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FORM 10-K
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

(Exact Name of Registrant as Specified in its Charter)

Securities registered pursuant to Section 12(b) of the Act:

Securities registered pursuant to Section 12(g) of the Act:         None

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.         Yes        X            No               

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. _________

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). Yes   X       No              

The aggregate market value of the Common Stock outstanding and held by non-affiliates (as defined in Rule 405 under the Securities Act of 1933) of the registrant, based upon the closing sale price of the Common Stock on the New York Stock Exchange on March 31, 2003, the last business day of the registrant’s most recently completed second quarter, was approximately $374 million.

The number of shares of Common Stock outstanding as of the close of business on November 28, 2003 was:
Class A 15,114,066; Class B 2,134,596.

The documents listed below have been incorporated by reference into this Annual Report on Form 10-K:

Cautionary Statement
Information included herein or incorporated by reference that does not consist of historical facts, including statements accompanied by or containing words such as “may,” “will,” “should,” “believes,” “expects,” “expected,” “intends,” “plans,” “projects,” “estimates,” “predicts,” “potential,” “outlook,” “forecast,” “anticipates,” “presume” and “assume,” are forward-looking statements. Such forward-looking statements are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. These statements are not guarantees of future performance and are subject to several factors, risks and uncertainties, the impact or occurrence of which could cause actual results to differ materially from the expected results described in the forward-looking statements. These important factors, risks and uncertainties include (i) uncertainty relating to the allocation of the purchase price among the assets of the Poly-Scientific division of Northrop Grumman, which was acquired in fiscal 2004, amortization of intangible assets resulting from that allocation and the impact of fair value purchase accounting adjustments, (ii) fluctuations in general business cycles for commercial aircraft, military aircraft, space products and industrial capital goods, (iii) the Company’s dependence on government contracts that may not be fully funded or may be terminated, (iv) the Company’s dependence on certain major customers, such as The Boeing Company and Lockheed Martin, for a significant percentage of its sales, (v) the possibility that advances in technology could reduce the demand for certain of the Company’s products, specifically hydraulic-based motion controls, (vi) intense competition in the Company’s business which may require the Company to lower prices or offer more favorable terms of sale, (vii) the Company’s significant indebtedness which could limit its operational and financial flexibility, (viii) the significant amount of the Company’s debt which is at variable interest rates that may increase, (ix) higher pension costs and increased cash funding requirements which could occur in future years if future actual plan results differ from assumptions used for the Company’s defined benefit pension plans, including returns on plan assets and interest rates, (x) a write-off of all or part of the Company’s goodwill which could adversely affect the Company’s operating results and net worth and cause it to violate covenants in its bank agreements, (xi) the potential for substantial fines and penalties or suspension or debarment from future contracts in the event the Company does not comply with regulations relating to defense industry contracting, (xii) the potential for cost overruns on development jobs and fixed price contracts and the risk that actual results may differ from estimates used in long-term contract accounting, (xiii) the Company’s ability to successfully identify and consummate acquisitions and integrate the acquired businesses, including the Poly-Scientific division, and the risk that known liabilities will be assumed by the Company in connection with acquisitions, including liabilities for which indemnification from the seller may be limited or unavailable, (xiv) the possibility of a catastrophic loss of one or more of the Company’s manufacturing facilities, (xv) the impact of product liability claims related to the Company’s products used in applications where failure can result in significant property damage, injury or death, (xvi) the possibility that litigation may result unfavorably to the Company, (xvii) foreign currency fluctuations in those countries in which the Company does business and other risks associated with international operations and (xviii) the cost of compliance with environmental laws. The factors identified above are not exhaustive. New factors, risks and uncertainties may emerge from time to time that may affect the forward-looking statements made herein. Given these factors, risks and uncertainties, investors should not place undue reliance on forward-looking statements as predictive of future results. The Company disclaims any obligation to update the forward-looking statements made in this report.

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PART I

    The Registrant, Moog Inc., a New York corporation formed in 1951, is referred to in this Annual Report on Form 10-K as “Moog,” “the Company” or in the nominative “we” or the possessive “our.”

Item 1. Business.

    Certain information required herein is incorporated by reference to the 2003 Annual Report.

    Description of the Company’s Business. See pages 2 through 24 of the 2003 Annual Report.

    Distribution. Moog’s sales and marketing organization consists of individuals possessing highly specialized technical expertise. This expertise is required in order to effectively evaluate a customer’s precision control requirements and to facilitate communication between the customer and Moog’s engineering staff. Moog’s sales staff is the primary contact with customers. Manufacturers’ representatives are used to cover certain domestic aerospace markets. Distributors are used selectively to cover certain industrial markets.

    Industry and Competitive Conditions. Moog 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 experiences considerable competition in both of these markets.

    Many of our competitors have greater financial and other resources. In Aircraft Controls, the Company’s principal competitors include Parker Hannifin Corporation, Curtiss-Wright Corporation, Liebherr-Holding GmbH, Goodrich Actuation Systems and Teijin Seiki Co., Ltd. In Space Controls, the Company’s principal competitors include Vacco Industries, Inc., Parker Hannifin, Goodrich, MPC and Textron. In Industrial Controls, competitors include Bosch Rexroth AG, Parker Hannifin, Eaton Vickers and Danaher.

    Competition in each market served is based upon design capability, product performance and life, service, price and delivery time. The Company believes it competes effectively on all of these bases.

    Backlog. Substantially all backlog will be realized as sales in the next twelve months. Also see the discussion in Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations, beginning on page 31 of this report.

    Raw Materials. Materials, supplies and components are purchased from numerous suppliers. The Company believes the loss of any one supplier, although potentially disruptive in the short term, would not materially affect the Company’s operations in the long term.

    Working Capital. See the discussion on operating cycle in Note 1 of Item 8, Financial Statements and Supplementary Data, on page 43 of this report.

    Seasonality. Moog’s business is generally not seasonal.

    Patents. Moog has numerous patents and has filed applications for others. While the protection afforded by these is of value, the Company does not consider the successful conduct of any material part of its business to be dependent upon such protection. The Company’s patents and patent applications, including U.S. and international patents, relate to electrohydraulic, electropneumatic and electromechanical actuation mechanisms and control valves, electronic control component systems and interface devices. The Company has trademark and trade name protection in major markets throughout the world.

    Research Activities. Research and product development activity has been and continues to be significant to the Company. See Item 6, Selected Financial Data, on page 30 of this report.

    Employees. On September 27, 2003, the Company employed 4,744 full-time employees, compared to 4,817 full-time employees on September 28, 2002.

    Segment Financial Information. See the discussion in Note 15 of Item 8, Financial Statements and Supplementary Data, on pages 52 and 53 of this report.

    Customers. The information required herein is incorporated by reference to pages 2 through 24 of the 2003 Annual Report. Also see pages 31 and 52 of this report. The Company’s customers fall into three groups, Original Equipment Manufacturer (OEM) customers of its aircraft and space businesses, OEM customers of its industrial business, and aftermarket customers in all three businesses. Aircraft and space OEM customers collectively represented 46% of fiscal 2003 sales. The majority of these sales are to a small number of large companies. Due to the long-term nature of many of the programs, many of the Company’s relationships with aircraft and space OEM customers are based on long-term agreements. The Company’s sales of industrial controls are to a diversity of customers around the world and are normally based on lead times of 90 days or less. The Company also provides spare and replacement parts and repair and overhaul services, or aftermarket, for most of its product applications. The Company’s major aftermarket customers include the U.S. Government and the commercial airlines.

    The Boeing Company represented approximately 15% of consolidated sales in 2003, including sales to the Boeing Commercial Airplane Group which represented 5% of fiscal 2003 sales. Sales to Lockheed Martin were approximately 10% of sales. Sales arising from U.S. Government prime or subcontracts, including military sales to Boeing, were approximately 38% of sales. Sales to these customers are made primarily through Aircraft Controls and Space Controls.

    International Operations. Operations outside the United States are conducted through wholly-owned foreign subsidiaries. The Company’s international operations are located predominantly in Europe and the Asian-Pacific region. See pages 53, 57 and 58 of this report. The Company’s international operations are subject to the usual risks inherent in international trade, including currency fluctuations, local governmental restrictions on foreign investment and repatriation of profits, exchange controls, regulation of the import and distribution of foreign goods, as well as changing economic and social conditions in countries in which such operations are conducted.

    Environmental Matters. See the discussion in Note 16 of Item 8, Financial Statements and Supplementary Data, on page 53 of this report.

    Website Access to Information. The Company’s internet address is www.moog.com. The Company makes its annual reports on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K and, if applicable, amendments to those reports available on the investor information portion of its website. The reports are free of charge and are available as soon as reasonably practicable after

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they are filed with the Securities and Exchange Commission. The Company will post to the investor information portion of its web-site its corporate governance guidelines, board committee charters and code of ethics. This information will be available in print to any shareholder upon request. All requests for these documents should be made to Susan Johnson, the Company’s manager of investor relations, by calling (716) 652-4225.

    Executive Officers of the Registrant. Other than John B. Drenning, the principal occupations of the following officers for the past five years have been their employment with the Company. John B. Drenning’s principal occupation is partner in the law firm of Hodgson Russ LLP.

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    On October 1, 1999, Robert H. Maskrey was named Executive Vice President and Chief Operating Officer. Previously he was a Vice President of the Company.

    On February 25, 2000, Martin J. Berardi was named Vice President and continues as a General Manager in the Industrial Controls segment.

    On February 25, 2000, Warren C. Johnson was named Vice President and continues as General Manager of the Aircraft Group, a position he assumed in October 1999. Previously he was Chief Engineer of the Aircraft Group.

    On June 1, 2000, Timothy P. Balkin was named Treasurer. Previously he was Director of Financial Planning and Analysis.

    On February 7, 2002, Jay K. Hennig was named Vice President and continues as the Space Systems Group’s General Manager, a position he assumed in January 2001. Previously he was General Manager of Moog’s Chatsworth Operations in California.

Item 2. Properties.

    On September 27, 2003, the Company occupied approximately 2,425,000 square feet of space in the United States and countries throughout the world, distributed by segment as follows:

    Aircraft Controls has principal manufacturing facilities located in New York, California, Utah, England and the Philippines. Space Controls has primary manufacturing facilities located in New York and California. Industrial Controls has principal manufacturing facilities located in New York, Germany, Italy, Japan, Ireland and Luxembourg. The Company’s headquarters are located in East Aurora, New York.

    On September 30, 2003, the Company acquired the assets of the Poly-Scientific division of Litton Systems, Inc., a subsidiary of Northrop Grumman Corporation. This business occupies an additional 352,000 square feet of space, located primarily in Virginia, North Carolina and Pennsylvania.

    The Company believes that its properties have been adequately maintained and are generally in good condition. Operating leases for properties expire at various times from 2003 through 2017. Upon the expiration of its current leases, the Company believes that it will be able to either secure renewal terms or enter into leases for alternative locations at market terms.

Item 3. Legal Proceedings.

    From time to time, the Company is named as a defendant in legal actions. The Company is not a party to any pending legal proceedings which management believes will result in a material adverse effect on the Company’s financial condition or results of operations.

Item 4. Submission of Matters to a Vote of Security Holders.

    None.

PART II

Item 5. Market for the Registrant’s Common Equity and Related Stockholder Matters.

    Moog’s two classes of common shares, Class A Common Stock and Class B Common Stock, are traded on the New York Stock Exchange (NYSE) under the ticker symbols MOG.A and MOG.B. The following chart sets forth, for the periods indicated, the high and low sales prices of the Class A Common Stock and Class B Common Stock on the NYSE.

    The number of shareholders of record of Class A Common Stock and Class B Common Stock was 1,259 and 593, respectively, as of November 28, 2003.

    Dividend restrictions are included in Note 8 of Item 8, Financial Statements and Supplementary Data, on page 46 of this report. The Company does not pay dividends on its Class A Common Stock or Class B Common Stock.

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Item 6. Selected Financial Data.

For a more detailed discussion of 2001 through 2003, refer to Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations, on pages 31 through 38 of this report and Item 8, Financial Statements and Supplementary Data, on pages 39 through 55 of this report.

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    All references to years in this Management’s Discussion and Analysis of Financial Condition and Results of Operations are to fiscal years.

Overview

    Moog 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. In 2003, approximately 47% of the Company’s sales were related to global military defense or government funded programs. The Company has three operating segments.

    Aircraft Controls designs and manufactures technologically advanced flight and engine controls for manufacturers of military and commercial aircraft. Moog supplies flight controls for major, in-production military aircraft, including the U.S. Navy’s F/A-18E/F Super Hornet fighter aircraft, the V-22 Osprey tiltrotor aircraft and the F-15 Eagle. The Company is the contract lead for developing flight controls for the System Development and Demonstration phase of the F-35 Joint Strike Fighter program, teaming with Parker Hannifin, Hamilton Sundstrand and Curtiss-Wright. Lockheed Martin is the prime contractor on the F-35, the next generation fighter aircraft to be used by the U.S. Air Force, Navy and Marine Corps and the U.K. Royal Navy and Royal Air Force. The Company is a supplier to both commercial large body aircraft manufacturers, The Boeing Company and EADS, and business aircraft manufacturers including Raytheon Company and Bombardier Inc. Aftermarket sales, including repairs and spare parts, represented 35% of Aircraft Controls sales in 2003.

    Space Controls designs and manufactures controls and systems that control the flight, positioning or thrust of tactical and strategic missiles, launch vehicles, satellites and NASA’s Space Shuttle. Customers include Lockheed Martin Corporation, Boeing, Alliant Techsystems Inc., Astrium Ltd. and Raytheon. Moog participates on tactical missile programs such as Maverick, VT-1, Hellfire and TOW, missile defense programs such as the Ground-Based Midcourse Defense program, or GMD, Minuteman, and the Atlas and Delta Evolved Expendable Launch Vehicles.

    Industrial Controls designs and manufactures hydraulic and electric controls used in a variety of industrial applications. Product applications include plastic injection and blow molding machines, steam and gas turbines, steel rolling mills, fatigue testing machines, motion simulators, metal forming and gun and turret positioning and ammunition-loading systems on combat vehicles.

    On September 16, 2003, the Company completed the offering and sale of 2,012,500 shares of Class A Common Stock at $38 per share. The Company used the net proceeds of $72 million to pay a portion of the $158 million purchase price of the Company’s September 30, 2003 acquisition of the Poly-Scientific division of Litton Systems, Inc., a subsidiary of Northrop Grumman Corporation. Poly-Scientific is a manufacturer of motion control and data transmission devices, and its principal products are electrical and fiber optic slip rings, brushless D.C. motors and electromechanical actuators. Poly-Scientific had sales of approximately $132 million for its year ended December 31, 2002.

Critical Accounting Policies - Estimates or Judgments

    The Company’s financial statements and accompanying notes are prepared in accordance with accounting principles generally accepted in the United States. The preparation of these consolidated financial statements requires management to make estimates, assumptions and judgments that affect the amounts reported. These estimates, assumptions and judgments are affected by management’s application of accounting policies, which are discussed in Note 1 to the Consolidated Financial Statements in Item 8 of this report. The critical accounting policies were reviewed with the Audit Committee of the Company’s Board of Directors.

    Revenue Recognition on Long-Term Contracts. In 2003, 41% of the Company’s sales were accounted for using the percentage of completion (cost-to-cost) method of accounting for long-term contracts which recognizes sales and costs as work is performed in advance of the delivery of the product. The remaining 2003 sales were recognized when the risks and rewards of ownership and title to the product transferred to the customer, principally as units were shipped.

    The percentage of completion (cost-to-cost) method of accounting is used primarily on the Company’s aircraft and space contracts, which typically have longer performance cycles, resulting in the matching of sales with costs as they are incurred throughout the duration of the contract.

    Percentage of completion (cost-to-cost) accounting for long-term contracts requires a disciplined cost estimating system in which all relevant functions of the business are involved. The Company believes it has adequate systems and procedures that result in reasonably dependable estimates of extent of progress toward completion, contract revenues and contract costs by contract. The cost estimates rely on engineering and manufacturing assessments of progress achieved against technical or performance milestones, and are validated using applicable product or project cost history.

    Contract prices, or contract values, are generally based on the terms and conditions specified in the contract or in the related customer purchase orders. However, the effort required under a contract can change during the performance period. These changes are typically in the form of a directed scope change from the customer, or a claim by the Company for an adjustment to the contract value based upon requirements that are different from the contract’s baseline requirements. The Company includes an estimate of scope changes or claims in the contract value for purposes of revenue recognition only when that amount can be reliably estimated and when realization is considered probable. At September 27, 2003, the amount of unnegotiated scope changes or claims included in contract values on firm fixed price contracts which are used in the determination of 2003 sales and operating profit was not material.

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    The Company reviews contract cost estimates and contract values, including unnegotiated claims and scope changes, on a quarterly basis. As a result of these reviews, sales and costs of sales are recorded in the statement of earnings to reflect the most current assessment of each contract’s percentage of completion.

    Contract Loss Reserves. For contracts for which the estimated costs at completion, exclusive of allocated general and administrative period costs, exceed the estimated contract value, a loss reserve for the entire remaining loss is recorded when the loss becomes known. Loss reserves are more common on firm fixed price contracts that involve, to varying degrees, the design and development of new and unique controls or control systems to meet customers’ specifications. The determination of contract loss reserves is made on a specific contract basis and, therefore, no general reserves are maintained.

    Once established, the amount of the loss reserve is reviewed at least quarterly and adjusted, if necessary, based on progress made and on updated cost estimates including a current assessment of any remaining risks.

    Provisions for losses on contracts are reflected in the statement of earnings as additional cost of sales. As costs are incurred, the previously established contract loss reserve included in current liabilities is reduced. At September 27, 2003, contract loss reserves were $16.1 million.

    Reserves for Inventory Valuation. At September 27, 2003, inventories represented approximately 17% of total assets and 31% of current assets. Inventories are stated at lower-of-cost-or-market with cost determined primarily on the first-in, first-out method of valuation.

    The Company records valuation reserves to provide for slow-moving or obsolete inventory by using both a formula-based method that increases the valuation reserve as the inventory ages and, supplementally, a specific identification method. Determining the appropriate reserve for inventory valuation requires significant knowledge of the business. Management considers overall inventory levels in relation to firm customer backlog as well as forecasted demand including consideration of aftermarket sales. Inventory obsolescence reserves also consider issues such as low demand or technological obsolescence. The Company’s inventory valuation reserve represents a reduction in inventory cost which creates a new cost basis of accounting. The reserve amount is maintained in a general ledger account separate from the gross inventory cost. Once a reserve is established for an inventory item, it is removed upon the subsequent use or disposition of the item. At September 27, 2003, the reserve for inventory valuation was $34.6 million, or 16.9% of gross inventories.

    Reviews for Impairment of Goodwill. The Company reviews goodwill for impairment at least annually at the reporting unit level. At September 27, 2003, the Company had $195 million of goodwill.

    In testing for impairment of goodwill, companies are required to allocate goodwill among reporting units, estimate fair values of those reporting units and determine their carrying values. The Company’s reporting units are the operating segments used for segment reporting: Aircraft Controls, Space Controls and Industrial Controls. This determination was made based on the similarities of the components of these groups as well as the components not qualifying as businesses themselves.

    The process of evaluating the Company’s goodwill for potential impairment is subjective and requires significant estimates. These estimates include judgments about future cash flows of the reporting units and allocations of commonly shared assets to the reporting units, as well as the estimates of the cost of capital used to discount future cash flows.

    Based on the discounted present values of the projected cash flows, the fair value of each reporting unit exceeded the respective carrying value resulting in no impairment of the Company’s goodwill.

    Pension Assumptions. The Company maintains defined benefit plans in six countries covering substantially all employees. The U.S. plans represent 81% of the consolidated projected benefit obligation at September 27, 2003. The accounting for these plans is based in part on certain assumptions that may be highly uncertain and may have a material impact on the financial statements if different reasonable assumptions had been used.

    The assumption for return on assets reflects the average rate of earnings expected on funds invested or to be invested to provide for the benefits included in the projected benefit obligation. The assumed return on assets of 8.5% used in 2003 for the U.S. plans was determined with reference to the fund’s investment mix at September 28, 2002 of 70% equities and 30% fixed income securities, along with forecasted rates of return on these types of securities. The assumption took the market’s poor performance in 2001 and 2002 into consideration. Had the Company selected a return on assets that was one percentage point lower, pension expense for U.S. plans for 2003 would have been $2 million higher than the amount recorded.

    In addition to the return on assets assumption, assumptions for the rate of compensation increase and discount rate were made. The rate of compensation increase used in determining the 2003 pension cost was 3.8% for the U.S. plans and was determined using a long-term projection for inflation in addition to real wage increase assumptions. The discount rate used in determining the 2003 pension cost was 6.9% for U.S. plans. Consistent with prior years, the Company used the AA corporate bond rate as the discount rate for U.S. plans. At September 27, 2003, the discount rate used to value the projected benefit obligation was 6.5%.

    Deferred Tax Asset Valuation Allowances. At September 27, 2003, the Company had total gross deferred tax assets of $66.0 million. These assets relate principally to domestic liabilities or asset valuation reserves including pension and vacation accruals, inventory obsolescence, bad debt reserves and contract loss reserves. Based on recent historical earnings performance and current projections, management believes that a valuation allowance is not required against the domestic portion of these deferred tax assets, which totaled $53.6 million at September 27, 2003.

    Deferred tax assets recorded at September 27, 2003 by the Company’s foreign subsidiaries totaled $12.4 million, of which $4.8 million relates to net operating losses in Luxembourg. The Company had a $3.7 million valuation allowance recorded against this asset at September 27, 2003 representing 78% of the gross

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asset related to net operating losses. Management believes this reserve is adequate after considering recent operating performance, future financial projections, tax planning strategies and the allowable tax carryforward period. Other than the deferred tax assets related to net operating losses in Luxembourg and based on recent historical earnings performance and current projections, management believes that a valuation allowance is not required against the other $7.6 million of the foreign portion of deferred tax assets.

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Results of Operations

2003 Compared to 2002

    Consolidated. Net sales for 2003 increased 5% to $755 million from $719 million in 2002. Sales increased by $45 million in Aircraft Controls and $14 million in Industrial Controls, while sales decreased by $23 million in Space Controls.

    Cost of sales as a percentage of net sales increased to 68.9% in 2003 from 67.9% in 2002. The increase in cost of sales as a percentage of net sales is primarily attributable to lower sales levels and an unfavorable product mix in Space Controls and higher sales on the F-35 Joint Strike Fighter aircraft program which is a cost-plus contract with modest margins, offset partially by benefits from cost savings initiatives within Industrial Controls.

    Estimated costs to complete are reviewed quarterly for contracts accounted for under the percentage of completion (cost-to-cost) method of accounting. For those contracts with anticipated losses at completion, a contract loss reserve is recorded when the loss becomes known. Additions to contract loss reserves are reflected in the statement of earnings in cost of sales. Additions to contract loss reserves were $17 million in 2003 compared to $11 million in 2002. Half of the additions in 2003 relates to increased cost estimates on business jet development contracts. The balance of the additions primarily relates to other aircraft development contracts. During 2003, $15 million of contract loss reserves, primarily on business jet development contracts, were utilized as costs were incurred and were reflected as reductions to the previously established contract loss reserves, compared to $13 million in 2002.

    Reserves for inventory valuation are recorded for obsolete or slow-moving inventory. Additions to reserves were $8 million in 2003 compared to $9 million in 2002. Reductions to reserves resulting from inventory being disposed were $2 million in 2003 and in 2002. Most of the inventory disposed had been previously reserved.

    Research and development expenses decreased to $30 million in 2003 from $33 million in 2002. The lower level of research and development primarily relates to completion of a pump and motor design for military aircraft applications and controls for unmanned combat aircraft, both which peaked in 2002.

    As a percentage of net sales, selling, general and administrative expenses increased to 17.0% in 2003 from 16.3% in 2002. The increase primarily relates to commissions, personnel related costs, travel costs, the June 2003 Paris Air Show, professional services and bid and proposal costs related primarily to the Boeing 7E7.

    Interest expense decreased to $17 million in 2003 from $26 million in 2002. The decrease in interest expense is primarily due to lower interest rates including the effects of the Company’s use of its available credit facility to redeem its $120 million 10% senior subordinated notes on May 1, 2003.

    Other expense of $1 million in 2003 includes $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. Other expense is net of a third quarter $0.7 million gain on a sale of land.

    The Company’s effective tax rate was 26.7% in 2003 compared to 29.0% in 2002. The decrease in the effective tax rate resulted from state investment tax credits realized in 2003, benefits related to the 2002 reorganization of the Company’s European operations and to a higher level of additional export tax benefits that the Company claimed on amended U.S. tax returns. These benefits were partially offset by a $1 million valuation allowance adjustment related to deferred tax assets associated with net operating losses in Luxembourg.

    In 2003, net earnings increased 14% to $43 million from $38 million in 2002. Diluted earnings per share, or EPS, increased 10% to $2.76 in 2003 from $2.50 in 2002. Diluted weighted average shares outstanding were higher in 2003 compared to 2002 due to the exercise of options, the sale of Class A Common Stock on September 16, 2003 and a higher dilutive effect of outstanding stock options related to the higher price of Class A Common Stock.

    Aircraft Controls. Net sales in Aircraft Controls increased 12% to $404 million in 2003 from $359 million in 2002. Military aircraft sales increased $64 million to $266 million, while commercial aircraft sales decreased $19 million to $138 million. The increase in military aircraft sales is primarily due to a $43 million increase in sales for primary flight controls and the leading edge flap actuation system on the F-35 Joint Strike Fighter development program and a $16 million inc