YOU SHOULD READ THE FOLLOWING DISCUSSION AND ANALYSIS IN CONJUNCTION WITH OUR UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS INCLUDED IN ITEM 1 OF THIS DOCUMENT.
THIS MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS CONTAINS FORWARD-LOOKING STATEMENTS. SEE "FORWARD-LOOKING INFORMATION IS SUBJECT TO RISK AND UNCERTAINTY" FOR A DISCUSSION OF CERTAIN OF THE UNCERTAINTIES, RISKS AND ASSUMPTIONS ASSOCIATED WITH THESE STATEMENTS. GOODRICH AVIATION TECHNICAL SERVICES, INC. (ATS) HAS BEEN ACCOUNTED FOR AS A DISCONTINUED OPERATION. UNLESS OTHERWISE NOTED HEREIN, DISCLOSURES PERTAIN ONLY TO OUR CONTINUING OPERATIONS.
OVERVIEW
We are one of the largest worldwide suppliers of aerospace components, systems and services to the commercial and general aviation airplane markets. We are also a leading supplier of systems and products to the global defense and space markets. Our business is conducted globally with manufacturing, service and sales undertaken in various locations throughout the world. Our products and services are principally sold to customers in North America, Europe and Asia. Key Market Channels for Products and Services, Growth Drivers and Industry and our Highlights
We participate in three key market channels: commercial, regional, business and general aviation airplane original equipment (OE); commercial, regional, business and general aviation airplane aftermarket; and defense and space. Commercial, Regional, Business and General Aviation Airplane OE Commercial, regional, business and general aviation airplane OE includes sales of products and services for new airplanes produced by Airbus and Boeing, and regional, business and small airplane manufacturers.
The key growth drivers in this market channel include the number of orders for new airplanes, which will be delivered to the manufacturers' customers over a period of several years, OE manufacturer production and delivery rates and introductions of new airplane models such as the Boeing 787 and 747-8, the Airbus A380 and A350 XWB, the Embraer 190 and engine types such as the Pratt & Whitney Geared Turbofan engine.
We have significant sales content on most of the airplanes manufactured in this market channel. We have benefited from increased production rates and deliveries of Airbus and Boeing airplanes and from our substantial content on many of the regional and general aviation airplanes. Delivery of new Boeing aircraft in 2008 and beyond may be negatively impacted by the Boeing labor dispute with the International Association of Machinists and Aerospace Workers, which began on September 6, 2008.

While the commercial airline industry has been negatively impacted by the recent rise in fuel costs, the commercial airplane manufacturers still have a significant backlog of orders and continue to expect new order flow greater than new airplane deliveries in 2008. Airlines worldwide are expected to continue to take delivery of a significant number of new airplanes in 2008 and beyond to replace older aircraft and for additional capacity.
In August 2008, we announced a letter of intent with Rolls-Royce plc proposing the formation of a joint venture, which would develop and supply engine controls for Rolls-Royce aero engines. The proposed joint venture would combine our existing U.K.-based engine controls design and manufacturing business and Rolls-Royce's expertise in the integration of controls into the engine. We would retain the aftermarket products and services business associated with the joint venture's products.
Commercial, Regional, Business and General Aviation Airplane Aftermarket The commercial, regional, business and general aviation airplane aftermarket channel includes sales of products and services for existing commercial and general aviation airplanes, primarily to airlines and package carriers around the world.
The key growth drivers in this channel include worldwide passenger capacity growth measured by Available Seat Miles (ASM) and the size, type and activity levels of the worldwide airplane fleet. Other important factors affecting growth in this market channel are the age and types of the airplanes in the fleet and Gross Domestic Product (GDP) trends in countries and regions around the world. Capacity in the global airline system, as measured by ASMs, is expected to grow at about 4% in 2008. We expect that the global airplane fleet will continue to grow in 2008, as the OE manufacturers are expected to deliver more airplanes than are retired during 2008. However, ASM growth could deteriorate if airlines choose to fly their in-service airplanes less frequently due to high fuel prices, decreased demand and other factors.
While we have significant product content on most of the airplane models that are currently in service, we enjoy the benefit of having excellent positions on the newer, more fuel-efficient airplanes currently in service. These positions have enabled us to continue to have strong commercial aftermarket sales growth. Even though many airlines have announced that they will remove some of their older airplanes from their fleets, we do not expect these removals to have a significant impact on our results in 2008. These older airplanes, primarily MD-80s and 737 Classics, represent approximately 31% of the world's fleet of large commercial aircraft, but only 8% of our large commercial aftermarket sales, or about 2% of our total sales.
Defense and Space
Worldwide defense and space sales include sales to prime contractors such as Boeing, Northrop Grumman, Lockheed Martin, the U.S. Government and foreign companies and governments.
The key growth drivers in this channel include the level of defense spending by the U.S. and foreign governments, the number of new platform starts, the level of military flight operations and the level of upgrade, overhaul and maintenance activities associated with existing platforms.

The market for our defense and space products is global, and is not dependent on any single program, platform or customer. We anticipate fewer new fighter and transport aircraft platform starts over the next several years. We also anticipate that the introduction of the F-35 Lightning II and new helicopter platforms, along with upgrades on existing defense and space platforms, will provide long-term growth opportunities in this market channel. Additionally, we are participating in, and developing new products for, the rapidly expanding homeland security and intelligence, surveillance and reconnaissance sectors, which should further strengthen our position in this market channel. Long-term Sustainable Growth
We believe that we are well positioned to continue to grow overall sales due to:
• Awards for key products on important new and expected programs, including the Airbus A380 and A350 XWB, the Boeing 787 and 747-8, the Embraer 190, the Pratt & Whitney Geared Turbofan engine, the Dassault Falcon 7X and the Lockheed Martin F-35 Lightning II and F-22 Raptor;

• Growing commercial airplane fleet and strong positions on newer, more fuel-efficient airplanes, which should fuel sustained aftermarket strength;

• Balance in the large commercial airplane market, with strong sales to both Airbus and Boeing;

• Aging of the existing large commercial and regional airplane fleets, which should result in increased aftermarket support;

• Increased number of long-term agreements for product sales on new and existing commercial airplanes;

• Increased opportunities for aftermarket growth due to airline outsourcing;

• Growth in global maintenance, repair and overhaul (MRO) opportunities for our systems and components, particularly in Europe, Asia and the Middle East, where we have expanded our capacity; and

• Expansion of our product offerings in support of high growth areas in the defense and space market channel, such as helicopter products and systems and intelligence, surveillance and reconnaissance products.

Third Quarter 2008 Sales Content by Market Channel During the third quarter 2008, approximately 94% of our sales were from our three primary market channels described above. Following is a summary of the percentage of sales by market channel:

Airbus Commercial OE                                                            13 %
Boeing Commercial OE                                                            10 %
Regional, Business and General Aviation Airplane OE                              9 %

Total Commercial, Regional, Business and General Aviation Airplane OE           32 %

Large Commercial Airplane Aftermarket                                           29 %
Regional, Business and General Aviation Airplane Aftermarket                     7 %

Total Commercial, Regional, Business and General Aviation Airplane
Aftermarket                                                                     36 %

Total Defense and Space                                                         26 %

Other                                                                            6 %

Total                                                                          100 %

Results of Operations - Third Quarter 2008 as Compared to Third Quarter 2007

                                                          Third Quarter                     $              %
                                                    2008                 2007            Change         Change
                                                           (Dollars in millions, except diluted EPS)
Sales                                           $    1,772.3         $    1,601.7        $ 170.6           10.7

Segment operating income (1)                    $      321.7         $      275.9        $  45.8           16.6
Corporate general and administrative costs             (24.9 )              (39.7 )         14.8           37.3

Total operating income                                 296.8                236.2           60.6           25.7
Net interest expense                                   (25.3 )              (29.3 )          4.0           13.7
Other income (expense) - net                            (9.6 )              (12.5 )          2.9           23.2
Income tax expense                                     (94.1 )              (54.2 )        (39.9 )         73.6

Income from continuing operations                      167.8                140.2           27.6           19.7
Income (loss) from discontinued operations               0.2                (13.4 )         13.6          101.5

Net income                                      $      168.0         $      126.8        $  41.2           32.5

Effective tax rate                                      35.9 %               27.9 %

Diluted EPS:
Continuing operations                           $       1.33         $       1.10        $  0.23           20.9

Net income                                      $       1.33         $       0.99        $  0.34           34.3

(1) We measure each reporting segment's profit based upon operating income. Accordingly, we do not allocate net interest expense, other income (expense) - net and income taxes to our reporting segments. The company-wide Enterprise Resource Planning (ERP) implementation costs that are not directly associated with a specific business were not allocated to the segments. For a reconciliation of total segment operating income to total operating income, see Note 3, "Business Segment Information" to our Condensed Consolidated Financial Statements.

Sales
The sales increase in the third quarter 2008 as compared to the third quarter 2007 was driven by changes in each of our major market channels as follows:
• Large commercial airplane original equipment sales increased by approximately 1%;

• Regional, business and general aviation airplane original equipment sales increased by approximately 29%;

• Large commercial, regional, business and general aviation airplane aftermarket sales increased by approximately 13%; and

• Defense and space sales of both original equipment and aftermarket products and services increased by approximately 12%.

See "Business Segment Performance" section. Segment operating income
The segment operating income growth was generated by increased sales and improved operational performance in most business units as discussed in the "Business Segment Performance" section.
Corporate general and administrative costs Corporate general and administrative costs decreased for the third quarter 2008 as compared to the third quarter 2007 primarily due to lower share-based compensation as discussed below and lower non-qualified pension expense due to a favorable discount rate in 2008 compared to 2007. Net interest expense
Net interest expense decreased for the third quarter 2008 as compared to the third quarter 2007 primarily due to lower debt levels in 2008 as a result of the repayment, from operating cash flow, of $162 million of notes which matured in the second quarter 2008.
Other income (expense) - net
Other income (expense) - net decreased for the third quarter 2008 as compared to the third quarter 2007, primarily as a result of lower expenses related to previously owned businesses of approximately $3 million, primarily for environmental litigation and remediation costs.

Income from continuing operations
In summary, the change in income from continuing operations during the third quarter 2008 as compared to the third quarter 2007 was also impacted by the following items:

                                                                          Increase (Decrease)
                                                           Before               After                Diluted
                                                            Tax                  Tax                   EPS
                                                               (Dollars in millions, except diluted EPS)
Changes in estimates on long-term contracts             $       19.5         $       12.0         $         0.10

Lower share-based compensation                          $       13.4         $        8.2         $         0.06

Settlement of customer claims in 2007                   $      (21.6 )       $      (13.5 )       $        (0.10 )

Higher effective tax rate                               $          -         $      (15.6 )       $        (0.12 )

Changes in estimates on long-term contracts During the third quarter 2008 and 2007, we revised our estimates on certain of our long-term contracts, primarily in our aerostructures and aircraft wheels and brakes business units. These changes in estimates resulted in higher income of approximately $20 million in the third quarter of 2008 compared to the third quarter of 2007.
Share-based compensation
The decrease in share-based compensation was primarily due to the following:
• The impact of unfavorable changes in our share price, which resulted in lower expense of approximately $13 million; and

• Approximately $6 million of costs in 2007 related to the 2007 special stock options (see Note 17, "Share-Based Compensation", to our Condensed Consolidated Financial Statements); partially offset by

• Approximately $4 million of costs for retirement eligible individuals resulting from a change in the vesting requirements in 2008.

Settlement of customer claims
During the third quarter of 2007, we settled certain claims with a customer that did not recur in 2008.
Higher effective tax rate
For the third quarter of 2008, we reported an effective tax rate of 35.9%. For the third quarter 2007, we reported an effective tax rate of 27.9%, including a benefit of approximately 8 percentage points primarily related to the reversal of tax reserves associated with tax settlements. Income (loss) from discontinued operations The loss from discontinued operations for the third quarter 2007 included the estimated loss on the sale of ATS of approximately $14 million.

Effective tax rate
Our effective rate during the third quarter 2008 was not reduced for the benefit of the U.S. Research and Development Credit (R&D Credit), which became law on October 3, 2008. We estimate that the effective tax rate for 2008 would have been approximately 1 percentage point lower had we been able to consider the tax benefits associated with the R&D Credit.
Results of Operations - Nine Months Ended September 30, 2008 as Compared to Nine

Months Ended September 30, 2007

                                                        Nine Months Ended                   $              %
                                                    2008                 2007            Change         Change
                                                           (Dollars in millions, except diluted EPS)
Sales                                           $    5,366.6         $    4,724.4        $ 642.2           13.6

Segment Operating Income (1)                    $      940.3         $      762.4        $ 177.9           23.3
Corporate general and administrative costs             (80.5 )             (108.4 )         27.9           25.7

Total operating income                                 859.8                654.0          205.8           31.5
Net interest expense                                   (80.1 )              (88.3 )          8.2            9.3
Other income (expense) - net                           (32.2 )              (45.6 )         13.4           29.4
Income tax expense                                    (242.5 )             (156.9 )        (85.6 )         54.6

Income from continuing operations                      505.0                363.2          141.8           39.0
Income (loss) from discontinued operations               7.5                (11.8 )         19.3          163.6

Net income                                      $      512.5         $      351.4        $ 161.1           45.8

Effective tax rate                                      32.4 %               30.2 %

Diluted EPS:
Continuing operations                           $       3.97         $       2.84        $  1.13           39.8

Net income                                      $       4.03         $       2.75        $  1.28           46.5

(1) We measure each reporting segment's profit based upon operating income. Accordingly, we do not allocate net interest expense, other income (expense) - net and income taxes to our reporting segments. The company-wide Enterprise Resource Planning (ERP) implementation costs that are not directly associated with a specific business were not allocated to the segments. For a reconciliation of total segment operating income to total operating income, see Note 3, "Business Segment Information" to our Condensed Consolidated Financial Statements.

Sales
The sales increase in the nine months ended September 30, 2008 as compared to the nine months ended September 30, 2007 was driven primarily by growth in each of our major market channels as follows:
• Large commercial airplane original equipment sales increased by approximately 14%;

• Regional, business and general aviation airplane original equipment sales increased by approximately 26%;

• Large commercial, regional, business and general aviation airplane aftermarket sales increased by approximately 11%; and

• Defense and space sales of both original equipment and aftermarket products and services increased by approximately 12%.

See "Business Segment Performance" section. Segment operating income
The segment operating income growth was generated by increased sales and improved operational performance in most business units as discussed in the "Business Segment Performance" section.
Corporate general and administrative
Corporate general and administrative costs decreased for the nine months ended September 30, 2008 as compared to the nine months ended September 30, 2007, primarily due to lower share-based compensation as discussed below and lower non-qualified pension expense due to a favorable discount rate in 2008 compared to 2007.
Net interest expense
Net interest expense decreased for the nine months ended September 30, 2008 as compared to the nine months ended September 30, 2007 primarily due to the repayment, from operating cash flow, of $162 million of notes which matured in the second quarter 2008.
Other income (expense) - net
Other income (expense) - net decreased for the nine months ended September 30, 2008 as compared to the nine months ended September 30, 2007 primarily as a result of the following:
• Lower expenses related to previously owned businesses of approximately $10 million, primarily for environmental litigation and remediation costs; and

• Higher income from equity in affiliated companies of approximately $3 million;

Income from continuing operations
In summary, the change in income from continuing operations during the nine months ended September 30, 2008 as compared to the nine months ended September 30, 2007 was also impacted by the following items:

                                                                          Increase (Decrease)
                                                           Before               After                Diluted
                                                            Tax                  Tax                   EPS
                                                               (Dollars in millions, except diluted EPS)
Changes in estimates on long-term contracts             $       33.0         $       20.4         $         0.16

Lower share-based compensation                          $       29.8         $       18.1         $         0.14

Foreign exchange rate impact, including net
monetary asset remeasurement                            $      (19.4 )       $      (11.8 )       $        (0.09 )

Settlement of customer claims in 2007                   $      (21.6 )       $      (13.2 )       $        (0.10 )

Changes in estimates on long-term contracts During the nine months ended 2008 and 2007, we revised our estimates on certain of our long-term contracts, primarily in our aerostructures and aircraft wheels and brakes business units. These changes in estimates resulted in higher income of approximately $33 million in the nine months ended 2008 compared to the nine months ended 2007.
Share-based compensation
The decrease in share-based compensation was primarily due to the following:
• The impact of unfavorable changes in our share price, which resulted in lower expense of approximately $35 million; and

• Approximately $8 million of costs in 2007 related to the 2007 special stock options (see Note 17, "Share-Based Compensation", to our Condensed Consolidated Financial Statements); partially offset by

• Approximately $12 million of costs for retirement eligible individuals resulting from a change in the vesting requirements in 2008.

Foreign exchange rate impact
The net unfavorable foreign exchange impact was due to the following:
• Approximately $31 million relating to unfavorable foreign currency translation of net costs in currencies other than the U.S. Dollar, partially offset by approximately $4 million of higher net gains on cash flow hedges settled during the nine months ended September 30, 2008; partially offset by

• Approximately $24 million of increased net transaction gains relating to remeasuring monetary assets/liabilities into the local functional currency, partially offset by approximately $16 million of higher net losses on forward contracts we entered into to offset the impact of net monetary asset gains/losses.

Settlement of customer claims
During the nine months ended September 30, 2008, we settled certain claims with a customer that did not recur in 2008.
Income (loss) from discontinued operations The income from discontinued operations for the nine months ended September 30, 2008 included a gain from the sale of a previously discontinued operation for approximately $6 million. The loss from discontinued operations for the nine months ended September 30, 2007 included the estimated loss on the sale of ATS of approximately $14 million.

Effective tax rate
For the nine months ended September 30, 2008, we reported an effective tax rate of 32.4%, including a benefit of approximately 3 percentage points for amended state returns primarily for additional research and development credits and changes in apportionment and a benefit of approximately 3 percentage points related to amended returns following the settlement of a foreign tax audit. For the nine months ended September 30, 2007, we reported an effective tax rate of 30.2%, including a benefit of approximately 2 percentage points for the elimination of certain valuation allowances against net operation losses of a foreign subsidiary and a benefit of approximately 3 percentage points primarily related to the reversal of tax reserves associated with tax settlements. Our effective rate during the nine months ended September 30, 2008 was not reduced for the benefit of the R&D Credit, which became law on October 3, 2008. We estimate that the effective rate for 2008 would have been approximately 1 percentage point lower had we been able to consider the tax benefits associated with the R&D Credit.

2008 OUTLOOK
We expect the following results for the year ending December 31, 2008:

                                                          2008 Outlook             2007 Actual
Sales                                               $7.1 billion                $6.4 billion
Diluted EPS - Net Income                            $4.90 to $5.00 per share    $3.78 per share
Capital Expenditures                                $275 to $325 million        $282.6 million
Operating Cash Flow net of Capital Expenditures     65% of net income           64% of net income

Sales
We expect that full year 2008 sales will be approximately $7.1 billion. Our current market assumptions, for each of our major market channels, for the full year 2008, including sales resulting from recent acquisitions, compared with the full year 2007, include the following:
• Large commercial airplane OE sales are expected to increase by approximately 5% to 10%, depending on the outcome of the Boeing labor dispute;

. . .