Cautionary Statement

The Private Securities Litigation Reform Act of 1995 provides a "safe harbor" for forward-looking statements. Information in this Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations" and elsewhere in this 10-K that does not consist of historical facts are "forward-looking statements." Statements accompanied or qualified by, or containing, words such as "may," "will," "should," "believes," "expects," "intends," "plans," "projects," "estimates," "predicts," "potential," "outlook," "forecast," "anticipates," "presume," "assume" and "optimistic" constitute forward-looking statements and, as such, are not a guarantee of future performance. The statements involve factors, risks and uncertainties, the impact or occurrence of which can cause actual results to differ materially from the expected results described in such statements. Risks and uncertainties can include, among others, fluctuations in general business cycles and changing economic conditions; changing product demand and industry capacity; increased competition and pricing pressures; advances in technology that can reduce the demand for the Company's products, as well as other factors, many or all of which may be beyond the Company's control. Consequently, investors should not place undue reliance on forward-looking statements as predictive of future results. The Company disclaims any obligation to release publicly any updates or revisions to the forward-looking statements herein to reflect any change in the Company's expectations with regard thereto, or any changes in events, conditions or circumstances on which any such statement is based.

Application of Critical Accounting Policies and Estimates

The Company's consolidated financial statements and accompanying notes are prepared in accordance with U.S. generally accepted accounting principles. The preparation of the Company's financial statements requires management to make estimates, assumptions and judgments that affect the amounts reported. These estimates, assumptions and judgments are affected by management's application of accounting policies, which are discussed in Note 1. "Summary of Significant Accounting Policies" and elsewhere in the accompanying consolidated financial statements. As discussed below, our financial position or results of operations may be materially affected when reported under different conditions or when using different assumptions in the application of such policies. In the event estimates or assumptions prove to be different from actual amounts, adjustments are made in subsequent periods to reflect more current information. Management believes the following critical accounting policies affect the more significant judgments and estimates used in the preparation of the Company's financial statements.

Our ability to collect outstanding receivables from our customers is critical to our operating performance and cash flows. Accounts receivable are stated at an amount management expects to collect from outstanding balances. Management provides for probable uncollectible accounts through a charge to earnings and a credit to a valuation allowance based on its assessment of the current status of individual accounts after considering the age of each receivable and communications with the customers involved. Balances that are collected, for which a credit to a valuation allowance had previously been recorded, result in a current-period reversal of the earlier transaction charging earnings and crediting a valuation allowance. Balances that are still outstanding after management has used reasonable collection efforts are written off through a charge to the valuation allowance and a credit to accounts receivable in the current period. Historically, Management's estimates have been conservative, thus increasing the valuation allowance while collection efforts continue. The actual amount of accounts written off over the five year period ended May 31, 2009 equaled only 0.1% of sales for that period. While subsequent collection of amounts previously reserved has resulted in a reduction of the valuation allowance, the amounts have not been material. The balance of the valuation allowance decreased by $30,000 since May 31, 2008 to the current level of $42,000. Management does not expect the valuation allowance to materially change in the future for the current accounts receivable balance.

Inventory

Inventory is stated at the lower of average cost or market. Average cost approximates first-in, first-out cost.

Maintenance and other inventory represent stock that is estimated to have a product life-cycle in excess of twelve-months. This stock represents certain items the Company is required to maintain for service of products sold, and items that are generally subject to spontaneous ordering.

This inventory is particularly sensitive to technical obsolescence in the near term due to its use in industries characterized by the continuous introduction of new product lines, rapid technological advances and product obsolescence. Therefore, management of the Company has recorded an allowance for potential inventory obsolescence. Based on certain assumptions and judgments made from the information available at that time, we determine the amount in the inventory allowance. If these estimates and related assumptions or the market changes, we may be required to record additional reserves. Historically, actual results have not varied materially from the Company's estimates.

The provision for potential inventory obsolescence was $210,000 and $180,000 for the years ended May 31, 2009 and 2008.

Revenue Recognition

Sales are recognized when units are delivered or services are performed. Sales under fixed-price contracts are recorded as deliveries are made at the contract sales price of the units delivered. Sales under certain fixed-price contracts requiring substantial performance over several periods prior to commencement of deliveries, are accounted for under the percentage-of-completion method of accounting whereby revenues are recognized based on estimates of completion prepared on a ratio of cost to total estimated cost basis. Costs include all material and direct and indirect charges related to specific contracts. Other expenses are charged to operations as incurred. Total estimated costs for each of the contracts are estimated based on a combination of historical costs of manufacturing similar products and estimates or quotes from vendors for supplying parts or services towards the completion of the manufacturing process. Adjustments to cost and profit estimates are made periodically due to changes in job performance, job conditions and estimated profitability, including those arising from final contract settlements. These changes may result in revisions to costs and income and are recognized in the period in which the revisions are determined. Any losses expected to be incurred on contracts in progress are charged to operations in the period such losses are determined. If total costs calculated upon completion of the manufacturing process in the current period for a contract are more than the estimated total costs at completion used to calculate revenue in a prior period, then the revenue and profits in the current period will be lower than if the estimated costs used in the prior period calculation were equal to the actual total costs upon completion. Historically, actual results have not varied materially from the Company's estimates. In the fiscal year ended May 31, 2009, 42% of total revenue recognized was accounted for using the percentage-of-completion method of accounting while the remaining 58% of revenue was recorded as deliveries were made to our customers. In the fiscal year ended May 31, 2008, 47% of total revenue recognized was accounted for using the percentage-of-completion method of accounting while the remaining 53% of revenue was recorded as deliveries were made to our customers.

Income Taxes

The provision for income taxes provides for the tax effects of transactions reported in the financial statements regardless of when such taxes are payable. Deferred tax assets and liabilities are recognized for the expected future tax consequences of temporary differences between the tax and financial statement basis of assets and liabilities. The deferred tax assets relate principally to asset valuation allowances such as inventory obsolescence reserves and bad debt reserves and also to liabilities including warranty reserves, accrued vacation, accrued commissions and others. The deferred tax liabilities relate primarily to differences between financial statement and tax depreciation. Deferred taxes are based on tax laws currently enacted with tax rates expected to be in effect when the taxes are actually paid or recovered.

Realization of the deferred tax assets is dependent on generating sufficient taxable income at the time temporary differences become deductible. The Company provides a valuation allowance to the extent that deferred tax assets may not be realized. A valuation allowance has not been recorded against the deferred tax assets since management believes it is more likely than not that the deferred tax assets are recoverable. The Company considers future taxable income and potential tax planning strategies in assessing the need for a potential valuation allowance. In future years the Company will need to generate approximately $2.7 million of taxable income in order to realize our deferred tax assets recorded as of May 31, 2009 of $882,000. This deferred tax asset balance is $191,000 higher than at the end of the prior year primarily due to an increase in the difference between the book and tax inventory values. The amount of the deferred tax assets considered realizable however, could be reduced in the near term if estimates of future taxable income are reduced. If actual results differ from estimated results or if the Company adjusts these assumptions, the Company may need to adjust its deferred tax assets or liabilities, which could impact its effective tax rate. Historically, actual results have not varied materially from the Company's estimates.

The Company and its subsidiary file separate Federal and State income tax returns. As of May 31, 2009, the Company had State investment tax credit carryforwards of approximately $158,000 expiring through May 2015.

Results of Operations

A summary of the period to period changes in the principal items included in the consolidated statements of income is shown below:

Summary comparison of the years ended May 31, 2009 and 2008

                                                               Increase /
                                                               (Decrease)
                                              Sales, net     $  (1,856,000)
                                      Cost of goods sold     $   (346,000)
            Selling, general and administrative expenses     $   (593,000)
                                Other income / (expense)     $    49,000
        Income before provision for income taxes, equity
      in net income of affiliate, minority stockholder's
                         interest and extraordinary gain     $   (867,000)
                              Provision for income taxes     $   (288,000)
        Income before equity in net income of affiliate,
       minority stockholder's interest and extraordinary
                                                    gain     $   (580,000)
          Extraordinary gain, net of deferred income tax     $   (406,000)
                                              Net income     $   (961,000)

                                 Year ended                    Change
                         May 31, 2009   May 31, 2008    Increase /     Percent
                                                       (Decrease)     Change
           Net Revenue   $16,738,000    $18,594,000    $ (1,856,000)   -10%
         Cost of sales    12,078,000     12,424,000       (346,000)     -3%
          Gross profit   $  4,660,000   $  6,170,000   $ (1,510,000)    -24%
 †††as a percentage of      28%            33%
          net revenues

The Company's consolidated results of operations showed a 10% decrease in net revenues and a decrease in net income of 63%. Gross profit decreased by 24%. The net revenue, gross profit and net income levels reached for the year ended May 31, 2008 were record highs for the Company. Revenues recorded in the current period for long-term construction projects decreased by 19% from the level recorded in the prior year. This decrease is primarily due to fewer projects completed in the current year (15 in fiscal 2009; 31 in fiscal 2008) as well as smaller sales value for the projects completed. The average total order value of completed projects in fiscal 2009 was $258,000, down from $375,000 in fiscal 2008. Revenues recorded for all other product sales decreased by 2% from last year. The gross profit as a percentage of net revenues for the current and prior year periods was 28% and 33%, respectively.

Sales of the Company's products are made to three general groups of customers:
industrial, construction and aerospace / defense. A breakdown of sales to these three general groups of customers is as follows:

           2009             2008
  Industrial          11%   Industrial          12%
  Construction        49%   Construction        53%

Management attributes a large portion of the decrease in revenue to the current economic recession and its effect on the construction markets throughout the world. Several construction projects in the United States and in Asia that had been in the planning stages during the past year or more have been placed "on-hold" by their owners, citing the decline in demand for their buildings or an inability to secure the necessary financing to complete their projects. We maintain contact with these owners / contractors so that we will be in a position to work with them should their project resume activity. It is not possible to determine the amount of contracts which we may have been awarded had the construction projects not been placed "on-hold." A small number of customers have cancelled outstanding purchase orders with the Company. We include provisions in our contracts for the building projects that allow us to collect from the customer a pro-rata amount for work completed on a contract at the time of cancellation. These cancelled purchase orders are not expected to have a material impact on our operating results or cash flow. At May 31, 2008, we had 125 open sales orders in our backlog with a total sales value of $11.4 million. At May 31, 2009, we had 26% fewer open sales orders in our backlog (92 orders) but the total sales value is $13.1 million or approximately 15% higher than the prior year. $3.9 million of the current backlog is on projects already in progress. $2.6 million of the $11.4 million sales order backlog at May 31, 2008 was in progress at that date. In order to remain profitable during this down-turn in the economy, we are carefully watching our expenses to reduce them wherever possible.

Management is cautiously optimistic that the year-end sales order backlog will provide a strong start towards positive revenue growth and operating results for fiscal 2010 compared with fiscal 2009. 65% of the sales value in the backlog is for aerospace / defense customers compared to 50% at the end of fiscal 2008. The Company continues to be negatively affected by the slow global construction market. As a percentage of the total sales order backlog, orders from customers in construction accounted for 34% at May 31, 2009 and 46% at May 31, 2008.

Net revenue by geographic region, as a percentage of total net revenue for fiscal years ended May 31, 2009 and 2008 is as follows:

2009 2008
North America 77% North America 67%
Asia 19% Asia 27%
Other 4% Other 6%

Selling, General and Administrative Expenses


   Year ended   Change


                                     May 31, 2009   May 31, 2008    Increase /    Percent
                                                                   (Decrease)    Change
               Outside Commissions    $  792,000     $1,101,000    $  (309,000)   -28%
                        Other SG&A     2,979,000      3,263,000      (284,000)      -9%
                        Total SG&A    $3,771,000     $4,364,000    $  (593,000)    -14%

Selling, general and administrative expenses decreased by 14% from the prior year. Outside commission expense decreased by 28% over last year's level. Outside commission expense was lower in this period due to a lower level of sales. Other selling, general and administrative expenses decreased by 9% from last year.

The above factors resulted in operating income of $889,000 for the year ended May 31, 2009, down 51% from the $1,806,000 in the prior year.

Interest expense of $67,000 is 51% less than in the prior year. The average level of use of the Company's operating line of credit remained fairly constant from last year to this year at $1.4 million. The interest rate on the operating line of credit decreased 1.75 percentage points since May 31, 2008 to 3% at May 31, 2009.. The line of credit is used primarily to fund the production of larger projects that do not allow for advance payments or progress payments.

The Company's effective tax rate (ETR) is calculated based upon current assumptions relating to the year's operating results and various tax related items. The ETR for the fiscal year ended May 31, 2009 is 32.9%, almost identical to the ETR for the prior year of 33.1%. A reconciliation of provision for income taxes at the statutory rate to income tax provision at the Company's effective rate is as follows:

                                                             2009               2008
Computed tax provision at the expected statutory rate     $290,000    $  712,700
Effect of graduated Federal rates on subsidiary income     (10,400 )     (10,600 )
State income tax - net of Federal tax benefit                6,200         4,500
Tax effect of permanent differences:
   Equity in net income of affiliate                             -        (2,000 )
   Minority shareholder interest                                 -        12,400
   Extraordinary gain upon merger                                -      (137,600 )
   Other permanent differences                             (11,900 )     (37,600 )
Other                                                        7,400        27,200
                                                         $ 281,300    $  569,000

Merger with Tayco Developments

As noted in Item 1 above, the Company merged with Developments effective April 1, 2008.

In the merger, each outstanding share of Developments' common stock was converted into the right to receive one share of Taylor Devices, Inc. common stock. The Paid-in capital of the Company was increased for most of the value of the new shares of Company stock exchanged for shares of Developments' stock. This was offset considerably by the cancellation of the shares of the Company's stock that had been owned by Developments. The net increase in Paid-in capital for this transaction was $1,479,389. The per-share value of $5.12 was calculated as the average of the closing Bid and Ask prices on March 31, 2008. This same amount was used to value the Company's shares of stock that were received as Treasury stock in exchange for each share of Developments' stock that was owned by the Company.

A summary of the Company's common stock changes due to the merger follows:

                                                             Shares
of
                                                 Common     Common
Paid-in      Treasury
                                                  Stock        Stock
Capital       Stock

        Shares exchanged for Developments' shares    987,928     $24,698

Net change 62,044 $ 7,259 $1,479,389 ($1,168,983)

A significant change in the Company's Consolidated Statement of Income from last year to this year is the recording of an extraordinary gain that resulted from the merger. The $406,157 gain was calculated as the amount by which the value of the net assets acquired with Developments exceeded the total acquisition costs. The Equity in net income of affiliate and Minority stockholder's interest lines on the Consolidated Statement of Income were zero in the current year because the transaction occurred last year. The amounts reported on these lines for the prior year are not significantly different from a full year because the transaction occurred after ten months of the year were completed.

                                                 2009               2008
Consolidated Statement of Income items:
             Equity in net income of affiliate        $        -          $
12,016
             Minority stockholder's interest        $        -          $
36,430
            Extraordinary gain on the merger        $        -          $
406,157

Following the merger, the independent existence of Developments ended and Realty became a wholly owned subsidiary of the Company. The chart below shows the Company's equity interest in the affiliated companies prior to the merger and subsequent to the merger:

                                              Before Merger    After Merger
                 Tayco Developments, Inc.           23%            100%   Prior
to becoming part of the Company
                         Tayco Realty, Inc.           58%            100%

The Company has a stock option plan which provides for the granting of nonqualified or incentive stock options to officers, key employees and non-employee directors. Options granted under the plan are exercisable over a ten year term. Options not exercised by the end of the term expire.

On June 1, 2006, the Company adopted the stock option expensing rules of Statement of Financial Accounting Standards (SFAS) No. 123R, "Share Based Payment," using the fair value recognition provisions of SFAS No. 123, "Accounting for Stock-Based Compensation." The Company used the modified prospective approach of adoption under SFAS No. 123R which resulted in the recognition of $55,000 and $81,000 of compensation cost for the years ended May 31, 2009 and 2008.

The fair value of each stock option grant has been determined using the Black-Scholes model. The model considers assumptions related to exercise price, expected volatility, risk-free interest rate, and the weighted average expected term of the stock option grants. The Company used a weighted average expected term. Expected volatility assumptions utilized in the model were based on volatility of the Company's stock price for the thirty month period immediately preceding the granting of the options. The Company issued stock options in August 2008 and April 2009. The risk-free interest rate is derived from the U.S. treasury yield.

The following assumptions were used in the Black-Scholes model in estimating the fair market value of the Company's stock option grants:

                                                                         August
2008     April 2009
                                                 Risk-free interest
rate:         5.0%         3.875%
                                            Expected life of the options:
2.5 years       2.5 years
                                          Expected share price
volatility:         71%           89%
                                                   Expected dividends:
zero           zero

These assumptions resulted in estimated fair-market value per stock option: $1.94 $1.06

The ultimate value of the options will depend on the future price of the Company's common stock, which cannot be forecast with reasonable accuracy.

A summary of changes in the stock options outstanding during the year ended May 31, 2009 is presented below:

Weighted-
                                                                Number of
Average
                                                                 Options
Exercise Price
             Options outstanding and exercisable at May 31, 2008:
120,500            $ 5.30
                                               Options granted:
39,500            $ 4.01
             Options outstanding and exercisable at May 31, 2009:
160,000            $ 4.98

              Capital Resources, Line of Credit and Long-Term Debt

The Company's primary liquidity is dependent upon its working capital needs. These are primarily inventory, accounts receivable, costs and estimated earnings in excess of billings, accounts payable, accrued commissions, billings in excess of costs and estimated earnings, and debt service. The Company's primary sources of liquidity have been operations and bank financing.

Capital expenditures for the year ended May 31, 2009 were $676,000 compared to $565,000 in the prior year. The Company has no commitments to make any capital expenditures as of May 31, 2009.

º Through August 6, 2009, the Company had a $5,000,000 line of credit with a bank. There was a $1,017,000 principal balance outstanding as of May 31, 2009, up from the $879,000 balance outstanding as of May 31, 2008. The outstanding balance on the line of credit fluctuated as the Company's various long-term projects progressed

Effective August 7, 2009, the Company replaced its bank credit facility with a . . .