an export
incentive reduced 2008 income tax expense by $1.6 million and the
effective tax rate by 2.2%; the impact of the domestic production
deduction reduced 2008 income tax expense by $0.8 million and
the effective tax rate by 1.1%.

The decrease in the 2007 effective tax rate as compared to 2006
was due to: the impact of the research tax credit reduced 2007
income tax expense by $4.4 million and the effective tax rate
by 11.6%; resolution of certain tax exposure items reduced 2007
income tax expense by $2.3 million and the effective tax rate by
5.9%; the release of a portion of the valuation allowance on capital
loss carryforward reduced income tax expense by $0.8 million and
the effective tax rate by 2.0%; and the effect of deferring U.S. tax
on foreign earnings and adjustments to foreign tax accruals reduced
2007 tax expense by $0.5 million and the effective tax rate by
1.3%. The Company recorded $1.3 million as a cumulative credit
to adjust previously recorded tax amounts during 2007.

Capital Resources and liquidity

Working capital from continuing operations (current assets less cur-
rent liabilities) decreased to $102.0 million at September 30, 2008
from $122.5 million at September 30, 2007.

The $50.1 million increase in accounts receivable at September 30,
2008 is mainly due to: $21.3 million related to the Doble acquisi-
tion, $18.4 million related to the USG segment and $7.2 million
related to the Test segment, both due to timing and increased
volume of sales. The $11.1 million increase in inventories at
September 30, 2008 is mainly due to the Doble acquisition. Other
current assets decreased by $12.9 million due to the decrease in
deferred costs at Aclara PLS due to the revenue recognized under
the Aclara PLS PG&E agreement. Current maturities of long-term

14 E S C O TE Ch nOlOg iE S inC.

2 0 0 8 A n n u Al REpO R T

debt increased $50 million at September 30, 2008 due to the
Company’s outstanding borrowings related to the Doble acquisition.

Net cash provided by operating activities from continuing opera-
tions was $81.0 million, $46.1 million and $57.5 million in 2008,
2007 and 2006, respectively. The increase in 2008 is related to
improvements in operating working capital requirements.

Capital expenditures from continuing operations were $16.7 million,
$12.4 million and $5.8 million in 2008, 2007 and 2006, respective-
ly. The increase in 2008 compared to 2007 included approximately
$3 million for the ETS Austin, Texas facility expansion. There were
no commitments outstanding that were considered material for
capital expenditures at September 30, 2008.

At September 30, 2008, intangible assets, net, of $238.2 million
included $63.8 million of capitalized software. Approximately
$53.9 million of the capitalized software balance represents
software development costs on the TWACS NG software within the
USG segment. TWACS NG software is being deployed to efficiently
handle the additional levels of communications dictated by the
size of the utility service territories and the frequency of meter
reads that are required under time-of-use or critical peak pricing
scenarios to meet the requirements of large IOUs. Amortization
is on a straight-line basis over seven years and began in
March 2006. The Company recorded $11.0 million and $6.2 million
in amortization expense related to TWACS NG during 2008 and
2007, respectively.

DiVESTiTuRE

On November 25, 2007, the Company completed the sale of the
filtration portion of Filtertek Inc. (Filtertek) to Illinois Tool Works
Inc. for $74.4 million, net. The TekPack division of Filtertek was not
included in the transaction. The Filtertek businesses are accounted
for as discontinued operations in accordance with SFAS No. 144,
“Accounting for the Impairment or Disposal of Long-Lived Assets.”
Accordingly, the Filtertek businesses are reflected as discontinued
operations in the financial statements and related notes for all
periods presented. A pretax loss of $0.2 million related to Filtertek
is reflected in the Company’s fiscal 2008 results in discontinued
operations. Filtertek’s net sales were $13.7 million for the two-
month period ended November 25, 2007. Filtertek’s net sales were
$82.8 million and $76.5 million for the years ended September 30,
2007 and 2006, respectively. The pretax earnings from operations
from the Filtertek businesses were $4.7 million and $4.5 million for
the years ended September 30, 2007 and 2006, respectively. Upon
receipt of the final purchase price allocation in the fourth quarter
of 2008, the Company reduced its expected tax expense on the sale
of Filtertek from $4.8 million to $0.2 million. Filtertek’s operations
were included within the Company’s Filtration segment prior to
divestiture. The operations of the TekPack business are reflected
in continuing operations and continue to be included in the
Filtration segment.

Management’s Discussion and Analysis

ACQuiSiTiOnS

Doble

On November 30, 2007, the Company acquired the capital stock of
Doble for a purchase price of approximately $328 million, net of
cash acquired. Doble, headquartered in Watertown, Massachusetts,
is a worldwide leader in providing high-end diagnostic test
solutions for the electric utility industry. The acquisition aligns
with the Company’s long-term growth strategy of expanding its
products and services in the utility industry. The acquisition was
funded by a combination of the Company’s existing cash, including
the proceeds from the divestiture of Filtertek, and borrowings under
a new $330 million credit facility led by National City Bank. The
operating results for Doble, since the date of acquisition, are
included within the USG segment.

lDiC

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.

BAnK CREDiT FACiliTY

On November 30, 2007, in conjunction with the acquisition of
Doble, the Company entered into a new $330 million five-year
revolving credit facility with a $50 million increase option. This
facility replaced the Company’s $100 million credit facility. The
credit facility is available for direct borrowings and/or the issuance
of letters of credit, and is provided by a group of sixteen banks, led
by National City Bank as agent, with a maturity of November 30,
2012. In October 2008, PNC Financial Services Group Inc. agreed to
purchase National City Bank. The Company anticipates no material
changes to the terms of its credit facility due to this transaction.

At September 30, 2008, the Company had approximately $90 mil-
lion available to borrow under the credit facility, plus a $50 million
increase option, in addition to its $28.7 million cash on hand. At
September 30, 2008, the Company had outstanding borrowings of
$233.7 million, and outstanding letters of credit of $6.6 million. The
Company classified $50 million as the current portion on long-term
debt as of September 30, 2008, as the Company intends to repay
this amount within the next twelve months. As of September 30,
2008, 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, 2008:

(Dollars in millions)

Payments due by period

Less
than
1 year

1 to 3
years

More
than
3 to 5
years 5 years

Total

$ 233.7

50.0

—

183.7

18.5

9.8

8.7

—

25.2

7.3

9.9

6.0

2.0

Contractual
Obligations

Long-Term Debt
Obligation

Estimated Interest
Payments(1)

Operating Lease
Obligations

Purchase
Obligations(2)

—

Total

$ 277.4

67.1

18.6

189.7

—

2.0

(1) Estimated interest payments for the Company’s debt obligations were calculated
based on management’s determination of the estimated applicable interest rates

and payment dates.

(2) A purchase obligation is defined as a legally binding and enforceable agree-

ment 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.

The Company has no off balance sheet arrangements outstanding
at September 30, 2008.

E S C O TE Ch nOlOg iE S inC.

2 0 0 8 A n n u Al REpO R T

Management’s Discussion and Analysis

ShARE REpuRChASES

In August 2008, the Company’s Board of Directors authorized an
open market common stock repurchase program of the Company’s
shares in a value not to exceed $30 million, subject to market
conditions and other factors which covers the period through
September 30, 2009. There were no stock repurchases during 2008.
The Company repurchased $10 million or 265,000 shares in 2007
under a previously authorized program. There were no stock
repurchases during 2006.

pEnSiOn FunDing REQuiREMEnTS

The minimum cash funding requirements related to the Company’s
defined benefit pension plans are approximately $3.5 million in
2009, approximately $1.8 million in 2010 and approximately
$1.8 million in 2011.

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.

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. The Company is exposed to market risk related
to changes in interest rates and selectively uses derivative financial
instruments, including forward contracts and swaps, to manage
these risks. During 2008, the Company entered into a two-year
amortizing interest rate swap to hedge some of its exposure
to variability in future LIBOR-based interest payments on
variable rate debt. The swap notional amount for the first year
is $175 million amortizing to $100 million in the second year.
All derivative instruments are reported on the balance sheet at fair
value. The derivative instrument is designated as a cash flow hedge
and the gain or loss on the derivative is deferred in accumulated
other comprehensive income until recognized in earnings with
the underlying hedged item. Including the impact of interest rate
swaps outstanding, the interest rates on approximately 75% of
the Company’s total borrowings were effectively fixed as of

September 30, 2008. The following is a summary of the notional
transaction amounts and fair values for the Company’s outstanding
derivative financial instruments by risk category and instrument
type, as of September 30, 2008.

(Dollars in thousands)

Notional Avg Rec
Amount

Average
Rate Pay Rate

Fair
Value

Interest rate swaps

$175,000

2.82%

3.99%

($1,347)

At September 30, 2007, the Company had no obligations related to
interest rate swaps.

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 $130.9 million, $83.1 million, and
$71.4 million in 2008, 2007 and 2006, 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, 2008 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 judg-
ments of certain amounts included in the Consolidated 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.

16 E S C O TE Ch nOlOg iE S inC.

2 0 0 8 A n n u Al REpO R T

Management’s Discussion and Analysis

REVEnuE RECOgniTiOn

Approximately 60% of the segment’s revenues (approximately 15%
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 develop-
ing 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.

Filtration Segment: Within the Filtration segment, approximately
65% of segment revenues (approximately 12% 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 35% of segment revenues (approximately 8%
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 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 perfor-
mance 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.

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.

E S C O TE Ch nOlOg iE S inC.

2 0 0 8 A n n u Al REpO R T

Management’s Discussion and Analysis

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 inter-
pretations 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 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. Manage-
ment 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 prin-
ciples of FASB Interpretation No. 48, “Accounting for Uncertainty
in Income Taxes, an Interpretation of FASB Statement No. 109”
(FIN 48). The Company has recorded an accrual that reflects the
recognition and measurement process for the financial statement
recognition and measurement of a tax position taken or expected
to be taken on a tax return based upon FIN 48. Additional future
income tax expense or benefit may be recognized once the positions
are effectively settled.

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 if such
determination is made.

18 E S C O TE Ch nOlOg iE S inC.

2 0 0 8 A n n u Al REpO R T

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 Manage-
ment 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 2009, the Company
could be required to record a charge to equity. In addition, if the
discount rate was decreased by 25 basis points from 7.25% to
7.00%, the projected benefit obligation for the defined benefit
plan would increase by approximately $1.8 million and result in an
additional after-tax charge to shareholders’ equity of approximately
$1.1 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 400
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.

Management’s Discussion and Analysis

Other Matters

COnTingEnCiES

As a normal incident of the businesses in which the Company is
engaged, various claims, charges and litigation are asserted or com-
menced against the Company. In the opinion of Management, final
judgments, if any, which might be rendered against the Company
are adequately reserved, covered by insurance, or otherwise are not
likely to have a material adverse effect on its financial statements.

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. The Company is exposed to market risk related to
changes in interest rates and selectively uses derivative financial
instruments, including forward contracts and swaps, to manage
these risks. During 2008, the Company entered into a two-year
amortizing interest rate swap to hedge some of its exposure
to variability in future LIBOR-based interest payments on
variable rate debt. The swap notional amount for the first year is
$175 million amortizing to $100 million in the second year. All
derivative instruments are reported on the balance sheet at fair
value. The derivative instrument is designated as a cash flow hedge
and the gain or loss on the derivative is deferred in accumulated
other comprehensive income until recognized in earnings with the
underlying hedged item. At September 30, 2007, the Company had
no obligations related to interest rate swaps. 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 disclo-
sure 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 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,
the Company’s internal control over financial reporting.

new Accounting pronouncements

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.

In December 2007, the FASB issued SFAS No. 141R, “Business
Combinations” (SFAS 141R), which establishes principles and
requirements for how an acquirer recognizes and measures in its
financial statements the identifiable assets acquired, the liabilities
assumed, and any noncontrolling interest in an acquiree, including
the recognition and measurement of goodwill acquired in a business
combination. The requirements of SFAS 141R are effective for busi-
ness combinations for which the acquisition date is on or after the
beginning of the first annual reporting period beginning on or after
December 15, 2008. Earlier adoption is not permitted.

In February 2008, the FASB released FASB Staff Position
No. FAS 157-2, “Effective Date of FASB Statement No. 157,”
which delayed for one year the effective date of SFAS 157 for all
non-financial assets and non-financial liabilities, except those that
are recognized or disclosed in the financial statements at fair value
at least annually. Items in this classification include goodwill, asset
retirement obligations, rationalization accruals, intangible assets
with indefinite lives and certain other items. The adoption of
SFAS 157 with respect to the Company’s non-financial assets
and liabilities, effective January 1, 2009, is not expected to
have a significant effect on the Company’s consolidated
financial statements.

In March 2008, the FASB issued SFAS No. 161, “Disclosures about
Derivative Instruments and Hedging Activities, an amendment of
FASB Statement No. 133” (SFAS 161). This statement is intended to
improve transparency in financial reporting by requiring enhanced
disclosures of an entity’s derivative instruments and hedging
activities and their effects on the entity’s financial position,
financial performance, and cash flows. SFAS 161 is effective
prospectively for financial statements issued for fiscal years and
interim periods beginning after November 15, 2008, with early
application permitted. The adoption of SFAS 161 is not expected
to have a material impact to the Company’s financial position or
results of operations.

E S C O TE Ch nOlOg iE S inC.

2 0 0 8 A n n u Al REpO R T

Management’s Discussion and Analysis

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, adequacy of the Company’s credit
facilities and future cash flows, estimates of anticipated contract
costs and revenues, the timing, amount and success of claims for
research credits, the anticipated value of the Aclara RF Contract
with PG&E, the outcome of current litigation, claims and charges,
the anticipated timing and amount of lost deferred tax assets,
continued reinvestment of foreign earnings, the impact of SFAS 161
and SFAS 157, the timing, total value and period of performance of
contracts awarded to the Company, the accuracy of the Company’s
estimates utilized in software revenue recognition, the accuracy
of the Company’s estimates utilized to project costs at completion
in the Test segment and Filtration segment, income tax liabilities,
the effective tax rate, the timing and results of the IRS audit of
the Company’s Federal income tax returns for the period ended
September 30, 2003 through September 30, 2006, repayment
of debt within the next twelve months, the recognition of costs
related to share-based compensation arrangements, 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), 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 those described
under “Item 1A. Risk Factors” in the Company’s Annual Report on
Form 10-K for the fiscal years ended September 30, 2008 and the
following: 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 content of purchase order releases
under the PG&E contracts; and Aclara RF System’s successful
performance of the Aclara RF Contract with PG&E; 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; delivery delays or defaults
by customers; performance issues with key customers, suppliers
and subcontractors; material changes in the costs of certain raw
materials; 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.

20 E S C O TE Ch nOlOg iE S inC.

2 0 0 8 A n n u Al REpO R T

Consolidated Statements of Operations

(Dollars in thousands, except per share amounts)
Years ended September 30,

Net sales

Costs and expenses:
Cost of sales
Selling, general and administrative expenses
Amortization of intangible assets
Interest expense (income), net

Other expenses (income), net

Total costs and expenses

Earnings before income tax
Income tax expense

Net earnings from continuing operations

(Loss) earnings from discontinued operations, net of tax of
$325 in 2008, $1,382 in 2007 and $2,402 in 2006
Loss on sale of discontinued operations, net of tax of $157

Net (loss) earnings from discontinued operations

2008

2007

2006

$ 623,817

444,704

382,353

374,098
151,173
17,570
9,812
149

282,596
111,610
10,243
(599)
2,815

239,199
95,909
6,410
(867)
(2,683)

552,802

406,665

337,968

71,015
23,613

$ 47,402

(115)
(576)

(691)

38,039
7,633

30,406

3,307
—

3,307

44,385
15,220

29,165

2,115
—

2,115

Net earnings

$ 46,711

33,713

31,280

Earnings (loss) per share:

Basic:

Continuing operations
Discontinued operations

Net earnings

Diluted:

Continuing operations
Discontinued operations

Net earnings

Average common shares outstanding (in thousands):

Basic

Diluted

See accompanying Notes to Consolidated Financial Statements.

1.83
(0.03)

1.80

1.80
(0.02)

1.78

1.17
0.13

1.30

1.15
0.13

1.28

1.14
0.08

1.22

1.11
0.08

1.19

25,909

26,315

25,865

26,387

25,718

26,386

E S C O TE Ch nOlOg iE S inC.

2 0 0 8 A n n u Al REpO R T

2008

2007

$ 28,667

18,638

135,436

85,319

9,095

66,962

15,368

15,108

—

11,520

55,885

25,264

28,054

35,670

270,636

260,350

5,342

48,050

64,438

2,344

120,174

47,583

72,591

328,878

238,223

17,745

—

4,995

32,626

44,938

5,184

87,743

37,550

50,193

124,757

74,624

10,338

55,845

$ 928,073

576,107

Consolidated Balance Sheets

(Dollars in thousands)
Years ended September 30,

ASSETS

Current assets:

Cash and cash equivalents

Accounts receivable, less allowance for doubtful accounts of
$1,050 and $519 in 2008 and 2007, respectively

Costs and estimated earnings on long-term contracts, less progress
billings of $34,978 and $3,881 in 2008 and 2007, respectively

Inventories

Current portion of deferred tax assets

Other current assets

Current assets from discontinued operations

Total current assets

property, plant and equipment:

Land and land improvements

Buildings and leasehold improvements

Machinery and equipment

Construction in progress

Less accumulated depreciation and amortization

Net property, plant and equipment

Goodwill

Intangible assets, net

Other assets

Other assets from discontinued operations

See accompanying Notes to Consolidated Financial Statements.

22 E S C O TE Ch nOlOg iE S inC.

2 0 0 8 A n n u Al REpO R T

Consolidated Balance Sheets

(Dollars in thousands)
Years ended September 30,

liABiliTiES AnD ShAREhOlDERS’ EQuiTY

Current liabilities:

Short-term borrowings and current maturities of long-term debt

Accounts payable

Advance payments on long-term contracts, less costs incurred
of $7,880 and $20,314 in 2008 and 2007, respectively

Accrued salaries

Current portion of deferred revenue

Accrued other expenses

Current liabilities from discontinued operations

Total current liabilities

Long-term portion of deferred revenue

Pension obligations

Deferred tax liabilities

Other liabilities

Long-term debt

Long-term liabilities from discontinued operations

Total liabilities

Shareholders’ equity:

2008

2007

$ 50,000 —

49,329

45,726

7,467

20,718

18,920

22,249

—

3,408

12,348

24,621

16,103

16,994

168,683

119,200

2,228

12,172

83,515

9,588

183,650 —

—

4,514

8,029

18,522

7,825

2,534

459,836

160,624

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 29,465,154 and 29,159,629 shares in 2008 and 2007, respectively

Additional paid-in capital

Retained earnings

Accumulated other comprehensive income, net of tax

Less treasury stock, at cost (3,375,106 and 3,416,966 common shares in

2008 and 2007, respectively)

Total shareholders’ equity

See accompanying Notes to Consolidated Financial Statements.

295

254,240

273,470

556

528,561

292

243,131

226,759

6,303

476,485

(60,324)

(61,002)

468,237

$ 928,073

415,483

576,107

E S C O TE Ch nOlOg iE S inC.

2 0 0 8 A n n u Al REpO R T

Consolidated Statements of Shareholders’ Equity

(In thousands)
Years ended September 30,

Common Stock
Amount
Shares

Additional
Paid-In
Capital

Retained
Earnings

Accumulated
Other
Comprehensive
Income (Loss)

Treasury
Stock

Total

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

Translation adjustments

Minimum pension liability,
net of tax of $(1,103)

Comprehensive income

Stock options and stock compensation
plans, net of tax benefit of $(3,173)

—

31,280

—

1,448

—

31,280

1,448

2,048

—

2,048

34,776

292

8,073

—

155

8,231

Balance, September 30, 2006

29,031

290

236,390

193,046

(2,070)

(51,222) 376,434

Comprehensive income:

Net earnings

Translation adjustments

Minimum pension liability,
net of tax of $(1,622)

Comprehensive income

SFAS 158 adjustment, net of tax of $(358)

Stock options and stock compensation
plans, net of tax benefit of $(828)

Purchases into treasury

—

129

—

6,741

—

33,713

—

4,252

—

33,713

4,252

3,558

—

3,558

41,523

563

—

563

—

227

6,970

(10,007)

Balance, September 30, 2007

29,160

292

243,131

226,759

6,303

(61,002) 415,483

Comprehensive income:

Net earnings

Translation adjustments

Net unrecognized actuarial loss,

net of tax of $2,506

Interest rate swap, net of tax of $512

Comprehensive income

Stock options and stock compensation
plans, net of tax benefit of $(845)

—

46,711

—

(869)

(4,043)

(835)

—

46,711

(869)

(4,043)

(835)

40,964

305

11,109

—

678

11,790

Balance, September 30, 2008

29,465

$295

254,240

273,470

556

(60,324) 468,237

See accompanying Notes to Consolidated Financial Statements.

E S C O TE Ch nOlOg iE S inC.

2 0 0 8 A n n u Al REpO R T

Consolidated Statements of Cash Flows

(Dollars in thousands)
Years ended September 30,

Cash flows from operating activities:
Net earnings
Adjustments to reconcile net earnings to net cash provided by operating activities:

Net loss (earnings) from discontinued operations, net of tax
Depreciation and amortization
Stock compensation expense
Changes in operating working capital
Effect of deferred taxes on tax provision
Change in deferred revenue and costs, net
Other

Net cash provided by operating activities — continuing operations

Net (loss) earnings from discontinued operations, net of tax
Net cash used by discontinued operations

Net cash used by operating activities — discontinued operations

Net cash provided by operating activities

Cash flows from investing activities:
Acquisition of businesses, net of cash acquired
Proceeds from sale of marketable securities
Change in restricted cash
Capital expenditures — continuing operations
Additions to capitalized software

2008

2007

2006

$ 46,711

33,713

31,280

691
27,634
3,990
(8,770)
12,349
(2,780)
1,213

81,038

(691)
(3,207)

(3,898)

77,140

(345,395)
4,966
(6,841)
(16,683)
(11,012)

(3,307)
16,406
4,834
(29,504)
13,759
9,339
814

46,054

3,307
(4,375)

(1,068)

44,986

(8,250)
—
—
(12,443)
(29,994)

(2,115)
11,716
4,285
2,201
4,242
4,244
1,671

57,524

2,115
(3,427)

(1,312)

56,212

(91,968)
—
—
(5,847)
(27,802)

Net cash used by investing activities — continuing operations

(374,965)

(50,687)

(125,617)

Capital expenditures — discontinued operations
Proceeds from divestiture of business, net — discontinued operations

Net cash provided (used) by investing activities — discontinued operations

Net cash used by investing activities

Cash flows from financing activities:
Proceeds from long-term debt
Principal payments on long-term debt
Debt issuance costs
Net (decrease) increase in short-term borrowings — discontinued operations
Purchases of common stock into treasury
Excess tax benefit from stock options exercised
Proceeds from exercise of stock options
Other

Net cash provided (used) by financing activities

Net increase (decrease) in cash and cash equivalents
Cash and cash equivalents at beginning of year

Cash and cash equivalents at end of year

Changes in operating working capital:
Accounts receivable, net
Costs and estimated earnings on long-term contracts, net

Inventories

Other current assets
Accounts payable
Advance payments on long-term contracts, net
Accrued expenses

Supplemental cash flow information:

Interest paid
Income taxes paid (including state, foreign & AMT)

See accompanying Notes to Consolidated Financial Statements.

(1,126)
74,370

73,244

(7,060)
—

(7,060)

(3,270)
—

(3,270)

(301,721)

(57,747)

(128,887)

304,157
(71,197)
(2,965)
(2,844)
—
737
6,384
338

234,610

10,029
18,638

$ 28,667

$ (30,497)
2,425
1,051
5,732
734
3,716
8,069

—
—
—
2,844
(10,007)
73
1,843
(173)

(5,420)

(18,181)
36,819

18,638

(16,220)
(10,175)
(14,132)
(5,097)
12,950
(3,959)
7,129

(8,770)

(29,504)

9,233
7,004

109
3,731

52,000
(52,000)
—
—
—
1,569
2,761
680

5,010

(67,665)
104,484

36,819

(8,749)
3,047
2,190
3,294
6,703
594
(4,878)

2,201

456
10,768

E S C O TE Ch nOlOg iE S inC.

2 0 0 8 A n n u Al REpO R T

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.

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, 2008 and 2007.

As a result of the acquisition of Doble Engineering Company
(Doble) in November 2007, the Company changed the name
of the Communications segment to the Utility Solutions Group
segment. The renaming of this segment more accurately describes
the segment’s operating activities and strategically aligns the
respective operating entities to focus on a single goal of satisfying
the expanding Automated Metering Infrastructure (AMI), Smart
Grid, and other operational requirements of electric, gas and water
utilities worldwide. The name change was done in conjunction
with the Company’s strategic integration and rebranding of its AMI
related technologies under the unified brand name Aclara™, and
renaming the businesses as follows: Distribution Control Systems,
Inc. was renamed Aclara Power-Line Systems Inc.; Hexagram, Inc.
was renamed Aclara RF Systems Inc.; and Nexus Energy Software,
Inc. was renamed Aclara Software Inc.

C. nATuRE OF OpERATiOnS

The Company has three industry operating segments: Utility
Solutions Group (USG), RF Shielding and Test (Test), and
Filtration/Fluid Flow (Filtration). The USG segment 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. The Test segment
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

26 E S C O TE Ch nOlOg iE S inC.

2 0 0 8 A n n u Al REpO R T

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

USG Segment: Within the USG segment, approximately 97%
of the segment’s revenue arrangements (approximately 55% 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 segment’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 fair value of 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
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.

notes to Consolidated Financial Statements

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 recog-
nized when services have been provided. The Company determines
VSOE for program management support based on hourly rates when
services are performed separately.

Approximately 3% of segment 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® digital video surveillance systems.

Test Segment: Within the Test segment, approximately 40%
of revenues (approximately 10% 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 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 60% of the segment’s revenues (approximately 15%
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.

Filtration Segment: Within the Filtration segment, approximately
65% of revenues (approximately 12% 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 35% of segment revenues (approximately 8% 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.

F. CASh AnD CASh EQuiVAlEnTS

Cash equivalents include temporary investments that are readily
convertible into cash, such as money markets.

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.

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2 0 0 8 A n n u Al REpO R T

notes to Consolidated Financial Statements

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, 3-10 years; and office furniture
and equipment, 3-10 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. 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 4 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.” Capitalized costs 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

28 E S C O TE Ch nOlOg iE S inC.

2 0 0 8 A n n u Al REpO R T

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

notes to Consolidated Financial Statements

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 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.

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

(In thousands)

2008

2007

2006

Weighted Average Shares
Outstanding — Basic

Dilutive Options and Performance-
Accelerated Restricted Stock

25,909

25,865

25,718

was greater than the average market price of the common shares.
These options expire in various periods through 2013. Approximate-
ly 38,000, 14,000 and 9,000 restricted shares were outstanding but
unearned at September 30, 2008, 2007 and 2006, respectively, and,
therefore, were not included in the respective years’ computations
of diluted EPS.

R. ShARE-BASED COMpEnSATiOn

S. COMpREhEnSiVE inCOME (lOSS)

Accumulated other comprehensive income as shown on the
consolidated balance sheet of $0.6 million at September 30, 2008
consisted of $(6.5) million related to the pension net actuarial
loss; $7.9 million related to currency translation adjustments;
and $(0.8) million related to interest rate swaps. Accumulated
other comprehensive income of $6.3 million at September 30,
2007 consisted of $8.8 million related to currency translation
adjustments; and $(2.5) million related to the minimum
pension liability.

T. DEFERRED REVEnuE AnD COSTS

Deferred revenue and costs are recorded for products or services
that have not been provided but have been invoiced under con-
tractual 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 and costs
are deferred until the customer has accepted the product or service.

406

522

668

u. DERiVATiVE FinAnCiAl inSTRuMEnTS

Adjusted Shares — Diluted

26,315

26,387

26,386

Options to purchase 542,689 shares at prices ranging from
$35.69-$54.88 were outstanding during the year ended
September 30, 2008, 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 602,731 shares at prices ranging from
$36.07-$54.88 were outstanding during the year ended
September 30, 2007, 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 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

All derivative financial instruments are reported on the balance
sheet at fair value. The accounting for changes in fair value of a
derivative instrument depends on whether it has been designated
and qualifies as a hedge and on the type of hedge. For each
derivative instrument designated as a cash flow hedge, the
effective portion of the gain or loss on the derivative is deferred
in accumulated other comprehensive income until recognized in
earnings with the underlying hedged item. For each derivative
instrument designated as a fair value hedge, the gain or loss on
the derivative and the offsetting gain or loss on the hedged item
are recognized immediately in earnings. Regardless of type, a
fully effective hedge will result in no net earnings impact while
the derivative is outstanding. To the extent that any hedge is
ineffective at offsetting cash flow or fair value changes in the
underlying hedged item, there could be a net earnings impact.

E S C O TE Ch nOlOg iE S inC.

2 0 0 8 A n n u Al REpO R T

notes to Consolidated Financial Statements

V. nEW ACCOunTing STAnDARDS

In December 2007, the FASB issued SFAS No. 141R, “Business
Combinations” (SFAS 141R), which establishes principles and
requirements for how an acquirer recognizes and measures in its
financial statements the identifiable assets acquired, the liabilities
assumed, and any noncontrolling interest in an acquiree, including
the recognition and measurement of goodwill acquired in a business
combination. The requirements of SFAS 141R are effective for
business combinations for which the acquisition date is on or after
the beginning of the first annual reporting period beginning on or
after December 15, 2008. Earlier adoption is not permitted.

In February 2008, the FASB released FASB Staff Position No.
FAS 157-2, “Effective Date of FASB Statement No. 157,” which
delayed for one year the effective date of SFAS 157 for all
non-financial assets and non-financial liabilities, except those
that are recognized or disclosed in the financial statements at
fair value at least annually. Items in this classification include
goodwill, asset retirement obligations, rationalization accruals,
intangible assets with indefinite lives and certain other items. The
adoption of SFAS 157 with respect to the Company’s non-financial
assets and liabilities, effective January 1, 2009, is not expected
to have a significant effect on the Company’s consolidated
financial statements.

2. Divestiture

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2 0 0 8 A n n u Al REpO R T

Accordingly, the Filtertek businesses are reflected as discontinued
operations in the financial statements and related notes for all
periods presented. A pretax loss of $0.2 million related to Filtertek
is reflected in the Company’s fiscal 2008 results in discontinued
operations. Filtertek’s net sales were $13.7 million for the two-
month period ended November 25, 2007. Filtertek’s net sales were
$82.8 million and $76.5 million for the years ended September 30,
2007 and 2006, respectively. The pretax earnings from operations
from the Filtertek businesses were $4.7 million and $4.5 million for
the years ended September 30, 2007 and 2006, respectively. Upon
receipt of the final purchase price allocation in the fourth quarter
of 2008, the Company reduced its expected tax expense on the sale
of Filtertek from $4.8 million to $0.2 million. Filtertek’s operations
were included within the Company’s Filtration segment prior to
divestiture. The operations of the TekPack business are reflected
in continuing operations and continue to be included in the
Filtration segment.

The major classes of discontinued assets and liabilities included in
the Consolidated Balance Sheet at September 30, 2007 are shown
below:

(In thousands)

Assets

Accounts receivable, net
Inventories
Other current assets

Current assets
Net property, plant & equipment
Goodwill
Other assets

Total assets of Discontinued Operations

liabilities

Accounts payable
Accrued expenses and other Current liabilities

Current liabilities
Other liabilities

Total liabilities of Discontinued Operations

3. Acquisitions

Doble

September 30, 2007

$ 17,675
11,986
6,009

35,670
28,084
24,709
3,052

$ 91,515

$ 8,908
8,086

16,994
2,534

$ 19,528

On November 30, 2007, the Company acquired the capital stock of
Doble for a purchase price of approximately $328 million, net of
cash acquired. Doble, headquartered in Watertown, Massachusetts,
is a worldwide leader in providing high-end diagnostic test
solutions for the electric utility industry. The acquisition aligns
with the Company’s long-term growth strategy of expanding its
products and services in the utility industry. The acquisition was
funded by a combination of the Company’s existing cash, including
the proceeds from the divestiture of Filtertek, and borrowings
under a new $330 million credit facility led by National City Bank.
The operating results for Doble, since the date of acquisition, are
included within the USG segment.

notes to Consolidated Financial Statements

The acquisition was recorded by allocating the cost of completing
the acquisition to the assets acquired, including identifiable
intangible assets and liabilities assumed, based on their estimated
fair values at the acquisition date pursuant to SFAS No. 141,
“Business Combinations.” The excess of the cost of the acquisition
over the net amounts assigned to the fair value of the assets
acquired and the liabilities assumed was recorded as goodwill. The
final valuation of intangible and tangible assets was completed
prior to September 30, 2008. The purchase price allocation is as
follows:

(In thousands)

Net tangible assets
Identifiable intangible assets:
Trade names
Customer relationships
Software and databases

Total identifiable intangible assets
Goodwill
Long-term deferred tax liabilities

Total cash consideration

Reconciliation of purchase price:
Total cash consideration
Less: cash acquired

Purchase price

$ 44,498

112,290
52,510
3,790

168,590
192,203
(67,830)

$ 337,461

$ 337,461
(9,639)

$ 327,822

The identifiable intangible assets consisting of customer
relationships will be amortized on a straight-line basis over
twenty years and the software and databases will be amortized
on a straight-line basis over five years. The identifiable intangible
asset consisting of trade names has an indefinite life and is not
subject to amortization.

pro Forma Results

The following pro forma financial information for the years ended
September 30, 2008 and 2007 presents the combined results of
operations of ESCO and Doble as if the acquisition had occurred
on October 1, 2006. The pro forma financial information for the
periods presented excludes the Filtertek business which was sold
on November 25, 2007. The combined results of operations have
been adjusted for the impact of certain acquisition-related items,
including additional amortization of identifiable intangible assets,
additional financing expenses and other direct costs. The impact
of pro forma adjustments are tax-effected at the expected future
consolidated corporate tax rate.

The unaudited pro forma financial information is not intended to
represent, or be indicative of, the Company’s consolidated results
of operations or financial condition that would have been reported
had the acquisition been completed as of the beginning of each of
the periods presented. This information is provided for illustrative

purposes only and is not necessarily indicative of the Company’s
future consolidated results of operations or financial condition.

(In millions, except per share data)
(Unaudited)

Pro Forma Results

Net sales
Net earnings from continuing operations

Net earnings per share
Basic
Diluted

lDiC

FY 2008

FY 2007

$ 640.1
$ 46.9

503.6
30.5

$ 1.82
$ 1.79

1.18
1.15

On July 31, 2008, the Company acquired the capital stock of
LDIC GmbH and LDIC AG (collectively “LDIC”) for a purchase price
of approximately $13 million, net of cash acquired. LDIC, with
operations in Germany and Switzerland, is a manufacturer of partial
discharge diagnostic testing instruments and systems serving
the international electric utility industry with annual revenues of
approximately $10 million. The operating results for LDIC since the
date of acquisition are included within Doble in the USG segment.
The acquisition serves to broaden the portfolio of intelligent
diagnostic products and will expand the distribution channels for
Doble’s products and services throughout Europe. In connection
with the acquisition of LDIC, the Company transferred $6.8 million
of cash (€5 million) into an escrow account to be earned by the
sellers if future target revenues are achieved. The $6.8 million is
classified as restricted cash and is included in Other Assets on the
Company’s consolidated balance sheet at September 30, 2008. The
Company recorded approximately $8 million of goodwill as a result
of the transaction and $2.5 million of trade names. In addition,
the Company recorded $1.5 million of amortizable identifiable
intangible assets consisting of customer relationships which are
being amortized on a straight-line basis over seven years.

FY 07 — Wintec

On August 10, 2007, the Company acquired the assets and certain
liabilities of Wintec, LLC (Wintec) for a purchase price of $6 million.
Wintec is engaged in the design, manufacture and sale of metallic
elements, filters, and strainers for pneumatic/hydraulic applications
and surface tension devices for propellant management fluid control
with annual revenues of approximately $3.5 million. The assets
acquired consist of accounts receivable, inventory and property,
plant and equipment. The Company recorded approximately
$5 million of goodwill in connection with the transaction. In
addition, the Company recorded $0.2 million of identifiable
intangible assets consisting of customer contracts and order
backlog which are being amortized on a straight-line basis over
periods ranging from nine months to seventeen months. The
operating results for Wintec, since the date of acquisition, are
included within VACCO in the Filtration segment.

E S C O TE Ch nOlOg iE S inC.

2 0 0 8 A n n u Al REpO R T

notes to Consolidated Financial Statements

FY 06 — Aclara RF

4. goodwill and Other intangible Assets

On February 1, 2006, the Company acquired the capital stock
of Aclara RF (formerly Hexagram, Inc.) 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 Aclara RF exceeds
certain sales targets. The Company paid $1.3 million of contingent
consideration in both 2008 and 2007. Aclara RF is a radio-frequency
(RF) fixed network AMI company headquartered in Cleveland, Ohio.
Aclara RF broadens the Company’s served market and provides an RF
based AMI system serving primarily electric, gas and water utilities.
The operating results for Aclara RF, since the date of acquisition,
are included within the USG segment. 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.

FY 06 — Aclara Software

On November 29, 2005, the Company acquired Aclara Software
(formerly Nexus Energy Software, Inc.) 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 Aclara Software exceeds certain sales
targets. Aclara Software is a software company headquartered in
Wellesley, Massachusetts. Aclara Software 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 Aclara Software, since the date
of acquisition, are included within the USG segment. 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 Aclara
Software, 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.

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 Company’s acquisitions, excluding Doble,
was not presented as it was not significant to the Company’s
results of operations. None of the goodwill recorded as part of the
acquisitions mentioned above is expected to be deductible for U.S.
Federal or state income tax purposes.

Included on the Company’s Consolidated Balance Sheets at
September 30, 2008 and 2007 are the following intangible assets
gross carrying amounts and accumulated amortization:

(Dollars in millions)

Goodwill

2008

$ 328.9

2007

124.8

Intangible assets with determinable lives:
Patents

Gross carrying amount
Less: accumulated amortization

Net

Capitalized software

Gross carrying amount
Less: accumulated amortization

Net

Customer Relationships

Gross carrying amount
Less: accumulated amortization

Net

Other

Gross carrying amount
Less: accumulated amortization

Net

$ 13.6
12.8

$ 0.8

$ 91.2
27.4

$ 63.8

$ 54.0

2.2 —

$ 51.8

$ 10.0
6.5

$ 3.5

13.5
12.5

1.0

79.1
13.7

65.4

—

9.9
5.1

4.8

Intangible assets with indeterminable lives:
Trade names

$ 118.3

3.5

The Company performed its annual evaluation of goodwill and
intangible assets for impairment during the fourth quarter of fiscal
2008 and concluded no impairment existed at September 30, 2008.

The changes in the carrying amount of goodwill attributable to each
business segment for the years ended September 30, 2008 and 2007
are as follows:

(Dollars in millions)

USG

Test Filtration

Balance as of
September 30, 2006
Acquisitions

Balance as of
September 30, 2007

Divestiture

Acquisitions

Balance as of
September 30, 2008

$ 74.6
0.8

75.4
—

203.7

29.1
—

0.4

39.8
5.2

45.0
(24.7)

—

$ 279.1

29.5

20.3

32 E S C O TE Ch nOlOg iE S inC.

2 0 0 8 A n n u Al REpO R T

notes to Consolidated Financial Statements

Amortization expense related to intangible assets with determinable
lives was $17.6 million, $10.2 million and $6.4 million in 2008,
2007 and 2006, respectively. The increase in amortization expense
in 2008 as compared to the prior year was mainly due to the
Company’s TWACS NG software and the purchase accounting
identifiable assets. The Company recorded $11.0 million and
$6.2 million of amortization expense related to Aclara PLS’s TWACS
NG software in 2008 and 2007, respectively. 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 three to seven years. Estimated intangible assets
amortization for fiscal year 2009 is approximately $19 million.
Intangible asset amortization for fiscal years 2010 through 2013 is
estimated at approximately $20 million declining to $12 million per
year. The decrease in intangible asset amortization is related to the
TWACS NG software.

5. Accounts Receivable

Accounts receivable, net of the allowance for doubtful accounts,
consist of the following at September 30, 2008 and 2007:

(Dollars in thousands)

2008

2007

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, 2008 are:

(Dollars in thousands)
Years ending September 30:

2009

2010

2011

2012

2013 and thereafter

Total

8. income Tax Expense

$ 7,305

5,621

4,313

3,863

4,067

$25,169

Total income tax expense for the years ended September 30, 2008,
2007 and 2006 was allocated as follows:

(Dollars in thousands)

2008

2007

2006

Income tax expense from
continuing operations
Discontinued operations

$23,613
482

7,633
1,382

15,220
2,402

Commercial

$126,860

80,039

Total income tax expense

$24,095

9,015

17,622

U.S. Government and prime contractors

8,576

5,280

Total

$135,436

85,319

6. inventories

The components of income from continuing operations before
income taxes consisted of the following for the years ended
September 30:

(Dollars in thousands)

2008

2007

2006

Inventories consist of the following at September 30, 2008
and 2007:

United States
Foreign

$66,460
4,555

33,922
4,117

40,204
4,181

(Dollars in thousands)

Finished goods

Work in process — including

long-term contracts

Raw materials

Total

2008

2007

$20,590

17,653

15,736

13,892

30,636

24,340

$66,962

55,885

Total income before income taxes $71,015

38,039

44,385

The principal components of income tax expense from continuing
operations for the years ended September 30, 2008, 2007 and 2006
consist of:

(Dollars in thousands)

2008

2007

2006

Federal

Current (including Alternative

7. property, plant and Equipment

Minimum Tax)

737

(6,530)

1,607

Depreciation expense of property, plant and equipment from
continuing operations for the years ended September 30, 2008,
2007 and 2006 was $10.0 million, $6.3 million and $5.3 million,
respectively.

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, 2008, 2007 and
2006 was $7.8 million, $6.6 million and $5.5 million, respectively.

Deferred

State and local:

Current

Deferred

Foreign:

Current

Deferred

Total

16,457

10,342

10,384

2,807

2,113

919

2,454

1,967

(451)

1,234

1,106

1,220

265

(171) 6

$ 23,613

7,633

15,220

E S C O TE Ch nOlOg iE S inC.

2 0 0 8 A n n u Al REpO R T

notes to Consolidated Financial Statements

The actual income tax expense from continuing operations for the
years ended September 30, 2008, 2007 and 2006 differs from the
expected tax expense for those years (computed by applying the
U.S. Federal corporate statutory rate) as follows:

in future periods. The valuation allowance established against the
foreign NOL carryforwards was $3.9 million and $3.1 million at
September 30, 2008 and 2007, respectively. The Company classifies
its valuation allowance related to deferred taxes on a pro rata basis.

Federal corporate statutory rate

35.0%

2008

2007

2006

State and local, net of Federal benefits

2.5

Foreign — Puerto Rico —

Foreign — Other

Foreign — Tax Credit

Foreign earnings repatriation

Research credit

Export Incentive

Domestic Production Deduction

Share-Based Compensation

Change in tax contingencies —

Change in FIN 48 Liability

Release of valuation allowance —

Other, net

(0.1)

(0.2)

—

(1.4)

(2.2)

(1.1)

0.7

(0.3)

0.4

2.8

(0.7)

(0.6)

—

2.4

0.4

(0.6)

—

4.4

(11.6)

(5.5)

—

3.7

—

1.3

(5.9)

(3.1)

—

(2.0)

(0.6)

—

Effective income tax rate

33.3%

20.1%

34.3%

The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and liabilities at September 30,
2008 and 2007 are presented below.

(Dollars in thousands)

Deferred tax assets:

2008

2007

Inventories, long-term contract accounting,

contract cost reserves and others

1,964

Pension and other postretirement benefits

Net operating loss carryforward — domestic

Net operating loss carryforward — foreign

Alternative Minimum Tax credit carryforward —

Capital loss carryforward

Other compensation-related costs

and other cost accruals

Research credit carryforward

Total deferred tax assets

Deferred tax liabilities:

Plant and equipment, depreciation methods,
acquisition asset allocations, and other

3,828

3,339

12,311

3,092

779

7,888

4,393

1,429

3,950

8,297

10,830

11,285

10,020

13,979

40,883

56,501

The Company expects the net research tax credits related to fiscal
year 2008 to be approximately $0.9 million. On October 3, 2008,
the President signed into law the Tax Extenders and Alternative
Minimum Tax Relief Act of 2008. Accordingly, $0.7 million of fiscal
year 2008 research tax credit benefit is expected to be recognized
as a discrete item in the first quarter of 2009. In fiscal 2008, the
Company recorded $1.0 million of research credits. The expiration
of the research credits is between 2020 and 2028. The Company
anticipates being able to utilize the research credits to reduce
future Federal and state income tax cash payments.

No deferred taxes have been provided on the accumulated
unremitted earnings of the Company’s foreign subsidiaries as of
September 30, 2008. 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 $3.3 million would be due,
which would correspondingly reduce the Company’s net earnings.

Effective October 1, 2007, the Company adopted FASB
Interpretation No. 48, “Accounting for Uncertainty in Income
Taxes” (FIN 48). FIN 48 provides a financial statement recognition
threshold and measurement attribute for a tax position taken
or expected to be taken in a tax return. The adoption of FIN 48
had the following impact on the Company’s financial statements:
decreased current assets by $1.5 million, decreased current
liabilities by $0.3 million, and decreased long-term liabilities by
$1.2 million. As of October 1, 2007, the Company had $6.7 million
of unrecognized tax benefits of which $5.9 million, if recognized,
would affect the Company’s effective tax rate. The Company made
no adjustments to retained earnings related to the adoption.
As of September 30, 2008, the Company had $13.0 million of
unrecognized benefits (see table below), of which $10.8 million of
the unrecognized tax benefits, net of Federal benefit, if recognized,
would affect the Company’s effective tax rate with the remaining
amount impacting goodwill.

A reconciliation of the Company’s unrecognized tax benefits for the
year ended September 30, 2008 is presented in the table below:

(96,783)

(38,780)

(Dollars in millions)

Net deferred tax (liability) asset before
valuation allowance

Less valuation allowance

(55,900)

17,721

(12,247)

(10,979)

Net deferred tax (liabilities) assets

$ (68,147)

6,742

At September 30, 2008, the Company has established a valuation
allowance of $8.3 million against the capital loss carryforward
generated in 2004 and 2008, as such loss carryforward may not be
realized in future periods. In addition, the Company has established
a valuation allowance against certain net operating loss (NOL)
carryforwards in foreign jurisdictions which may not be realized

Balance as of October 1, 2007

Increases related to prior year tax positions

Decreases related to prior year tax positions

Increases related to current year tax positions

Lapse of statute of limitations

Balance as of September 30, 2008

$ 6.7

6.3

(0.1)

0.3

(0.2)

$13.0

The Company anticipates a $0.3 million reduction in the amount of
unrecognized tax benefits in the next twelve months as a result of a
lapse of the applicable statute of limitations. The Company’s policy

34 E S C O TE Ch nOlOg iE S inC.

2 0 0 8 A n n u Al REpO R T

notes to Consolidated Financial Statements

is to include interest related to unrecognized tax benefits in income
tax expense and penalties in operating expense. As of September 30,
2008, the Company had accrued interest related to uncertain tax
positions of $0.2 million, net of Federal income tax benefit, on its
consolidated balance sheet. No penalties have been accrued.

The principal jurisdictions for which the Company files income tax
returns are U.S. Federal and the various city, state, and interna-
tional locations where the Company has operations. Due to the
Company’s available net operating loss, the 1995 through 2007
U.S. Federal tax years remain subject to income tax examinations.
During the fourth quarter of 2008, the Internal Revenue Service
(IRS) commenced examination of the Company’s U.S. Federal
income tax return for the period ended September 30, 2003 through
September 30, 2006. It is reasonably possible that the fiscal years
2003-2006 U.S. audit cycle will be completed during the next
twelve months, which could result in a decrease in the balance of
unrecognized tax benefits. However, no adjustments have been pro-
posed by the IRS and therefore, an estimate of a range cannot be
made at this time. Various state tax years from 2003 through 2007
remain subject to income tax examinations. The Company is subject
to income tax in many jurisdictions outside the United States, none
of which are individually material to the Company’s financial posi-
tion, statements of cash flows, or results of operations.

9. Debt

Debt consists of the following at September 30, 2008 and 2007:

(Dollars in thousands)

2008

2007

Revolving credit facility,

including current portion

$233,650 —

Current portion of long-term debt

(50,000) —

Total long-term debt, less

current portion

$183,650 —

On November 30, 2007, in conjunction with the acquisition of
Doble, the Company entered into a new $330 million five-year
revolving credit facility with a $50 million increase option. This
facility replaced the Company’s $100 million credit facility. The
credit facility is available for direct borrowings and/or the issuance
of letters of credit, and is provided by a group of sixteen banks, led
by National City Bank as agent, with a maturity of November 30,
2012. At September 30, 2008, the Company had approximately
$90 million available to borrow under the credit facility, plus a
$50 million increase option, in addition to $28.7 million cash on
hand. At September 30, 2008, the Company had outstanding letters
of credit of $6.6 million. The Company classified $50 million as
the current portion on long-term debt as of September 30, 2008,
as the Company intends to repay this amount within the next
twelve months.

The credit facility requires, as determined by certain financial
ratios, a facility fee ranging from 15 to 25 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 a leverage
ratio and an interest coverage ratio. During 2008 and 2007, the
maximum aggregate short-term borrowings at any month-end were
$274.7 million and $9 million, respectively; the average aggregate
short-term borrowings outstanding based on month-end balances
were $249.8 million and $1.7 million, respectively; and the
weighted average interest rates were 4.75%, 6.24%, and 5.25%
for 2008, 2007 and 2006, respectively. The letters of credit issued
and outstanding under the credit facility totaled $6.6 million and
$0.8 million at September 30, 2008, and 2007, respectively.

10. Capital Stock

The 29,465,154 and 29,159,629 common shares as presented
in the accompanying Consolidated Balance Sheets at
September 30, 2008 and 2007 represent the actual number
of shares issued at the respective dates. The Company held
3,375,106 and 3,416,966 common shares in treasury at
September 30, 2008 and 2007, respectively.

In August 2008, the Company’s Board of Directors authorized an
open market common stock repurchase program of the Company’s
shares in a value not to exceed $30 million, subject to market
conditions and other factors which covers the period through
September 30, 2009. There were no stock repurchases during 2008.
The Company repurchased $10 million or 265,000 shares during
2007. There were no stock repurchases during 2006.

11. Share-Based Compensation

The Company provides compensation benefits to certain key
employees under several share-based plans providing for employee
stock options and/or performance-accelerated restricted shares
(restricted shares), and 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 2,000,000 shares added to the
authorized shares allocated 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, 2008, 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 187,167 shares, respectively.

E S C O TE Ch nOlOg iE S inC.

2 0 0 8 A n n u Al REpO R T

notes to Consolidated Financial Statements

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 vari-
ous periods through 2013. Beginning in fiscal 2004, the options
granted have a five-year contractual life from date of issuance. The
Company recognizes compensation cost on a straight-line basis over
the requisite service period for the entire award.

The fair value of each option award is estimated as of the date of
grant using the 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. In fiscal year
2008, the Company utilized historical company data to develop
its expected term assumption. For fiscal years 2007 and 2006, 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 2008,
2007 and 2006, respectively: expected dividend yield of 0% in all
periods; expected volatility of 34.8%, 27.3% and 28.0%; risk-free
interest rate of 2.9%, 4.6% and 4.6%; and expected term of
3.8 years, 3.50 years and 3.50 years.

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

October 1,

Granted

Exercised

Cancelled

September 30,

At September 30,
Reserved for future grant

Exercisable

FY2008

FY2007

FY2006

Estimated
Weighted
Avg. price

$30.35

$35.82

$24.83

$42.22

1,558,941

16,000

(295,339)

(140,401)

Estimated
Weighted
Avg. Price

$ 26.60

$ 45.71

$ 21.56

$ 40.59

1,387,348

296,280

(101,683)

(23,004)

Estimated
Weighted
Avg. Price

$ 20.48

$ 44.63

$ 15.95

$ 35.77

1,324,548

328,080

(232,371)

(32,909)

1,139,201

$30.40

1,558,941

$ 30.35

1,387,348

$ 26.60

1,010,014

884,812

$26.25

878,238

951,066

1,146,741

$ 21.99

753,415

$ 16.46

Summary information regarding stock options outstanding at
September 30, 2008 is presented below:

Options Outstanding

Range of
Exercise Prices

$ 5.39 - $10.72

$12.64 - $14.52

$17.29 - $32.32

$35.18 - $42.10

$42.99 - $54.88

Weighted-

Average Weighted
Average
Exercise
Price

Remaining
Contractual
Life

1.2 years

$ 6.78

Number
Outstanding at
Sept. 30, 2008

167,076

218,714

3.5 years

78,857

1.3 years

193,158

481,396

1.3 years

2.6 years

$13.75

$23.04

$35.42

$45.35

1,139,201

2.3 years

$30.40

The aggregate intrinsic value of options exercised during 2008,
2007 and 2006 was $5.5 million, $2.4 million and $7.9 million,
respectively. The aggregate intrinsic value of stock options
outstanding and exercisable at September 30, 2008 was
$20.5 million. The weighted-average contractual life of stock
options outstanding at September 30, 2008 was 2.3 years. The
weighted-average fair value of stock options granted in 2008,
2007, and 2006 was $10.98, $12.25, and $12.17, respectively.

36 E S C O TE Ch nOlOg iE S inC.

2 0 0 8 A n n u Al REpO R T

notes to Consolidated Financial Statements

Exercisable Options Outstanding

Range of
Exercise Prices

$ 5.39 - $10.72

$12.64 - $14.52

$17.29 - $32.32

$35.18 - $54.88

Number
Exercisable at
Sept. 30, 2008

167,076

218,714

78,857

420,165

884,812

Weighted
Average
Exercise
Price

$ 6.78

$13.75

$23.04

$41.11

$26.25

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, 2008, there was
$9.6 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 2.4 years.

performance-accelerated Restricted Share Awards

12. Retirement and Other Benefit plans

The performance-accelerated restricted shares (restricted
shares) have a five-year term 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 the majority of the outstanding restricted share awards is
being recognized over the longer performance period as it is not
probable the performance condition will be met. The restricted
share award grants were valued at the stock price on the date of
grant. Pretax compensation expense related to the restricted share
awards was $1.2 million, $1.5 million and $1.5 million for fiscal
years ended September 30, 2008, 2007 and 2006, respectively.

The following summary presents information regarding outstanding
restricted share awards as of September 30, 2008 and changes
during the period then ended:

Nonvested at October 1, 2007

Granted

Vested

Cancelled

Weighted
Shares Avg. Price

164,060

$41.77

94,335

$37.08

(44,500)

$34.80

(11,000)

$41.32

Nonvested at September 30, 2008

202,895

$41.15

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 $0.7 million, $0.8 million and $1.0 million for the years ended
September 30, 2008, 2007 and 2006, respectively.

The total share-based compensation cost that has been recognized
in results of operations and included within SG&A (continuing
operations) was $4.0 million, $4.8 million and $4.3 million for
the years ended September 30, 2008, 2007 and 2006, respectively.
The total income tax benefit recognized in results of operations
for share-based compensation arrangements was $1.1 million,
$1.2 million and $1.2 million for the years ended September 30,
2008, 2007 and 2006, respectively. The Company has elected to

Substantially all domestic employees are covered by a defined
contribution pension plan maintained by the Company. 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. In conjunction with the
acquisition of Doble, the Company assumed responsibility for their
defined benefit plan which it intends to freeze effective December
31, 2008 and no additional benefits will be accrued after that date.
The annual contributions to the defined benefit 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. Effective December 31, 2004, no new
retirees are eligible for life insurance benefits.

The Company adopted Statement of Financial Accounting Standards
No. 158, “Employer’s Accounting for Defined Benefit Pension
and Other Postretirement Plans” (SFAS 158) as of September 30,
2007. SFAS 158 requires an employer to recognize the overfunded
or underfunded status of a defined benefit postretirement plan
as an asset or liability in its statement of financial position and
to recognize changes in that funded status in the year in which
the changes occur through comprehensive income. As a result of
adopting the provisions of SFAS 158, the Company recorded a pretax
credit of $0.9 million to accumulated other comprehensive income
in equity as of September 30, 2007.

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 $0.6 million and $0.7 million at
September 30, 2008 and 2007, respectively, related to its other

E S C O TE Ch nOlOg iE S inC.

2 0 0 8 A n n u Al REpO R T

notes to Consolidated Financial Statements

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 table provides the components of net periodic benefit
cost for the plans for the years ended September 30, 2008, 2007
and 2006:

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, 2008, and a statement of the funded status
as of September 30, 2008 and 2007:

(Dollars in millions)

Reconciliation of benefit obligation

Pension Benefits

2008

2007

Net benefit obligation at beginning of year

$ 46.2

48.2

Service cost

Interest cost

Actuarial (gain) loss

Acquisitions

Gross benefits paid

0.6 —

3.8

(7.1)

18.8

(2.6)

2.7

(2.9)

—

(1.8)

Net benefit obligation at end of year

$ 59.7

46.2

(Dollars in millions)

Pension Benefits

2008

2007

Reconciliation of fair value of plan assets

Fair value of plan assets at beginning of year

$ 38.2

Actual return on plan assets

Employer contributions

Gross benefits paid

Acquisitions

(9.6)

0.8

(2.6)

21.2 —

35.1

4.7

0.2

(1.8)

Fair value of plan assets at end of year

$ 48.0

38.2

Pension Benefits

(Dollars in millions)

2008

2007

2006

Service cost

Interest cost

$ 0.6

3.8

—

2.7

Expected return on plan assets

(4.3)

(2.8)

Net actuarial (gain) loss

Net periodic benefit cost

Defined contribution plans

Total

0.2

0.3

4.2

$ 4.5

0.4

0.3

3.6

3.9

—

2.6

(2.7)

0.4

0.3

2.9

3.2

The discount rate used in measuring the Company’s pension
obligations was developed by matching yields of actual high-
quality corporate bonds to expected future pension plan cash flows
(benefit payments). Over 400 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. The expected long-term rate of return on
plan assets assumption was determined by reviewing the actual
investment return of the plans since inception and evaluating
those returns in relation to expectations of various investment
organizations to determine whether long-term future returns are
expected to differ significantly from the past.

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

(Dollars in millions)

Funded Status

Pension Benefits

2008

2007

Discount rate

Rate of increase in

compensation levels

2008

2007

2006

6.25%

5.75%

5.25%

n/A

N/A

Funded status at end of year

$(11.7)

(8.0)

Expected long-term rate of

Unrecognized prior service cost

—

Unrecognized net actuarial (gain) loss

—

— —

Accrued benefit cost

(11.7)

(8.0)

Amounts recognized in the Balance Sheet

return on assets

8.25%

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

consist of:

Noncurrent asset

Current liability

Noncurrent liability

1.6 —

(1.3)

(11.9)

(0.2)

(7.8)

Discount rate

Rate of increase in

compensation levels

2008

2007

7.25%

6.25%

n/A

N/A

Accumulated other comprehensive income

(before tax effect)

11.7

5.1

Amounts recognized in Accumulated Other
Comprehensive Income consist of:

Net actuarial loss

Prior service cost

11.6

0.1

Accumulated Other Comprehensive Income

$11.7

5.0

0.1

5.1

The assumed rate of increase in compensation levels is not
applicable in 2008, 2007 and 2006 as the plan was frozen
as of December 31, 2003.

38 E S C O TE Ch nOlOg iE S inC.

2 0 0 8 A n n u Al REpO R T

notes to Consolidated Financial Statements

The asset allocation for the Company’s pension plans at the end
of 2008 and 2007, the Company’s acceptable range and the target
allocation for 2009, by asset category, follows:

Target Acceptable Percentage of Plan
Assets at Year-end

Range

Allocation

Asset Category

Equity securities

Fixed income

Cash/cash equivalents

2009

60%

40%

2008

2007

50-70%

30-50%

0-5%

62%

36%

69%

29%

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 plan. 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:

instruments are reported on the balance sheet at fair value. The
derivative instrument is designated as a cash flow hedge and the
gain or loss on the derivative is deferred in accumulated other
comprehensive income until recognized in earnings with the
underlying hedged item. Including the impact of interest rate swaps
outstanding, the interest rates on approximately 75% of the
Company’s total borrowings were effectively fixed as of September 30,
2008. The following is a summary of the notional transaction
amounts and fair values for the Company’s outstanding derivative
financial instruments by risk category and instrument type, as of
September 30, 2008.

(Dollars in thousands)

Notional Avg Rec
Amount

Average
Rate Pay Rate

Fair
Value

Interest rate swaps

$175,000

2.82%

3.99%

($1,347)

14. Other Financial Data

Items charged to operations during the years ended September 30,
2008, 2007 and 2006 included the following:

(Dollars in thousands)

2008

2007

2006

Salaries and wages

(including fringes)

$146,448

113,924

95,839

Maintenance and repairs

3,359

3,053

2,686

(Dollars in millions)

Pension
Benefits

Other
Benefits

Research and development

(R&D) costs:

Expected Employer Contributions — 2009

$ 5.0

0.1

Expected Benefit Payments

2009

2010

2011

2012

2013

2014-2018

4.4

3.4

3.6

3.9

4.5

$24.5

0.1

0.3

13. Derivative Financial instruments

Company-sponsored

32,955

23,471

18,329

Customer-sponsored

5,293

3,718

2,522

Total R&D

$ 38,248

27,189

20,851

Other engineering costs

10,537

9,082

9,069

Total R&D and other
engineering costs

$ 48,785

36,271

29,920

As a % of net sales

7.8%

8.2%

7.8%

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, 2008, 2007, and
2006 is as follows:

(Dollars in thousands)

2008

2007

Balance as of October 1

$1,445

1,390

2006

930

Additions charged to expense

3,387

1,769

2,330

Deductions

(1,887)

(1,714)

(1,870)

Balance as of September 30

$2,945

1,445

1,390

E S C O TE Ch nOlOg iE S inC.

2 0 0 8 A n n u Al REpO R T

notes to Consolidated Financial Statements

15. Business Segment information

The Company is organized based on the products and services
it offers. Under this organizational structure, the Company has
three reporting segments: Utility Solutions Group (USG), Test
and Filtration/Fluid Flow (Filtration). In conjunction with the
acquisition of Doble in November 2007, the Company changed the
name of the Communications segment to the Utility Solutions Group
segment. The renaming of this segment more accurately describes
the segment’s operating activities and strategically aligns the
respective operating entities to focus on a single goal of satisfying
the expanding AMI, Smart Grid, and other operational requirements
of electric, gas and water utilities worldwide. The segment name
change was done along with the Company’s strategic integration
and rebranding of its three AMI related technologies under the
unified brand name Aclara™, and renaming the AMI businesses
as follows: Distribution Control Systems, Inc. was renamed Aclara
Power-Line Systems Inc.; Hexagram, Inc. was renamed Aclara RF
Systems Inc.; and Nexus Energy Software, Inc. was renamed Aclara
Software Inc. In addition to the AMI businesses operating under
the Aclara™ brand, the USG also includes Comtrak Technologies,
LLC (Comtrak) and Doble. The USG segment 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. Aclara PLS’s Two-Way Automatic
Communications System, known as TWACS®, is currently used for
automatic meter reading (AMR) and related advanced metering
infrastructure (AMI) functions serving over 200 utilities, as well as
having load management capabilities. Aclara RF’s STAR® system,
the premier wireless AMI system, delivers two-way and one-way
operation on secure licensed radio frequencies for more than 100
utilities serving electric, gas and water customers. Aclara Software
applications add value across the utility enterprise, addressing
meter and energy data management, distribution planning and
operations, customer service and revenue management. Doble
provides high-end, diagnostic test solutions for the electric power
delivery industry and is a leading supplier of partial discharge
testing instruments used to assess the integrity of high voltage
power delivery equipment. Comtrak’s SecurVision® product line
provides digital video surveillance and security functions for large
commercial enterprises and alarm monitoring companies.

Test segment operations represent the EMC Group, consisting
primarily of ETS-Lindgren L.P. (ETS) and Lindgren R.F. 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 equip-
ment, communications systems, electronic products, and shielded
rooms for high security data processing and secure communication.

As a result of the divestiture of Filtertek in November 2007, the
Company reevaluated the aggregation criteria of its remaining

40 E S C O TE Ch nOlOg iE S inC.

2 0 0 8 A n n u Al REpO R T

operating units within the Filtration segment. The TekPack business
(formerly a division of Filtertek) was not included in the divestiture
transaction. Prior to the divestiture of Filtertek, each of the
components of the Filtration segment were presented separately
due to differing long-term economics. However, as a result of
the divestiture of Filtertek, management believes the remaining
companies within the Filtration segment now have similar long-
term economics and, therefore, will not be presented separately
beginning in fiscal 2008. The Filtration segment’s operations consist
of: PTI Technologies Inc., VACCO Industries and TekPack. 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.

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 depreciation and amortization is based upon
the direct assets listed above. Information in the tables below
is presented on a Continuing Operations basis and excludes
Discontinued Operations.

nET SAlES

(Dollars in millions)

Year ended September 30,

2008

2007

2006

Utility Solutions

Test

Filtration

Consolidated totals

$362.9

144.8

116.1

$623.8

197.6

141.5

105.6

444.7

156.2

128.6

97.6

382.4

One customer (PG&E) exceeded 10% of net sales in fiscal 2008 with
sales of $110.2 million. No customers exceeded 10% of net sales in
2007 or 2006.

EBiT

(Dollars in millions)

Year ended September 30,

2008

2007

2006

Utility Solutions

Test

Filtration

$ 66.3

13.9

21.2

22.0

14.4

18.4

28.3

15.0

14.9

Reconciliation to consolidated

totals (Corporate)

(20.6)

(17.4)

(14.7)

Consolidated EBIT

Less: interest expense

Add: interest income

80.8

(9.8)

—

Earnings before income tax

$ 71.0

37.4

—

0.6

38.0

43.5

—

0.9

44.4

notes to Consolidated Financial Statements

iDEnTiFiABlE ASSETS

(Dollars in millions)

gEOgRAphiC inFORMATiOn

net sales

Year ended September 30,

2008

2007

2006

(Dollars in millions)

Utility Solutions

$203.3

151.6

Test

Filtration

Corporate

Consolidated totals

84.2

59.7

580.9

$ 928.1

72.0

56.2

296.3

576.1

97.9

50.3

58.3

282.2

488.7

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

CApiTAl EXpEnDiTuRES

(Dollars in millions)

Year ended September 30,

2008

2007

2006

Utility Solutions

Test

Filtration

Corporate

$ 9.0

5.9

1.6

0.2

7.0

4.0

1.4

—

Consolidated totals

$16.7

12.4

3.4

0.7

1.7

—

5.8

In addition to the above amounts, the Company incurred
expenditures for capitalized software of $11.0 million, $30.0 million
and $27.8 million in 2008, 2007 and 2006, respectively.

DEpRECiATiOn AnD AMORTiZATiOn

(Dollars in millions)

Year ended September 30,

Utility Solutions

Test

Filtration

Corporate

2008

$18.5

1.8

2.8

4.5

2007

10.3

1.3

2.8

2.0

2006

5.0

1.3

2.6

2.8

Consolidated totals

$27.6

16.4

11.7

Year ended September 30,

2008

2007

2006

United States

$492.9

361.7

311.0

Europe

Far East

Other

34.4

55.5

41.0

21.1

38.0

24.0

16.9

36.1

18.4

Consolidated totals

$623.8

444.7

382.4

long-lived assets

(Dollars in millions)

Year ended September 30,

United States

Europe

Other

2008

$66.4

3.5

2.7

2007

45.7

2.0

2.5

2006

41.6

1.5

0.8

Consolidated totals

$72.6

50.2

43.9

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, 2008, the Company had $6.6 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. 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.

E S C O TE Ch nOlOg iE S inC.

2 0 0 8 A n n u Al REpO R T

notes to Consolidated Financial Statements

17. Quarterly Financial information (unaudited)

(Dollars in thousands, except per share amounts)

First
Quarter

Second
Quarter

Third
Quarter

Fourth
Quarter

Fiscal
Year

2008

Net sales

Net earnings from continuing operations
Net earnings (loss) from discontinued operations

Net earnings

Basic earnings (loss) per share:
Net earnings from continuing operations
Net earnings (loss) from discontinued operations

Net earnings

Diluted earnings (loss) per share:
Net earnings from continuing operations
Net earnings (loss) from discontinued operations

Net earnings

2007

Net sales

Net earnings (loss) from continuing operations
Net earnings (loss) from discontinued operations

Net earnings (loss)

Basic earnings (loss) per share:
Net earnings (loss) from continuing operations
Net earnings from discontinued operations

Net earnings (loss)

Diluted earnings (loss) per share:
Net earnings (loss) from continuing operations
Net earnings from discontinued operations

Net earnings (loss)

$ 134,957

135,159

157,669

196,032

623,817

7,905
(5,089)

6,082
—

13,308
—

20,107
4,398

47,402
(691)

2,816

6,082

13,308

24,505

46,711

0.31
(0.20)

0.11

0.30
(0.19)

0.11

0.24
—

0.24

0.23
—

0.23

0.51
—

0.51

0.50
—

0.50

0.77
0.17

0.94

0.76
0.17

0.93

1.83
(0.03)

1.80

1.80
(0.02)

1.78

$ 80,587

108,860

115,365

139,892

444,704

(1,351)
(30)

8,953
665

7,879
975

14,925
1,697

30,406
3,307

(1,381)

9,618

8,854

16,622

33,713

(0.05)
—

(0.05)

(0.05)
—

(0.05)

0.35
0.02

0.37

0.34
0.02

0.36

0.30
0.04

0.34

0.29
0.04

0.33

0.58
0.07

0.65

0.57
0.07

0.64

1.17
0.13

1.30

1.15
0.13

1.28

See Notes 2 and 3 of Notes to Consolidated Financial Statements for discussion of divestiture and acquisition activity.

During the fourth quarter of 2008, the Company reduced its
expected tax expense by $4.6 million on the sale of Filtertek upon
receipt of the final purchase price allocation.

During 2007, the Company determined that certain tax accounts
had not been accurately recorded in the financial statements for

fiscal years 2001 to 2006. The effect in any individual year was not
material to the Company’s results of operations, financial position,
or cash flows. The Company recorded $1.3 million as a cumulative
credit adjustment to tax expense to correct previously recorded tax
accounts during the fourth quarter of 2007.

E S C O TE Ch nOlOg iE S inC.

2 0 0 8 A n n u Al REpO R T

Management’s Statement of Financial Responsibility

The Company’s Management is responsible for the fair presentation
of the Company’s financial statements in accordance with account-
ing principles generally accepted in the United States of America,
and for their integrity and accuracy. Management is confident that
its financial and business processes provide accurate information on
a timely basis.

Management, with the oversight of ESCO’s Board of Directors, has
established and maintains a strong ethical climate in which the
Company’s affairs are conducted. Management also has established
an effective system of internal controls that provide reasonable as-
surance as to the integrity and accuracy of the financial statements,
and responsibility for the Company’s assets. KPMG LLP, the Com-
pany’s independent accountants, reports directly to the Audit and
Finance Committee of the Board of Directors. The Audit and Finance
Committee has established policies consistent with newly enacted
corporate reform laws for auditor independence. In accordance with
corporate governance listing requirements of the New York Stock
Exchange:

▶ A majority of Board members are independent of the Company and

its Management.

▶ All members of the key Board committees — the Audit and

Finance, the Human Resources and Compensation and the Nomi-
nating and Corporate Governance Committees — are independent.

▶ The independent members of the Board meet regularly without the

presence of Management.

▶ The Company has a clear code of ethics and a conflict of inter-
est policy to ensure that key corporate decisions are made by
individuals who do not have a financial interest in the outcome,
separate from their interest as Company officials.

▶ The charters of the Board committees clearly establish their

respective roles and responsibilities.

▶ The Company has a Corporate Ethics Committee, ethics officers at
each operating location and an ombudsman hot line available to
all domestic employees and all foreign employees have local ethics
officers and access to the Company’s ombudsman.

The Company has a strong financial team, from its executive leader-
ship to each of its individual contributors. Management monitors
compliance with its financial policies and practices over critical
areas including internal controls, financial accounting and report-
ing, accountability, and safeguarding of its corporate assets. The
internal audit control function maintains oversight over the key
areas of the business and financial processes and controls, and
reports directly to the Audit and Finance Committee. Additionally,
all employees are required to adhere to the ESCO Code of Business
Conduct and Ethics, which is monitored by the Corporate Ethics
Committee.

Management is dedicated to ensuring that the standards of financial
accounting and reporting that are established are maintained. The
Company’s culture demands integrity and a commitment to strong
internal practices and policies.

The Consolidated Financial Statements have been audited by KPMG
LLP, whose report is included herein.

Victor L. Richey
Chairman, Chief Executive Officer
and President

Gary E. Muenster
Executive Vice President,
and Chief Financial Officer

E S C O TE Ch nOlOg iE S inC.

2 0 0 8 A n n u Al REpO R T

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 Rule 13a-15(f) under the Securities Exchange Act of
1934). 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, 2008 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, 2008 based on these criteria.

The Company acquired Doble Engineering Company (Doble) on
November 30, 2007. 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, 2008,
Doble’s internal control over financial reporting. Total assets related
to Doble as of September 30, 2008 of $52.2 million and revenues for
the ten-month period subsequent to the acquisition (November 30,
2007 to September 30, 2008) of $74.3 million were included in the
Consolidated Financial Statements of the Company as of and for the
year ended September 30, 2008.

Our internal control over financial reporting as of September 30, 2008,
has been audited by KPMG LLP, an independent registered public
accounting firm, as stated in the report which is included herein.

Victor L. Richey
Chairman, Chief Executive Officer
and President

Gary E. Muenster
Executive Vice President,
and Chief Financial Officer

E S C O TE Ch nOlOg iE S inC.

2 0 0 8 A n n u Al REpO R T

Report 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, 2008 and 2007, 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,
2008. We also have audited the Company’s internal control over
financial reporting as of September 30, 2008, based on criteria
established in Internal Control — Integrated Framework issued
by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO). The Company’s management is responsible for
these Consolidated Financial Statements, for maintaining effective
internal control over financial reporting, and for its assessment
of the effectiveness of internal control over financial reporting,
included in the accompanying Management’s Report on Internal
Control Over Financial Reporting. Our responsibility is to express
an opinion on these Consolidated Financial Statements and an
opinion on the Company’s internal control over financial reporting
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 audits to obtain
reasonable assurance about whether the financial statements are
free of material misstatement and whether effective internal control
over financial reporting was maintained in all material respects.
Our audits of the Consolidated Financial Statements included
examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting
principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. Our audit
of internal control over financial reporting included obtaining an
understanding of internal control over financial reporting, assessing
the risk that a material weakness exists, and testing and evaluating
the design and operating effectiveness of internal control based on
the assessed risk. Our audits also included performing such other
procedures as we considered necessary in the circumstances. We
believe that our audits provide a reasonable basis for our opinions.

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
that 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, 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, 2008 and 2007, and the results of their operations
and their cash flows for each of the years in the three-year period
ended September 30, 2008, in conformity with U.S. generally
accepted accounting principles. Also in our opinion, ESCO
Technologies Inc. and subsidiaries maintained, in all material
respects, effective internal control over financial reporting as of
September 30, 2008, based on criteria established in Internal
Control — Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission.

The Company acquired Doble Engineering Company (Doble) on
November 30, 2007, and management excluded from its assessment
of the effectiveness of the Company’s internal control over financial
reporting as of September 30, 2008, Doble’s internal control
over financial reporting. Total assets related to Doble as of
September 30, 2008 of $52.2 million and revenues for the
ten-month period subsequent to the acquisition (November 30,
2007 to September 30, 2008) of $74.3 million were included in the
Consolidated Financial Statements of the Company as of and for the
year ended September 30, 2008. Our audit of internal control over
financial reporting of the Company also excluded an evaluation of
the internal control over financial reporting of Doble.

As discussed in Note 8 to the Consolidated Financial Statements,
the Company adopted Statement of Financial Accounting Standards
Board Interpretation No. 48, Accounting for Uncertainty in Income
Taxes, an interpretation of Statement of Financial Accounting
Standard No. 109, effective October 1, 2007. As discussed in
Note 12 to the Consolidated Financial Statements, the Company
adopted Statement of Financial Accounting Standards (SFAS)
No. 158, Employers’ Accounting for Defined Benefit Pension and
Other Postretirement Plans, as of September 30, 2007. Additionally,
as discussed in Note 11 to the Consolidated Financial Statements,
the Company adopted SFAS No. 123(R), Share-Based Payment,
effective October 1, 2005.

St. Louis, Missouri
December 1, 2008

E S C O TE Ch nOlOg iE S inC.

2 0 0 8 A n n u Al REpO R T

Five-Year Financial Summary

(Dollars in millions, except per share amounts)

2008

2007

2006

2005

2004

For years ended September 30:

Net sales

Net earnings from continuing operations

Net earnings (loss) from discontinued operations

Net earnings (loss)

Earnings (loss) per share:

Basic:

Continuing operations

Discontinued operations

Net earnings (loss)

Diluted:

Continuing operations

Discontinued operations

Net earnings (loss)

As of September 30:

Working capital from continuing operations

Total assets

Total debt

Shareholders’ equity

$623.8

47.4

(0.7)

46.7

$1.83

(0.03)

$1.80

(0.02)

$1.78

102.0

928.1

233.7

$468.2

444.7

30.4

3.3

33.7

1.17

0.13

1.30

1.15

0.13

1.28

122.5

576.1

—

415.5

382.4

29.2

2.1

31.3

1.14

0.08

1.22

1.11

0.08

1.19

109.9

488.7

—

376.4

350.4

342.1

38.4

5.1

43.5

1.51

0.20

1.71

1.46

0.20

1.66

180.9

423.8

—

331.0

35.1

0.6

35.7

1.36

0.02

1.38

1.32

0.02

1.34

165.2

402.4

0.4

307.6

See Notes 2 and 3 of Notes to Consolidated Financial Statements for discussion of divestiture and acquisition 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
2008 and 2007.

Quarter

First

Second

Third

Fourth

2008

2007

high

$41.86

43.56

52.11

54.06

low

32.64

32.65

38.72

38.85

High

$49.28

49.20

52.41

43.50

Low

41.88

40.67

34.73

29.63

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.

E S C O TE Ch nOlOg iE S inC.

2 0 0 8 A n n u Al REpO R T

New Peer Group

Russell 2000®

Old Peer Group

ESCO Technologies Inc.

Market performance

The adjacent graph presents a comparison of the cumulative total
shareholder return on the Company’s common stock as measured against
(i) the Russell 2000 Index, (ii) the peer group included in last year’s
performance graph (the “2007 Peer Group”) and (iii) a new peer group
(the “2008 Peer Group”). The Company is not a component of the 2007
Peer Group or the 2008 Peer Group, but it is a component of the Russell
2000 Index. The measurement period begins on September 30, 2003 and
measures at each September 30 thereafter. These figures assume that all
dividends, if any, paid over the measurement period were reinvested, and
the starting value of each index and the investments in the Company’s
common stock were $100 at the close of trading on September 30, 2003.

ESCO Technologies inc.

Russell 2000 Index

2008 Peer Group

2007 Peer Group

The 2008 Peer Group is the same peer group as the “2007 Peer
Group”, except that (i) Tektronix Inc. was removed because it has
since been acquired by another company which does not operate
primarily in the Company’s lines of business, (ii) LeCroy Corporation
was added to replace Tektronix Inc., and (iii) Comverge Inc. and
Echelon Corporation were added because they are significant
companies in the Company’s Utility Solutions Group line of busi-
ness. The 2008 Peer Group is comprised of eight companies, which
correspond to the Company’s three industry segments as follows:
Utility Solutions Group segment (58% of the Company’s 2008
total revenue) — Badger Meter Inc., Itron Inc., Comverge, Inc.,
Echelon Corporation and Roper Industries Inc.; Test segment
(23% of the Company’s 2008 total revenue) — LeCroy Corporation;
and Filtration/Fluid Flow segment (19% of the Company’s 2008
total revenue) — Pall Corporation and Clarcor Inc.

ESCO Technologies Inc.

Russell 2000 Index

2008 Peer Group

2007 Peer Group

$300

250

200

150

100

9/03

9/04

9/05

9/06

9/07

9/08

9/03

9/04

9/05

9/06

9/07

9/08

100.00

149.68

221.21

203.40

146.85

212.81

100.00

118.77

140.09

154.00

173.00

147.94

100.00

110.70

145.56

161.98

226.98

195.22

100.00

117.33

154.44

176.68

243.05

228.31

The 2007 Peer Group as presented in the graph is comprised of
five companies, which correspond to two of the Company’s three
industry segments as follows: Filtration/Fluid Flow segment —
Pall Corporation and Clarcor Inc.; Utility Solutions Group seg-
ment — Badger Meter Inc., Itron Inc. and Roper Industries Inc.
The 2007 Peer Group as presented in last year’s graph also included
Tektronix Inc., which is excluded from this year’s graph for the
reason stated above.

In calculating the composite returns of the 2008 and 2007 Peer
Groups, the return of each company comprising each Peer Group is
weighted by (a) its market capitalization in relation to the other
companies in its corresponding Company industry segment, and
(b) the percentage of the Company’s 2008 total revenue represented
by its corresponding Company industry segment.

E S C O TE Ch nOlOg iE S inC.

2 0 0 8 A n n u Al REpO R T

Shareholders’ Summary

ShAREhOlDERS’ AnnuAl MEETing

inVESTOR RElATiOnS

The Annual Meeting of the Shareholders of ESCO Technologies
Inc. will be held at 9:30 a.m. Thursday, February 5, 2009, 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.

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.

CERTiFiCATiOnS

TRAnSFER AgEnT AnD REgiSTRAR

Pursuant to New York Stock Exchange (NYSE) requirements, the
Company submitted to the NYSE the annual certifications, dated
February 29, 2008 and February 23, 2007, 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, 2008 and
September 30, 2007.

10-K REpORT

A copy of the Company’s 2008 Annual Report on Form 10-K
filed with the Securities and Exchange Commission is available
to shareholders without charge. Direct your written request
to patricia K. Moore, Director of investor Relations, 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.

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 November 13, 2008.

inDEpEnDEnT REgiSTERED puBliC A CCOunTing FiRM

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

E S C O TE Ch nOlOg iE S inC.

2 0 0 8 A n n u Al REpO R T

Management and Board of Directors

ExEcutIvE OffIcErS

cOrpOrAtE StAff

victor L. richey
Chairman, Chief Executive
Officer, & President

Gary E. Muenster
Executive Vice President &
Chief Financial Officer

Mark S. Dunger
Vice President
Planning & Development

Deborah J. Hanlon
Vice President
Human Resources

charles J. Kretschmer
Vice President

richard A. Garretson
Vice President
Tax

Alyson S. Barclay
Senior Vice President,
Secretary & General Counsel

OpErAtInG ExEcutIvES

Bruce E. Butler
President
ETS-Lindgren LP

Sam r. chapetta
Filtration Group Vice President &
President
PTI Technologies Inc.

William M. Giacone
Vice President &
General Manager — Lindgren
ETS-Lindgren LP

Antonio E. Gonzalez
President
VACCO Industries

Bruce S. Kessler
President
Aclara Power-Line Systems Inc.

randall K. Loga
President
TekPackaging LLC

Kent A. Marty
General Manager
Comtrak Technologies, LLC

Gary L. Moore
President
Aclara RF Systems Inc.

Bruce A. phillips
Group President
Aclara Companies

Bryan Sayler
Senior Vice President &
General Manager — ETS
ETS-Lindgren LP

robert A. Smith
President
Doble Engineering Company

BOArD Of DIrEctOrS

James M. Mcconnell 2
Retired President &
Chief Executive Officer
Instron Corp.

James M. Stolze 2
Vice President &
Chief Financial Officer
Stereotaxis, Inc.

victor L. richey 1
Chairman, Chief Executive
Officer, & President

Larry W. Solley 3,4
Retired
Executive Vice President
Emerson Electric Co.

Donald c. trauscht 1,2,3,4
(Lead Director)
Chairman
BW Capital Corp.

James D. Woods 3
Chairman Emeritus &
Retired Chief Executive Officer
Baker Hughes Inc.

committee Membership

1 Executive Committee

2 Audit and Finance Committee

3 Human Resources and

Compensation Committee

4 Nominating and Corporate

Governance

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E S C O T E C h n O l O g i E S i n C . 2 0 0 8 A n n u A l R E p O R T

ESCO Technologies Inc.
9900A Clayton Road
St. Louis, MO 63124