Edgar Filing: SERVOTRONICS INC /DE/

tenksb.htm

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D. C. 20549

FORM 10-KSB

X	ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2007

__	TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from _________________ to _________________.

Commission File No. 1-07109

	SERVOTRONICS, INC.
	(Name of small business issuer as specified in its charter)

Delaware		16-0837866
(State or other jurisdiction of		(I. R. S. Employer
incorporation or organization)		Identification No.)

1110 Maple Street, Elma, New York		14059
(Address of principal executive offices)		(Zip Code)

Issuer’s telephone number: 716-655-5990

Securities registered pursuant to Section 12(b) of the Act:

		Name of each exchange on
Title of each class		which registered

Common Stock, $.20 par value		American Stock Exchange

Securities registered pursuant to Section 12(g) of the Act: None

Check whether the issuer is not required to file reports pursuant to Section 13 or 15(d) of the Exchange Act. o

Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X . No ___.

Check if disclosure of delinquent filers in response to Item 405 of Regulation S-B is not contained in this form, and no disclosure will be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-KSB or any amendment to this Form 10-KSB. x

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ___. No X .

Issuer’s revenues for its most recent fiscal year: $31,378,000

As of February 29, 2008 the aggregate market value of the voting common stock held by non-affiliates of the registrant was $29,361,748.44 based on the average of sales prices reported by the American Stock Exchange on that day.

As of February 29, 2008 the number of $.20 par value common shares outstanding was 2,281,102.

DOCUMENTS INCORPORATED BY REFERENCE
Document		Part of Form 10-KSB
2008 Proxy Statement		Part III

Transitional Small Business Disclosure Format. Yes ___. No X .

TABLE OF CONTENTS

PART I

Item 1.	Description of Business …………………………………………………………………………………………………………………………………	3

Item 2.	Description of Properties…………………………………………………………………………………………………………………………………	7

Item 3.	Legal Proceedings…………………………………………………………………………………………………………………………………………	8

Item 4.	Submission of Matters to a Vote of Security Holders…………………………………………………………………………………………………	8

PART II

Item 5.	Market for Common Equity, Related Stockholder
	Matters and Small Business Issuer Purchases of Equity Securities……………………………………………………………………………	8

Item 6.	Management’s Discussion and Analysis or Plan of Operation……………………………………………………………………………………..	9

Item 7.	Financial Statements……………………………………………………………………………………………………………………………………..	17

Item 8.	Changes in and Disagreements with Accountants on
	Accounting and Financial Disclosure…………………………………………………………………………………………………………….	17

Item 8A(T).	Controls and Procedures………………………………………………………………………………………………………………………………..	17

Item 8B.	Other Information………………………………………………………………………………………………………………………………………..	18

PART III

Item 9.	Directors, Executive Officers, Promoters and Control Persons
	and Corporate Governance; Compliance with Section 16(a)
	of the Exchange Act………………………………………………………………………………………………………………………………..	19

Item 10.	Executive Compensation………………………………………………………………………………………………………………………………..	19

Item 11.	Security Ownership of Certain Beneficial Owners and
	Management and Related Stockholder Matters………………………………………………………………………………………………….	19

Item 12.	Certain Relationships and Related Transactions, and
	Director Independence……………………………………………………………………………………………………………………………..	20

Item 13.	Exhibits…………………………………………………………………………………………………………………………………………………....	20

Item 14.	Principal Accountant Fees and Services……………………………………………………………………………………………………………...	25

Signatures…………………………………………………………………………………………………………………………………………………………………………………..		26

Consolidated Financial Statements………………………………………………………………………………………………………………………………………………............		F1-F22

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PART I

Item 1. Description of Business

General

Servotronics, Inc. and its subsidiaries (collectively the “Registrant” or the “Company”) design, manufacture and market advanced technology products consisting primarily of control components and consumer products consisting of knives and various types of cutlery.

The Company was incorporated in New York in 1959. In 1972, the Company was merged into a wholly-owned subsidiary organized under the laws of the State of Delaware, thereby changing the Company’s state of incorporation from New York to Delaware.

Products

Advanced Technology Products

The Company designs, manufactures and markets a variety of servo-control components which convert an electrical current into a mechanical force or movement and other related products. The principal servo-control components produced include torque motors, electromagnetic actuators, hydraulic valves, pneumatic valves and similar devices, all of which perform the same general function. These are sold principally to the commercial aerospace, missile, aircraft and government related industries, as well as medical and industrial markets.

To fill most of its orders for components, the Company must either modify a standard model or design a new item in order to satisfy the customer’s particular requirements. The Company also produces unique products based on specifications provided by its customers. The Company produces under long-term contracts and other types of orders.

The Company also produces metallic seals of various cross-sectional configurations. These seals fit between two surfaces, usually metal, to produce a more secure and leak-proof joint. The Company manufactures these seals to close tolerances from standard and special alloy steels. Ductile coatings are often applied to the seals in order to increase their effectiveness.

From time to time, the Company has also produced other products of its own and/or of a given design to meet customers’ requirements.

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Consumer Products

The Company designs, manufactures and sells a variety of cutlery products. These products include a wide range of kitchen knives such as steak, carving, bread, butcher and paring knives for household use and for use in restaurants, institutions and private industry, and pocket and other types of knives for hunting, fishing and camping. The Company sells cutlery products to the U.S. Government and related agencies. These products include machetes, bayonets and other types of knives that are primarily for military use. The Company also produces and markets other cutlery items such as various specialty tools, putty knives, linoleum sheet cutters and field knives. The Company manufactures its cutlery products from stainless or high carbon steel in numerous styles, designs, models and sizes. Substantially all of the Company’s commercial cutlery related products are intended for the medium to premium priced markets.

The Company sells many of its cutlery products under its own brand names including “Old Hickory” and “Queen.”

Sales, Marketing and Distribution

Advanced Technology Products

The Company’s advanced technology products are marketed throughout the United States and in selected foreign markets. Products are essentially non-seasonal in nature. These products are sold to the United States Government, government prime contractors, government subcontractors, commercial manufacturers and end users. Sales are made primarily by the Company’s professional staff and a field engineering representative.

During the Company’s last fiscal year, sales of advanced technology products pursuant to subcontracts with prime or subcontractors for various branches of the United States Government or pursuant to prime contracts directly with the government accounted for approximately 17% of the Company’s total sales as compared to 18% in 2006. In 2007 and 2006, the Company’s sales of advanced technology products to one customer, including various divisions and subsidiaries of a common parent company, amounted to approximately 11% in 2007 and 14% in 2006. The Company also had sales to another customer that amounted to approximately 22% of total sales in 2007 and 23% in 2006. No other single customer represented more than 10% of the Company’s sales in any of these years.

The Company’s prime contracts and subcontracts with the United States Government are subject to termination for the convenience of the Government. In the event of such termination, the Company is ordinarily entitled to receive payment for its costs and profits on work done prior to termination. Since the inception of the Company’s business, less than 1% of its Government contracts have been terminated for convenience.

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Consumer Products

The Company’s consumer products are marketed throughout the United States. Consumer sales are moderately seasonal. Sales are to hardware, supermarket, variety, department, discount, gift and drug stores. The Company’s Consumer Products Group (CPG) also sells its cutlery products (principally machetes, bayonets, survival knives and kitchen knives) to various branches of the United States Government which accounted for approximately 29% of the Company’s total sales in 2007 as compared to 13% in 2006. No other single customer of the CPG represented more than 10% of the Company’s sales in 2007. The Company sells its products through its own sales personnel and through independent manufacturers’ representatives.

Business Segments

Business segment information is presented in Note 10, Business segments, of the accompanying consolidated financial statements.

Intellectual Properties

The Company has rights under certain copyrights, trademarks, patents, and registered domain names. In the view of management, the Company’s competitive position is not dependent on patent protection.

Research Activities

The amount spent by the Company in research and development activities during its 2007 and 2006 fiscal years was not significant.

Environmental Compliance

The Company does not anticipate that the cost of compliance with current environmental laws will be material.

Manufacturing

The Company manufactures its consumer products in Franklinville, New York and Titusville, Pennsylvania and its advanced technology products in Elma, New York.

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Raw Materials and Other Supplies

The Company purchases raw materials and certain components for its products from outside vendors. The Company is not generally dependent upon a single source of supply for any raw material or component used in its operations.

Competition

Although no reliable industry statistics are available to enable the Company to determine accurately its relative competitive position with respect to any of its products, the Company believes that it is a significant factor with respect to certain of its servo-control components. The Company’s share of the overall cutlery market is not significant.

The Company encounters active competition with respect to its products from numerous companies, many of which are larger in terms of manufacturing capacity, financial resources and marketing organization. Its principal competitors vary depending upon the customer and/or the products involved. The Company believes that it competes primarily with more than 20 companies with respect to its consumer products, in addition to foreign imports. To the Company’s knowledge, its principal competitors with regard to cutlery include World Kitchen, Inc., Benchmade Knife Company, Inc., Tramontina, Inc., Dexter-Russell Inc., W. R. Case & Sons Cutlery Company, Lifetime Hoan Corp., and Gerber.

The Company has many different competitors with respect to servo-control components because of the nature of that business and the fact that these products also face competition from other types of control components which, at times, can accomplish the desired result.

The Company markets most of its products throughout the United States and to a lesser extent in selected foreign markets. The Company believes that it competes in marketing its consumer products primarily on the basis of price, quality and delivery, and its control products primarily on the basis of operating performance, adherence to rigid specifications, quality, price and delivery.

Employees

The Company, at December 31, 2007, had approximately 265 employees of which approximately 250 are full time; 207 in Western New York and 43 in Pennsylvania. In excess of 83% of its employees are engaged in production, inspection, packaging or shipping activities. The balance are engaged in executive, engineering, administrative, clerical or sales capacities.

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Item 2. Description of Properties

The Company’s executive offices are located on premises leased by the Company at 1110 Maple Street, Elma, a suburb of Buffalo, New York. The Company owns, leases and/or has options on real property as set forth in the following table:

Number of

Principal buildings and Approx.

Approx. product type of floor area

Location acreage manufactured construction (sq. feet)

Elma, New York 38.4 Advanced 1-concrete block/ 82,000

technology steel

products

Franklinville, 12.7 Cutlery products 1-tile/wood

New York 1 concrete/metal

1 concrete block 154,000

Titusville,

Pennsylvania .4 Cutlery products 2-brick 25,000

In Elma, New York, the Company leases and/or has options on approximately 38.4 acres of land and a facility from a local industrial development agency. The lease is accounted for as a capital lease and entitles the Company to purchase the property for a nominal amount. The balance outstanding on the capital lease at December 31, 2007 was approximately $3.6 million. All of the above properties are covered by insurance.

See the accompanying consolidated financial statements, including Note 8, Commitments, thereto, for further information with respect to the Company’s lease commitments.

The Company possesses modern precision manufacturing and testing equipment suitable for the development, manufacture, assembly and testing of its advanced technology products. The Company uses computer-aided technology throughout its processes, procedures, designs, manufacturing and administrative functions. The Company designs and makes most of the tools, dies, jigs and specialized testing equipment necessary for the production of the advanced technology products. The Company also possesses automatic and semi-automatic grinders, tumblers, presses and miscellaneous metal finishing machinery and equipment for use in the manufacture of consumer products.

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Item 3. Legal Proceedings

There are no legal proceedings which are material to the Company currently pending by or against the Company other than ordinary routine litigation incidental to the business which is not expected to materially adversely affect the business or earnings of the Company.

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

None.

PART II

Item 5.

Market for Common Equity, Related Stockholder Matters and Small

Business Issuer Purchases of Equity Securities

(a)

Price range of common stock

The following table shows the range of high and low prices for the Company’s common stock as reported by the American Stock Exchange (symbol SVT) for 2007 and 2006.

		High		Low
2007
	Fourth Quarter	$	16.90	$	11.30
	Third Quarter		16.75		10.60
	Second Quarter		10.90		8.40
	First Quarter		10.45		8.20
2006
	Fourth Quarter	$	9.90	$	6.15
	Third Quarter		7.20		6.05
	Second Quarter		9.25		5.80
	First Quarter		10.30		4.70

(b)

Approximate number of holders of common stock

Title	Approximate number of
Of	record holders (as of
Class	December 31, 2007)

Common Stock, $.20 par value per share	542

(c)

Dividends on common stock

No cash dividends were paid in 2007 or 2006.

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(d)

Securities Authorized for Issuance Under Equity Compensation Plans

The following table sets forth the securities authorized for issuance under the Company’s equity compensation plans as of December 31, 2007.

			Number of securities
	Number of securities		remaining available for
	to be issued upon	Weighted-average	future issuance under
	exercise of outstanding	exercise price of	equity compensation
	options, warrants	outstanding options,	plans (excluding securities
	and rights	warrants and rights	reflected in column (a))
Plan category	(a)	(b)	(c)
Equity compensation
plans approved by

security holders	333,000	$3.503	17,000

Equity compensation
plans not approved

by security holders	180,900	$6.072	84,100
Total	513,900	$4.407	101,100

(e)

Company Re-purchases of Equity Securities

Period	Total Number of Shares Purchased	Average Price $ Paid Per Share	Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs	Maximum Number of Shares that may yet be Purchased under the Plans or Programs
2007 Total	83,866	9.57	83,866	55,643

In January 2006, the Board of Directors authorized the purchase of up to 250,000 shares of the Company’s outstanding common stock. The shares may be purchased in the open market or in privately negotiated transactions; and at times and in amounts that the Company deems appropriate. As of February 29, 2008, the Company has purchased 194,357 shares and there remain 55,643 shares available to purchase under this program.

Item 6.

Management’s Discussion and Analysis or Plan of Operation

Management Discussion

During the years ended December 31, 2007 and 2006, approximately 45% and 32% respectively of the Company’s revenues were derived from contracts with agencies of the U.S. Government or their prime contractors and their subcontractors. Sales of products sold for government applications have increased approximately $6,228,000 when comparing the results of 2007 to 2006 primarily due to increased shipments on previously reported contracts for CPG developed products. The Company believes that government involvement in military

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operations overseas will continue to have a direct impact on the financial results in both the Advanced Technology and Consumer Products markets. While the Company remains optimistic in relation to these opportunities, it recognizes that sales to the government are affected by defense budgets, the foreign policies of the U.S. and other nations, the level of military operations and other factors and, as such, it is difficult to predict the impact on future financial results. The Company’s commercial business is affected by such factors as uncertainties in today’s global economy, global competition, the vitality and ability of the commercial aviation industry to purchase new aircraft, the effects of terrorism and the threat of terrorism, market demand and acceptance both for the Company’s products and its customers’ products which incorporate Company-made components.

The Aerospace Industries Association (AIA) and various other sources state that the aircraft market is strong and, based on current backlog and aircraft order rates, will remain so in 2008. The Company’s Advanced Technology Group revenue increased approximately 8.3% for the year ended December 31, 2007 compared to the same period in 2006 due to a general increase amid existing and new customers as well as across various product lines. The ATG continues its aggressive business development efforts in its primary markets and is broadening its focus to include new – both domestic and foreign - markets that are consistent with its core competencies. Based on the success of these efforts and in conjunction with the onset of certain production programs, the ATG expects this upward trend in sales to continue into 2008.

The Company’s Consumer Products Group develops products for government and military applications. Forecasted procurements for certain of these items are forming the basis for projected deliveries in 2008. Procurement proposals and product development activities are ongoing. The CPG has significant contracts for CPG developed products for the military that required deliveries in 2007 and into 2008. These significant contracts accounted for approximately 84% of the growth in the consolidated revenues of the Company for the twelve month period ended December 31, 2007.

See also Note 10, Business segments, of the accompanying consolidated financial statements for information concerning business segment operating results.

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Results of Operations - Year 2007 as Compared to 2006

The following table sets forth for the period indicated the percentage relationship of certain items in the consolidated statement of operations to revenues and the period to period dollar ($000’s omitted) and percentage increase or decrease of such items as compared to the indicated prior period.


							Period to			Period to
	Relationship to						period			period
	revenue						$ increase			% increase
	year ended						(decrease)			(decrease)
	December 31,						year ended			year ended
	2007			2006				2007-2006			2007-2006
Revenue:
Advanced technology products		54.4	%		64.2	%	$	1,305			8.3	%
Consumer products		45.6			35.8			5,525			62.9
		100.0			100.0			6,830			27.8
Cost of goods sold, exclusive of depreciation		74.2			76.4			4,532			24.2
Gross profit		25.8			23.6			2,298			39.7
Selling, general and administrative		13.3			14.7			568			15.7
Interest		0.8			1.1			(11	)		(4.1	)
Depreciation and amortization		1.8			2.5			(66	)		(10.7	)
Other income, net		(0.5	)		(1.8	)		(297	)		(67.3	)
		15.4			16.5			788			19.4
Income before income tax provision		10.4			7.1			1,510			87.4
Income tax provision		3.9			2.6			554			87.7
Net income		6.5	%		4.5	%	$	956			87.2	%

The Company’s consolidated revenues increased approximately $6,830,000 or 27.8% for the twelve month period ended December 31, 2007 when compared to the same period in 2006. The increase in revenue is the result of increased shipments for commercial and government applications at the ATG as well as increased government related shipments of CPG products under existing contracts.

As shown in the above table, gross profit increased by 39.7% for the twelve month period ended December 31, 2007 compared to the same period in 2006. Increased sales volume is primarily the source for the dollar value increase in gross profit. Gross profit as a percentage of sales is affected by many factors including the mix of products sold in the period within the ATG and CPG as well as the composition of ATG and CPG sales to the total consolidated sales.

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Selling, general and administrative (SG&A) expenses that include variable costs increased for the twelve month period ended December 31, 2007 compared to the same period in 2006 by approximately $568,000. The increase in SG&A is primarily due to the increase in costs associated with the settlement of the Company’s qualified defined benefit plans at both the ATG and CPG of approximately $686,000. See also Note 5, Employee benefit plans, of the accompanying consolidated financial statements for further information on costs associated with the settlement.

Interest expense decreased for the twelve month period ended December 31, 2007 compared to the same period in 2006 due to the decrease in the average outstanding debt despite the increases in the market driven interest rates. Average debt outstanding will continue to decline as the Company repays its scheduled debt obligations and assuming the Company does not incur additional debt. See also Note 4, Long-term debt, of the accompanying consolidated financial statements for information on long-term debt.

Depreciation and amortization expense decreased approximately 10.7% for the twelve month period ended December 31, 2007 compared to the same period in 2006 due to variable estimated useful lives of depreciable property (as identified in Note 1, Summary of significant accounting policies, of the accompanying consolidated financial statements) as well as the amount and nature of capital expenditures in current and previous periods.

Components of other income include interest income on cash and cash equivalents, and other amounts not directly related to the sale of the Company’s products. The decrease in other income for the twelve month period ended December 31, 2007 when compared to the same twelve month period in 2006 is primarily due to a partial payment of an insurance recovery in 2006. There was no significant recovery in 2007.

The Company’s effective tax rate was 36.6% in 2007 and 37.0% in 2006. The effective tax rate in both years reflects state income taxes, permanent non-deductible expenditures and the tax benefit for manufacturing deductions allowable under the American Jobs Creation Act of 2004 as well as reductions in New York State’s statutory tax rate and income apportionment formula. See also Note 6, Income tax provision, of the accompanying consolidated financial statements for information concerning income taxes.

Net income increased $956,000 or 87.2% when comparing the twelve month period ended December 31, 2007 to the same period in 2006. The increase in income is the result of increased sales at both the ATG and CPG for products with favorable margins as well as the other factors as discussed above.

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Results of Operations - Year 2006 as Compared to 2005

The following table sets forth for the period indicated the percentage relationship of certain items in the consolidated statement of operations to revenues and the period to period dollar and percentage increase or decrease of such items as compared to the indicated prior period. Certain balances for the year ended December 31, 2005 were reclassified to conform with classifications adopted in the current year.

							Period to			Period to
	Relationship to						period			period
	Revenue						$ increase			% increase
	year ended						(decrease)			(decrease)
	December 31,						year ended			year ended
	2006			2005				2006-2005			2006-2005
Revenue:
Advanced technology products		64.2	%		59.7	%	$	2,107			15.4	%
Consumer products		35.8			40.3			(454	)		(4.9	)
		100.0			100.0			1,653			7.2
Cost of goods sold, exclusive of depreciation		76.4			74.5			1,715			10.1
Gross profit		23.6			25.5			(62	)		(1.1	)
Selling, general and administrative		14.7			16.6			(189	)		(5.0	)
Interest		1.1			1.0			31			13.2
Depreciation and amortization		2.5			3.0			(62	)		(9.1	)
Other income, net		(1.8	)		(4.5	)		(585	)		(57.0	)
		16.5			16.1			365			9.9
Income before income tax provision		7.1			9.4			(427	)		(19.8	)
Income tax provision		2.6			3.4			(160	)		(20.2	)
Net income		4.5	%		5.9	%	$	(267	)		(19.6	)%

The Company’s consolidated revenues increased approximately $1,653,000 or 7.2% for the 12 month period ended December 31, 2006 when compared to the same period in 2005. Increases in commercial shipments in combination with certain price increases at the Company’s ATG more than offset the decreases in revenue at the Company’s CPG. The decrease in revenues at the CPG resulted from the scheduled and previously reported essential completion of a significant government contract. Continued demand for the Company’s ATG products drive increases in revenues.

Gross margins for the twelve month period ended December 31, 2006 decreased by 1.1% as compared to 2005. This drop is directly related to the reduction in revenues and margins at the CPG segment as shown above. In 2007, the CPG received a $3 million order from a government prime contractor for deliveries into early 2008. This order is expected to have a positive effect on total revenues and margins in 2007. Gross margins are affected by many factors including the mix of products sold in the period within the ATG and CPG as well as the composition of ATG and CPG sales to the total consolidated sales and, consistent with accounting principles generally accepted in the United States of America (GAAP), the expensing of preproduction and development costs as they are incurred.

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Selling, general and administrative (SG&A) expenses include variable costs such as legal and professional. Although certain General and Administrative costs (i.e., professional, legal, salary and Section 404 related expenses,) decreased by approximately $360,000 in 2006, there were expanded sales/marketing activities which increased costs that partially offset these reductions at both the ATG and the CPG. Also, consistent with GAAP, these costs are expensed as they are incurred and because of this may result in timing differences and fluctuations from period to period. Therefore, these costs are not necessarily matched to their respective benefits.

Interest expense increased for the year ended December 31, 2006 when compared to the same period in 2005 because of increases in the market driven interest rates. Average debt outstanding was lower and will continue to decline as the Company repays its scheduled debt obligations and assuming the Company does not incur additional debt. See also Note 4, Long-term debt, of the accompanying consolidated financial statements for information on long-term debt.

Depreciation and amortization expense decreased approximately 9.1% for the year ended December 31, 2006 when compared to the same period in 2005 due to variable estimated useful lives of depreciable property as identified in Note 1, Summary of significant accounting policies, of the accompanying consolidated financial statements and the reduction in capital expenditures over the last three years.

Other income in 2006 includes approximately $220,000 of net recovery, from a previously reported defalcation; the amount of net recovery in 2005 was $795,000. Components of other income also include; interest income on cash and cash equivalents, and other minor amounts not directly related to the sale of the Company’s products.

The Company’s effective tax rate was 37% in 2006 and 2005. The effective tax rate in both years reflects state income taxes, permanent non-deductible expenditures and the tax benefit for extraterritorial sales as well as manufacturing deductions allowable under the American Jobs Creation Act of 2004. See also Note 6, Income tax provision, of the accompanying consolidated financial statements for information concerning income tax rates.

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Net income decreased $267,000 when comparing the year ended December 31, 2006 to the same period of 2005 due to the decrease of $369,000 in after tax, other income received in 2006 not related to the sale of the Company’s products. This decrease was offset by the positive results of increased consolidated revenues and the effects of cost containment activities that directly affect the after-tax reported income.

Liquidity and Capital Resources

The Company’s primary liquidity and capital requirements relate to working capital needs; primarily inventory, accounts receivable, capital expenditures for property, plant and equipment and principal and interest payments on debt.

At December 31, 2007, the Company had working capital of approximately $14,572,000 ($13,254,000-2006) of which approximately $4,879,000 ($4,104,000-2006) was comprised of cash and cash equivalents. In the twelve month period ended December 31, 2007, $2,450,000 in cash was generated from operations through an increase in net income as previously discussed as well as increases in certain accrual items for income taxes, employee compensation and related benefits. The primary uses of cash for the Company’s operating activities were from increases in accounts receivable and inventory aggregating $1,494,000 related to the timing of shipments of product.

The Company’s primary use of cash in its financing and investing activities in 2007 related to capital expenditures for equipment of approximately $485,000, principal payments on long-term debt of approximately $386,000 and investment in treasury shares of approximately $804,000. In January of 2006, the Company’s Board of Directors authorized the purchase by the Company of up to 250,000 shares of its common stock in the open market or in privately negotiated transactions. As of December 31, 2007, the Company has purchased 194,357 shares for approximately $1,721,900 under this program. The Company has financed this purchase program through its cash reserves. At December 31, 2007, there are no material commitments for capital expenditures.

The Company also has a $1,000,000 line of credit on which there is no balance outstanding at December 31, 2007 or 2006. If needed, this can be used to fund cash flow required for operations.

The Company believes that it has adequate internal and external resources available to fund expected working capital and capital expenditure requirements through fiscal 2008 as supported by the level of cash and cash equivalents and bank lines of credit.

Off Balance Sheet Arrangements

None.

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Critical Accounting Policies

The Company prepares its consolidated financial statements in accordance with GAAP. As such, the Company is required to make certain estimates, judgments and assumptions that the Company believes are reasonable based upon the information available. These estimates and assumptions affect the reported amounts of assets and liabilities as of the date of the consolidated financial statements and the reported amounts of revenues and expenses during the periods presented. Actual results could differ significantly from those estimates under different assumptions and conditions. The Company believes that the following discussion addresses the Company’s most critical accounting policies, which are those that are most important to the portrayal of the Company’s financial condition and results of operations and which require the Company’s most difficult and subjective judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain. Note 1, Summary of significant accounting policies, of the accompanying consolidated financial statements include a summary of the significant accounting policies used in the preparation of the consolidated financial statements.

New Accounting Pronouncements

Management reviewed recent accounting pronouncements and has not determined the effect these pronouncements will have on Financial Statement results. See Note 1, Summary of significant accounting policies, of the accompanying consolidated financial statements for further discussion of new accounting pronouncements.

Revenue Recognition

Revenues are recognized as services are rendered or as units are shipped at the designated FOB point consistent with the transfer of title, risks and rewards of ownership. Such purchase orders generally include specific terms relative to quantity, item description, specifications, price, customer responsibility for in-process costs, delivery schedule, shipping point, payment and other standard terms and conditions of purchase and may provide for progress payments based on in-process costs as they are incurred.

Inventories

Inventories are stated at the lower of standard cost or net realizable value. Cost includes all cost incurred to bring each product to its present location and condition, which approximates actual cost (first-in, first-out). Market provisions in respect to net realizable value and obsolescence are applied to the gross value of the inventory. Pre-production and start-up costs are expensed as incurred.

-16-

Employee Benefit Plans

The Company provides a range of benefits to its employees and retired employees. The Company records annual amounts relating to these plans based on calculations specified by GAAP, which includes various actuarial assumptions, such as discount rates, assumed rates of return on plan assets and health care cost trend rates. The Company believes that the assumptions utilized in recording its obligations under its plans are reasonable based on advice from its actuaries. As discussed in Note 5, Employee benefit plans, of the accompanying consolidated financial statements, the Company’s defined benefit plans were settled in 2007 with no future costs associated with them after 2007.

Use of Estimates

The preparation of the consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Such estimates include, but are not limited to, reserves and allowances for inventories and trade receivables. Actual results could differ from those estimates.

Item 7. Financial Statements

The consolidated financial statements of the Company which are included in this Form 10-KSB Annual Report are described in the accompanying Index to Consolidated Financial Statements on Page F1.

Item 8. Changes in and Disagreements with Accountants on Accounting and Financial

Disclosure

None.

Item 8A(T). Controls and Procedures

(i) Disclosure Controls and Procedures

The Company carried out an evaluation under the supervision and with the participation of its management, including the Company's Chief Executive Officer ("CEO") and Chief Financial Officer ("CFO"), of the effectiveness of the Company's disclosure controls and procedures as of December 31, 2007. Based upon that evaluation, the CEO and CFO concluded that the Company's disclosure controls and procedures are effective in timely alerting them to the material information relating to the Company (or the Company's consolidated subsidiaries) required to be included in the Company's periodic filings with the SEC, such that the information relating to the Company, required to be disclosed in SEC reports (i) is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms, and (ii) is accumulated and communicated to the Company's management, including the CEO and CFO, as appropriate to allow timely decisions regarding required disclosure.

-17-

(ii) Management's Report on Internal Control over Financial Reporting

The Company's management, with the participation of the Company's CEO and CFO, is responsible for establishing and maintaining adequate internal control over financial reporting. The Company's management has assessed the effectiveness of the Company's internal control over financial reporting as of December 31, 2007. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control - Integrated Framework. Based on this assessment management has concluded that, as of December 31, 2007, the Company's internal control over financial reporting is effective based on those criteria.

This annual report does not include an attestation report of the Company's registered public accounting firm regarding internal control over financial reporting because the management's report was not subject to attestation by the Company's registered public accounting firm pursuant to temporary rules of the SEC that permit the Company to provide only management's report in this annual report.

(iii) Changes in Internal Control Over Financial Reporting

There were no changes in the Company's internal control over financial reporting during the fourth quarter of 2007 that have materially affected, or are reasonably likely to affect, the Company's internal control over financial reporting.

Item 8B.

Other Information

None.

-18-

PART III

Item 9.

Directors, Executive Officers, Promoters and Control Persons and Corporate Governance; Compliance with Section 16(a) of the Exchange Act

Information regarding directors and executive officers of the Company, compliance with Section 16(a) of the Securities Exchange Act and the Company’s Audit Committee, its members and the Audit Committee financial expert is incorporated herein by reference to the information included in the Company’s definitive proxy statement if it is filed with the Commission within 120 days after the end of the Company’s 2007 fiscal year or such information will be included by amendment to this form 10-KSB.

Code of Ethics

The Company has adopted a Code of Ethics and Business Conduct that applies to all directors, officers and employees of the Company as required by the listing standards of the American Stock Exchange. The Code is available on the Company’s website at www.servotronics.com and the Company intends to disclose on this website any amendment to the Code. Waivers under the Code, if any, will be disclosed under the rules of the SEC and the American Stock Exchange.

Item 10. Executive Compensation

Information regarding executive compensation is incorporated herein by reference to the information included in the Company’s definitive proxy statement if it is filed with the Commission within 120 days after the end of the Company’s 2007 fiscal year or such information will be included by amendment to this form 10-KSB.

Item 11. Security Ownership of Certain Beneficial Owners and Management and Related

Stockholder Matters

Information regarding security ownership of certain beneficial owners and management is incorporated herein by reference to the information included in the Company’s definitive proxy statement if it is filed with the Commission within 120 days after the end of the Company’s 2007 fiscal year or such information will be included by amendment to this form 10-KSB.

Also incorporated by reference is the information in the table under the heading “Securities Authorized for Issuance Under Equity Compensation Plans” included in Item 5 of this Form 10-KSB.

-19-

Item 12. Certain Relationships and Related Transactions, and Director Independence

Information regarding certain relationships and related transactions and director independence is incorporated herein by reference to the information included in the Company’s definitive proxy statement if it is filed with the Commission within 120 days after the end of the Company’s 2007 fiscal year or such information will be included by amendment to this form 10-KSB.

Item 13. Exhibits

(a)	Exhibits

	Exhibit
	number	Presentation	Reference


	3(A)(1)	Certificate of Incorporation	Exhibit 3(A)(1) to 1996
			Form 10-KSB*

	3(A)(2)	Amendments to Certificate	Exhibit 3(A)(2) to 1996
		of Incorporation dated	Form 10-KSB*
		August 27, 1984

	3(A)(3)	Certificate of designation	Exhibit 4(A) to 1987
		regarding Series I	Form 10-K*
		preferred stock

	3(A)(4)	Amendments to Certificate	Exhibit 3(A)(4) to 1998
		of Incorporation dated	Form 10-KSB*
		June 30, 1998

	3(B)(1)	By-laws	Exhibit 3(B) to 1986
			Form 10-K*

	3(B)(2)	Amendment to By-laws	Exhibit 3.1 to Form 8-K
		dated January 2008	filed February 4, 2008*

	4.1(A)	First amended and restated	Exhibit 4(A) to 1993
		term loan agreement with	Form 10-KSB*
		Fleet Bank of New York
		dated October 4, 1993

	4.1(B)	Second amended and restated	Exhibit 4.1(B) to 1999
		term loan agreement with	Form 10-KSB*
		Fleet Bank of New York
		dated February 26, 1999

_____________________________________________________________

*Incorporated herein by reference (File No. 1-07109)

**Indicates management contract or compensatory plan or arrangement

-20-


Exhibit
number	Presentation	Reference

4.1(C)	First amendment to second	Exhibit 4.1(C) to 1999
	amended and restated term	Form 10-KSB*
	loan agreement with
	Fleet Bank of New York
	dated December 17, 1999

4.1(D)	Second amendment to a second	Exhibit 4.1(D) to 2004
	amended and restated term	Form 10-KSB*
	loan agreement with
	Fleet National Bank
	dated December 20, 2004

4.2(A)	Letter of Credit Reimbursement	Exhibit 4(B)(1) to
	Agreement with Fleet Bank	1994 10-KSB*
	dated December 1, 1994

4.2(B)	First Amendment and	Exhibit 4.2(B) to 1999
	Extension to Letter of	Form 10-KSB*
	Credit and Reimbursement
	Agreement with Fleet Bank
	of New York dated as of
	December 17, 1999

4.2(C)	Second Amendment and	Exhibit 4.2(C) to 2004
	Extension to Letter of	Form 10-KSB*
	Credit and Reimbursement
	Agreement originally dated
	December 1, 1994, with
	Fleet National Bank, dated as
	of December 20, 2004

4.3	Agency Mortgage and Security	Exhibit 4(B)(2) to
	Agreement dated as of	1994 10-KSB*
	December 1, 1994 from the
	Registrant and its subsidiaries

_____________________________________________________________

*Incorporated herein by reference (File No. 1-07109)

**Indicates management contract or compensatory plan or arrangement

-21-


Exhibit
number	Presentation	Reference

4.4	Guaranty Agreement dated as	Exhibit 4(B)(3) to
	of December 1, 1994 from	1994 10-KSB*
	the Registrant and its
	subsidiaries to the Erie
	County Industrial
	Development Agency
	(“ECIDA“), Norwest Bank
	Minnesota, N.A., as Trustee,
	and Fleet Bank

4.5	Shareholder Rights Plan	Exhibit 4 to Form
	dated as of August 27,	8-K filed August 27,
	2002	2002*

10(A)(1)	Employment contract for	Exhibit 10(A)(1) to Form
	Dr. Nicholas D. Trbovich,	8-K filed August 18,
	Chief Executive Officer	2005**

10(A)(2)	Amendment to employment	Exhibit 10(A)(2) to Form
	contract for Dr. Nicholas D.	8-K filed August 9,
	Trbovich, Chief Executive	2006**
	Officer

10(A)(4)	Employment contract for	Exhibit 10(A)(1) to Form
	Nicholas D. Trbovich, Jr.	8-K filed August 18,
		2005**
10(A)(5)	Amendment to employment	Exhibit 10(A)(5) to Form
		8-K filed July 6, 2007**

10(B)	Form of Indemnification	Exhibit 10(E) to 1986
	Agreement between the	Form 10-K*
	Registrant and each of
	its Directors and Officers**

10(C)(1)	Loan agreement between	Exhibit 10(C)(1)
	the Company and its	to 1991 Form 10-K*
	employee stock ownership
	trust, as amended

10(C)(2)	Stock purchase agreement	Exhibit 10(D)(2) to
	between the Company	1988 Form 10-K*
	and its employee
	stock ownership trust

_____________________________________________________________

*Incorporated herein by reference (File No. 1-07109)

**Indicates management contract or compensatory plan or arrangement

-22-

Exhibit
number	Presentation	Reference

10(D)(1)	2000 Employees Stock	Exhibit 10(D)(1)(a) to 2000
	Option Plan**	Form 10-KSB*

10(D)(2)	Stock Option Agreement	Exhibit 10(D)(2)(a) to 2000
	for Donald W. Hedges	Form 10-KSB*
	dated July 7, 2000**

10(D)(3)	Stock Option Agreement	Exhibit 10(D)(3)(c) to 2000
	for Nicholas D.	Form 10-KSB*
	Trbovich dated
	July 7, 2000**

10(D)(4)	Stock Option Agreement	Exhibit 10(D)(4)(a) to 2000
	for William H. Duerig	Form 10-KSB*
	dated July 7, 2000**

10(D)(9)	Land Lease Agreement	Exhibit 10(D)(9) to 1992
	between TSV, Inc.	Form 10-KSB*
	(wholly-owned subsidiary
	of the Registrant) and the
	ECIDA dated as of May 1,
	1992, and Corporate
	Guaranty of the Registrant
	dated as of May 1, 1992

10(D)(10)	Amendment to Land Lease	Exhibit 10(D) (11) to 1993
	Agreement and Interim	Form 10-KSB*
	Lease Agreement dated
	November 19, 1992

10(D)(11)	Lease Agreement dated as of	Exhibit 10(D)(11) to
	December 1, 1994 between	1994 10-KSB*
	the Erie County Industrial
	Development Agency
	(“ECIDA”) and TSV, Inc.

10(D)(12)	Sublease Agreement dated	Exhibit 10(D)(12) to
	as of December 1, 1994	1994 10-KSB*
	between TSV, Inc. and
	the Registrant

10(D)(13)(a)	2001 Long-Term Stock	Appendix A to 2001
	Incentive Plan	Proxy**

_____________________________________________________________

*Incorporated herein by reference (File No. 1-07109)

**Indicates management contract or compensatory plan or arrangement

-23-

Exhibit
number	Presentation	Reference

10(D)(13)(b)	Amendment to the 2001	Filed herewith
	Long-Term Stock
	Incentive Plan

21	Subsidiaries of the	Exhibit 21 to 2005
	Registrant	10-KSB*

23.1	Consent of Freed Maxick &	Filed herewith
	Battaglia, CPAs, P.C.
31.1	Certification of Chief Financial	Filed herewith

	Officer pursuant to
	Rule 13a-14 or 15d-14 of the
	Securities Exchange act of
	1934, as adopted pursuant to
	Section 302 of the Sarbanes-
	Oxley Act of 2002.

31.2	Certification of Chief Executive	Filed herewith
	Officer pursuant to
	Rule 13a-14 or 15d-14 of the
	Securities Exchange act of
	1934, as adopted pursuant to
	Section 302 of the Sarbanes-
	Oxley Act of 2002.

32.1	Certification of Chief Financial	Filed herewith
	Officer pursuant to 18 U.S.C.
	1350 as adopted pursuant to
	Section 906 of the Sarbanes-
	Oxley Act of 2002.

32.1	Certification of Chief Financial	Filed herewith
	Officer pursuant to 18 U.S.C.
	1350 as adopted pursuant to
	Section 906 of the Sarbanes-
	Oxley Act of 2002.

32.2	Certification of Chief Executive	Filed herewith
	Officer pursuant to 18 U.S.C.
	1350 as adopted pursuant to
	Section 906 of the Sarbanes-
	Oxley Act of 2002.

_____________________________________________________________

*Incorporated herein by reference (File No. 1-07109)

**Indicates management contract or compensatory plan or arrangement

-24-

The Company hereby agrees that it will furnish to the Securities and Exchange Commission upon request a copy of any instrument defining the rights of holders of long-term debt not filed herewith.

Item 14. Principal Accountant Fees and Services

Information regarding principal accountant fees and services is incorporated herein by reference to the information included in the Company’s definitive proxy statement if it is filed with the Commission within 120 days after the end of the Company’s 2007 fiscal year or such information will be included by amendment to this Form 10-KSB.

FORWARD-LOOKING STATEMENTS

In addition to historical information, certain sections of this Form 10-KSB contain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, such as those pertaining to the Company’s capital resources and profitability. Forward-looking statements involve numerous risks and uncertainties. The Company derives a material portion of its revenues from contracts with agencies of the U.S. Government or their prime contractors. The Company’s business is performed under fixed price contracts and the following factors, among others discussed herein, could cause actual results and future events to differ materially from those set forth or contemplated in the forward-looking statements: uncertainties in today’s global economy, global competition, difficulty in predicting defense appropriations, the vitality of the commercial aviation industry and its ability to purchase new aircraft, the willingness and ability of the Company’s customers to fund long-term purchase programs and market demand and acceptance both for the Company’s products and its customers’ products which incorporate Company-made components. The success of the Company also depends upon the trends of the economy, including interest rates, income tax laws, governmental regulation, legislation, population changes and those risk factors discussed elsewhere in this Form 10-KSB. Readers are cautioned not to place undue reliance on forward-looking statements, which reflect management’s analysis only as the date hereof. The Company assumes no obligation to update forward-looking statements.

-25-

SIGNATURES

In accordance with Section 13 or 15(d) of the Securities Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

SERVOTRONICS, INC.

March 27, 2008	By:	/s/ Nicholas D. Trbovich, President
		Nicholas D. Trbovich
		President, Chief Executive Officer
		and Chairman of the Board

In accordance with the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Company and in the capacities and on the dates indicated.


/s/ Nicholas D. Trbovich	President, Chief Executive	March 27, 2008
Nicholas D. Trbovich	Officer, Chairman of the
	Board and Director

/s/ Cari L. Jaroslawsky	Chief Financial Officer,	March 27, 2008
Cari L. Jaroslawsky	Treasurer

/s/ Donald W. Hedges	Director	March 27, 2008
Donald W. Hedges

/s/ William H. Duerig	Director	March 27, 2008
William H. Duerig

/s/ Nicholas D. Trbovich Jr.	Director	March 27, 2008
Nicholas D. Trbovich Jr.

-26-

SERVOTRONICS, INC. AND SUBSIDIARIES

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

Page


Report of Independent Registered Public Accounting Firm		F2

Consolidated balance sheets at December 31, 2007 and 2006		F3

Consolidated statements of operations for the years ended
December 31, 2007 and 2006		F4

Consolidated statements of cash flows for the years ended
December 31, 2007 and 2006		F5

Notes to consolidated financial statements		F6-F22

Consolidated financial statement schedules are omitted because they are not applicable or the required information is shown in the consolidated financial statements or the notes thereto.

-F1-

Report of Independent Registered Public Accounting Firm

To the Board of Directors

Servotronics, Inc. and Subsidiaries

We have audited the consolidated balance sheets of Servotronics, Inc. and Subsidiaries (the “Company”) as of December 31, 2007 and 2006, and the related consolidated statements of operations and cash flows for the years then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Servotronics, Inc. and Subsidiaries as of December 31, 2007 and 2006, and the results of their operations and their cash flows for each of the years then ended, in conformity with U.S. generally accepted accounting principles.

/s/ Freed Maxick & Battaglia, CPAs, P.C.

Buffalo, New York

March 27, 2008

-F2-

SERVOTRONICS, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

($000’s omitted except share and per share data)

Assets	December 31,
Current assets:	2007			2006
Cash and cash equivalents	$	4,879		$	4,104
Accounts receivable		4,570			4,226
Inventories		8,011			6,861
Deferred income taxes		411			545
Other assets		572			563

Total current assets		18,443			16,299

Property, plant and equipment, net		5,870			5,940

Other non-current assets		218			399
	$	24,531		$	22,638
Liabilities and Shareholders’ Equity
Current liabilities:
Current portion of long-term debt	$	387		$	384
Accounts payable		1,419			1,205
Accrued employee compensation and benefit costs		1,278			1,089
Accrued income taxes		489			47
Other accrued liabilities		298			320

Total current liabilities		3,871			3,045

Long-term debt		4,242			4,630

Deferred income taxes		412			515

Shareholders’ equity:
Common stock, par value $.20; authorized
4,000,000 shares; issued 2,614,506 shares;
outstanding 1,933,797 (1,991,600 – 2006) shares		523			523
Capital in excess of par value		13,033			13,033
Retained earnings		6,753			4,703
Accumulated other comprehensive loss		(67	)		(278	)
		20,242			17,981
Employee stock ownership trust commitment		(1,832	)		(1,933	)
Treasury stock, at cost 335,404 (251,538 – 2006) shares		(2,404	)		(1,600	)
Total shareholders’ equity		16,006			14,448
	$	24,531		$	22,638

See notes to consolidated financial statements

-F3-

SERVOTRONICS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

($000’s omitted except per share data)

	Year Ended
	December 31,
	2007			2006

Revenue	$	31,378		$	24,548

Costs, expenses and other income:
Cost of goods sold, exclusive of depreciation		23,294			18,762
Selling, general and administrative		4,184			3,616
Interest expense		255			266
Depreciation and amortization		551			617
Other income, net		(144	)		(441	)

		28,140			22,820

Income before income tax provision		3,238			1,728

Income tax provision		1,186			632

Net income	$	2,052		$	1,096

Income per share:

Basic
Net income per share	$	1.06		$	0.55

Diluted
Net income per share	$	0.96		$	0.51

See notes to consolidated financial statements

-F4-

SERVOTRONICS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

($000’s omitted)

	Year Ended
	December 31,
	2007			2006
Cash flows related to operating activities:
Net income	$	2,052		$	1,096
Adjustments to reconcile net income to net
cash provided by operating activities -
Depreciation and amortization		551			617
Receipt of treasury shares		-			(160	)
Deferred income taxes		245			(124	)
Change in assets and liabilities -
Accounts receivable		(344	)		(451	)
Inventories		(1,150	)		(303	)
Other assets		(9	)		367
Other non-current assets		181			249
Accounts payable		214			315
Accrued employee compensation and benefit costs		189			(27	)
Other accrued liabilities		(22	)		41
Non-current pension liabilities		-			(386	)
Accrued income tax		442			(282	)
Employee stock ownership trust payment		101			101
Net cash provided by operating activities		2,450			1,053
Cash flows related to investing activities:
Capital expenditures - property, plant and equipment		(485	)		(282	)
Net cash used in investing activities		(485	)		(282	)
Cash flows related to financing activities:
Principal payments on long-term debt		(386	)		(384	)
Purchase of treasury shares		(804	)		(920	)
Net cash used in financing activities		(1,190	)		(1,304	)
Net increase (decrease) in cash and cash equivalents		775			(533	)
Cash and cash equivalents at beginning of year		4,104			4,637
Cash and cash equivalents at end of year	$	4,879		$	4,104

Supplemental disclosures:


Income taxes paid	$	961	$	553
Interest paid	$	246	$	262

See notes to consolidated financial statements

-F5-

SERVOTRONICS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Summary of significant accounting policies

Principles of consolidation

The consolidated financial statements include the accounts of Servotronics, Inc. and its wholly-owned subsidiaries (the “Company”).

Cash and cash equivalents

The Company considers cash and cash equivalents to include all cash accounts and short-term investments purchased with an original maturity of three months or less.

Revenue recognition

Revenues are recognized as services are rendered or as units are shipped and at the designated FOB point consistent with the transfer of title, risks and rewards of ownership. Such purchase orders generally include specific terms relative to quantity, item description, specifications, price, customer responsibility for in-process costs, delivery schedule, shipping point, payment and other standard terms and conditions of purchase and may provide for progress payments based on in-process costs as they are incurred.

Inventories

Inventories are stated at the lower of standard cost or net realizable value. Cost includes all cost incurred to bring each product to its present location and condition, which approximates actual cost (first-in, first-out). Market provisions in respect of net realizable value and inventory expected to be used in greater than one year are applied to the gross value of the inventory through a reserve of approximately $646,000 and $269,000 at December 31, 2007 and 2006, respectively. Pre-production and start-up costs are expensed as incurred.

Shipping and handling costs

Shipping and handling costs are classified as a component of cost of goods sold.

-F6-

Property, plant and equipment

Property, plant and equipment is carried at cost; expenditures for new facilities and equipment and expenditures which substantially increase the useful lives of existing plant and equipment are capitalized; expenditures for maintenance and repairs are expensed as incurred. Upon disposal of properties, the related cost and accumulated depreciation are removed from the respective accounts and any profit or loss on disposition is included in income.

Depreciation is provided on the basis of estimated useful lives of depreciable properties, primarily by the straight-line method for financial statement purposes and by accelerated methods for tax purposes. Depreciation expense includes the amortization of capital lease assets. The estimated useful lives of depreciable properties are generally as follows:

Buildings and improvements	5-39 years
Machinery and equipment	5-15 years
Tooling	3-5 years

Income taxes

The Company accounts for income taxes in accordance with SFAS No. 109, “Accounting for Income Taxes”. SFAS No. 109 requires the recognition of deferred tax liabilities and assets for the expected future tax consequences of operating loss and credit carryforwards and temporary differences between the carrying amounts and the tax basis of assets and liabilities. The Company and its subsidiaries file a consolidated federal income tax return and separate state income tax returns.

Employee stock ownership plan

Contributions to the employee stock ownership plan are determined annually by the Company according to plan formula.

Impairment of long-lived assets

The Company reviews long-lived sassets for impairment whenever events or changes in business circumstances indicate that the carrying amount of the assets may not be fully recoverable based on undiscounted future operating cash flow analyses. If an impairment is determined to exist, any related impairment loss is calculated based on fair value. Impairment losses on assets to be disposed of, if any, are based on the estimated proceeds to be received, less costs of disposal. The Company has determined that no impairment of long lived assets existed at December 31, 2007 and 2006.

-F7-

Use of estimates

The preparation of the consolidated financial statements in conformity with accounting principles generally accepted in the United States of America (GAAP) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Research and development costs

Research and development costs are expensed as incurred as defined in SFAS No. 2, Accounting for Research and Development Costs.

New accounting pronouncements

In September 2006, the Financial Accounting Standards Board (FASB) issued Statement No. 157 “Fair Value Measurement”. This Statement defines fair value, establishes a framework for measuring fair value in GAAP, and expands disclosures about fair value measurements. In February of 2008, the FASB issued FASB Staff Position 157-2 which delays the effective date of SFAS 157 for non-financial assets and liabilities which are not measured at fair value on a recurring basis (at least annually) until fiscal years beginning after November 15, 2008. The Company is currently evaluating the impact of SFAS 157 on the Company’s consolidated financial statements.

In June 2006, the FASB issued Interpretation No. 48 “Accounting for Uncertainty in Income Taxes—an interpretation of FASB Statement No. 109” (“FIN 48”). This Interpretation clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements in accordance with FASB Statement No. 109, “Accounting for Income Taxes”. FIN 48 prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. This Interpretation also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition. The Company adopted the provisions of FIN 48 in the first quarter of fiscal 2007. The adoption of FIN 48 did not have a material impact on the Company's financial position, results of operations or cash flows.

-F8-

The Company's practice is to recognize interest and/or penalties related to income tax matters in income tax expense. The Company did not have any accrued interest or penalties included in its consolidated balance sheet at December 31, 2007 or 2006, and did not recognize any interest and/or penalties in its consolidated statement of operations during the year ended December 31, 2007.

The Company's tax years for 2004, 2005, and 2006 are subject to examination by the federal and state tax authorities. During 2007, the Internal Revenue Service concluded an examination of the Company’s 2005 federal income tax return. That examination resulted in a $3,000 tax refund to the Company.

In September 2006, the FASB issued SFAS No. 158 ("SFAS 158"), "Employers' Accounting for Defined Benefit Pension and Other Postretirement Plans—An Amendment of FASB No. 87, 88, 106 and 132(R)". SFAS 158 requires that the funded status of defined benefit postretirement plans be recognized in the company's balance sheet and changes in the funded status be reflected in comprehensive income. SFAS 158 provides for its recognition and disclosure elements to be effective as of the end of the fiscal year ending after December 15, 2006, and measurement elements of plan assets and benefit obligations to be effective for fiscal years ending after December 15, 2008. The Company adopted the recognition and disclosure elements of SFAS 158 during the year ended December 31, 2006, which did not have a material effect on our consolidated financial position, results of operations or cash flows.

In February 2007, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 159, The Fair Value Option for Financial Assets and Financial Liabilities (“SFAS No. 159”). SFAS No.159 permits companies to elect to follow fair value accounting for certain financial assets and liabilities in an effort to mitigate volatility in earnings without having to apply complex hedge accounting provisions. The standard also establishes presentation and disclosure requirements designed to facilitate comparison between entities that choose different measurement attributes for similar types of assets and liabilities. SFAS No. 159 is effective for fiscal years beginning after November 15, 2007. The Company is currently assessing the impact of SFAS No. 159 on the Company’s consolidated financial statements.

-F9-

Risk Factors

The aviation and aerospace industries as well as markets for the Company’s consumer products are facing new and evolving challenges on a global basis. The success of the Company depends upon the trends of the economy, including interest rates, income tax laws, governmental regulation, legislation, and other risk factors. In addition, uncertainties in today’s global economy, competition from expanding manufacturing capabilities and technical sophistication of low-cost developing countries, particularly in South and East Asia, currency policies in relation to the U.S. dollar of some major foreign exporting countries so as to maintain or increase a pricing advantage of their exports vis-à-vis U.S. manufactured goods, the effect of terrorism, difficulty in predicting defense and other government appropriations, the vitality of the commercial aviation industry and its ability to purchase new aircraft, the willingness and ability of the Company’s customers to fund long-term purchase programs, volatile market demand and the continued market acceptance of the Company’s advanced technology and cutlery products make it difficult to predict the impact on future financial results.

Financial instruments that potentially subject the Company to concentration of credit risks principally consist of cash accounts in financial institutions. Although the accounts exceed the federally insured deposit amount, management does not anticipate nonperformance by the financial institutions.

Fair Value of Financial Instruments

The carrying amount of cash and cash equivalents, accounts receivable, inventories, accounts payable and accrued expenses are reasonable estimates of their fair value due to their short maturity. Based on variable interest rates and the borrowing rates currently available to the Company for loans similar to its long-term debt, the fair value approximates its carrying amount.

-F10-

Inventories

	December 31,
	2007		2006
	($000’s omitted)

Raw materials and common parts, net of reserve	$	3,008	$	2,417
Work-in-process		3,885		3,655
Finished goods		1,118		945
		8,011		7,017
Less: common parts expected to be used
after one year (classified as long-term)		-		(156	)
	$	8,011	$	6,861

Property, plant and equipment

	December 31,
	2007			2006
	($000’s omitted)

Land	$	25		$	25
Buildings		6,638			6,553
Machinery, equipment and tooling		11,336			10,963
		17,999			17,541
Less accumulated depreciation and amortization		(12,129	)		(11,601	)
	$	5,870		$	5,940

Property, plant and equipment includes land and building under a $5,000,000 capital lease which can be purchased for a nominal amount at the end of the lease term. As of December 31, 2007, accumulated amortization on the building amounted to approximately $1,900,000. The associated current and long-term liabilities are discussed in Note 4, Long-term debt, of the consolidated financial statements. Depreciation expense for the year ended December 31, 2007 and 2006 amounted to $551,000 and $617,000, respectively. The Company believes that it maintains property and casualty insurance in amounts adequate for the risk and nature of its assets and operations and which are generally customary in its industry.

-F11-

4. Long-term debt

	December 31,
	2007			2006

	($000’s omitted)
Industrial Development Revenue Bonds; secured by an equivalent
letter of credit from a bank with interest payable monthly
at a floating rate (3.62% at December 31, 2007)(A)	$	3,640		$	3,810

Term loan payable to a financial institution;
interest at LIBOR plus 2%, (6.91% at December 31, 2007);
quarterly principal payments of $26,786 through the
fourth quarter of 2011		428			535

Term loan payable to a financial institution;
interest at LIBOR plus 2%, not to exceed 6.00% (6.00% at
December 31, 2007); quarterly principal payments
of $17,500; payable in full in the fourth quarter
of 2009; partially secured by equipment		290			360

Secured term loan payable to a government agency;
monthly payments of $1,950 including interest
fixed at 3% payable through fourth quarter of 2015		165			183

Secured term loan payable to a government agency;
monthly principal payments of approximately $1,645 with
interest waived payable through second quarter of 2012		106			126

		4,629			5,014

Less current portion		(387	)		(384	)

	$	4,242		$	4,630

(A) The Industrial Development Revenue Bonds were issued by a government agency to finance the construction of the Company’s headquarters/Advanced Technology facility. Annual sinking fund payments of $170,000 commenced December 1, 2000 and continue through 2013, with a final payment of $2,620,000 due December 1, 2014. The Company has agreed to reimburse the issuer of the letter of credit if there are draws on that letter of credit. The Company pays the letter of credit bank an annual fee of 1% of the amount secured thereby and pays the remarketing agent for the bonds an annual fee of .25% of the principal amount outstanding. The Company’s interest under the facility capital lease has been pledged to secure its obligations to the government agency, the bank and the bondholders.

Principal maturities of long-term debt are as follows: 2008 - $387,000, 2009 - $539,000, 2010 - $321,000, 2011 - $323,000, 2012 - $202,000 and thereafter - $2,855,000.

The Company also has a $1,000,000 line of credit on which there is no balance outstanding at December 31, 2007 or 2006.

-F12-

Certain lenders require the Company to comply with debt covenants as described in the specific loan documents, including a debt service ratio. At December 31, 2007 and 2006, the Company was in compliance with all of its debt covenants.

5.	Employee benefit plans

Employee stock ownership plan (ESOP)

Under the Company’s ESOP adopted in 1985, participating employees are awarded shares of the Company’s common stock based upon eligible compensation and minimum service requirements. Upon inception of the ESOP, the Company borrowed $2,000,000 from a bank and lent the proceeds to the trust established under the ESOP to purchase shares of the Company’s common stock. The Company’s loan to the trust is at an interest rate approximating the prime rate and is repayable to the Company over a 40-year term ending in December 2024. During 1987 and 1988, the Company loaned an additional $1,942,000 to the trust under terms similar to the Company’s original loan. Each year the Company makes contributions to the trust which the plan’s trustees use to repay the principal and interest due the Company under the trust loan agreement. Shares held by the trust are allocated in the aggregate to participating employees in proportion to the amount of the loan repayment made by the trust to the Company. Since inception of the ESOP, approximately 433,787 shares have been allocated, exclusive of shares distributed to ESOP participants. At December 31, 2007 and 2006, approximately 345,305 and 371,000 shares, respectively, purchased by the ESOP remain unallocated.

Related compensation expense associated with the Company’s ESOP, which is equal to the principal reduction on the loans receivable from the trust, amounted to $101,000 in 2007 and 2006. Included as a reduction to shareholders’ equity is the employee stock ownership trust commitment which represents the remaining indebtedness of the trust to the Company. Employees are entitled to vote allocated shares and the ESOP trustees are entitled to vote unallocated shares and those allocated shares not voted by the employees.

-F13-

Defined benefit plan

During the fourth quarter of 2007, the Company settled its defined benefit plans that were terminated on October 31, 2006. The Company recognized the curtailment/settlement in accordance with FAS No. 88 “Employers’ Accounting for Settlements and Curtailments of Defined Benefit Pension Plans and for Termination Benefits”. In the fourth quarter of 2007 the Company paid settlements in the form of cash to employees and retirees and through the purchase of nonparticipating annuity contracts.

The following tables summarize the benefit obligations, funded status, expenses and other related disclosures related to the Plans:


Measurement date	December 31,			December 1,
Change in benefit obligation	2007			2006

Benefit obligation at prior measurement date	$	512,882		$	526,265
Interest cost		8,843			28,918
Actuarial loss		11,983			8,265
Benefits paid (exclusive of settlements)		-			(17,375	)
Settlements		(533,708	)		(34,025	)
Benefit obligation at current measurement date	$	-		$	512,048

Change in fair value of plan assets
Plan assets at prior measurement date	$	508,575		$	388,623
Actual return (net of investment expenses)		(3,274	)		11,600
Employer contributions		28,407			223,395
Benefits paid (exclusive of settlements)		-			(17,375	)
Settlements		(533,708	)		(37,841	)
Plan assets at current measurement date	$	-		$	568,402

Funded status
Funded status	$	-		$	56,354
Unrecognized prior service cost		-			44,313
Unrecognized net loss		-			272,421
Unrecognized net transition obligation		-			29,638
Prepaid pension cost	$	-		$	402,726

Net periodic pension cost
Interest cost	$	8,843		$	28,918
Expected return on assets		(7,210	)		(16,475	)
Amortization of transition obligation		1,235			14,820
Recognized curtailment loss		6,128			19,190
Amortization of prior service cost		1,561			1,561
Recognized curtailment loss		56,335			-
Recognized settlement loss		304,011			20,614
Decrease in additional minimum liability		-			(385,601	)
Net periodic pension cost (income)	$	370,903		$	(316,973	)

-F14-


Weighted average assumptions
Discount rate prior measurement date		5.11	%		5.75	%
Discount rate current measurement date		5.11	%		5.75	%
Rate of compensation increase		n/a			n/a
Long-term rate of return		4.00	%		4.00	%

Additional Financial Statement Disclosures for SFAS No. 132 (R)

Plan Assets
Cash and cash equivalents	N/A				100.00	%
Total	N/A				100.00	%

Accumulated benefit obligation
Projected benefit obligation (PBO)	$	-		$	512,048
Accumulated benefit obligation (ABO)	$	-		$	512,048
Plan assets	$	-		$	568,402
Plan assets over ABO	$	-		$	56,354

	2007			2006
Federal statutory rate		34.0	%		34.0	%
Permanent differences and other		(1.9	%)		0.0	%
State income taxes (less federal effect)		4.5	%		3.0	%
Effective tax rate		36.6	%		37.0	%

	2007			2006
	($000’s omitted)
Inventories	$	235		$	174
Accrued employee compensation and benefit costs		264			172
Operating loss and credit carryforwards		17			165
Minimum pension liability		-			53
Other		10			2
Total deferred tax assets		526			566
Valuation allowance		(13	)		-
Net deferred tax asset		513			566
Minimum pension liability		(70	)		-
Property, plant and equipment		(444	)		(536	)
Total deferred tax liabilities		(514	)		(536	)
Net deferred tax (liability) asset	$	(1	)	$	30

Balance December
31, 2005	2,614,506		$523	$13,033	$3,609	($2,034)	($520)	($186)	$14,425
Comprehensive income:
Net income	-		-	-	$1,096	-	-	-	$1,096
Other comprehensive
loss, net of tax
Retirement benefits
adjustment	-		-	-	-	-	-	(92)	(92)
Total comprehensive income		-	-	-	-	-	-	-	1,004
Compensation expense	-		-	-	-	101	-	-	101
Purchase/receipt of
treasury shares	-		-	-	-	-	(1,080)	-	(1,080)
Other	-		-	-	(2)	-	-	-	(2)
Balance December
31, 2006	2,614,506		$523	$13,033	$4,703	($1,933)	($1,600)	($278)	$14,448
Comprehensive income:
Net income	-		-	-	$2,052	-	-	-	$2,052
Other comprehensive
income, net of tax
Retirement benefits
adjustment	-		-	-	-	-	-	211	211
Total comprehensive income	-		-	-	-	-	-	-	2,263
Compensation expense	-		-	-	-	101	-	-	101
Purchase/receipt of
treasury shares	-		-	-	-	-	(804)	-	(804)
Other	-		-	-	(2)	-	-	-	(2)
Balance December
31, 2007	2,614,506		$523	$13,033	$6,753	($1,832)	($2,404)	($67)	$16,006

					Weighted
			Weighted		Average		Aggregate
			Average		Remaining		Intrinsic
	Options		Exercise		Contractual		Value
	Outstanding		Price ($)		Life		($)

Outstanding as of December 31, 2005		513,900		4.41		6.29
Granted in 2006		-		-
Exercised in 2006		-		-
Forfeited in 2006		-		-

Outstanding as of December 31, 20065		513,900		4.41		56.29
Granted in 2007		-		-
Exercised in 2007		-		-
Forfeited in 2007		-		-

Outstanding as of December 31, 2007		513,900		4.41		4.29	5,186,539

Exercisable as of December 31, 2007		512,900		4.41		4.28	5,176,739

	Advanced Technology						Consumer Products
	Group						Group						Consolidated
	Year ended						Year ended						Year ended
	December 31,						December 31,						December 31,
	2007			2006			2007			2006			2007			2006
Revenues from unaffiliated customers	$	17,071		$	15,766		$	14,307		$	8,782		$	31,378		$	24,548
Profit (loss)	$	3,750		$	3,428		$	1,096		$	(592	)	$	4,846		$	2,836
Depreciation and amortization	$	(383	)	$	(445	)	$	(168	)	$	(172	)		(551	)		(617	)
Interest expense	$	(232	)	$	(239	)	$	(23	)	$	(27	)		(255	)		(266	)
Other income, net	$	113		$	335		$	31		$	106			144			441
General corporate expense														(946	)		(666	)
Income before income tax provision													$	3,238		$	1,728
Identifiable assets	$	15,684		$	15,396		$	8,846		$	7,242		$	24,530		$	22,638
Capital expenditures	$	222		$	111		$	263		$	171		$	485		$	282