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 30, 2004 and September 27, 2003 and the results of its operations for the three and nine months ended June 30, 2004 and 2003 and its cash flows for the nine months ended June 30, 2004 and 2003. The results of operations for the three and nine months ended June 30, 2004 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 27, 2003. All references to years in these financial statements are to fiscal years.

As of December 31, 2003, the Company adopted FASB Interpretation No. 46 R, "Consolidation of Variable Interest Entities," revised in December 2003. The Company is the primary beneficiary of two variable interest entities and has accordingly consolidated these entities beginning December 31, 2003. The Company leases land and buildings from these variable interest entities that own the land and buildings and have the related debt. In the initial consolidation as of December 31, 2003, the Company recorded land and buildings, net of depreciation, of $13,526 and long-term debt, including current installments, of $9,279, reduced other assets by $4,252 and recorded other net liabilities of $32. The cumulative effect of this accounting change is a $37 pretax loss and is included in other expense as the amount is immaterial.

In December 2003, the FASB issued SFAS No. 132 R (revised), "Employers' Disclosures about Pensions and Other Postretirement Benefits." This statement requires revisions to employers' disclosures about pension plans and other postretirement benefit plans. It does not change the measurement or recognition provisions of SFAS No. 87 or SFAS No. 106. The interim period disclosure requirements were applied beginning in the Company's second quarter of 2004 and the annual disclosure requirements will be effective for 2004.

On September 30, 2003, the beginning of the Company's 2004 fiscal year, the Company acquired the net assets of the Poly-Scientific division of Litton Systems, Inc., a subsidiary of Northrop Grumman Corporation. Operating results for this acquisition have been included in the consolidated financial statements since that date. The acquired business is a manufacturer of motion control and data transmission devices. Its principal products are electrical and fiber optic slip rings, brushless D.C. motors and electromechanical actuators. The acquisition complements the Company's business in the design and manufacture of components and subsystems used in high-performance motion control systems in addition to extending product applications into the medical market.

On the acquisition date, the Company paid $158,000 in cash for the net assets. In the second quarter, the Company received a net amount of $5,981 from the seller representing a purchase price adjustment in accordance with the asset purchase agreement, resulting in an adjusted purchase price of $152,019.

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The following table summarizes the estimated fair values of the assets acquired and the liabilities assumed at the date of acquisition. This preliminary purchase price allocation will be finalized during fiscal 2004 after the Company completes its review of assets. The Company does not expect this review to have a material impact on the purchase price allocation.

After consideration of all types of intangibles that are typically associated with an acquired business, including those referenced in SFAS 141, a portion of the purchase price was ascribed only to those applicable identifiable intangible assets that had value. Customer relationships were valued using the discounted cash flow projections from new customers considering that many of Poly-Scientific's customers were already customers of the Company. Backlog was valued using the projected operating profit for firm customer orders after return on requisite assets, which provides for an annual return on net working capital, fixed assets, and intangible assets needed to support production. Patents and engineering drawings were valued with consideration given to the fact that the intellectual property is not a predominant business driver using an estimate of costs, including royalties, that were otherwise avoided due to the acquisition of such intellectual property with the assets of the acquired business. Based on these valuations, the Company's management concluded that intangible assets other than goodwill had a value of $6,810, or 4% of the purchase price.

The acquired intangible assets are all being amortized and have a weighted-average useful life of eight years. Customer-related intangible assets, including customer relationships and backlog, are $5,150 and have a weighted-average useful life of eight years. Technology-related intangible assets, including engineering drawings, patents and patent applications, are $1,660 and have a weighted-average useful life of ten years.

The resulting goodwill was $92,650, or 61% of the purchase price, reflecting the strong forecasted cash flows of the acquired operations. The acquired business has become a separate reporting segment, Components, and the entire amount of goodwill is included in that segment. The goodwill from this acquisition is deductible over fifteen years for tax purposes.

The following summary, prepared on a pro forma basis, combines the consolidated results of operations of the Company with those of the acquired business for the three and nine months ended June 30, 2003 as if the acquisition took place at the beginning of the fiscal year. The pro forma consolidated results include the impact of adjustments, including amortization of intangibles, increased interest expense on acquisition debt, additional shares of common stock outstanding and related income tax effects, among others. Pro forma net earnings for the nine months ended June 30, 2003 also include $1,087 of expense related to the step-up in inventory, all of which was assumed to be incurred in the first quarter following the acquisition as inventory turns over in one quarter.

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The pro forma results are not necessarily indicative of what actually would have occurred if the acquisition had been in effect for the three and nine months ended June 30, 2003. In addition, they are not intended to be a projection of future results.

The Company accounts for stock options under the intrinsic value method as prescribed by Accounting Principles Board 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. At June 30, 2004, the Company had outstanding interest rate swaps with a $180,000 notional amount, effectively converting that amount of variable-rate debt to fixed-rate debt. Of the $180,000 notional amount, $90,000 matures in the second quarter of 2005, $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 30, 2004, the interest rate swaps effectively convert these amounts of variable-rate debt to fixed-rate debt at 3.5%, 4.1% and 3.8%, 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 fiscal 2004 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 2004 or 2003. At June 30, 2004, the fair value of derivatives was a net asset of $522, most of which is included in other current assets and other assets. At September 27, 2003, the fair value of derivatives was a net liability of $1,956, most of which is included in accrued liabilities and other long-term liabilities.

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Effective December 2, 2003, the Company established a Stock Employee Compensation Trust (SECT) to assist in administering and provide funding for employee stock plans and benefit programs. During the third quarter of 2004, the Company made a loan to the SECT that the SECT used to purchase outstanding shares of Class B common stock. The SECT purchased 252,369 shares from members of the Moog family for $9,174 and 125,775 shares from Seneca Foods Corporation for $4,578. These purchases were based on the ten-day average market price of the stock prior to the transaction date. In addition, the SECT sold 20,000 shares of Class B common stock to the Savings and Stock Ownership Plan for $750. 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:

Preferred stock dividends are deducted from net earnings to calculate income available to common stockholders for earnings per share.

On September 16, 2003, the Company completed the sale of 3,018,750 shares of Class A Common Stock.

The Board of Directors approved a three-for-two stock split of the Company's Class A and Class B common shares effected in the form of a 50% share distribution paid on February 17, 2004 to shareholders of record on January 26, 2004. As a result, the number of Class A common shares outstanding increased from 15,237,995 to 22,856,443 and the number of Class B common shares outstanding increased from 2,092,541 to 3,138,626 on the distribution date. All share and per share amounts included in these financial statements have been restated to show the effects of the stock split.

The following should be read in conjunction with Management's Discussion and Analysis of Financial Condition and Results of Operations contained in the Company's Form 10-K for the fiscal year ended September 27, 2003 and its quarterly reports on Form 10-Q for the quarters ended March 31, 2004 and December 31, 2003. All references to years in this Management's Discussion and Analysis of Financial Condition and Results of Operations are to fiscal years.

The Company is a leading worldwide designer and manufacturer of high performance precision motion and fluid controls and control systems for a broad range of applications in aerospace and industrial markets. The Company operates under four segments, Aircraft Controls, Space Controls, Industrial Controls and Components. The Components segment is new in 2004 as a result of the acquisition of the Poly-Scientific division of Litton Systems, Inc. The Company's 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 one-third of the Company's 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 Controls segments, with the exception of aftermarket activity, due to the contracting nature of the business activities. Two-thirds of the Company's 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.

Management continuously looks for opportunities to capitalize on its technical strengths to expand its existing business in addition to growth through strategic acquisitions. The Company has a substantial established presence throughout Europe and the Pacific region and has the potential to market and distribute certain products to a wider customer base by utilizing its existing offices.

Challenges facing the Company include improving profitability while experiencing pricing pressures from customers, strong competition, and increases in certain costs, such as health care, retirement and corporate governance costs. Management addresses these challenges by continuing to improve its operating efficiencies through various process and manufacturing initiatives and using low cost manufacturing facilities without compromising quality.

The Board of Directors approved a three-for-two stock split of the Company's Class A and Class B common shares effected in the form of a 50% share distribution paid on February 17, 2004 to shareholders of record on 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 split.

On September 30, 2003, the Company acquired the Poly-Scientific division of Litton Systems, Inc., a subsidiary of Northrop Grumman. The adjusted purchase price was $152 million. The acquired business is a separate reporting segment, Components, and is a manufacturer of motion control and data transmission devices. Its principal products are electrical and fiber optic slip rings, brushless D.C. motors and electromechanical actuators.

On September 16, 2003, the Company completed the sale of 3,018,750 shares of Class A common stock at $25.33 per share. The Company used the net proceeds of $72 million to pay a portion of the Poly-Scientific purchase price.

Net sales increased 24% to $239 million in the third quarter of 2004 from $193 million in the third quarter of 2003. The acquisition of Poly-Scientific provided an incremental $33 million of sales in the third quarter of 2004. The remaining $13 million sales increase was generated primarily by an increase in Industrial Controls. Net sales increased 24% to $699 million in the first nine months of 2004 from $563 million in the first nine months of 2003. The Poly-Scientific acquisition provided an incremental $97 million of sales in the first nine months of 2004. Sales increased $30 million in Industrial Controls and $11 million in Aircraft Controls.

Gross margins decreased to 30.5% of sales in the third quarter of 2004 from 32.0% in the third quarter of 2003. A less favorable product mix in Aircraft Controls contributed to the lower gross margins. For the first nine months of 2004, gross margins decreased to 30.5% from 31.1% in the first nine months of 2003. Year-to-date margins were negatively affected by a less favorable product mix in Aircraft Controls and weaker first quarter gross margins. In the first quarter of 2004, Components incurred a $1.8 million charge related to inventory sold during the first quarter that was stepped up to fair value as part of the Poly-Scientific acquisition and margins in Space Controls reflected establishment of a contract loss reserve for the recall and repair of attitude control valves.

Gross margins can also be influenced by activity in contract loss reserves, especially additions to loss reserves associated with new loss contracts or substantial increases in cost estimates on existing contracts. For contracts with anticipated losses at completion, a provision for the entire amount of the estimated remaining loss is charged against income in the period in which the loss becomes known. At June 30, 2004, contract loss reserves were $14 million, including $10 million on aircraft development contracts and $3 million on satellites and strategic and tactical missile contracts, compared with $16 million at September 27, 2003. The decrease in contract loss reserves for the nine months ended June 30, 2004 resulted from $12 million of additions related to cost estimates on new and existing loss contracts less $14 million of reductions related to costs incurred that were charged against the previously established loss reserves. The additions to contract loss reserves for the nine months ended June 30, 2004 primarily relate to aircraft development contracts, including business jets and unmanned combat aerial vehicles, satellites programs and an investment in a tactical missile program. Comparatively, for the first nine months of 2003, additions to contract loss reserves were $11 million.

Selling, general and administrative expenses decreased to 17.1% of sales in the third quarter of 2004 from 18.1% in the third quarter of 2003. This decrease relates to lower selling, general and administrative expenses as a percentage of sales within the Components segment. Selling, general and administrative expenses increased to 17.4% in the first nine months of 2004 from 16.8% in the first nine months of 2003, related primarily to the Company's bid and proposal efforts, principally on the next generation commercial aircraft development on Boeing's 7E7, incurred largely in the second quarter of 2004. In the fourth quarter of 2004, these costs will shift to research and development expenses as the Company begins its development activities that are expected to continue for four years.

Operating margins were 11.5% in both the third quarters of 2004 and 2003. For the nine months ended June 30, operating margins decreased to 11.3% in 2004 from 11.8% in 2003. Operating margins declined in Aircraft Controls and Space Controls and improved in Industrial Controls.

Interest expense decreased to $2.9 million in the third quarter of 2004 from $3.5 million in the third quarter of 2003. Interest expense decreased to $8.9 million in the first nine months of 2004 from $14.3 million in the first nine months of 2003. The decrease in interest expense is primarily due to lower interest rates including the effects of the redemption of the Company's $120 million 10% senior subordinated notes on May 1, 2003.

Other expense was $0 in the third quarter of 2004 compared to $0.8 million in the third quarter of 2003. Other expense in the third quarter of 2003 included $1.2 million for the write off of deferred debt issuance costs related to the $120 million 10% senior subordinated notes that were redeemed at par on May 1, 2003, and was net of a $0.7 million gain on a sale of land. Other expense was $0.9 million in the first nine months of 2004 compared to $0.6 million in the first nine months of 2003.

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The Company's effective tax rate for the third quarter and first nine months of 2004 was 31.0% compared to 27.0% in the third quarter of 2003 and 27.5% in the first nine months of 2003. The effective tax rate was lower in 2003 due to additional export tax benefits associated with amended U.S. tax returns.

Net earnings increased 37% to $15 million in the third quarter of 2004 from $11 million in the third quarter of 2003, and increased 35% to $42 million in the first nine months of 2004 from $31 million in the first nine months of 2003. Diluted earnings per share increased 22% to $0.56 in the third quarter of 2004 from $0.46 in the third quarter of 2003, and increased 17% to $1.57 in the first nine months of 2004 from $1.34 in the first nine months of 2003. Average common shares outstanding for the third quarter and first nine months of 2004 increased primarily as a result of the sale of 3,018,750 shares of Class A common stock on September 16, 2003.

2004 Outlook - Net sales in 2004 are expected to increase 24% over 2003 to approximately $934 million, including $130 million related to the acquisition of Poly-Scientific. Sales are expected to increase $42 million in Industrial Controls and are expected to increase nominally in Aircraft Controls and Space Controls. Operating margins are forecasted to be 11.5%, fairly consistent with the 11.6% level achieved in 2003. The Company is forecasting that Industrial Controls will have a positive impact on margins compared to 2003, offset by lower margins in Space Controls and Aircraft Controls. Operating margins for Components are expected to exceed the average overall margin. Diluted net earnings per share are expected to be approximately $2.17 in 2004, an 18% increase over 2003.

2005 Outlook - Net sales in 2005 are expected to increase 4% to 6% to within a range of $967 million to $987 million. Sales are expected to increase by an amount between $19 million and $39 million in Industrial Controls, with more modest increases in the other three segments. Operating margins are expected to increase to approximately 12% in 2005. Compared to 2004, operating margins in 2005 are expected to be positively impacted by Space Controls, Industrial Controls and Components, offset by a slight decrease in Aircraft Controls. Diluted earnings per share are expected to increase 10% to 14% to within a range of $2.39 and $2.48.

Net sales in Aircraft Controls decreased 1% in the third quarter of 2004 to $102 million from $104 million in the third quarter of 2003. Within military aircraft, sales of controls for fighter aircraft decreased, offset by higher aftermarket sales. Sales of sub-assemblies and components for the F-15 in Japan were less than $1 million in the third quarter of 2004, decreasing $4 million from the third quarter of 2003. Since the third quarter of 2003, sales for the F-15 in Japan have been approximately $1 million each quarter. The Company has recently received a $13 million multi-year order for sub-assemblies and components for the F-15 in Japan, which is expected to increase sales in 2005. Sales of flight controls on the F-35 Joint Strike Fighter cost-plus development program decreased $2 million to $13 million and are trending down towards an average of approximately $11 million per quarter through 2005 as major design and development efforts move towards system integration testing of hardware. Since the beginning of the development program with Lockheed Martin, the Company has been teamed with key partners in the design of the flight controls for the F-35. As the contract lead for the flight controls, the Company's sales include costs incurred and invoiced by its partners, whose contributions relative to the Company's account for approximately half of the total development costs over the duration of this phase of the program that is expected to

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run through 2008. These decreases in military aircraft sales were offset by a $3 million increase in aftermarket sales primarily related to repair activities.

Net sales increased 4% in the first nine months of 2004 to nearly $307 million from $296 million in the first nine months of 2003. Military aircraft sales increased $25 million to $210 million, while commercial aircraft sales decreased $15 million to $96 million. Approximately half of the increase in military aircraft sales relates to the high level of activity on the Joint Strike Fighter program. Military aircraft sales also increased $4 million on the F/A-18E/F fighter aircraft program due to increased shipments associated with increasing demand for the Company's hardware as production quantities of this aircraft continue to increase at Boeing. Military aircraft sales increases also included $3 million for military engine controls as production quantities have increased for various military fighter aircraft including the F-18, $3 million on flight control hardware for the Indian Light Combat Aircraft, for which the Company recently received an order, and $3 million in aftermarket activity. In addition, military aircraft sales increased $3 million on the V-22 Tilt Rotor Osprey program, related to the replacement of swashplate actuators in accordance with the customer's specifications. Sales on the V-22 program will decrease in 2005 as the efforts associated with the replacement of swashplate actuators finishes in late 2004. These increases in sales were partially offset by a $7 million decrease in sales on the F-15 in Japan. Approximately half of the decrease in commercial aircraft sales was for Boeing OEM sales, as cost input was soft related to weak commercial airplane demand at Boeing. Sales on business jet development programs decreased $5 million as major programs are transitioning from development to production. In addition, solenoids sales decreased $4 million as last year's sales included a series of orders related to commercial aircraft cockpit door locks.

Operating margins for Aircraft Controls decreased to 14.7% in the third quarter of 2004 from 16.9% in the third quarter of 2003. Operating margins decreased to 15.5% in the first nine months of 2004 from 17.7% in the first nine months of 2003. The decreases reflect the mix of products sold. During the third quarter of 2003, margins were strong in part due to the high level of sales of the F-15 in Japan, which carries strong margins. In addition, during the first half of 2004, the Company incurred significant bid and proposal expenses associated with next generation commercial aircraft development on Boeing's 7E7.

Twelve-month backlog for Aircraft Controls was $228 million at June 30, 2004 compared to $242 million at June 30, 2003 reflecting declining development effort on the F-35 Joint Strike Fighter and the timing of receiving a new order on the F-18.

2004 Outlook for Aircraft Controls - Net sales in Aircraft Controls in 2004 are expected to be $410 million compared to $404 million in 2003; however, there will be some differences in product mix. Military aircraft sales, in particular those for fighter aircraft programs including the F-35, are expected to increase, offset by lower sales on the F-15 in Japan, while commercial aircraft sales, most notably Boeing OEM sales, are expected to decrease. Operating margins are expected to be 15.5% in 2004 compared to 17.4% in 2003, reflecting the higher proportion of sales on the F-35 cost-plus contract that has nominal fee income, lower sales on the profitable F-15 work in Japan and significant bid and proposal expenses associated with development work on Boeing's 7E7 in 2004.

2005 Outlook for Aircraft Controls - Net sales in Aircraft Controls in 2005 are expected to increase to $415 million. Commercial aircraft sales are expected to increase 13% to $148 million, while military aircraft sales are expected to decrease 4% to $267 million. Commercial aircraft sales increases are expected for aftermarket activities, Boeing OEM and business jet development programs. Military aircraft sales decreases are expected on the F-35 Joint Strike Fighter and the V-22 Osprey, offset partially by increases related to the new sub-assemblies order for the F-15 in Japan and in aftermarket activities. Operating margins are expected to be 15.3% in 2005.

Net sales in Space Controls decreased 3% to $63 million in the first nine months of 2004 from $65 million in the first nine months of 2003. Sales decreased $6 million for controls on missile defense programs and decreased $2 million on controls for satellites. These decreases were partially offset by a $6 million increase in sales of controls for tactical missiles on programs including Maverick, Hellfire and VT-1 due to increased production activity in 2004, most notably in the first quarter.

Operating margins for Space Controls decreased to a (1.6%) loss in the third quarter of 2004 compared to break-even in the third quarter of 2003. The loss resulted from recording a loss reserve for $1.2 million reflecting the amount of expected costs in excess of contract value upon being awarded a contract to develop fin controls on the Joint Common Missile program. Operating margins for Space Controls decreased to a (3.8%) loss in the first nine months of 2004 from a 2.0% profit in the first nine months of 2003 reflecting repair efforts on recalled attitude control valves for satellites, lower sales volume on satellites, recording a contract loss reserve on the Joint Common Missile program and $0.6 million of qualification test problems on two satellite contracts for mechanical actuation controls. Repair efforts on the recalled valves are continuing and are expected to be completed during 2004. Management has reviewed and addressed circumstances that led up to these problems and believes that these incidents are not reflective of work performed on other satellite contracts.

Twelve-month backlog for Space Controls was $67 million at June 30, 2004 compared to $55 million at June 30, 2003 and relates to increasing order input for satellites and launch vehicles.

2004 Outlook for Space Controls - Net sales in Space Controls in 2004 are expected to be $86 million compared to $84 million in 2003. The slight increase reflects a shift in sales towards tactical and strategic missiles, partially offset by lower sales in missile defense and to a lesser extent, satellite and launch vehicle programs. A (2.0%) operating loss is anticipated in Space Controls in 2004, reflecting the costs associated with the recall of attitude control valves and qualification test problems on satellites experienced in the first half of the year, recording a contract loss reserve on the Joint Common Missile program and offset by a recovery to positive margins in the last quarter of the year.

2005 Outlook for Space Controls - Net sales in Space Controls in 2005 are expected to increase to $89 million as sales for satellites increase more than decreases on tactical missile programs as production rates temporarily decline on programs including Hellfire, VT-1 and Maverick. Operating margins are expected to be a 2.7% profit in 2005.

Net sales in Industrial Controls increased 15% to $232 million in the first nine months of 2004 from $202 million in the first nine months of 2003. Stronger foreign currencies relative to the U.S. dollar in the first nine months of 2004 represented two-thirds of the increase in sales. The sales increase also reflects stronger sales in high-end specialty markets in addition to the strengthening economy for industrial products. Sales of controls increased for plastics making machinery, turbines, heavy industry, presses and metal forming equipment and in aftermarket and through distributors. These increases were partially offset by a decline in sales of controls for military ground vehicles related to the timing of funding from various governments.

Operating margins for Industrial Controls increased to 9.9% in the third quarter of 2004 from 6.7% in the third quarter of 2003. Operating margins for Industrial Controls increased to 9.6% in the first nine months of 2004 from 6.2% in the first nine months of 2003. These increases are primarily due to higher sales in Europe and in the Pacific.

Twelve-month backlog for Industrial Controls was $93 million at June 30, 2004 compared to $74 million at June 30, 2003. Backlog is increasing in Industrial Controls due to increasing demand for the Company's industrial controls in its specialty markets including military ground vehicles and simulators, the strengthening global industrial economy and stronger foreign currencies relative to the U.S. dollar.

2004 Outlook for Industrial Controls - Net sales in Industrial Controls are expected to increase 16% in 2004 to $308 million, reflecting stronger foreign currencies relative to the U.S. dollar, the Company's position in specialty markets and the recovery in the industrial hydraulics industry particularly in Europe and in the Pacific, offset by decreases in the military ground vehicles market. The Company expects sales to increase in the plastics, heavy industry and metal forming markets in addition to increases in sales of industrial controls through distributors. Operating margins in Industrial Controls are expected to increase to 9.8% in 2004 from 6.3% in 2003 primarily as a result of stronger sales volume.

2005 Outlook for Industrial Controls - Net sales in Industrial Controls are expected to increase between 6% and 12% to within a range of $327 million to $347 million in 2005, reflecting the continuation of growth realized in 2004. Sales increases are expected in every major product line, including defense controls and simulators for military flight training. Operating margins in Industrial Controls are expected to be approximately 10% in 2005 as costs for new marketing initiatives targeting long-term growth opportunities are expected to offset the benefits of increasing sales volume.

Operating margins were 14.1% in the third quarter and 11.7% in the first nine months of 2004. The year-to-date margins include $1.8 million of costs related to the step-up in inventory as part of acquisition accounting that affected only affected the first quarter of 2004.

Twelve-month backlog for Components increased to $51 million at June 30, 2004 from $46 million at March 31, 2004 and December 31, 2003 related to the timing of aircraft-related contract awards.

2004 Outlook for Components - Net sales in Components are expected to be $130 million in 2004, with operating margins of 12.3%.

2005 Outlook for Components - In 2005, net sales are expected to increase 4% to $136 million resulting from an increase in industrial business related to expected increases in medical sales and ground communication systems sales, partially offset by a decline in sales for products used in aircraft applications. Operating margins are expected to increase to 13.3%, related in part to $1.8 million of costs included in the 2004 operating profit for the step-up in inventory as part of acquisition accounting that will only affect 2004.

Cash flow from operations and available borrowing capacity provide the Company with resources needed to run its operations, continually invest in its business and take advantage of acquisition opportunities as they may arise.

Net cash provided by operating activities increased $42 million to $90 million in the first nine months of 2004 from $48 million in the first nine months of 2003. Approximately one-third of this increase relates to higher earnings adjusted for non-cash charges such as depreciation and amortization and provisions for losses. Depreciation and amortization was $27 million in the first nine months of 2004 compared to $22 million in the first nine months of 2003. The acquisition of Poly-Scientific contributed an incremental $3 million of depreciation and amortization in 2004. Provisions for losses were $20 million in 2004 compared to $19 million in 2003. In addition, changes in working capital in the first nine months of 2004 compared to the first nine months of 2003 improved, related primarily to strong receivables collections.

Net cash used by investing activities in 2004 includes the $152 million adjusted purchase price for the Poly-Scientific acquisition.

Capital expenditures were $25 million in the first nine months of 2004, including $4 million of assets acquired under capital leases, compared to $21 million in the first nine months of 2003.

Net cash provided by financing activities in 2004 includes $80 million of borrowings used to pay a portion of the purchase price for the Poly-Scientific acquisition. The remainder of the purchase price was paid with proceeds from the sale of Class A Common Stock late in 2003.

Effective December 2, 2003, the Company established a Stock Employee Compensation Trust (SECT) to assist in administering and provide funding for employee stock plans and benefit programs. During the third quarter of 2004, the Company made a loan to the SECT that the SECT used to purchase outstanding shares of Class B common stock. The SECT purchased 252,369 shares from members of the Moog family for $9.2 million and 125,775 shares from Seneca Foods Corporation for $4.6 million. These purchases were based on the ten-day average market price of the stock prior to the transaction date. In addition, the SECT sold 20,000 shares of Class B common stock to the Savings and Stock Ownership Plan for $0.8 million. 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.

In the third quarter of 2003, the Company completed the redemption of the $120 million 10% senior subordinated notes at par. The redemption was financed by using the unused portion of the credit facility.

The Company's largest credit facility is its U.S. facility that consists of a $75 million term loan and a $315 million revolver that had outstanding balances of $56 million and $257 million, respectively, at June 30, 2004. Interest on outstanding credit facility borrowings is based on LIBOR plus the applicable margin, which is currently 150 basis points. The credit facility expires on March 31, 2008 and requires quarterly principal payments on the term loan of $3.75 million. The credit facility is secured by substantially all of the Company's U.S. assets.

The U.S. credit facility provides that the undertaking of additional debt financing in certain circumstances will require the consent of lenders representing a majority of the total credit facility commitments. In recent years, the Company has demonstrated its ability to secure consents and modifications to access debt and capital markets. In addition, the Company has shown strong, consistent financial performance. Management believes that it will be able to undertake additional debt or equity financing as needed.

At June 30, 2004, the Company had $75 million of unused borrowing capacity, including $49 million from the U.S. credit facility after considering standby letters of credit.

Long-term debt to capitalization was 40% at June 30, 2004 compared to 35% at September 27, 2003. The ratio was low at September 27, 2003 due to receiving proceeds from an equity offering prior to year-end that were used to pay a portion of the purchase price of the Poly-Scientific acquisition just after year-end.

The Company believes its cash on hand, cash flows from operations and available borrowings under short and long-term lines of credit will continue to be sufficient to meet its operating needs for 2004.

The Company does not have any material off balance sheet arrangements that have or are reasonably likely to have a material future effect on its results of operations or financial condition.

The Company's contractual obligations and commercial commitments have not changed materially from the disclosures in the Company's Form 10-K for the year ended September 27, 2003 except with respect to the Company's acquisition of Poly-Scientific. The financing of the acquisition included $80 million of additional borrowings on the Company's credit facility, and a $21 million bridge loan that was fully repaid in the second quarter of 2004. The Components segment, acquired on September 30, 2003, also had purchase obligations that the Company assumed at that date of $11 million, primarily due in 2004 and 2005.

Nearly half of the Company's sales relate to global military defense or government funded programs. The duration of a military program can be as long as a decade or more and the barriers to entry are significant once the Company is baselined on a program. Contract awards are typically in annual buys and associated aftermarket business can be significant. Most of these sales are within Aircraft Controls and Space Controls.

Military programs are subject to funding through defense budgets and appropriations. Although U.S. Defense spending has increased measurably in recent years and is also forecasted to continue to increase, this spending is subject to annual Congressional authorization in addition to the changing priorities of new or different administrations. Further, if the particular area of program spending by the Department of Defense (DoD) does not include the programs on which the Company participates, the fact that overall spending is increasing is not relevant to the Company. Procurement and research and development spending by the DoD is what is relevant to the Company, and that accounts for only 36% of the 2004 DoD budget. From time to time, government programs can be terminated which can affect the Company's financial outlook. For example, during the second quarter of 2004, the RAH-66 Comanche helicopter program was terminated, reducing revenue projections by nearly $3 million in 2004 alone. The Company is also affected by delays in depot maintenance funding on U.S. programs such as the F-15 Eagle and the UH-60 Black Hawk helicopter for which the Company performs repair services.

During the third quarter of 2004, the Company was awarded a contract to develop fin controls for the Joint Common Missile program. This tactical missile program will replace both Hellfire and Maverick and will include a four-year design, development and risk-reduction phase before the start of production of 50,000 missiles over fifteen to twenty years.

The satellite and related launch vehicle markets are stable at present as the industry deals with overcapacity for high-speed telephone and internet communication. Activity is slowing down on the Space Shuttle program as the program stretches out and the restart of the launch schedule is delayed. As a result, the Company's contract for the refurbishment of the Space Shuttle flight will stretch out into 2008 compared the previous targeted completion in 2006.

Approximately one-third of the Company's sales are generated in industrial markets. Contract lead times are measured in weeks resulting in a relatively small backlog and difficulty in forecasting sales with reasonable certainty. Diversification of customers, product applications and geography help to soften the impact of sales changes within this portfolio of products. Industrial markets appear to be rebounding from the downturn of the past couple of years, particularly in Europe and in the Pacific. Demand has been strong for injection molding machines, especially in Asia, and steel mills are being constructed in China, increasing demand for steel mill gauge controls.

The U.S. military has a current focus on updating its flight training simulation capabilities, including the Army's Flight School XXI, a flight school for the 21^st century, and plans to spend $1 billion on simulation over the next twenty years. The Army's simulators use hydraulic equipment that is near end of life or in need of refurbishment, and electronic upgrades are difficult due to the age of the equipment. The Company has positioned itself to be able to develop electric motion systems based on industrial product technology in addition to providing hydraulic systems. The Company has received $18 million of new orders in 2004 for these simulator platforms and has more opportunities for further growth.