The accompanying unaudited consolidated condensed financial statements have been prepared by management in accordance with generally accepted accounting principles and in the opinion of management contain all adjustments, consisting of normal recurring adjustments, necessary to present fairly the financial position of Moog Inc. as of June 25, 2005 and the results of its operations for the three and nine months ended June 25, 2005 and June 30, 2004 and its cash flows for the nine months ended June 25, 2005 and June 30, 2004. The results of operations for the three and nine months ended June 25, 2005 are not necessarily indicative of the results expected for the full year. The accompanying unaudited consolidated condensed financial statements should be read in conjunction with the financial statements and notes thereto included in the Company's Form 10-K for the fiscal year ended September 25, 2004. All references to years in these financial statements are to fiscal years.

In December 2004, the FASB issued SFAS No. 123 R (revised 2004), "Share-Based Payment," which is a revision of SFAS No. 123, "Accounting for Stock-Based Compensation." This statement will provide investors and other users of financial statements with more complete and neutral financial information by requiring that the compensation cost relating to share-based payment transactions be recognized in the financial statements. Statement 123(R) requires all share-based payments to employees, including grants of employee stock options, to be recognized in the income statement based on their fair values. This statement covers a wide range of share-based compensation arrangements including share options, restricted share plans, performance-based awards, share appreciation rights, and employee share purchase plans, and replaces FASB SFAS No. 123, "Accounting for Stock-Based Compensation," and supersedes Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees." SFAS No. 123, as originally issued in 1995, established as preferable a fair-value-based method of accounting for share-based payment transactions with employees. However, that statement permitted entities the option of continuing to apply the guidance in APB Opinion No. 25, as long as the footnotes to financial statements disclosed what net income would have been had the preferable fair-value-based method been used. SFAS No. 123(R) is effective for public companies (excluding small business issuers) at the beginning of the next fiscal year beginning after June 15, 2005. Upon adoption, all prior years for which SFAS No. 123 was effective may be, but are not required to be, restated. Based on options outstanding at June 25, 2005, the Company expects that diluted earnings per share will be negatively impacted by approximately $.05 per share for 2006.

In November 2004, the FASB issued SFAS No. 151 "Inventory Costs, an amendment of ARB No. 43, Chapter 4." The amendments made by this statement clarify that abnormal amounts of idle facility expense, freight, handling costs and wasted materials (spoilage) should be recognized as current-period charges and require the allocation of fixed production overheads to inventory based on the normal capacity of the production facilities. The provisions of this statement are effective for inventory costs incurred during fiscal years beginning after June 15, 2005. Earlier application is permitted for inventory costs incurred during fiscal years beginning after November 2004. The Company believes the adoption of this standard will not have a material impact on its results of operations or financial position.

The Company accounts for stock options under the intrinsic value method as prescribed by APB Opinion No. 25. The exercise price equals the market price of the underlying common shares on the date of grant and, therefore, no compensation expense is recognized. The following table illustrates the effect on net earnings and earnings per share as if the fair value method had been applied to all outstanding awards in each period.

Inventories consist of:

The Company uses derivative financial instruments to manage the risk associated with changes in interest rates that affect the amount of future interest payments. Interest rate swaps with a notional amount of $90,000 matured in the second quarter of 2005. At June 25, 2005, the Company had outstanding interest rate swaps with a $90,000 notional amount, effectively converting that amount of variable-rate debt to fixed-rate debt. Of the $90,000 notional amount, $55,000 matures in the second quarter of 2006 and $35,000 matures in the first quarter of 2007. Based on the applicable margin at June 25, 2005, the interest rate swaps effectively convert these amounts of variable-rate debt to fixed-rate debt at 3.8% and 3.6%, respectively, through their maturities, at which time the interest will revert back to variable rates based on LIBOR plus the applicable margin. Activity in Accumulated Other Comprehensive Loss (AOCL) related to derivatives held by the Company during the first nine months of 2005 is summarized below:

To the extent that the interest rate swaps are not perfectly effective in offsetting the change in the value of the interest payments being hedged, the ineffective portion of these contracts is recognized in earnings immediately. Ineffectiveness was not material in the first nine months of 2005 or 2004. The fair value of derivatives was a net asset of $1,198 and $248 at June 25, 2005 and September 25, 2004, respectively, most of which is included in other current assets and other noncurrent assets.

The Stock Employee Compensation Trust (SECT) assists in administering and provides funding for employee stock plans and benefit programs, including the Moog Inc. Savings and Stock Ownership Plan (SSOP). The shares in the SECT are not considered outstanding for purposes of calculating earnings per share. However, in accordance with the Trust agreement, the SECT trustee votes all shares held by the SECT on all matters submitted to shareholders.

Basic and diluted weighted-average shares outstanding are as follows:

On April 1, 2005, the Company distributed Class A and Class B Common Stock in a three-for-two stock split, effected in the form of a 50% share distribution to shareholders of record as of March 18, 2005. On February 17, 2004, the Company distributed Class A and Class B Common Stock in a three-for-two stock split, effected in the form of a 50% share distribution, to shareholders of record as of January 26, 2004. Share and per share amounts have been restated accordingly.

Preferred stock dividends are deducted from net earnings to calculate income available to common stockholders for earnings per share. On January 2, 2004, the 83,771 outstanding shares of Series B Preferred Stock automatically converted into 24,273 shares of Class A Common Stock.

The components of comprehensive income are as follows:

We are a leading worldwide designer and manufacturer of high performance, precision motion and fluid controls and control systems for a broad range of applications in the aerospace, defense and industrial markets. Our products and systems include military and commercial aircraft flight controls, satellite positioning controls, controls for steering tactical and strategic missiles, thrust vector controls for space launch vehicles and controls for positioning gun barrels and automatic ammunition loading for military combat vehicles. Our products are also used in a wide variety of industrial applications, including injection molding machines for the plastics markets, metal forming, power generating turbines, simulators used to train pilots and certain medical applications. We operate under four segments, Aircraft Controls, Space and Defense Controls, Industrial Controls and Components. Our principal manufacturing facilities are located in the United States, including facilities in New York, California, Utah, Virginia, North Carolina and Pennsylvania, and in Germany, England, Italy, the Philippines, Luxembourg, Japan, India and Ireland.

Revenue under long-term contracts, representing approximately one-third of our sales, is recognized using the percentage of completion, cost-to-cost method of accounting. This method of revenue recognition is associated with the Aircraft Controls and Space and Defense Controls segments due to the long term contractual  nature of the business activities, with the exception of their respective aftermarket activities. The remainder of our sales are recognized when the risks and rewards of ownership and title to the product are transferred to the customer, principally as units are delivered or as service obligations are satisfied. This method of revenue recognition is associated with the Industrial Controls and Components segments, as well as with aftermarket activity.

We intend to increase our revenue base and improve our profitability and cash flows from operations by building on our market leadership positions and by strengthening our niche market positions in the principal markets that we serve. We also expect to maintain a balanced, diversified portfolio in terms of markets served, product applications, customer base and geographic presence. Our strategy to achieve our objectives includes maintaining our technological excellence by building upon our systems integration capabilities while solving our customers' most demanding technical problems, growing our profitable aftermarket business, entering and developing new markets by using our broad expertise as a designer and supplier of precision controls, taking advantage of our global engineering, selling and manufacturing capabilities, striving for continuing cost improvements and capitalizing on strategic acquisition opportunities.

Challenges facing us include improving shareholder value through increased profitability while experiencing pricing pressures from customers, strong competition and increases in costs, such as health care, retirement and corporate governance costs. We address these challenges by focusing on strategic revenue growth and by continuing to improve operating efficiencies through various process and manufacturing initiatives and using low cost manufacturing facilities without compromising quality.

In the second quarter of 2005, we acquired an industrial systems engineering business and a commercial aircraft repair business. We expect incremental annual sales of approximately $5 million from these businesses.

On April 1, 2005, we distributed Class A and Class B Common Stock in a three-for-two stock split, effected in the form of a 50% share distribution, to shareholders of record as of March 18, 2005. On February 17, 2004, we distributed Class A and Class B Common Stock in a three-for-two stock split, effected in the form of a 50% share distribution, to shareholders of record as of January 26, 2004. All share and per share amounts included in Management's Discussion and Analysis of Financial Condition and Results of Operations have been restated to show the effects of the stock splits.

Our gross margin improved in the third quarter of 2005 from the same quarter last year, due primarily to higher volume. Our gross margin also improved in the first nine months of 2005 from the first nine months of 2004 due to the higher level of sales. In addition, our margin was low in Space and Defense Controls in the first quarter of 2004 due to a $1.8 million contract loss reserve established for the recall and repair of attitude control valves used on satellites. We were also negatively impacted in the first quarter of 2004 by the sale of inventory that included a $1.8 million step up to fair value as part of our acquisition of the Poly-Scientific division of Litton Systems, Inc., a Northrop Grumman subsidiary, on September 30, 2004. These factors were partially offset by a $1.8 million favorable scope change adjustment on a business jet development contract in the first quarter of 2004.

Research and development expenses increased in the third quarter and first nine months of 2005, predominantly related to increasing development activities on Boeing's next generation commercial aircraft, the 787 Dreamliner, and the X-47 unmanned combat aerial vehicle.

Selling, general and administrative expenses as a percentage of sales were higher in the third quarter of 2005 compared to the third quarter of 2004, related primarily to higher personnel costs, selling and marketing efforts including the Paris Air Show, tax consulting and Sarbanes-Oxley compliance costs. However, selling, general and administrative expenses as a percentage of sales were lower in the first nine months of 2005 compared to the first nine months of 2004, largely as a result of lower bid and proposal costs on Boeing's 787. Our bid and proposal efforts on the 787 were substantial through the second quarter of 2004 and our costs have since shifted to research and development on this program.

Interest expense was higher in the third quarter of 2005 compared to the third quarter of 2004. The higher level of interest expense relates to higher interest rates primarily associated with our public offering of $150 million of 6¼% senior subordinated notes due 2015 that we closed on January 10, 2005. We used the net proceeds to repay indebtedness under our bank credit facility. Interest expense was also higher in the first nine months of 2005 compared to 2004, as increases from higher interest rates, including the effect of the senior subordinated notes, were offset by lower levels of debt.

Our effective tax rate was lower in the third quarter of 2005 compared to the third quarter of 2004 due to additional research and development tax credits associated with amended U.S. tax returns filed in the third quarter of 2005. However, our effective tax rate was higher in the first nine months of 2005 compared to the same period one year ago due to higher foreign tax rates and reduced export tax benefits.

Net earnings increased 12% and diluted earnings per share increased 14% in the third quarter of 2005 compared to the third quarter of 2004. Net earnings and diluted earnings per share both increased 14% in the first nine months of 2005 compared to the first nine months of 2004. Weighted-average shares outstanding were lower in 2005 compared to 2004 primarily as a result of our Stock Employee Compensation Trust's purchase of outstanding Class B Common Stock in the third quarter of 2004.

The Space Controls segment was renamed Space and Defense Controls during the fourth quarter of 2004 and now includes the defense controls product line, which was previously included in Industrial Controls. All amounts have been restated to present defense controls within Space and Defense Controls.

Operating profit, as presented below, is net sales less cost of sales and other operating expenses excluding corporate expenses. Cost of sales and other operating expenses are directly identifiable to the respective segment or allocated on the basis of sales, manpower or profit. Operating profit is reconciled to earnings before income taxes in Note 14 of the Notes to Consolidated Condensed Financial Statements, included in this report.

Our operating margin for Aircraft Controls decreased in the third quarter and first nine months of 2005 from the same periods of 2004. The lower margin in the third quarter of 2005 primarily relates to research and development costs incurred related to the Boeing 787 program. The decrease in our operating margin for the first nine months of 2005 reflects higher research and development costs in addition to a scope change adjustment for a negotiation on a business jet development program, which had a favorable impact on our operating margin in the first quarter of 2004.

Twelve-month backlog for Aircraft Controls remained consistent from June 30, 2004 to June 25, 2005. Orders for the F-15 Eagle and commercial aircraft increased, but these increases were partially offset as we have worked down our backlog on the F-35 Joint Strike Fighter that is transitioning into the integration testing phase of the program.

2006 Outlook for Aircraft Controls - We expect net sales in Aircraft Controls to increase by 6% to $464 million in 2006, as commercial aircraft sales increase by $33 million and military aircraft sales decrease by $7 million. The expected increase in commercial aircraft sales relates to continuing growth in Boeing OEM sales and the ramp up of our business jet production activity. The expected decrease in military aircraft sales relates to reductions in F-15 deliveries and decreases on other fighter aircraft programs, such as the F-16, F-18 and Indian LCA, offset partially by an increase in aftermarket.

Our operating margin for Space and Defense Controls improved slightly in the third quarter of 2005 over the third quarter of 2004. Our operating margin for Space and Defense Controls increased significantly in the first nine months of 2005 from the first nine months of 2004. Increased volume, most notably on mechanisms for military satellite programs, and a $1.8 million contract loss reserve established in the first quarter of 2004 for the recall and repair of attitude control valves used on satellites, was responsible for the improved operating margins in the first nine months of 2005.

Twelve-month backlog for Space and Defense Controls was higher at June 25, 2005 compared to June 30, 2004, primarily reflecting strong orders on tactical and strategic missile programs and for defense controls.

2005 Outlook for Space and Defense Controls - We expect sales in Space and Defense Controls to increase to $125 million in 2005 from $116 million in 2004. The increase primarily relates to work on military satellite programs, although this activity is expected to slow down in the fourth quarter of 2005. We expect our operating margin to improve to 8.7% in 2005 from 2.8% in 2004, reflecting a higher level of sales of controls for military satellites and the absence of recall and repair efforts and the loss reserve for the Joint Common Missile program that we had in 2004.

2006 Outlook for Space and Defense Controls - We expect sales in Space and Defense Controls to increase 7% to $133 million in 2006. The expected increase in sales is driven by higher sales of defense controls and controls on tactical missiles. Sales for controls on tactical missiles are increasing related to a new order for Maverick fin controls, the resumption of the production on the TOW missile and the completion of production on the current order for the VT-1. These increases will be partially offset by a decrease in sales of controls for satellites as we complete most of our work near the end of 2005 on the military satellite programs that have contributed to our sales growth in 2005. We expect that our operating margin in 2006 will approximate the level achieved in 2005.

Our operating margins for Industrial Controls in the third quarter and first nine months of 2005 improved over the same periods in 2004 due to increased volume and product mix.

The higher level of twelve-month backlog for Industrial Controls at June 25, 2005 compared to one year ago relates in part to strong orders in heavy industry and material testing markets.

2005 Outlook for Industrial Controls - We expect our net sales in Industrial Controls to increase 13% to $317 million in 2005. Sales increases are expected in nearly every major product line, most notably for turbines, simulators for military flight training and heavy industry. Sales will also increase due to acquisitions of an industrial systems engineering business in the second quarter and of FCS Controls Systems, which is expected to close during the fourth quarter. We expect our operating margin to be 9.0% in 2005, a slight improvement over 8.6% in 2004.

2006 Outlook for Industrial Controls - We expect our net sales in Industrial Controls to increase between 15% and 21% over 2005 to within a range of $365 million to $385 million, an increase of $48 million to $68 million. Incremental sales from the acquisition of FCS are expected to be $32 million. Without the impact of the acquisitions, sales are forecasted to increase by 8% despite a stronger U.S. dollar relative to foreign currencies. Increases are also anticipated within most of the industrial markets we serve, with the larger increases expected in the sale of controls for material test and plastics making machinery. We expect our operating margin to be 9% to 10% in 2006, reflecting higher sales volume.

Our operating margin in Components increased in the third quarter and first nine months of 2005 compared to the third quarter and first nine months of 2004. The third quarter improvement reflects higher sales volume. The improvement in the first nine months of 2005 also resulted from a $1.8 million charge in the first quarter of 2004 for the step-up in inventory as part of acquisition accounting that did not affect any other quarters.