The following discussion should be read in conjunction with the information in the unaudited condensed consolidated financial statements and notes thereto included herein and Westinghouse Air Brake Technologies Corporation's Financial Statements and Management's Discussion and Analysis of Financial Condition and Results of Operations included in its Annual Report on Form 10-K for the year ended December 31, 2008, filed with the Securities and Exchange Commission on February 27, 2009.

OVERVIEW

Wabtec is one of the world's largest providers of value-added, technology-based products and services for the global rail industry. Our products are found on virtually all U.S. locomotives, freight cars and passenger transit vehicles, as well as in more than 100 countries throughout the world. Our products enhance safety, improve productivity and reduce maintenance costs for customers, and many of our core products and services are essential in the safe and efficient operation of freight rail and passenger transit vehicles. Wabtec is a global company with operations in 16 countries. In the first six months of 2009, about 38% of the Company's revenues came from customers outside the U.S.

Management Review and Future Outlook

Wabtec's long-term financial goals are to generate free cash flow in excess of net income, maintain a strong credit profile while minimizing our overall cost of capital, increase margins through strict attention to cost controls, and increase revenues through a focused growth strategy, including global and market expansion, new products and technologies, aftermarket products and services, and acquisitions. In addition, Management evaluates the Company's short-term operational performance through measures such as quality and on-time delivery.

The Company monitors a variety of factors and statistics to gauge market activity. The freight rail industry is largely driven by general economic conditions, which can cause fluctuations in rail traffic. These fluctuations can cause changes in demand for new locomotives and freight cars, and for aftermarket service and repair work. The passenger transit industry is primarily driven by government funding of projects and passenger ridership, which affect demand for new locomotives, subway cars and buses, and for aftermarket service and repair work.

Through the second quarter of 2009, conditions have remained generally stable in the Company's passenger transit rail markets, while conditions in the freight rail markets have declined significantly compared to 2008, due to the global recession. Through mid-July 2009, revenue ton-miles, in the U.S. freight rail industry have decreased 18%. As a result, demand for new locomotives and freight cars are significantly lower than in 2008. At June 30, 2009, the U.S. industry backlog of freight cars ordered was 21,558 compared to 31,921 at the end of the prior year. Less than 20% of the Company's revenues are directly related to deliveries of new freight cars. In the passenger transit rail market, ridership in the U.S. was down about 1% in the first quarter due to the economic slowdown, but U.S. federal government funding was expected to increase 6% for the year. This increase in funding has helped the Company build a strong backlog of transit projects. In addition, the Company has continued to expand its passenger transit capabilities outside the U.S., into markets such as Europe, which are much larger.

In 2009 and beyond, we will continue to face many challenges, including economic uncertainty in the markets in which we operate, fluctuations in the costs for raw materials, higher costs for medical and insurance premiums, and foreign currency fluctuations. In addition, we face general economic risks, as well as the risk that our customers could curtail spending on new and existing equipment. Risks associated with our four-point growth strategy include the level of investment that customers are willing to make in new technologies developed by the industry and the Company, and risks inherent in global expansion. When necessary, we will modify our financial and operating strategies to reflect changes in market conditions and risks.

Since 2006, Wabtec has downsized its Canadian operations by moving certain products to lower-cost facilities and outsourcing. In the Freight segment, Wabtec recorded no charges for the three and six months ended June 30, 2009. Wabtec recorded charges of $3.1 million for the three and six months ended June 30, 2008. Total expenses for restructuring and other expenses recorded since 2006 have been $16.5 million, comprised of the $5.6 million for employee severance costs for approximately 400 salaried and hourly employees; $5.5 million of pension and postretirement benefit curtailment for those employees; $4.8 million related to asset impairments for structures, machinery, and equipment; and $0.6 million for goodwill impairment. The goodwill impairment was recorded as amortization expense and most of the other charges were recorded in cost of sales. Severance costs are contractual liabilities and payment is dependent on the waiver by or expiration of certain seniority rights of those employees. As of June 30, 2009, $4.0 million of this amount had been paid.

RESULTS OF OPERATIONS

The following table shows our Consolidated Statements of Operations for the
periods indicated.



                                                 Three Months Ended              Six Months Ended
                                                      June 30,                       June 30,
In millions                                     2009            2008            2009           2008
Net sales                                     $   334.0       $   390.2       $  712.0       $  773.5
Cost of sales                                    (242.4 )        (281.7 )       (513.9 )       (559.8 )

Gross profit                                       91.6           108.5          198.1          213.7
Selling, general and administrative
expenses                                          (42.3 )         (42.1 )        (81.1 )        (82.5 )
Engineering expenses                              (10.8 )          (9.6 )        (21.3 )        (19.6 )
Amortization expense                               (1.8 )          (0.9 )         (3.2 )         (1.8 )

Total operating expenses                          (54.9 )         (52.6 )       (105.6 )       (103.9 )
Income from operations                             36.7            55.9           92.5          109.8
Interest income (expense), net                     (3.5 )          (1.3 )         (8.5 )         (2.7 )
Other expense, net                                 (0.1 )          (0.7 )          0.3           (1.1 )

Income from continuing operations before
income taxes                                       33.1            53.9           84.3          106.0
Income tax expense                                 (2.3 )         (20.1 )        (20.8 )        (39.7 )

Net income attributable to Wabtec
shareholders                                  $    30.8       $    33.8       $   63.5       $   66.3

SECOND QUARTER 2009 COMPARED TO SECOND QUARTER 2008

The following table summarizes the results of operations for the period:



                                                     Three months ended June 30,
                                                                            Percent
 In thousands                                        2009         2008      Change
 Freight Group                                    $   136,079   $ 199,631     (31.8 )%
 Transit Group                                        197,934     190,563       3.9 %

 Net sales                                            334,013     390,194     (14.4 )%

 Income from operations                                36,727      55,922     (34.3 )%
 Net income attributable to Wabtec shareholders   $    30,836   $  33,762      (8.7 )%

Net sales decreased by $56.2 million to $334.0 million from $390.2 million for the three months ended June 30, 2009 and 2008, respectively. The decrease is primarily due to the current economic conditions leading to lower Freight Group sales. The Company realized a net sales reduction of $17.1 million due to unfavorable effects of foreign exchange, but net earnings were generally not impacted by foreign exchange. Net income for the three months ended June 30, 2009 was $30.8 million or $0.64 per diluted share. Net income for the three

months ended June 30, 2008 was $33.8 million or $0.69 per diluted share. The decrease in net income is primarily due to lower Freight Group sales, severance and other costs related to downsizing and consolidation actions, partially offset by lower income taxes.

Freight Group sales decreased by $63.5 million or 31.8% primarily due to lower sales of $39.1 million for electronics and specialty products, $30.7 million for brake products, $10.0 million for remanufacturing, overhaul and manufacturing of locomotives and $6.2 million for other products. Offsetting those reductions was an increase in sales of $25.8 million from acquisitions. For the Freight Group, net sales were reduced by $3.3 million due to unfavorable effects of foreign exchange on sales mentioned above.

Transit Group sales increased by $7.3 million or 3.9% primarily due to increased sales of $9.8 million for brake products, $8.7 million for other transit-related products and $6.1 million from acquisitions. Offsetting those increases was a decrease in sales of $3.5 million for remanufacturing, overhaul and build of locomotives. For the Transit Group, net sales were reduced by $13.8 million due to unfavorable effects of foreign exchange on sales mentioned above.

Gross profit Gross profit decreased to $91.6 million in the second quarter of 2009 compared to $108.5 million in the same period of 2008. Gross profit is dependent on a number of factors including pricing, sales volume and product
mix. Gross profit, as a percentage of sales, was 27.4% compared to 27.8%, for the second quarter of 2009 and 2008, respectively. The gross profit percentage decreased due to lower Freight Group sales, severance and other costs related to downsizing and consolidation actions. The provision for warranty expense is generally established for specific losses, along with historical estimates of customer claims as a percentage of sales. The provision for warranty expense was $1.2 million higher in 2009 compared to the same period of 2008 because of increased transit sales. The warranty reserve increased at June 30, 2009 compared to June 30, 2008 by $4.6 million due primarily to transit authority contracts.

Operating expenses The following table shows our operating expenses:

                                                     Three months ended June 30,
                                                                            Percent
   In thousands                                      2009          2008     Change
   Selling, general and administrative expenses   $    42,346    $ 42,036       0.7 %
   Engineering expenses                                10,765       9,631      11.8 %
   Amortization expense                                 1,795         912      96.8 %

   Total operating expenses                       $    54,906    $ 52,579       4.4 %

Selling, general, and administrative expenses increased $0.3 million in the second quarter of 2009 compared to the same period of 2008. Engineering expenses increased by $1.1 million in the second quarter of 2009 compared to the same period of 2008 due primarily to the acquisitions that occurred in 2008. Amortization expense increased in the second quarter of 2009 compared to the same period in 2008 due primarily to the acquisitions that occurred in 2008. Total operating expenses were 16.4% and 13.5% of sales for the second quarter of 2009 and 2008, respectively.

Income from operations Income from operations totaled $36.7 million (or 11.0% of sales) in the second quarter of 2009 compared with $55.9 million (or 14.3% of sales) in the same period of 2008. Income from operations decreased primarily due to lower Freight Group sales, severance and other costs related to downsizing and consolidation actions.

Interest expense, net Interest expense, net increased $2.2 million in the second quarter of 2009 compared to the same period of 2008 primarily due to additional borrowings for acquisitions.

Other expense, net The Company recorded foreign exchange losses of $427,000 in the second quarter of 2009 and foreign exchange losses of $854,000 in the second quarter of 2008, due to the effect of currency exchange rate changes on intercompany transactions that are non U.S. dollar denominated and charged or credited to earnings.

Income taxes The effective income tax rate was 6.7% and 37.4% for second quarter of 2009 and 2008, respectively. The decrease in effective rate in the second quarter of 2009 is primarily due to a $9.7 million tax benefit resulting from the settlement of examinations in various taxing jurisdictions during the period.

Net income Net income for the second quarter of 2009 decreased $2.9 million, compared with the same period of 2008. The decrease in net income is primarily due to lower Freight Group sales, severance and other costs related to downsizing and consolidation actions, partially offset by lower income taxes.

FIRST SIX MONTHS OF 2009 COMPARED TO FIRST SIX MONTHS OF 2008

The following table summarizes the results of operations for the period:



                                                      Six months ended June 30,
                                                                           Percent
  In thousands                                       2009        2008      Change
  Freight Group                                    $ 316,026   $ 391,397     (19.3 )%
  Transit Group                                      395,947     382,124       3.6 %

  Net sales                                          711,973     773,521      (8.0 )%

  Income from operations                              92,475     109,808     (15.8 )%
  Net income attributable to Wabtec shareholders   $  63,502   $  66,272      (4.2 )%

Net sales decreased by $61.5 million to $712.0 million from $773.5 million for the six months ended June 30, 2009 and 2008, respectively. The decrease is primarily due to the current economic conditions leading to lower Freight Group sales. The Company realized a net sales reduction of $38.6 million due to unfavorable effects of foreign exchange, but net earnings were generally not impacted by foreign exchange. Net income for the six months ended June 30, 2009 was $63.5 million or $1.32 per diluted share. Net income for the six months ended June 30, 2008 was $66.3 million or $1.35 per diluted share. The decrease in net income is primarily due to lower Freight Group sales, severance and other costs related to downsizing and consolidation actions, partially offset by cost-saving initiatives and lower income taxes.

Freight Group sales decreased by $75.4 million or 19.3% primarily due to lower sales of $60.0 million for electronics and specialty products, $54.4 million for brake products and $10.1 million for remanufacturing, overhaul and manufacturing of locomotives. Offsetting those reductions was an increase in sales of $60.0 million from acquisitions. For the Freight Group, net sales were reduced by $8.6 million due to unfavorable effects of foreign exchange on sales mentioned above.

Transit Group sales increased by $13.9 million or 3.6% primarily due to increased sales of $26.9 million for brake products, $20.3 million for other transit-related products and $12.5 million from acquisitions. Offsetting those increases was a decrease in sales of $15.7 million for remanufacturing, overhaul and build of locomotives. For the Transit Group, net sales were reduced by $30.0 million due to unfavorable effects of foreign exchange on sales mentioned above.

Gross profit Gross profit decreased to $198.1 million for the first six months of 2009 compared to $213.7 million in the same period of 2008. Gross profit is dependent on a number of factors including pricing, sales volume and product
mix. Gross profit, as a percentage of sales, was 27.8% compared to 27.6%, for the first six months of 2009 and 2008, respectively. The provision for warranty expense is generally established for specific losses, along with historical estimates of customer claims as a percentage of sales. The provision for warranty expense was $0.3 million less for the first six months of 2009 compared to the same period of 2008 because of decreased sales.

Operating expenses The following table shows our operating expenses:

                                                     Six months ended June 30,
                                                                          Percent
   In thousands                                     2009        2008      Change
   Selling, general and administrative expenses   $  81,133   $  82,481      (1.6 )%
   Engineering expenses                              21,324      19,612       8.7 %
   Amortization expense                               3,186       1,815      75.5 %

   Total operating expenses                       $ 105,643   $ 103,908       1.7 %

Selling, general, and administrative expenses decreased a net $1.3 million in the first six months of 2009 compared to the same period of 2008 primarily due to cost-saving initiatives, partially offset by increased expenses from acquisitions. Engineering expenses increased by $1.7 million in the first six months of 2009 compared to the same period of 2008 due primarily to the acquisitions that occurred in 2008. Amortization expense increased in the first six months of 2009 compared to the same period in 2008 due primarily to the acquisitions that occurred in 2008. During the six months ended June 30, 2009 the Company sold a facility for net cash proceeds of $3.6 million to an unrelated third party. While certain portions of the building are being leased back, this transaction resulted in a gain of $2.1 million and deferred gain of $0.6 million. The deferred gain will be recognized over five years. Total operating expenses were 14.8% and 13.4% of sales for the first six months of 2009 and 2008, respectively.

Income from operations Income from operations totaled $92.5 million (or 13.0% of sales) in the first six months of 2009 compared with $109.8 million (or 14.2% of sales) in the same period of 2008. Income from operations decreased primarily due to lower Freight Group sales, severance and other costs related to downsizing and consolidation actions, partially offset by cost-saving initiatives.

Interest expense, net Interest expense, net increased $5.7 million in the first six months of 2009 compared to the same period of 2008 primarily due to additional borrowings for acquisitions.

Other expense, net The Company recorded foreign exchange gains of $223,000 in the first six months of 2009 and foreign exchange losses of $1.2 million in the first six months of 2008, due to the effect of currency exchange rate changes on intercompany transactions that are non U.S. dollar denominated and charged or credited to earnings.

Income taxes The effective income tax rate was 24.6% and 37.4% for first six months of 2009 and 2008, respectively. The decrease in effective rate in the first six months of 2009 is primarily due to a $9.7 million tax benefit resulting from the settlement of examinations in various taxing jurisdictions during the period.

Net income Net income for the first six months of 2009 decreased $2.8 million, compared with the same period of 2008. The decrease in net income is primarily due to lower Freight Group sales, severance and other costs related to downsizing and consolidation actions, partially offset by cost-saving initiatives and lower income taxes.

Liquidity and Capital Resources

Liquidity is provided primarily by operating cash flow and borrowings under the
Company's unsecured credit facility with a consortium of commercial banks. The
following is a summary of selected cash flow information and other relevant
data:



                                                  Six months ended
                                                      June 30,
               In thousands                     2009           2008
               Cash provided by (used for):
               Operating activities           $  38,016      $  30,177
               Investing activities              (9,803 )       (7,788 )
               Financing activities             (56,025 )      (22,804 )
               (Decrease) increase in cash    $ (20,472 )    $   6,991

Operating activities Cash provided by operations in the first six months of 2009 was $38.0 million as compared to $30.2 million for the same period of 2008. This $7.8 million increase in cash provided by operations primarily resulted from a decrease in working capital. The accounts receivable decrease resulted in an $86.1 million improvement, which was due to decreased sales. The inventory decrease resulted in a $37.3 million improvement, which was due to a reduction of inventory on hand. Accounts payables used cash of $53.1 million due to a reduction in purchasing. Accrued liabilities and customer deposits used cash of $54.5 million primarily due to a reduction in customer deposits. Other assets and liabilities, including accrued income taxes, used cash of $2.6 million.

Investing activities Cash used for investing activities in the first six months of 2009 was $9.8 million as compared to $7.8 million for the same period of 2008. Capital expenditures were $8.7 million and $8.3 million in the first six months of 2009 and 2008, respectively. During the first six months of 2009 the Company paid $4.7 million as part of the working capital settlement for the Poli acquisition. During the first six months of 2009 the Company sold a facility for net cash proceeds of $3.6 million to an unrelated third party. While certain portions of the building are being leased back, this transaction resulted in a gain of $2.1 million and deferred gain of $0.6 million. The deferred gain will be recognized over five years.

Financing activities In the first six months of 2009, cash used by financing activities was $56.0 million, which included $92.0 million of debt repayments and $72.0 million in proceeds from debt on the revolving credit facility, $17.7 million of debt repayments on the term loan and other debt, $1.0 million of dividend payments and $19.7 million for the repurchase of 669,700 shares of stock. In the first six months of 2008, cash used for financing activities was $22.8 million, which included $2.9 million of proceeds from the exercise of stock options and other benefit plans, offset by $1.0 million of dividend payments and $24.7 million for the repurchase of 718,100 shares of stock.

The following table shows outstanding indebtedness at June 30, 2009 and December 31, 2008.

                                              June 30,     December 31,
              In thousands                      2009           2008
              6.875% Senior Notes, due 2013   $ 150,000   $      150,000
              Term Loan Facility                185,000          200,000
              Revolving Credit Facility          16,000           36,000
              Capital Leases                        887            1,080

              Total                             351,887          387,080
              Less-current portion               31,352           30,381

              Long-term portion               $ 320,535   $      356,699

Cash balance at June 30, 2009 and December 31, 2008 was $121.3 and $141.8 million, respectively.

2008 Refinancing Credit Agreement

On November 4, 2008, the Company refinanced its existing unsecured revolving credit agreement with a consortium of commercial banks. This "2008 Refinancing Credit Agreement" provides the company with a $300 million five-year revolving credit facility and a $200 million five-year term loan facility. The Company incurred $2.9 million of deferred financing cost related to the 2008 Refinancing Credit Agreement. Both facilities expire in January 2013. The 2008 Refinancing Credit Agreement borrowings bear variable interest rates indexed to the indices described below. At June 30, 2009 the weighted average interest rate on the Company's variable rate debt was 1.64%. At June 30, 2009, the Company had available bank borrowing capacity, net of $52.5 million of letters of credit, of approximately $231.5 million, subject to certain financial covenant restrictions.

Under the 2008 Refinancing Credit Agreement, the Company may elect a Base Rate of interest or an interest rate based on the London Interbank Offered Rate ("LIBOR") of interest ("the Alternate Rate"). The Base Rate

adjusts on a daily basis and is the greater of the PNC, N.A. prime rate, 30-day LIBOR plus 150 basis points or the Federal Funds Effective Rate plus 0.5% per annum, plus a margin that ranges from 25 to 50 basis points. The Alternate rate is based on quoted LIBOR rates plus a margin that ranges from 125 to 200 basis points. Both the Base Rate and Alternate Rate margins are dependent on the Company's consolidated total indebtedness to cash flow ratios. The Base Rate margin is zero basis points and the initial Alternate Rate margin is 125 basis points. To reduce the impact of interest rate changes on a portion of this variable-rate debt, the Company entered into interest rate swaps which effectively convert a portion of the debt from variable to fixed-rate borrowings during the term of the swap contracts. On June 30, 2009, the notional value of interest rate swaps outstanding totaled $177.5 million and effectively changed the Company's interest rate on that bank debt at June 30, 2009 from a variable rate to a fixed rate of 2.18%. The interest rate swap agreements mature at various times through January 2010. The Company is exposed to credit risk in the event of nonperformance by the counterparties. However, since only the cash interest payments are exchanged, exposure is significantly less than the notional amount. The counterparties are large financial institutions and the Company does not anticipate nonperformance.

The 2008 Refinancing Credit Agreement limits the Company's ability to declare or pay cash dividends and prohibits the Company from declaring or making other distributions, subject to certain exceptions. The 2008 Refinancing Credit Agreement contains various other covenants and restrictions including the following limitations: incurrence of additional indebtedness; mergers, consolidations, sales of assets and acquisitions; additional liens; sale and leasebacks; permissible investments, loans and advances; certain debt payments; and imposes a minimum interest expense coverage ratio of 3.0 and a maximum debt to cash flow ratio of 3.25. The Company is in compliance with these measurements and covenants and expects that these measurements will not be any type of limiting factor in executing our operating activities.

6.875% Senior Notes Due August 2013

. . .