**United States**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

**FORM 10-K**
| **x**                                            | **ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF  THE SECURITIES EXCHANGE ACT OF 1934**     |
|--------------------------------------------------|-----------------------------------------------------------------------------------------------|
| ** **                                       | ** **                                                                                    | ** ** |
| ** **                                       | ** **                                                                                    | ** ** |
| **For the  fiscal year ended December 31, 2006** |
| ** **                                       |
| ** **                                       |
| **o**                                            | **TRANSITION REPORT PURSUANT TO SECTION 13 OR  15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |
|                                             |                                                                                          |   |

 

**Commission File No. 0-18348**

**BEAEROSPACE, INC.**

 (Exact name of registrant asspecified in its charter)

| **Delaware**                                                    |   | **06-1209796**                        |
|-----------------------------------------------------------------|--------|---------------------------------------|
| (State or other  jurisdiction of incorporation or organization) |   | (I.R.S. Employer  Identification No.) |
|                                                            |   |                                  |
| **1400  Corporate Center Way, Wellington, Florida**             |   | **33414**                             |
| (Address of  principal executive offices)                       |   | (Zip Code)                            |
|                                                            |   |                                  |

**(561)791-5000**

(Registrant’s telephone number, including area code)

Securities registeredpursuant to Section 12(b) of the Act: None

Securities registeredpursuant to Section 12(g) of the Act:

**Common Stock, $.01 Par Value**

(Title of Class)

Indicate by check mark if the registrant is awell-known seasoned issuer, as defined in Rule 405 of the Securities Act.

Yesx No o.

Indicateby check mark if the registrant is not required to file reports pursuant toSection 13 or Section 15(d) of the Act.

Yes o No x.

Indicateby check mark whether the registrant (1) has filed all reports required to befiled by Section 13 or 15(d) of the Securities Act of 1934 during the preceding12 months (or for such shorter period that the registrant was required to filesuch reports), and (2) has been subject to such filing requirements for thepast 90 days:

Yes x No o.

Indicate by check mark ifdisclosure of delinquent filers pursuant to Item 405 of Regulation S-K is notcontained herein, and will not be contained, to the best of the registrant’sknowledge, in definitive proxy or information statements incorporated byreference in Part III of this Form 10-K or any amendment to this Form 10-K. x

Indicateby check mark whether the registrant is a large accelerated filer, anaccelerated filer or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” inRule 12b-2 of the Exchange Act.

Large accelerated filer x Accelerated filer o Non-accelerated filer o.

Indicateby check mark whether the registrant is a shell company (as defined in Rule12b-2 of the Exchange Act).

Yes o No x.

The aggregate market value of the registrant’s voting stock held bynon-affiliates was approximately $1,774.6 million on June 30, 2006 based on theclosing sales price of the registrant’s common stock as reported on the NasdaqNational Market as of such date, which is the last business day of theregistrant’s most recently completed second fiscal quarter.  Shares of common stock held by executiveofficers and directors and persons who own 5% or more of outstanding commonstock have been excluded since such persons may be deemed affiliates.  This determination of affiliate status is nota determination for any other purpose.

Thenumber of shares of the registrant’s common stock, $.01 par value, outstandingas of February 13, 2007 was 78,434,449 shares.

 

----

DOCUMENTSINCORPORATED BY REFERENCE

Certain sections of theregistrant’s Proxy Statement to be filed with the Commission in connection withthe 2007 Annual Meeting of Stockholders are incorporated by reference in PartIII of this Form 10-K.  With the exceptionof those sections that are specifically incorporated by reference in thisAnnual Report on Form 10-K, such Proxy Statement shall not be deemed filed aspart of this Report or incorporated by reference herein.

 

2

----

 

**INDEX**

**PART I**
| ITEM 1.    | Business                                                                                                           |   |
|------------|--------------------------------------------------------------------------------------------------------------------|--------|
|       |                                                                                                               |   |
| ITEM 1A.   | Risk Factors                                                                                                       |   |
|       |                                                                                                               |   |
| ITEM 1B.   | Unresolved Staff Comments                                                                                          |   |
|       |                                                                                                               |   |
| ITEM 2.    | Properties                                                                                                         |   |
|       |                                                                                                               |   |
| ITEM 3.    | Legal Proceedings                                                                                                  |   |
|       |                                                                                                               |   |
| ITEM 4.    | Submission of Matters to a Vote of Security Holders                                                                |   |
|       |                                                                                                               |   |
| ** ** | **PART II**                                                                                                        |   |
| ** ** | ** **                                                                                                         |   |
| ITEM 5.    | Market for Registrant’s Common Equity, Related  Stockholder Matters and Issuer Purchases of Equity Securities |   |
|       |                                                                                                               |   |
| ITEM 6.    | Selected Financial Data                                                                                            |   |
|       |                                                                                                               |   |
| ITEM 7.    | Management’s Discussion and Analysis of Financial  Condition and Results of Operations                        |   |
|       |                                                                                                               |   |
| ITEM 7A.   | Quantitative and Qualitative Disclosures about  Market Risk                                                        |   |
|       |                                                                                                               |   |
| ITEM 8.    | Financial Statements and Supplementary Data                                                                        |   |
|       |                                                                                                               |   |
| ITEM 9.    | Changes in and Disagreements with Accountants on  Accounting and Financial Disclosure                              |   |
|       |                                                                                                               |   |
| ITEM 9A.   | Controls and Procedures                                                                                            |   |
|       |                                                                                                               |   |
| ITEM 9B.   | Other Information                                                                                                  |   |
|       |                                                                                                               |   |
| ** ** | **PART  III**                                                                                                      |   |
| ** ** | ** **                                                                                                         |   |
| ITEM 10.   | Directors, Executive Officers and Corporate  Governance                                                            |   |
|       |                                                                                                               |   |
| ITEM 11.   | Executive Compensation                                                                                             |   |
|       |                                                                                                               |   |
| ITEM 12.   | Security Ownership of Certain Beneficial Owners and  Management and Related Stockholder Matters                    |   |
|       |                                                                                                               |   |
| ITEM 13.   | Certain Relationships and Related Transactions, and  Director Independence                                         |   |
|       |                                                                                                               |   |
| ITEM 14.   | Principal Accounting Fees and Services                                                                             |   |
|       |                                                                                                               |   |
| ** ** | **PART IV**                                                                                                        |   |
| ** ** | ** **                                                                                                         |   |
| ITEM 15.   | Exhibits and Financial Statement Schedules                                                                         |   |
|       |                                                                                                               |   |
|       | Index to Exhibits                                                                                                  |   |
|       | Signatures                                                                                                         |   |
|       | Index to Consolidated Financial Statements and  Schedule                                                           |   |

 

3

----

 

**FORWARD-LOOKINGSTATEMENTS**

*This report contains forward-looking statementswithin the meaning of Section 27A of the Securities Act of 1933 and Section 21Eof the Securities Exchange Act of 1934. Forward-looking statements include allstatements that do not relate solely to historical or current facts, includingstatements regarding implementation and expected benefits of lean manufacturingand continuous improvement plans, our dealings with customers and partners, theconsolidation of facilities, reduction of our workforce, integration ofacquired businesses, ongoing capital expenditures, our ability to grow ourdistribution segment, the impact of the large number of grounded aircraft ondemand for our products and our underlying assets, the adequacy of funds tomeet our capital requirements, the ability to refinance our indebtedness, ifnecessary, the reduction of debt, the potential impact of new accountingpronouncements, the impact on our business from the September 11, 2001terrorist attacks, SARS outbreak and war in Iraq and the impact on our businessof the recent increases in passenger traffic and projected increases inpassenger traffic and the size of the airline fleet.  These forward-looking statements includerisks and uncertainties, and our actual experience may differ materially fromthat anticipated in such statements. Factors that might cause such a differenceinclude those discussed in our filings with the Securities and ExchangeCommission, under the heading “Risk Factors” in this Form 10-K, as well asfuture events that may have the effect of reducing our available operatingincome and cash balances, such as unexpected operating losses, the impact ofrising fuel prices on our airline customers, outbreaks in national orinternational hostilities, terrorist attacks, prolonged health issues whichreduce air travel demand (e.g., SARS), delays in, or unexpected costsassociated with, the integration of our acquired or recently consolidatedbusinesses, conditions in the airline industry, conditions in the business jetindustry, problems meeting customer delivery requirements, our success inwinning new or expected refurbishment contracts from customers, capitalexpenditures, cash expenditures related to possible future acquisitions, facilityclosures, product transition costs, labor disputes involving us, oursignificant customers or airframe manufacturers, the possibility of awrite-down of intangible assets, delays or inefficiencies in the introductionof new products or fluctuations in currency exchange rates.*

*Except as required under thefederal securities laws and rules and regulations of the SEC, we undertake noobligation to publicly update or revise any forward-looking statements, whetheras a result of new information, future events or otherwise. You are cautionednot to unduly rely on such forward-looking statements when evaluating theinformation presented herein. These statements should be considered only aftercarefully reading this entire Form 10-K.*

*Unless otherwise indicated, theindustry data contained in this Form 10-K is from the January/February 2007issue of the Airline Monitor, the October 31, 2006 and January 31, 2007 reportsof the International Air Transport Association (IATA), the Boeing CurrentMarket Outlook 2006, “The Ascend CASE Database” or the Airbus and Boeingcorporate websites.*

**PART I**

**ITEM 1.****          BUSINESS**

**Our Company**

**General**

Based on our experience in theindustry, we believe we are the world’s largest manufacturer of cabin interiorproducts for commercial aircraft and business jets and a leading aftermarketdistributor of aerospace fasteners. We sell our manufactured products directlyto virtually all of the world’s major airlines and airframe manufacturers and awide variety of general aviation customers. In addition, based on ourexperience, we believe that we have achieved leading global market positions ineach of our major product categories, which include:

·    commercial aircraft seats,including an extensive line of super first class, first class, business class,tourist class and regional aircraft seats;

·    a full line of aircraft foodand beverage preparation and storage equipment, including coffeemakers, waterboilers, beverage containers, refrigerators, freezers, chillers and microwave,high heat convection and steam ovens;

·    both chemical and gaseousaircraft oxygen delivery systems, protective breathing equipment andlighting  products;

4

----

 

·    business jet and generalaviation interior products, including an extensive line of executive aircraftseats, direct and indirect overhead lighting systems, oxygen delivery systems,air valve systems, high-end furniture and cabinetry; and

·    a broad line of aerospacefasteners, consisting of over 175,000 Stock Keeping Units (SKUs) serving thecommercial aircraft, business jet and military and defense industries.

We also provide comprehensiveaircraft cabin interior reconfiguration and passenger-to-freighter conversionengineering services and component kits.

We were organized as acorporation in Delaware in 1987. We have substantially expanded the size, scopeand nature of our business as a result of a number of acquisitions. Between1989 and 2001, we completed 22 acquisitions, for an aggregate purchase price ofapproximately $1 billion. We believe these acquisitions enabled us to positionourselves as a preferred global supplier to our customers. In addition, we haveundertaken three major facility and product line consolidation efforts,eliminating 22 facilities, since 1992. We also implemented lean manufacturingand continuous improvement programs which, together with our informationtechnology investments, have significantly improved our productivity andallowed us to expand our operating margins. During the 2002 — 2005 period, we made no significant acquisitions,focusing instead on consolidating and improving the operations efficiency ofour businesses.  During 2006, wecompleted two strategic acquisitions, Draeger GmbH (“Draeger”) whichstrengthens our Interior Systems segment and New York Fasteners Corp. (“NewYork Fasteners”) which expands the customer base product line breadth of ourDistribution segment.  Our organiccompound annual revenue growth rate, exclusive of acquisitions, over the pastthree years was 21%.

Our principal executive officesand corporate headquarters are located at 1400 Corporate Center Way,Wellington, Florida 33414 and our telephone number is 561-791-5000.

**Industry Overview**

The commercial and business jetaircraft cabin interior products industries encompass a broad range of productsand services, including aircraft seating, passenger entertainment and servicesystems, food and beverage preparation and storage systems, oxygen deliverysystems, lavatories, lighting systems, evacuation equipment, and overhead bins,as well as passenger-to-freighter conversions, interior reconfiguration and avariety of other engineering design, integration, installation, retrofit andcertification services.

Historically,the airline cabin interior products industry has derived revenues from fivesources:

·                     Newinstallation programs in which airlines purchase new equipment directly frominterior equipment manufacturers to outfit these newly purchased aircraft;

·                     Retrofitprograms in which airlines purchase new interior furnishings to overhaul theinteriors of aircraft already in service;

·                     Refurbishmentprograms in which airlines purchase components and services to improve theappearance and functionality of their cabin interior equipment;

·                     Equipmentto upgrade the functionality or appearance of the aircraft interior;

·                     Replacementspare parts.

The retrofit andrefurbishment cycles for commercial aircraft cabin interior products differ byproduct category. Aircraft seating typically has a refurbishment cycle of oneto two years and a retrofit cycle of four to eight years. Food and beveragepreparation and storage equipment is periodically upgraded or repaired, andrequires a continual flow of spare parts, but may be retrofitted only once ortwice during the useful life of an aircraft.

There is a direct relationshipbetween demand for fastener products and fleet size, aircraft utilization andan aircraft’s age. All aircraft must be serviced at prescribed intervals whichalso drives the aftermarket demand for aerospace fasteners.

Revenues for aerospacefastener products have been derived from the following sources:

5

----

 

·                     Demandfor aerospace fasteners on new build aircraft for the original equipmentmanufacturers (OEMs) and their suppliers;

·                     Demandfor structural modifications, cabin interior modifications and passenger-to-freighterconversions;

·                     Mandatedmaintenance and replacement of specified parts; and

·                     Aerospaceand defense subcontractors, most of whom tend to purchase throughdistributors.  As a result, we areexperiencing a channel shift driven by aerospace and military aircraft OEMs andtheir prime suppliers that are increasingly outsourcing various aspects of themanufacturing process.

Based on industrysources, we estimate that during 2006 the commercial and business jet cabininterior products industry had annual sales of approximately $1.7 billion andthe aerospace-grade fastener distribution industry had annual sales of over$1.6 billion.

Airline passenger trafficrebounded in 2004 and demonstrated strong continued growth through 2006. Globalair traffic growth in 2006 increased by approximately 5.9% over 2005, followinga 7.6% increase in 2005 over 2004.  Theairline industry responded to the strong year-over-year increases in passengertraffic with corresponding additions to global capacity. Global capacityincreased by approximately 4.6% during 2006 as compared to the prior year.

During the fourth quarterof 2006, the global airline industry generated significant profitability, and anumber of U.S. airlines generated their first profitable quarter since2001.  According to IATA, the worldwideairline industry is expected to generate approximately $2.5 billion in profitsduring 2007.

The business jet industryalso experienced a resurgence in demand beginning in 2004.  Approximately 840 aircraft were delivered in2006 (versus approximately 706 aircraft in 2005) and industry experts expectdeliveries of approximately 958 aircraft in 2007, which represents an increaseof 70% over the approximately 562 aircraft delivered in 2004 and an increase of14% over 2006. Industry sources estimate that nearly 3,025 business jets willbe built during the 2007 through 2009 period.

Since the second half of2003, we have experienced a surge in demand for our products, primarily fromthe large foreign international carriers. Our backlog achieved record levels in both 2005 and 2006 growing 57% to$1.1 billion in 2005 and 60% to $1.7 billion in 2006.  Our total bookings during fiscal 2006 ofapproximately $1.7 billion were up over 40% as compared to the prior year. Our$1.7 billion backlog at December 31, 2006 increased compared to our December31, 2005 backlog, despite a 33.7% year-over-year increase in revenues. The vastmajority of our backlog growth during 2006 was generated by foreign carriers;and less than 17% of our backlog at December 31, 2006 was with domesticairlines.  While some retrofit programsfor major US carriers have begun, through December 31, 2006, the domesticairlines have generally continued to conserve cash, in part by deferring cabininterior refurbishment programs and by deferring aircraft purchases. However,we expect that essentially all of the major U.S. carriers should soon begin toupgrade their international fleets to compete on international routes.  We believe there are substantial growthopportunities for retrofit programs, particularly for the twin-aisle aircraftthat service international routes.

Other factors expected toaffect the cabin interior products industry are the following:

*ExistingInstalled Base.* Existing installed base of products typically generates continuedretrofit, refurbishment and spare parts revenue as airlines maintain theiraircraft interiors. According to industry sources, the world’s activecommercial passenger aircraft fleet consisted of approximately 16,387 aircraftas of December 31, 2006.  Additionally,based on industry sources, there are approximately 14,000 business jetscurrently in service. Based on such fleet numbers, we estimate that the totalworldwide installed base of commercial and general aviation aircraft cabininterior products, valued at replacement prices, was approximately $16.9billion as of December 31, 2006.

*Growthin Worldwide Fleet.* The expansion of the worldwide fleet is expected to generate significantadditional revenues from new installation programs, while the increase in thesize of the installed base is expected to generate additional and continuedretrofit, refurbishment and spare parts revenue. According to the AirlineMonitor, worldwide air traffic is projected to grow at a compounded averagerate of between 4.8% and 4.9% per year during the 2006—2021 period, increasingannual revenue passenger miles from approximately 2.6 trillion in 2006 toapproximately 5.4 trillion by 2021. Industry experts believe that the worldwideinstalled seat base, which we consider a good indicator for potential growth inthe aircraft cabin interior products industry, will approximately double overthe 15-year period ending 2021.

6

----

 

*NewAircraft Deliveries.* The number of new aircraft delivered each year is generally regarded ascyclical in nature. According to the Airline Monitor, new deliveries of largecommercial jets increased to 820 in 2006 (versus 663 in 2005) and theapproximate amount of new deliveries are expected to increase to 925 in 2007,1,037 in 2008, and 1,086 in 2009.

*Wide-BodyAircraft Deliveries.* The trend toward a global fleet with a higher percentage of wide-bodyaircraft is significant to us because wide-body aircraft require up to five toeight times the dollar value content for our products as compared tonarrow-body aircraft. Deliveries of wide-body, long haul aircraft constitute anincreasing share of total new aircraft deliveries and are an increasingpercentage of the worldwide fleet. Wide-body aircraft represented approximately23% of all new commercial aircraft (excluding regional jets) delivered in2006.  Importantly, according to AirlineMonitor, over the 2007 to 2010 time period, approximately 1,023 wide-body andsuper wide-body aircraft will be delivered by Boeing and Airbus.  Wide-body aircraft currently carry up tothree or four times the number of seats as narrow-body aircraft, and because ofmultiple classes of service, including luxurious super first classcompartments, first class and business class configurations, our averagerevenue per aircraft on a wide-body aircraft is substantially higher than on anarrow-body aircraft. Aircraft cabin crews on wide-body aircraft flights todaymay make and serve between 300 and 900 meals and may brew and serve more than2,000 cups of coffee and serve more than 200 glasses of wine on a single flightthereby generating substantial demand for seating products and food andbeverage preparation and storage equipment, as well as extensive oxygendelivery distribution and lighting systems.

*Military and Defense as a NewPlatform*.  New productdevelopment activities and our recent acquisitions of Draeger and New YorkFasteners have substantially increased our presence in the military and defensemarket.  Key military end productsinclude a full line of oxygen systems, food and beverage preparation andstorage equipment and a growing number of fasteners for a broad range ofmilitary applications.

*Growthin Passenger-to-Freighter Conversion Business.*   Industrysources project that the size of the worldwide freighter fleet will almostdouble over the next twenty years, with almost 3,000 aircraft being added.Industry sources also estimate that over 2,200 of these aircraft are expectedto come from converting commercial passenger jets to use as freighters.

*NewProduct Development.* The aircraft cabin interior products companies are engaged in intensiveproduct development and marketing efforts for both new features on existingproducts and totally new products. These products include a broad range ofamenities such as luxurious first class cabins with appointments such aslie-flat seating, mini-bars, closets, flat screen TVs and mood lighting.  Other recently introduced products includeelectric lie-flat first and business class seats, narrow and wide-body economyclass seats, full face crew masks, Pulse OxygenTM  gaseous passenger oxygen systems, a fullrange of business and executive jet seating and LED lighting products,protective breathing equipment, oxygen generating systems, new food andbeverage preparation and storage equipment, kevlar barrier nets, de-icingsystems and crew rests.

*EngineeringServices Markets.* Historically, the airlines have relied primarily on their own in-houseengineering resources to provide engineering, design, integration andinstallation services, as well as services related to repairing or replacingcabin interior products that have become damaged or otherwise non-functional.As cabin interior product configurations have become increasingly sophisticatedand the airline industry increasingly competitive, the airlines have begun tooutsource these services in order to increase productivity and reduce costs.

Outsourced services include:

·                     Engineeringdesign, integration, project management, installation and certificationservices;

·                     Modificationsand reconfigurations for commercial aircraft including passenger-to-freighterconversions and related kits; and

·                     Servicesrelated to the support of product upgrades.

Weestimate that during 2006 the commercial and business jet cabin interiorproducts industry had annual sales of approximately $1.7 billion and theaerospace-grade fastener industry had annual sales of over $1.6 billion. Weestimate that the total worldwide installed base of commercial and generalaviation aircraft cabin interior products for the principal products wemanufacture was approximately $16.9 billion as of December 31, 2006.

7

----

* *

*Commercial Aircraft Industry*

Thecommercial airline industry saw an upturn in air travel beginning in 2003,bringing global revenue passenger miles back to 2000 levels. According to IATA,during 2006, the global airline industry expanded airline capacity byapproximately 4.6% in response to an approximate 5.9% increase in global airtraffic. We believe increases in passenger traffic, and associated increases inairline capacity, are initially benefiting providers of aftermarket productsand services. However, as the new aircraft delivery cycle begins to gainmomentum, increases in original equipment manufacturer production rates arealso expected. According to the Airline Monitor, the approximate number ofdeliveries of new large commercial aircraft are expected to grow to 925 in 2007from 820 in 2006, and then to 1,037 in 2008, 1,086 in 2009, and 1,205 in 2010.In addition, according to the Airline Monitor, approximately 1,023 twin-aisleaircraft will be delivered during the 2007-2010 period.  According to the Airline Monitor, by 2016approximately 37% of new annual deliveries will be twin-aisle aircraft, anincrease from 23% of new deliveries in 2006. An increase in twin-aisle aircraft is important to us as we believetwin-aisle aircraft require up to five to eight times the dollar value ofproducts of the type that we manufacture as compared to a single-aisle,or narrow-body, aircraft and generate substantially more demand for spare partsand upgrade products and services.

*Business Jet Industry*

Thebusiness jet industry experienced a severe downturn following the events ofSeptember 11, 2001, reaching a trough in 2003. However, in 2006approximately 840 aircraft were delivered, which represented an increase of 19%as compared to 2005 and an increase of 49% as compared to 2004.  Recent industry forecasts project significantnear-term growth, with total deliveries of approximately 958 aircraft in 2007,an increase of 70% over the approximately 562 aircraft delivered in 2004.Industry sources estimate that nearly 3,025 business jets will be built duringthe 2007 through 2009 period.

**CompetitiveStrengths**

Webelieve that we have a strong *competitive* position attributable to a number of factors,including the following:

*Large Installed Base*.  We have alarge installed base of commercial and general aviation cabin interiorproducts, estimated to be valued at approximately $6.0 billion (for ourprincipal products, valued at replacement prices) as of December 31, 2006.Based on our experience in the industry, we believe our installed base issubstantially larger than that of our competitors. We believe that our largeinstalled base is a strategic advantage as airlines tend to purchase aftermarketproducts and services, including spare parts, retrofits and refurbishmentprograms, from the original supplier of their equipment. As a result, we expectour large installed base to generate continued aftermarket revenue as airlinescontinue to maintain, evolve and reconfigure their aircraft cabin interiors.

*Operating Leverage and LowCost Producer*.  Our ability to leverage our manufacturing andengineering capabilities has allowed us to expand gross and operating margins.As a result of our cost savings programs implemented following the downturn inthe airline industry in 2001, and through our ongoing continuous improvementand lean manufacturing programs, our overall gross margins have increasedsubstantially. For example, our gross margin for the fiscal year ended December31, 2006 of 35.1% improved by 260 basis points over the fiscal year ended 2004,reflecting ongoing manufacturing efficiencies and operating leverage at thehigher volume of sales. In addition, our operating earnings have been increasingat a faster rate than our net sales. For example, for the year ended December31, 2006, operating earnings grew 58.4% over operating earnings for the yearended December 31, 2005, as compared to net sales growth of 33.7% during 2006.  Our operating margin which was 13.1% for thefiscal year 2006 has expanded by approximately 200 basis points per year ineach of the past two years.

*Focus on Innovation and NewProduct Development*.  We believe, based on our experience in theindustry, that we are a technological leader, with the largest research anddevelopment organization in the cabin interior products industry. As ofDecember 31, 2006, we had 877 employees in engineering, research anddevelopment and program management. We believe our engineering, research anddevelopment effort and our on-site technicians at both the airlines andairframe manufacturers enable us to play a leading role in developing andintroducing innovative products to meet emerging industry trends and therebygain early entrant advantages. Our strong focus and continued investment inresearch and development, even during the 2001-2003 industry downturn, allowsus to compete favorably in winning new business awards. For example, we believeour technological leadership and new product development capabilities were akey factor in our ability to grow our backlog to over $1.7 billion atDecember 31, 2006, an approximate 60% increase as compared to December 31,2005. Backlog growth has been driven primarily by international aftermarket demandfor retrofit of existing aircraft, including program awards in the emerginginternational super first class cabin interiors market. We believe these andother program awards, coupled with expected follow-on awards for other fleetsof existing aircraft for product commonality and competitive purposes, willcontinue to drive sales growth and market share

8

----

 

gains over the 2007-2009 period.Introduction of new products has also led to improvements in the product mix ofour current backlog, which, along with our continued focus on leanmanufacturing processes and additional operating leverage, is expected toresult in continued margin expansion.

*Exposure to InternationalMarkets*.  Our overall net sales are diversified acrossmultiple geographic regions. For 2006, approximately 29% of our sales were toEuropean customers and approximately 22% of our sales were to customers inemerging markets such as the Asia/Pacific Rim and Middle East regions.  These emerging market customers account forapproximately 38% of our current backlog and the domestic airlines account forless than 17% of our total backlog at December 31, 2006. We believe thisgeographic diversification makes us less susceptible to a downturn in aspecific geographic region and allows us to take advantage of regional growthtrends.

*Diverse Product Offeringand Broad Customer Base*.  In addition to serving diverse geographicregions, we also provide a comprehensive line of products and services to abroad customer base. For the fiscal year ended December 31, 2006, no customeraccounted for more than 10% of our net sales and our top 10 customers onlyaccounted for approximately 36% of net sales. We have a broad range of over 200principal customers, including essentially all of the world’s major airlines.During the fiscal year ended December 31, 2006, approximately 7% of sales wereto Boeing and Airbus and approximately 7% were to business jet manufacturersfor use in new business jets. Our broad product offering and customer base makeus less susceptible to the loss of any one customer or program. We havecontinued to expand our available products and services based on our beliefthat the airline industry increasingly will seek an integrated approach to thedesign, development, integration, installation, testing and sourcing ofaircraft cabin interior equipment. Based on our reputation for quality, serviceand product innovation, we believe that we are well positioned to serve theworld’s airlines and aircraft manufacturers and owners and operators of businessjets.

*Experience with ComplexRegulatory Environment*.  The airline industry is heavily regulated.The Federal Aviation Administration prescribes standards and licensingrequirements for aircraft components, including virtually all commercialairline and general aviation cabin interior products, and licenses componentrepair stations within the United States. Comparable agencies, such as theEuropean Aviation Safety Agency, the Japanese Civil Aviation Board, and theCivil Aviation Administration of China regulate these matters in othercountries.  In order to sell certainproducts or services, it is necessary to obtain the required licenses for theproduct or service under these various regulations. In addition, designing newproducts to meet existing regulatory requirements and retrofitting installedproducts to comply with new regulatory requirements can be both expensive andtime consuming. We have a long history of experience with the complexregulatory environment in which we operate and believe this enables us toefficiently obtain the required approvals for new products and services.

**Growth Opportunities**

Webelieve that we will benefit from the following industry trends:

*Improving Airline IndustryConditions*.  Improving worldwide industry conditions areresulting in increased demand for our products and services, as demonstrated bythe over 40% increase in our bookings during fiscal 2006 as compared to fiscal2005. At December 31, 2006, our backlog was over $1.7 billion, an increaseof approximately 60% over our December 31, 2005 backlog. A majority of thebacklog growth over the fiscal year ended December 31, 2006 was primarily theresult of international aftermarket demand for the retrofit of existingaircraft. We expect demand to further increase over the course of the nextseveral years consistent with the expected increase in wide-body and superwide-body aircraft deliveries and the expected participation by the domesticcarriers in both retrofit and new-buy activity.

*Worldwide Air Traffic Growthand Airline Capacity Additions Drive Resurgence in Aftermarket Activities*.  Oursubstantial installed base provides significant ongoing revenues fromreplacements, upgrades, repairs and the sale of spare parts. For the fiscalyear ended December 31, 2006 and the fiscal year ended December 31, 2005,approximately 60% and 63% of our revenues, respectively, were derived fromaftermarket activities. In addition, aftermarket revenues are generally drivenby aircraft usage, and as such, they have historically tended to recover morequickly than revenues from original equipment manufacturers. As worldwide airtraffic grows and airlines add capacity, we expect our aftermarket business tocontinue to grow. According to IATA, during the fiscal year ended December 31,2006, the global airline industry expanded airline capacity by 4.6% in responseto a 5.9% increase in global air traffic. During this same period, weexperienced a 27.5% increase in aftermarket revenues. In addition, as a resultof the severity of the economic downturn in the airline industry following theterrorist attacks of September 11, 2001, many carriers, particularly inthe United States, deferred interior refurbishments for a number of years.  We believe there are substantial growthopportunities for retrofit

9

----

 

programs for the twin-aisleaircraft that service international routes and that the major U.S. airlineswill need to invest in cabin interiors for their international fleets or facethe prospect of losing market share on their international routes.  Based on industry analysts’ expectations forairline traffic and our understanding of our customers’ cabin interior productsrequirements, we believe that global demand to retrofit existing aircraftwith  commercial aircraft cabin interiorproducts should grow at a compounded annual growth rate of approximately 19%over the 2005-2009 period and that total global demand (from both theaftermarket and new aircraft) for commercial aircraft cabin interior productsof the type that we manufacture should grow at a compounded annual growth rateof nearly 18% over this same five-year period.

*Record Backlog Driven byAftermarket Demand from International Airlines Retrofitting Existing Fleets*.  Webelieve that substantially all of the major international airlines are in theprocess of upgrading their existing fleets of twin-aisle aircraft. Thisactivity is being driven by both the age of the existing cabin interiors aswell as the desire by many of the leading international carriers to achieve acompetitive advantage by investing in cabin interior products that incorporateleading comfort amenities and place a strong emphasis on pleasing aesthetics,quality and finish in order to enhance their international passengers’ flightexperience. As a result, we believe that the life-cycle of premium products,such as international business class seats and the products comprising oursuper first class suites, will continue to compress as airlines makeinvestments in cabin interior products on a more frequent basis. For example,in 2005, British Airways selected us to outfit their wide-body fleet withour next generation horizontal lie-flat seats. In 2000, British Airwaysrevolutionized the airline industry by introducing the first horizontalbusiness class lie-flat seats (which were subsequently installed on theirwide-body fleet during 2001-2002). We believe British Airways’ decision toselect our next generation horizontal lie-flat seats may accelerate theretrofit cycle for premium class seating products for other airlines operatingwide-body aircraft serving international routes.  Through December 31, 2006, retrofit activityfor the international airlines with twin-aisle aircraft has consisted ofupgrading the premium class seating, mood lighting and food and beveragepreparation equipment for the first and business class sections of theirinternational fleets.  We believe theseinternational airlines are now beginning to address their coach class retrofitrequirements, which bodes well for future bookings and revenue growth.

*Growth of Wide-BodyAircraft Fleet*.  According to the Airline Monitor, newdeliveries of wide-body aircraft totaled 186 in 2006 and are expected to totalapproximately 1,023 aircraft over the 2007-2010 period, averaging approximately256 such aircraft per year or a 37% higher delivery level as compared to 2006.The Airline Monitor also predicts that nearly 3,230 twin-aisle aircraft will bedelivered over the 2007-2016 timeframe or approximately 323 wide-body and superwide-body aircraft per year or some 74% higher, on average, as compared to2006.  This compares to 1,852 aircraftdelivered from 1992-2005.  We expect tobenefit from this trend as wide-body aircraft generally carry more than five toeight times the dollar value of products of the type that we manufacture ascompared to single-aisle, or narrow-body, aircraft.

*Growth of Worldwide AirlineFleet*.  As a result of the current and projectedgrowth in worldwide air traffic, deliveries of new aircraft are expected togrow. According to the Airline Monitor, new deliveries of large commercialaircraft grew to 820 aircraft in 2006 from 663 in 2005 and are expected toincrease to 925 in 2007, 1,037 in 2008, 1,086 in 2009 and 1,205 in 2010. Theworldwide fleet of passenger and cargo aircraft was approximately 18,200 as ofDecember 31, 2006 and, according to the Airline Monitor, is expected toincrease to 40,097 by December 31, 2025. As the size of the fleet expands,demand should also grow for upgrade and refurbishment programs, for cabin interiorproducts and for maintenance products, including spares and fasteners.

*Growth in New AircraftIntroductions Lead to New Cabin Interior Product Introductions and MajorRetrofit Opportunities*.  Over the past two years, 15 customers haveplaced orders for 166 of the new Airbus A380 super wide-body aircraft and 33airlines have placed orders for 448 of the new Boeing 787 wide-body aircraft,which Boeing has indicated is its most successful new product launch in itshistory. Emirates Airline and Qantas Airways, which together account forapproximately 40% of all A380 passenger aircraft orders to date, have selectedus to outfit their A380 aircraft with luxurious super first class cabininteriors, including individual passenger compartments, electrically controlledlie flat seating, luxurious cabinetry, and various state of the art lightingproducts. Additionally, Qantas Airways and Air France have selected us tooutfit their A380 aircraft with next generation lie-flat businessclass seats, and Singapore Airlines and several other A380 customers haveselected us to supply them with our newly-designed oven, refrigerationand beverage maker products. We believe that a number of airlines, includingthose that have already placed orders to date for next generation wide-bodyaircraft, are also evaluating their existing wide-body fleets to ensurethat they can maintain fleet-wide commonality of cabin interiors as theybegin to take delivery of other new aircraft types.  For example, Emirates Airline has now alsoselected us to outfit a number of its Boeing 777 wide-body aircraftwith our super first class cabin interiors and new horizontal lie-flatbusiness class seats, and Air France has selected us to supply our new A380business class seats on its Boeing 777 fleet. Airlines that placed ordersfor the new Boeing 787 wide-body

10

----

 

aircraft are just beginning toplace orders for these cabin interiors. We expect to be selected to outfit a significant portion of theseaircraft.

*Growth in Business Jet andVIP Aircraft Markets*.  Business jet deliveries increased by 19% in2006 as compared to 2005; and are expected to increase by approximately 14%, in2007 as compared to 2006.  We expectseveral larger business jet types, including the Boeing Business Jet, the BombardierChallenger, the Global Express and the Global 5000, the Gulfstream 150,200, 350, 450 and 550, the Falcon 900 and the Falcon 2000 and 7x, the AirbusCorporate Jet, the Cessna Citation X and the Cessna Citation Jets and EmbraerLegacy to be significant contributors to growth in new general aviationaircraft deliveries in the future. Industry sources estimate that approximately3,025 business jets will be built during the 2007 through 2009 period, withover 41% projected to be larger business jets. This is important to us becausethe typical cost of cabin interior products manufactured for a large businessjet can be 10 times more than the cost to equip the interior of a small jet.Advances in engine technology and avionics and the continued development offractional ownership of executive aircraft are also important growth factorsfor the business jet market. In addition, because the average age of the morethan 14,000  general aviation and VIPaircraft existing today is approximately 15 years, we believe significantcabin interior retrofit and upgrade opportunities exist.

*Opportunity toSubstantially Expand Our Addressable Markets through our Fastener DistributionBusiness*.  Our fastener distribution business leveragesour key strengths, including marketing and service relationships with most ofthe world’s airlines and airframe manufacturers. As nearly 55% of fastenerdemand is generated by the existing worldwide fleet, demand for fasteners isexpected to increase over time as the fleet expands, similar to the market forcabin interior products.  The aerospaceand military OEMs are increasingly outsourcing to sub-contract manufacturers,driving a channel shift, which is benefiting distributors such as ourcompany.  The OEMs are increasing theiroutsourcing of manufactured parts to aerospace and defense subcontractors, manyof which tend to purchase through distributors. In addition, our recent acquisition of New York Fasteners hassubstantially expanded our military and defense customer base.

The strong cycle of newcommercial aircraft building together with our market share gains, the channelshift described above and our expanding military and defense platform, presentsus with an opportunity to potentially double the size of the profitability ofour distribution business over the next three years.

**BusinessStrategy**

Ourbusiness strategy is to maintain a leadership position and to best serve ourcustomers by:

·    Offering broad and innovative products and servicesin the industry;

·    Offering a broad range of engineering servicesincluding design, integration, installation and certification services, aircraftreconfiguration, and passenger-to-freighter conversion services;

·    Pursuing the highest level of quality in everyfacet of our operations, from the factory floor to customer support;

·    Aggressively pursuing continuous improvementinitiatives in all facets of our businesses and in particular our manufacturingoperations, to reduce cycle time, lower cost, improve quality and expand ourmargins; and

·    Pursuing a worldwide marketing and product supportapproach focused by airline and general aviation airframe manufacturer andencompassing our entire product line.

**Products and Services**

We conduct our operationsthrough strategic business units that have been aggregated under fivereportable segments: Seating, Interior Systems, Distribution, Business Jet, andEngineering Services.

11

----

The following is a summary of net sales for each of oursegments:
| ** **            | ** ** | **Fiscal Year Ended December 31,  ($ in millions)** | ** ** |
|-----------------------|------------|-----------------------------------------------------------------------------------|------------|
| ** **            | ** ** | **2006**                                                                          | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **            | ** ** | **Net  Sales**                                                                    | ** ** | **% of  Net  Sales** | ** ** | **Net  Sales** | ** ** | **% of  Net  Sales** | ** ** | **Net  Sales** | ** ** | **% of  Net  Sales** | ** ** |
| Seating               |       | $                                                                                 | 388.5      |   | 34.4 | % | $ | 281.8 |   | 33.4 | % | $ | 251.4 |   | 34.3 | % |
| Interior Systems      |       | 273.9                                                                             |       | 24.3 | % | 205.5 |   | 24.4 | % | 200.4 |   | 27.3 | % |
| Distribution          |       | 251.5                                                                             |       | 22.3 | % | 173.9 |   | 20.6 | % | 144.2 |   | 19.7 | % |
| Business Jet          |       | 147.5                                                                             |       | 13.1 | % | 120.2 |   | 14.2 | % | 75.2 |   | 10.2 | % |
| Engineering  Services |       | 66.8                                                                              |       | 5.9 | % | 62.7 |   | 7.4 | % | 62.3 |   | 8.5 | % |
| Net sales             |       | $                                                                                 | 1,128.2    |   | 100.0 | % | $ | 844.1 |   | 100.0 | % | $ | 733.5 |   | 100.0 | % |

 

***Seating**Segment***

We believe, based on ourexperience in the industry, that we are the world’s leading manufacturer ofaircraft seats, offering a wide selection of first class, business class,tourist class and regional aircraft seats. A typical seat manufactured and soldby us includes the seat frame, cushions, armrests, tray table and a variety ofoptional features such as adjustable lumbar supports, footrests, readinglights, head/neck supports, and oxygen masks. We estimate that as of December31, 2006, we had an aggregate installed base of approximately 1.0 millionaircraft seats valued at replacement prices of approximately $3.3 billion.

*Firstand Business Classes.* Based upon major airlines’ program selection and our backlog, we believewe are the leading worldwide manufacturer of premium class seats. Our line offirst class sleeper seats incorporates full electric actuation, an electricottoman, privacy panels and sidewall-mounted tables. Our business class seatsincorporate features developed over 25 years of seating design. The businessclass seats include electrical or mechanical actuation, PC power ports,telephones, leg rests, adjustable lumbar cushions, four-way adjustableheadrests and fiberoptic reading lights. The first and business class productsare substantially more expensive than tourist class seats due to these luxuryappointments.

*TouristClass and Regional Jet Seats.* We believe, based on our experience in the industry, that we are aleading worldwide manufacturer of tourist class seats and regional aircraftseats. We believe our Spectrum® coach class seat has become the industry’s mostpopular seat platform for single-aisle aircraft since its launch in late2002.  We believe the seat improvescomfort and offers significantly improved passenger living space as well asbenefiting the airlines with simplified maintenance and spare parts purchasing.Spectrum® was engineered for use across the entire single-aisle aircraft fleet,including regional jets.

*Spares.*  Aircraft seats require regularly scheduledmaintenance in the course of normal passenger use. Airlines depend on seatmanufacturers and secondary suppliers to provide spare parts and kit upgradeprograms. As a result, a significant market exists for spare parts and kitupgrades.

***InteriorSystems Segment***

We believe, based on ourexperience in the industry, that we are the leading manufacturer of interiorsystems for both narrow and wide-body aircraft, offering a broad selection ofcoffee and beverage makers, water boilers, ovens, liquid containers,refrigeration equipment, oxygen delivery systems and a variety of otherinterior components. We estimate that as of December 31, 2006 we had anaggregate installed base of such equipment valued at replacement prices ofapproximately $1.6 billion.

*OxygenDelivery Systems.*  Webelieve, based on our experience in the industry, that we are the leadingmanufacturer of oxygen delivery systems for both commercial and business jetaircraft.  We are the only manufacturerwith the capability to both produce all required components and to fully integrateoverhead passenger service units with either chemical or gaseous oxygenequipment.  Our systems are found onalmost all in-production aircraft types in the world today and on 100% of inproduction commercial airlines.  Ouroxygen equipment has been approved for use on all Boeing and Airbus aircraftand is also found on essentially all general aviation and VIP aircraft.  The Boeing 787 will be the first aircraftequipped with a passenger oxygen system using our advanced “Pulse Oxygen”technology.  We believe the Pulse Oxygensystem delivers oxygen more efficiently than traditional passenger systems andreduces overall system weight and fuel burn and facilitates lower maintenanceand cabin reconfiguration costs, when compared to traditional oxygen systems.

*CoffeeMakers/Water Boilers.* We believe, based on our experience in the industry, that we are theleading manufacturer of aircraft coffee and tea makers.  We manufacture a broad line of coffee makers,including the Endura® beverage maker, coffee warmers and water boilers, and aCombi Unit® which will both brew coffee and boil water for tea while utilizing25% less electrical power than traditional 5,000-watt water boilers.  We also manufacture a cappuccino/espresso maker.

*Ovens.*  We believe, based on our experience in theindustry, that we are the leading manufacturer of a broad line of specializedovens, including high-heat efficiency ovens, high-heat convection and steamovens and warming ovens.  Our “DS SteamOven” uses a method of preparing in-flight food by maintaining constanttemperature and

12

----

 

moisture in the food. It addresses the airlines’ need to provide a wider range of foodofferings than can be prepared by convection ovens.

*RefrigerationEquipment.*  We believe,based on our experience in the industry, that we are the worldwide industryleader in the design, manufacture and supply of commercial aircraftrefrigeration equipment.  We manufactureself-contained wine and beverage chillers, refrigerators/freezers and airchilling systems.

***Distribution Segment***

Through our subsidiary,M&M Aerospace Hardware, Inc. (M&M), we believe we offer one of thebroadest lines of fasteners and inventory management services worldwide. Nearly55% of our fastener sales are to the aftermarket, and over 60% of our ordersare shipped within 24 hours of receipt. With over 175,000 SKUs and next-dayservice, we serve as a distributor for almost every major aerospace fastenermanufacturer. Our service offerings include inventory management andreplenishment, electronic data interchange, special packaging and bar-coding,quality assurance testing and purchasing assistance. Our seasoned purchasingand sales teams, coupled with state-of-the-art information technology andautomated retrieval systems, provide the basis for our reputation for highquality and overnight delivery.

***Business Jet Segment***

We believe, based on ourexperience in the industry, that we are the leading manufacturer of a broadproduct line of furnishings for business jets. Our products include a completeline of business jet seating and sofa products, direct and indirect lighting,air valves and oxygen delivery systems as well as sidewalls, bulkheads,credenzas, closets, galley structures, lavatories and tables. We have thecapability to provide complete interior packages, including all designservices, all interior components and program management services for executiveaircraft interiors. We believe we are the preferred supplier of seatingproducts and direct and indirect lighting systems for essentially every generalaviation airframe manufacturer. We estimate that as of December 31, 2006, wehad an aggregate installed base of business jet equipment valued at replacementprices of approximately $1.1 billion.

We believe, based on ourexperience in the industry, our business jet segment, which has had decades ofexperience in equipping VIP and head of state aircraft, is the leadingmanufacturer of super first class cabin interior products for commercialwide-body aircraft. Super first class products incorporate a broad range ofamenities such as luxurious first class cabins with appointments such aslie-flat seating, mini-bars, closets, flat screen televisions and moodlighting, which were found only in VIP and head-of-state aircraft untilrecently.

***Engineering ServicesSegment***

*EngineeringDesign, Integration, Installation and Certification Services.*  We believe, based on our experience in theindustry, that we are a leader in providing engineering, design, integration,installation and certification services for commercial aircraft passenger cabininteriors. We also offer our customers in-house capabilities to design, manage,integrate, test and certify reconfigurations and modifications for commercialaircraft and to manufacture related products, including engineering kits andinterface components. We provide a broad range of interior reconfigurationservices which allow airlines to change the size of certain classes of service,modify and upgrade the seating, install telecommunications and entertainmentequipment, relocate galleys, lavatories and overhead bins, and install crewrest compartments.

*Passenger-to-FreighterConversions.*  Webelieve, based on our experience in the industry, that we are a leadingsupplier of structural design and integration services, including airframemodifications for passenger-to-freighter conversions. In addition, we haveperformed conversions for Boeing 767, Boeing 747-200 Combi Unit®, Boeing747-200 (door only) and Airbus A300 B4 aircraft. In addition, China Southernrecently selected us to convert six of their A300-600 wide-body passengeraircraft to freighter aircraft. Freighter conversions require sophisticated engineering capabilities andvery large and complex proprietary parts kits.

*CrewRest Compartments.*  Webelieve, based on our experience in the industry, that we are a leader in thedesign, certification and manufacture of crew rest compartments. Long-haulinternational flights can carry two flight crews and the off-duty flight crewoften utilize crew rest compartments to sleep during the flight. A crew restcompartment is constructed utilizing lightweight cabin interior materials andincorporates seating, electrical, heating, ventilation and air conditioning andlavatory systems.

**Research,Development and Engineering**

We work closely withcommercial airlines to improve existing products and identify customers’emerging needs.

 

13

----

 

Our expenditures in research, development andengineering totaled $88.6 million, $65.6 million and $55.1 million for thethree years ending December 31, 2006, respectively. We employed 877professionals in engineering, research and development and program managementas of December 31, 2006. We believe, based on our experience in the industry,that we have the largest engineering organization in the cabin interiorproducts industry, with mechanical, electrical, electronic and software designskills, as well as substantial expertise in materials composition and customcabin interior layout design and certification.

**Marketingand Customers**

We market and sell ourcommercial aircraft products directly to virtually all of the world’s majorairlines and airframe manufacturers. Airlines select manufacturers of cabininterior products primarily on the basis of custom design capabilities, productquality and performance, on-time delivery, after-sales customer service,product support and price. We believe that our large installed base, our timelyresponsiveness in connection with the custom design, manufacture, delivery andafter-sales customer service and product support of our products and our broadproduct line and stringent customer and regulatory requirements all presentbarriers to entry for potential new competitors in the cabin interior productsmarket.

We believe that airlinesprefer our integrated worldwide marketing approach, which is focused by airlineand encompasses our entire product line. Led by senior executives, teamsrepresenting each product line serve designated airlines that togetheraccounted for over 80% of the purchases of products manufactured by ourSeating, Interior Systems, and Engineering Services segments during the fiscalyear ended December 31, 2006.  Our teamshave developed customer-specific strategies to meet each airline’s product andservice needs. We also staff “on-site” customer engineers at major airlines andairframe manufacturers to represent our entire product line and work closelywith the customers to develop specifications for each successive generation ofproducts required by the airlines. These engineers help customers integrate ourwide range of cabin interior products and assist in obtaining the applicableregulatory certification for each particular product or cabin configuration.Through our on-site customer engineers, we expect to be able to moreefficiently design and integrate products that address the requirements of ourcustomers. We provide program management services, integrating all on-boardcabin interior equipment and systems, including installation and FederalAviation Administration certification, allowing airlines to substantiallyreduce costs. We believe that we are one of the only suppliers in the commercialaircraft cabin interior products industry with the size, resources, breadth ofproduct line and global product support capability to operate in this manner.

Our program managementapproach assigns a program manager to each significant contract. The programmanager is responsible for all aspects of the specific contract andprofitability, including managing change orders, negotiating relatednon-recurring engineering charges and monitoring the progress of the contractthrough its delivery dates. We believe that our customers benefit substantiallyfrom our program management approach, including better on-time delivery andhigher service levels. We also believe our program management approach resultsin better customer satisfaction.

We market our businessjet products directly to all of the world’s general aviation airframemanufacturers, modification centers and operators. Business jet ownerstypically rely upon the airframe manufacturers and completion centers tocoordinate the procurement and installation of their interiors. Business jetowners select manufacturers of business jet products on a basis similar tocommercial aircraft interior products: customer design capabilities, productquality and performance, on-time delivery, after-sales customer service, productsupport and price. We believe that potential new competitors would face anumber of barriers to entering the cabin interior products market. Barriers toentry include regulatory requirements, our large installed product base, ourcustom design capability, manufacturing capability, delivery, and after-salescustomer service, product support and our broad product line.

We market our aerospacefasteners directly to the airlines, completion centers, general aviationairframe manufacturers, first-tier suppliers to the commercial, military anddefense airframe manufacturers, the airframe manufacturers and otherdistributors. We believe that our key competitive advantages are the breadth ofour product offerings and our ability to deliver on a timely basis. We believethat our broad product offerings of aerospace fasteners and our ability todeliver products on a next day basis and our core competencies in productinformation management, purchasing and logistics management provide strongbarriers to entry.

As of December 31, 2006,our direct sales marketing and product support organizations consisted of 351persons. In addition, we currently retain 58 independent sales representatives.Our sales to non-U.S.  customers wereapproximately $645 million for the fiscal year ended December 31, 2006 and $445million for the fiscal year ended December 31, 2005 or approximately 57% and53%, respectively, of net sales during such periods. Approximately 82% and 84%of our total revenues were derived from airlines and other commercial aircraftoperators during the

14

----

 

fiscal year ended December 31, 2006 and the fiscalyear ended December 31, 2005, respectively. Approximately 60% of our revenuesduring the fiscal year ended December 31, 2006 and 63% of our revenues for thefiscal year ended December 31, 2005 were from refurbishment, spares and upgradeprograms. During the fiscal years ended December 31, 2006 and December 31,2005, no single customer accounted for more than 10% of our consolidated sales.The portion of our revenues attributable to particular customers varies fromyear to year with the airlines’ scheduled purchases of new aircraft and forretrofit and refurbishment programs for their existing aircraft.

**Backlog**

We estimate that ourbacklog at December 31, 2006 was in excess of $1.7 billion as compared toapproximately $1.1 billion at December 31, 2005 and $700 million at December31, 2004.  Approximately 48% of ourbacklog at December 31, 2006, is scheduled to be deliverable within the nexttwelve months.  While 40% of our totalbacklog is with North American customers, less than 17% of our total backlog iswith domestic airlines.  Approximately22% is with European customers and approximately 38% is with customers inemerging markets such as Asia, Pacific Rim and the Middle East.  Our backlog includes backlog from all of ourbusinesses. Orders during the fiscal year ended December 31, 2006 ofapproximately $1.7 billion increased by over 40% above the order level during2005, and our backlog at December 31, 2006 increased by over 60% compared tothe backlog at December 31, 2005 despite a 33.7% year over year increase inrevenues.

**CustomerService**

We believe that ourcustomers place a high value on customer service and product support and thatthis service is a critical differentiating factor in our industry. The keyelements of such service include:

·            Rapid response torequests for engineering design, proposal requests and technicalspecifications;

·            Flexibility withrespect to customized features;

·            On-time delivery;

·            Immediate availabilityof spare parts for a broad range of products; and

·            Prompt attention tocustomer problems, including on-site customer training.

Customer service isparticularly important to airlines due to the high cost to the airlines of latedelivery, malfunctions and other problems.

**Warrantyand Product Liability**

We warrant our products,or specific components thereof, for periods ranging from one to ten years,depending upon product and component type. We establish reserves for productwarranty expense after considering relevant factors such as our stated warrantypolicies and practices, historical frequencies of claims to replace or repairproducts under warranty and recent sales and claims trends. Actual warrantycosts reduce the warranty reserve as they are incurred. We periodically reviewthe adequacy of accrued product warranty reserves and revisions of suchreserves are recognized in the period in which such revisions are determined.

We also carry productliability insurance. We believe that our insurance should be sufficient tocover product liability claims.

**Competition**

The commercial aircraftcabin interior products market is relatively fragmented, with a number ofcompetitors in each of the individual product categories. Due to the globalnature of the commercial aerospace industry, competition comes from both U.S.and foreign manufacturers. However, as aircraft cabin interiors have becomeincreasingly sophisticated and technically complex, airlines have demandedhigher levels of engineering support and customer service than many smallercabin interior products suppliers can provide. At the same time, airlines haverecognized that cabin interior product suppliers must be able to integrate awide range of products, including sophisticated electronic components, such asvideo and live broadcast TV, particularly in wide-body aircraft. We believethat the airlines’ increasing demands will result in a consolidation of theremaining suppliers. We have participated in this consolidation throughstrategic acquisitions and internal growth and we intend to continue toparticipate in the consolidation.

15

----

 

Our principal competitorsfor seating products are Groupe Zodiac S.A. and Keiper Recaro GmbH. Our primarycompetitors for interior systems products are Britax PLC, JAMCO and GroupeZodiac S.A. Our principal competitors in the passenger-to-freighter conversionbusiness include Boeing Airplane Services, Elbe Flugzeugwerk GmbH, a divisionof EADS, Israel Aircraft Industries, Pemco World Air Services and Aeronavili.Our principal competitors for other product and service offerings in ourengineered interior structures, components and assemblies include TIMCO, JAMCO,Britax PLC and Driessen Aircraft Interior Systems. The market for business jetproducts is highly fragmented, consisting of numerous competitors, the largestof which is Decrane Aircraft Holdings. Our primary competitors in the fastenerdistribution market are Honeywell Hardware Products Group, Wesco AircraftHardware, C.J. Fox and Anixeter Pentacon.

**Manufacturingand Raw Materials**

Our manufacturingoperations consist of both the in-house manufacturing of component parts andsub-assemblies and the assembly of our designed component parts that arepurchased from outside vendors. We maintain state-of-the-art facilities, and wehave an ongoing strategic manufacturing improvement plan utilizing leanmanufacturing processes. We constantly strive for continuous improvement fromimplementation of these plans for each of our product lines. We have implementedcommon information technology platforms company-wide, as appropriate. Theseactivities should lower our production costs, shorten cycle times and reduceinventory requirements and at the same time improve product quality, customerresponse and profitability. We do not believe we are materially dependent onany single supplier or assembler for any of our raw materials or specified anddesigned component parts and, based upon the existing arrangements withvendors, our current and anticipated requirements and market conditions, webelieve that we have made adequate provisions for acquiring raw materials.

**GovernmentRegulation**

The Federal AviationAdministration (FAA) prescribes standards and licensing requirements foraircraft components, and licenses component repair stations within the UnitedStates. Comparable agencies regulate such matters in other countries. We holdseveral FAA component certificates and perform component repairs at a number ofour U.S. facilities under FAA repair station licenses. We also hold an approvalissued by the European Aviation Safety Administration (EASA) to design,manufacture, inspect and test aircraft seating products in Leighton Buzzard,England and to manufacture and ship from our Kilkeel, Northern Ireland facility.We also have the necessary approvals to design, manufacture, inspect, test andrepair our interior systems products in Nieuwegein, the Netherlands.

In March 1992, the FAAadopted Technical Standard Order C127, or TSO-C127, which provides a designapproval that the FAA may issue to seat manufacturers for seats testeddynamically to meet the requirements of 14 CFR 25.562 (commonly referred to as “16g”).  We have developed and certified 55 uniqueseat models that meet the requirements of TSO-C127 and TSO-C127a.  The FAA and EASA also prescribe that seatsmeet certain flammability and electrical interference specifications.  In October 2005, the FAA adopted 14 CFR121.311(j), which requires dynamic testing of all seats installed in all newaircraft certified after January 1, 1988 and produced after October 27,2009.  EASA is expected to establish asimilar role.  B/E’s large installed baseof 16G seats demonstrates our industry leadership in seat certificationrequirements.

On October 4, 2002, theFAA published a Supplemental Notice of Proposed Rule Making (SNPRM). This SNPRMproposed extending the current requirement for “enhanced safety” seats (16Gseats) on aircraft designs registered after 1988 to all aircraft. This proposedrule would require that older design aircraft be retrofitted with new enhancedsafety “16G” seats over a multi-year basis. The public comment period for theproposed retrofit rule closed on March 3, 2003. The date for final rule makingand any changes to the details of the rule will be based on the commentsreceived and the priority assigned to this proposal by the FAA.

In November 2002, ourseating group became the first passenger seating supplier to sign a Partnershipfor Safety Plan (PSP) with the FAA. Based on established qualifications ofpersonnel and systems, the PSP provides us with increased authority to approvetest plans and reports, and to witness tests. The PSP provides us with a numberof business benefits including greater planning flexibility, simplifiedscheduling and greater program control and eliminates variables such as FAAworkload and priorities.

**EnvironmentalMatters**

Our operations aresubject to extensive and changing federal, state and foreign laws andregulations establishing health and environmental quality standards, includingthose governing discharges of pollutants into the air and water and themanagement and disposal of hazardous substances and wastes. We may be subjectto liability or penalties for violations of those standards. We are alsosubject to laws and regulations, such as the Federal Superfund law and

16

----

 

similar state statutes, governing remediation ofcontamination at facilities that we currently or formerly owned or operated orto which we send hazardous substances or wastes for treatment, recycling ordisposal. We believe that we are currently compliant, in all material respects,with applicable environmental laws and regulations. However, we could becomesubject to future liabilities or obligations as a result of new or morestringent interpretations of existing laws and regulations. In addition, we mayhave liabilities or obligations in the future if we discover any environmentalcontamination or liability relating to our facilities or operations.

**Patents**

We currently hold 202U.S. patents and 143 international patents, as well as 107 U.S. patentapplications and 179 foreign patent applications covering a variety ofproducts. We believe that the termination, expiration or infringement of one ormore of such patents would not have a material adverse effect on us.

**Employees**

As of December 31, 2006,we had approximately 5,058 employees. Approximately 64% of our employees areengaged in manufacturing/distribution operations and purchasing, 17% inengineering, research and development and program management, 7% in sales,marketing, and product support and 12% in finance, information technology,legal and general administration. Unions represent approximately 20% of ourworldwide employees. One domestic labor contract representing approximately 6%of our employees expires May 2, 2009. The other labor contract with the onlyother domestic union, which represents approximately 2% of our employees, runsthrough May 7, 2007. We consider our employee relations to be good.

**Financial Information About Segments and Foreign and DomesticOperations**

Financial and other information by segment and relating to foreign anddomestic operations for the fiscal years ended December 31, 2006, December 31,2005 and December 31, 2004, is set forth in note 13 to our consolidated financialstatements.

**Available Information**

Our filings with the Securities and Exchange Commission (SEC),including our annual reports on Form 10-K, quarterly reports on Form 10-Q, ourProxy Statement, current reports on Form 8-K and amendments to those reports,are available free of charge on our website as soon as reasonably practicableafter they are filed with, or furnished to, the SEC. Our Internet website islocated at http://www.beaerospace.com. Information included in or connected toour website is not incorporated by reference in this annual report.

17

----

** **

**ITEM 1A.  RISK FACTORS**

*You should consider carefully thefollowing risks, along with the other information contained in or incorporatedby reference in this Form 10-K. Additional risks and uncertainties also may adversely affect ourbusiness and operations including those discussed in Item 1A Risk Factors.  If any of the following events actuallyoccur, our business and financial results could be materially adverselyaffected.*

**Risks Relating to Our****Industry**

***We are directly dependent upon theconditions in the airline and business jet industries and a severe andprolonged downturn could negatively impact our results of operations.***

The September 11, 2001 terrorist attacks, SARS andthe onset of the Iraq war severely impacted conditions in the airline industry.According to industry sources, in the aftermath of the attacks most major U.S.and a number of international carriers substantially reduced their flightschedules, parked or retired portions of their fleets, reduced their workforcesand implemented other cost reduction initiatives. U.S. airlines furtherresponded by decreasing domestic airfares. As a result of the decline in bothtraffic and airfares following the September 11, 2001 terrorist attacks,and their aftermath, as well as other factors, such as increases in fuel costsand heightened competition from low-cost carriers, the world airline industrylost a total of approximately $41.0 billion in calendar years 2001-2006.The airline industry crisis also caused 22 airlines worldwide to declarebankruptcy or cease operations in the last four years.

As a result of the foregoing, through 2006, the domesticU.S. airlines, in large part, have been seeking to conserve cash by deferringor eliminating cabin interior refurbishment programs and deferring or cancelingaircraft purchases. This, together with the reduction of new business jetproduction, caused a substantial contraction in our business during the 2001through 2003 period. Although the global airline industry began to recover inlate 2003 and conditions continue to improve, and the business jet industry isimproving as well, additional events similar to those described above or otherevents could cause a deterioration of conditions in our industry or end thecurrent business cycle. The rate at which the business jet industry recovers isdependent on corporate profits, the number of used jets on the market and otherfactors, which could slow the rate of recovery.

***The airline industry is heavily regulated andfailure to comply with applicable laws could reduce our sales, or require us toincur additional costs to achieve compliance, which could reduce our results ofoperations.***

The Federal Aviation Administration (FAA) prescribesstandards and licensing requirements for aircraft components, includingvirtually all commercial airline and general aviation cabin interior products,and licenses component repair stations within the United States. Comparableagencies, such as the European Aviation Safety Administration (EASA), the CivilAviation Authority of China (CAAC) and the Japanese Civil Aviation Board(JCAB), regulate these matters in other countries. If we fail to obtain arequired license for one of our products or services or lose a license previouslygranted, the sale of the subject product or service would be prohibited by lawuntil such license is obtained or renewed. In addition, designing new productsto meet existing regulatory requirements and retrofitting installed products tocomply with new regulatory requirements can be both expensive and timeconsuming.

From time to time these regulatory agencies propose newregulations. These new regulations generally cause an increase in costs tocomply with these regulations. For example, the FAA dynamic testingrequirements originally established in 1988 under 14 CFR 25.562 are currentlyrequired for certain new generation aircraft types.  The recent enactment of 14 CFR 121.311(j)will require dynamic testing of all seats installed in all new aircraftproduced after October 27, 2009.  EASA isexpected to establish a similar rule. Compliance with this rule may require industry participants to expandengineering, plant and equipment to ensure that all products meet thisrule.  Smaller seating companies may nothave the resources, financial or otherwise, to comply with this rule and may berequired to sell their business or cease operations.  To the extent the FAA implements rule changesin the future, we may incur additional costs to achieve compliance.

***The airline industry is subject toextensive health and environmental regulation, any violation of which couldsubject us to significant liabilities and penalties.***

We are subject to extensive and changing federal, stateand foreign laws and regulations establishing health and environmental qualitystandards, and may be subject to liability or penalties for violations of thosestandards. We are also subject to laws and regulations governing remediation ofcontamination at facilities currently or formerly owned or operated by us or towhich we have sent hazardous substances or wastes for treatment, recycling ordisposal. We may be subject to future liabilities or obligations as a result ofnew or more stringent interpretations of existing laws and

18

----

 

regulations. In addition, we may have liabilities or obligations in thefuture if we discover any environmental contamination or liability at any ofour facilities, or at facilities we may acquire.

**Risks Relating to OurBusiness**

***There are risks inherent in internationaloperations that could have a material adverse effect on our businessoperations.***

While the majority of our operations are baseddomestically, we have significant manufacturing operations basedinternationally with facilities in the United Kingdom, the Netherlands andGermany and each of our facilities sells to airlines all over the world. Ourcustomers are located primarily in North America, Europe and the emergingmarkets including the Asia/Pacific Rim region, South America and the MiddleEast. As a result, 57% of our net sales for the year ended December 31, 2006and 40% or more of our sales for the years ended December 31, 2005 and December31, 2004 were to customers located outside the United States.

In addition, we have a number of subsidiaries in foreigncountries (primarily in Europe), which have sales outside the United States.Approximately 35% and 30%, respectively, of our sales during the fiscal yearends December 31, 2006, and 2005 came from our foreign operations.Fluctuations in the value of foreign currencies affect the dollar value of ournet investment in foreign subsidiaries, with these fluctuations being includedin a separate component of stockholders’ equity. At December 31, 2006, wereported a cumulative foreign currency translation adjustment of approximately$18.1 million in stockholders’ equity as a result of foreign currencyadjustments, and we may incur additional adjustments in future periods. Inaddition, operating results of foreign subsidiaries are translated into U.S.dollars for purposes of our statement of operations at average monthly exchangerates. Moreover, to the extent that our revenues are not denominated in thesame currency as our expenses, our net earnings could be materially adverselyaffected. For example, a portion of labor, material and overhead costs forgoods produced in our production facilities in the United Kingdom, Germany andthe Netherlands are incurred in British pounds or euros, respectively, but therelated sales revenues are generally denominated in U.S. dollars. Changes inthe value of the U.S. dollar or other currencies could result in fluctuationsin foreign currency translation amounts or the U.S. dollar value oftransactions and, as a result, our net earnings could be materially adverselyaffected.

Historically we have not engaged in hedging transactions.However, we may engage in hedging transactions in the future to manage orreduce our foreign exchange risk. Our attempts to manage our foreign currencyexchange risk may not be successful and, as a result, our results of operationsand financial condition could be materially adversely affected.

Our foreign operations could also be subject tounexpected changes in regulatory requirements, tariffs and other marketbarriers and political, economic and social instability in the countries wherewe operate or sell our products and offer our services. The impact of any suchevents that may occur in the future could subject us to additional costs orloss of sales, which could materially adversely affect our operating results.

***If we make acquisitions, they may beless successful than we expect, which could have a material adverse effect onour financial condition.***

We may consider future acquisitions, some of which couldbe material to us. We explore and conduct discussions with many third partiesregarding possible acquisitions. Our ability to continue to achieve our goalsmay depend upon our ability to effectively acquire and integrate suchcompanies, to achieve cost efficiencies and to manage these businesses as partof our company. We may not be successful in implementing appropriateoperational, financial and management systems and controls to achieve thebenefits expected to result from these acquisitions. Our efforts to integratethese businesses could be materially adversely affected by a number of factorsbeyond our control, such as regulatory developments, general economicconditions, increased competition and the loss of certain customers resultingfrom the acquisitions. In addition, the process of integrating these businessescould cause difficulties for us, including an interruption of, or loss ofmomentum in, the activities of our existing business and the loss of keypersonnel and customers. Further, the benefits that we anticipate from these acquisitionsmay not develop. Depending upon the acquisition opportunities available, wealso may need to raise additional funds through the capital markets or arrangefor additional bank financing in order to consummate such acquisitions.

19

----

 

***Our total assets include substantialintangible assets. The write-off of a significant portion of unamortizedintangible assets would negatively affect our results of operations.***

Our total assets reflect substantial intangible assets.At December 31, 2006, goodwill and identified intangibles, net, representedapproximately 41% of total assets. Intangible assets consist principally ofgoodwill and other identified intangible assets associated with ouracquisitions. On at least an annual basis, we assess whether there has been animpairment in the value of goodwill and other intangible assets with indefinitelives. If the carrying value of the tested asset exceeds its estimated fairvalue, impairment is deemed to have occurred. In this event, the amount is written down to fair value.  Under current accounting rules, this wouldresult in a charge to operating earnings. Any determination requiring thewrite-off of a significant portion of unamortized goodwill and identifiedintangible assets would negatively affect our results of operations and totalcapitalization, which could be material.

***Our substantial indebtedness will require that asignificant portion of our cash flow be used for debt service, which will limitour ability to use our cash flow for other areas of our business and couldadversely affect the holders of our securities.***

As of December 31, 2006, we had approximately $504million of total indebtedness outstanding, representing approximately 42% oftotal capitalization, and $439 million of net indebtedness outstanding (totalindebtedness less cash and cash equivalents), representing approximately 38% ofnet capitalization. Subject to the limits contained in our existing bank creditfacility and the indentures governing our outstanding senior and seniorsubordinated notes, we could also incur substantial additional indebtedness inthe future.

As a result of our substantial indebtedness, we havesubstantial debt service obligations that could have significant consequencesto us, including:

·                  limitingour ability to use operating cash flow in other areas of our business becausewe must dedicate a substantial portion of those funds to fund debt serviceobligations;

·                  limitingour ability to obtain additional financing to fund our growth strategy, workingcapital requirements, capital expenditures, acquisitions, debt servicerequirements or other general corporate requirements;

·                  increasing our vulnerability toadverse economic and industry conditions; and

·                  increasing our exposure to interestrate increases because borrowings under our current bank credit facility are,and borrowings under any future bank credit facility could be, at variableinterest rates.

Our ability to satisfy our debt service obligations willdepend upon, among other things, our future operating performance and ourability to refinance indebtedness when necessary. Each of these factors is to alarge extent dependent on economic, financial, competitive, and other factorsbeyond our control. If, in the future, we cannot generate sufficient cash fromoperations to meet our debt service obligations, we will need to refinance,obtain additional financing or sell assets. In the future, our business may notgenerate sufficient cash flow, or we may not be able to obtain funding, tosatisfy our debt service requirements. We had a net loss for the fiscal yearended December 31, 2004, and our earnings were inadequate to cover fixedcharges for this period; and for the years ended December 31, 2006, and2005, our cash flows provided by operations were only $41.0 million and$12.6 million, respectively.  Ourcash flows from operations during the years ended December 31, 2006 and 2005reflect our high rate of growth, which resulted in large growth in ourreceivables and inventories.

In addition to the debt service requirements of ouroutstanding indebtedness, we have other demands on our cash resources,including, among others, capital expenditures and operating expenses.

***We have significant financial andoperating restrictions in our debt instruments that may have an adverse effecton our operations.***

The indentures governing our outstanding seniorsubordinated notes and our bank borrowings contain numerous financial andoperating covenants that limit our ability to incur additional or repayexisting indebtedness, to create liens or other encumbrances, to make certainpayments and investments, including dividend payments, to engage intransactions with affiliates, to engage in sale/leaseback transactions, toguarantee indebtedness and to sell or otherwise dispose of assets and merge orconsolidate with other entities. Agreements governing future indebtedness couldalso contain significant financial and operating restrictions. Our current bankcredit facilities contain customary affirmative and negative covenants. Afailure to comply with the obligations contained in any current or futureagreement governing our indebtedness, including our indentures, could result inan event of default under our current or any future bank credit

20

----

 

facility, or such indentures, which could permit acceleration of therelated debt and acceleration of debt under other instruments that may containcross-acceleration or cross-default provisions. We may not have, ormay not be able to obtain, sufficient funds to make any required acceleratedpayments.

***We compete with a number of established companies,some of which have significantly greater financial, technological and marketingresources than we do, and we may not be able to compete effectively with thesecompanies.***

We compete with numerous established companies. Some ofthese companies, particularly in the passenger-to-freighter conversionbusiness, have significantly greater financial, technological and marketingresources than we do. Our ability to be an effective competitor will depend onour ability to remain the supplier of retrofit and refurbishment products andspare parts on the commercial fleets on which our products are currently inservice. It will also depend on our success in causing our products and the newproducts we may develop to be selected for installation in new aircraft,including next-generation aircraft, and in avoiding product obsolescence. Ourability to maintain or expand our market position in the passenger-to-freighterconversion business will depend on our success in being selected to convertspecific aircraft, our ability to maintain and enhance our engineering design,our certification and program management capabilities and our ability tomanufacture a broader range of structural components, connectors and otherproducts used in this business.

***Provisions in our charter documentsmay discourage potential acquisitions of our company, even those which theholders of a majority of our common stock may favor.***

Our restated certificate of incorporation and by-lawscontain provisions that may have the effect of discouraging a third party frommaking an acquisition of us by means of a tender offer, proxy contest orotherwise. Our restated certificate of incorporation and by-laws:

·                  classify the board of directors intothree classes, with directors of each class serving for a staggered three-yearperiod;

·                  provide that directors may be removedonly for cause and only upon the approval of the holders of at least two-thirdsof the voting power of our shares entitled to vote generally in the election ofsuch directors;

·                  require at least two-thirds of thevoting power of our shares entitled to vote generally in the election ofdirectors to alter, amend or repeal the provisions relating to the classifiedboard and removal of directors described above;

·                  permit the board of directors to fillvacancies and newly created directorships on the board;

·                  restrict the ability of stockholdersto call special meetings; and

·                  contain advance notice requirementsfor stockholder proposals.

***Our rights plan and the ability of our board ofdirectors to issue preferred stock may have the effect of discouraging atakeover attempt not previously approved by the board of directors.***

Our board of directors has declared a dividend of onepreferred share purchase right for each share of common stock outstanding.  A right will also be attached to each shareof common stock subsequently issued.  Therights will have certain anti-takeover effects. If triggered, the rights would cause substantial dilution to a person orgroup of persons that acquires more than 15.0% of our common stock on terms notapproved by our board of directors.  Therights could discourage or make more difficult a merger, tender offer or othersimilar transaction.

Under our restated certificate of incorporation, ourboard of directors also has the authority to issue preferred stock in one ormore series and to fix the powers, preferences, and rights of any such serieswithout stockholder approval.  The boardof directors could, therefore, issue, without stockholder approval, preferredstock with voting and other rights that could adversely affect the voting powerof the holders of common stock and could make it more difficult for a thirdparty to gain control of us.  Inaddition, under certain circumstances, Section 203 of the Delaware GeneralCorporation Law makes it more difficult for an “interested stockholder”, orgenerally a 15% stockholder, to effect various business combinations with acorporation for a three-year period unless previously approved by our board ofdirectors.

21

----

*** ***

***You may not receive cash dividends onour shares of common stock.***

We have never paid a cash dividend and do not plan to paycash dividends on our common stock in the foreseeable future.  We intend to retain our earnings to financethe development and expansion of our business and to repay indebtedness.  Also, our ability to declare and pay cashdividends on our common stock is restricted by covenants in our outstandingnotes.  Our current bank credit facilityalso contains customary covenants, which include covenants restricting ourability to declare and pay cash dividends.

***If the price of our common stockcontinues to fluctuate significantly, you could lose all or part of anyinvestment in our common stock.***

The price of our common stock is subject to sudden andmaterial increases and decreases, and decreases could adversely affectinvestments in our common stock.  Forexample, since the beginning of 2004, the closing sale price of our commonstock has ranged from a low of $5.20 to a high of $31.33.  The price of our common stock could fluctuatewidely in response to:

·        ourquarterly operating results;

·        changesin earnings estimates by securities analysts;

·        changesin our business;

·        changesin the market’s perception of our business;

·        changesin the businesses, earnings estimates or market perceptions of our competitorsor customers;

·        changesin airline industry or business jet industry conditions;

·        changesin general market or economic conditions; and

·        changesin the legislative or regulatory environment.

In addition, the stock market has experienced extremeprice and volume fluctuations in recent years that have significantly affectedthe quoted prices of the securities of many companies, including companies inour industry.  The changes often appearto occur without regard to specific operating performance.  The price of our common stock could fluctuatebased upon factors that have little or nothing to do with our company and thesefluctuations could materially reduce our stock price.

22

----

 

**ITEM 1B.  UNRESOLVEDSTAFF COMMENTS**

None

**ITEM2.  PROPERTIES**

As of December 31, 2006, we had 14 principal operatingfacilities and one administrative facility, which comprised an aggregate ofapproximately 1.5 million square feet of space. The following table describes the principal facilities and indicates thelocation, function, approximate size, and ownership status of each location.
| Segment                    | ** ** | **Location**                  | ** ** | **Purpose**    | ** ** | **Facility  Size  (Sq. Feet)** | ** ** | **Ownership** |
|----------------------------|------------|-------------------------------|------------|----------------|------------|--------------------------------|------------|---------------|
|                       |       |                          |       |           |       |                           |       |          |
| ***Seating***              |       | Winston-Salem, North Carolina |       | Manufacturing  |       | 264,800                        |       | Leased        |
|                            |       | Leighton Buzzard, England     |       | Manufacturing  |       | 114,000                        |       | Owned         |
|                            |       | Kilkeel, Northern Ireland     |       | Manufacturing  |       | 141,000                        |       | Leased/Owned  |
| *** ***               |       |                          |       |           |       |                           |       |          |
| ***Interior  Systems***    |       | Anaheim, California           |       | Manufacturing  |       | 98,000                         |       | Leased        |
|                       |       | Lenexa, Kansas                |       | Manufacturing  |       | 80,000                         |       | Leased        |
|                       |       | Nieuwegein, the Netherlands   |       | Manufacturing  |       | 47,350                         |       | Leased        |
|                       |       | Westminster, California       |       | Manufacturing  |       | 70,000                         |       | Leased        |
|                       |       | Lubeck, Germany               |       | Manufacturing  |       | 86,100                         |       | Leased        |
|                       |       |                          |       |           |       |                           |       |          |
| ***Business Jet***         |       | Miami, Florida                |       | Manufacturing  |       | 110,000                        |       | Leased        |
|                            |       | Holbrook, New York            |       | Manufacturing  |       | 20,100                         |       | Leased        |
|                            |       | Tucson, Arizona               |       | Manufacturing  |       | 90,500                         |       | Leased        |
| *** ***               |       |                          |       |           |       |                           |       |          |
| ***Distribution***         |       | Miami, Florida                |       | Distribution   |       | 210,000                        |       | Leased        |
| *** ***               |       | East Berlin, Connecticut      |       | Distribution   |       | 21,000                         |       | Leased        |
| *** ***               |       |                          |       |           |       |                           |       |          |
| ***Engineering Services*** |       | Marysville, Washington        |       | Manufacturing  |       | 110,000                        |       | Leased        |
| *** ***               |       |                          |       |           |       |                           |       |          |
| ***Corporate***            |       | Wellington, Florida           |       | Administrative |       | 19,620                         |       | Leased/Owned  |
|                       |       |                          |       |           |       | 1,482,470                      |       |          |

 

We believe that ourfacilities are suitable for their present intended purposes and adequate forour present and anticipated level of operations.

[Remainder of pageintentionally left blank]

23

----

**ITEM 3. LEGAL PROCEEDINGS**

We are a defendant invarious legal actions arising in the normal course of business, the outcomes ofwhich, in the opinion of management, neither individually nor in the aggregateare likely to result in a material adverse effect on our business, results ofoperations or financial condition.

There are no materialpending legal proceedings, other than the ordinary routine litigationincidental to the business discussed above, to which we or any of oursubsidiaries are a party or of which any of our property is the subject.

**ITEM4.  SUBMISSION OF MATTERS TO A VOTE OFSECURITY HOLDERS**

During the last quarter of the fiscal year covered bythis Form 10-K, we did not submit any matters to a vote of security holders,through the solicitation of proxies or otherwise.

[Remainder of pageintentionally left blank]

24

----

**PART II**
| **ITEM 5.** | **MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED  STOCKHOLDER MATTERS, AND ISSUER PURCHASES OF EQUITY SECURITIES** |
|-------------|-------------------------------------------------------------------------------------------------------------------------|

 

Our common stock is quoted on the Nasdaq NationalMarket under the symbol “BEAV.”  Thefollowing table sets forth, for the periods indicated, the range of high andlow per share sales prices for the common stock as reported by Nasdaq.

 
| ** **     | ** ** | **Calendar Year Ended  December 31,** | ** ** |
|----------------|------------|------------------------------------------------------|------------|
| ** **     | ** ** | **2006**                                             | ** ** | **2005** | ** ** |
| ** **     | ** ** | **High**                                             | ** ** | **Low** | ** ** | **High** | ** ** | **Low** | ** ** |
| ** **     | ** ** | **(Amounts in Dollars)**                   | ** ** |
| First Quarter  |       | $                                                    | 25.78      |   | $ | 20.25 |   | $ | 13.10 |   | $ | 9.30 |   |
| Second Quarter |       | 29.60                                                |       | 18.28 |   | 16.48 |   | 10.15 |   |
| Third Quarter  |       | 25.25                                                |       | 17.64 |   | 17.75 |   | 14.05 |   |
| Fourth Quarter |       | 27.77                                                |       | 19.09 |   | 22.46 |   | 16.06 |   |
|                |            |                                                      |            |  |  |  |  |  |  |  |  |  |  |

 

On February 14,2007, the last reported sale price of our common stock as reported by Nasdaqwas $31.33 per share. As of such date, based on information provided to us byComputershare, our transfer agent, we had approximately 1,000 registeredholders, and because many of these shares are held by brokers and otherinstitutions on behalf of the beneficial holders, we are unable to estimate thenumber of beneficial shareholders represented by these holders of record. Wehave not paid any cash dividends in the past, and we have no present intentionof doing so in the immediate future. Our Board of Directors intends, for theforeseeable future, to retain any earnings to reduce indebtedness and financeour future growth, but expects to review our dividend policy regularly. The indenturesgoverning our 8-7/8% senior subordinated notes, as well as our amended andrestated bank credit facilities, permit the declaration of cash dividends onlyin certain circumstances described therein.

The followinggraph compares the cumulative 5-year total return to shareholders on BEAerospace, Inc.’s common stock relative to the cumulative total returns of theNASDAQ Composite index, the Dow Jones US Airlines index and the Dow Jones USAerospace & Defense index. An investment of $100 (with reinvestment of alldividends) is assumed to have been made in the company’s common stock and ineach of the indexes on 12/31/2001 and its relative performance is trackedthrough 12/31/2006.

25

----

**ITEM6.  SELECTED FINANCIAL DATA**

(In millions, except per sharedata)

The financial datafor the years ended December 31, 2006, December 31, 2005, December 31, 2004 andDecember 31, 2003, and the transition period ended December 31, 2002 have beenderived from financial statements that have been audited by our independent registeredpublic accounting firm. In 2002, we changed our fiscal year to a calendar year,as a result, we have presented results for the ten-month transition periodended December 31, 2002.  The followingfinancial information is qualified by reference to, and should be read inconjunction with, Item 7—“Management’s Discussion and Analysis of FinancialCondition and Results of Operations” and our historical financial statements,including notes thereto, which are included in Item 15 of this Form 10-K.  Our historical results are not necessarilyindicative of our future results.

 
| ** **                                  | ** ** | **Fiscal  Year Ended  December 31,** | ** ** | **Transition  Period Ended  December 31,** | ** ** |
|---------------------------------------------|------------|------------------------------------------------|------------|------------------------------------------------------|------------|
| ** **                                  | ** ** | **2006**                                       | ** ** | **2005**                                             | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** |
| **Statements  of Operations Data:**         |       |                                           |       |                                                 |       |   |   |   |   |   |   |
| Net sales                                   |       | $                                              | 1,128.2    |                                                 | $          | 844.1 |   | $ | 733.5 |   | $ | 624.4 |   | $ | 503.6 |   |
| Cost of sales(a)                            |       | 731.7                                          |       | 548.5                                                |       | 494.8 |   | 453.6 |   | 352.3 |   |
| Gross profit                                |       | 396.5                                          |       | 295.6                                                |       | 238.7 |   | 170.8 |   | 151.3 |   |
| Gross margin                                |       | 35.1                                           | %          | 35.0                                                 | %          | 32.5 | % | 27.4 | % | 30.0 | % |
| Operating  expenses:                        |       |                                           |       |                                                 |       |   |   |   |   |   |   |
| Selling, general and administrative(b)      |       | 159.6                                          |       | 136.4                                                |       | 119.2 |   | 105.8 |   | 128.0 |   |
| Research, development and engineering       |       | 88.6                                           |       | 65.6                                                 |       | 55.1 |   | 44.7 |   | 34.1 |   |
| Operating  earnings (loss)                  |       | 148.3                                          |       | 93.6                                                 |       | 64.4 |   | 20.3 |   | (10.8 | ) |
| Operating margin                            |       | 13.1                                           | %          | 11.1                                                 | %          | 8.8 | % | 3.3 | % | NM |   |
| Interest  expense, net                      |       | 38.9                                           |       | 59.3                                                 |       | 76.1 |   | 70.6 |   | 57.3 |   |
| Loss on debt  extinguishment                |       | 19.4                                           |       | —-                                              |       | 8.8 |   | 1.2 |   | —- |   |
| Earnings (loss)  before income taxes        |       | 90.0                                           |       | 34.3                                                 |       | (20.5 | ) | (51.5 | ) | (68.1 | ) |
| Income tax  expense (benefit)               |       | 4.4                                            |       | (50.3                                                | )          | 1.5 |   | 2.0 |   | 2.7 |   |
| Net earnings  (loss)                        |       | $                                              | 85.6       |                                                 | $          | 84.6 |   | $ | (22.0 | ) | $ | (53.5 | ) | $ | (70.8 | ) |
| * *                                    |       |                                           |       |                                                 |       |   |   |   |   |   |   |
| *Basic  net earnings (loss) per share:*     |       |                                           |       |                                                 |       |   |   |   |   |   |   |
| Net earnings  (loss)                        |       | $                                              | 1.11       |                                                 | $          | 1.44 |   | $ | (0.53 | ) | $ | (1.49 | ) | $ | (2.03 | ) |
| Weighted average  common shares             |       | 77.1                                           |       | 58.8                                                 |       | 41.7 |   | 36.0 |   | 34.9 |   |
| * *                                    |       |                                           |       |                                                 |       |   |   |   |   |   |   |
| *Diluted  net earnings (loss) per share:*   |       |                                           |       |                                                 |       |   |   |   |   |   |   |
| Net earnings  (loss)                        |       | $                                              | 1.10       |                                                 | $          | 1.39 |   | $ | (0.53 | ) | $ | (1.49 | ) | $ | (2.03 | ) |
| Weighted average  common shares             |       | 78.0                                           |       | 60.8                                                 |       | 41.7 |   | 36.0 |   | 34.9 |   |
| ** **                                  |       |                                           |       |                                                 |       |   |   |   |   |   |   |
| **Balance  Sheet Data (end of period):**    |       |                                           |       |                                                 |       |   |   |   |   |   |   |
| Working capital                             |       | $                                              | 456.0      |                                                 | $          | 573.4 |   | $ | 225.0 |   | $ | 274.3 |   | $ | 262.9 |   |
| Goodwill,  intangible and other assets, net |       | 636.2                                          |       | 525.3                                                |       | 545.5 |   | 541.5 |   | 534.9 |   |
| Total assets                                |       | 1,497.7                                        |       | 1,426.5                                              |       | 1,024.8 |   | 1,052.5 |   | 1,067.1 |   |
| Long-term debt,  net of current portion     |       | 502.0                                          |       | 677.4                                                |       | 678.6 |   | 880.1 |   | 836.0 |   |
| Stockholders’ equity                   |       | 706.0                                          |       | 569.6                                                |       | 182.8 |   | 31.9 |   | 69.3 |   |

 

26

----

**SELECTEDFINANCIAL DATA (continued)**

**Footnotesto Table**

(a)                      During theyear ended December 31, 2003 and the ten month period ended December 31, 2002we incurred $19.9 and $32.5, respectively related to severance, integrationcosts, lease termination costs, relocation, training and facility preparationcosts in connection with consolidation of facilities and headcount reductionsfollowing the events of September 11, 2001. As a result of these events, we also recorded write-downs of property,plant, equipment, inventory and other assets of $10.9 and $7.0 for the yearended December 31, 2003 and ten-month period ended December 31, 2002.

(b)                     In February2003, we received an adverse arbitration award related to the amounts due usfrom the Thales Group, which reduced the amount due by $29.5.  This non-cash charge is included in selling,general and administrative expenses in the ten-month period ended December 31,2002.

27

----

 

**ITEM 7.**       **MANAG****EMENT’S DISCUSSION ANDANALYSIS OF FINANCIAL CONDITION AND**

**RESULTSOF****OPERATIONS**

**(Dollarsin millions, except per share data)**

**OVERVIEW**

Based on our experiencein the industry, we believe we are the world’s largest manufacturer of cabininterior products for commercial aircraft and business jets and a leadingaftermarket distributor of aerospace fasteners. We sell our manufacturedproducts directly to virtually all of the world’s major airlines and airframemanufacturers and a wide variety of business jet customers. In addition, basedon our experience, we believe that we have achieved leading global marketpositions in each of our major product categories, which include:

·                     commercialaircraft seats, including an extensive line of super first class, first class,business class, tourist class and regional aircraft seats;

·                     a full lineof aircraft food and beverage preparation and storage equipment, includingcoffeemakers, water boilers, beverage containers, refrigerators, freezers,chillers and a line of ovens which includes microwave, high heat convection andsteam ovens;

·                     both chemicaland gaseous aircraft oxygen delivery, distribution and storage systems andprotective breathing equipment;

·                     business jetand general aviation interior products, including an extensive line ofexecutive aircraft seats, direct and indirect overhead lighting systems, oxygendelivery systems, air valve systems, high-end furniture and cabinetry; and

·                     a broad lineof aerospace fasteners, covering over 175,000 stock keeping units (SKUs).

We also design, developand manufacture a broad range of cabin interior structures and providecomprehensive aircraft cabin interior reconfiguration andpassenger-to-freighter conversion engineering services and component kits.

We generally derive ourrevenues from refurbishment or upgrade programs for the existing worldwidefleets of commercial and general aviation aircraft and from the sale of ourcabin interior equipment for new aircraft deliveries.  For fiscal 2006, fiscal 2005 and fiscal 2004approximately 60%, 63% and 60%, respectively, of our revenues were derived fromthe aftermarket, with the remaining portions attributable to the sale of cabininterior equipment associated with new aircraft deliveries. We believe our largeinstalled base of products, estimated to be approximately $6.0 billion as ofDecember 31, 2006 (valued at replacement prices), gives us a significantadvantage over our competitors in obtaining orders both for spare parts and forrefurbishment programs, principally due to the tendency of the airlines topurchase equipment for such programs from the incumbent supplier.

We conduct our operationsthrough strategic business units that have been aggregated under fivereportable segments: Seating, Interior Systems, Distribution, Business Jet andEngineering Services.

Net sales by reportablesegment for the years ended December 31, 2006, December 31, 2005 and December31, 2004 were as follows:
| ** **            | ** ** | **Fiscal Year Ended December 31,** | ** ** |
|-----------------------|------------|--------------------------------------------------------|------------|
| ** **            | ** ** | **2006**                                               | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **            | ** ** | **Net  Sales**                                         | ** ** | **% of  Net  Sales** | ** ** | **Net  Sales** | ** ** | **% of  Net Sales** | ** ** | **Net  Sales** | ** ** | **% of  Net   Sales** | ** ** |
| Seating               |       | $                                                      | 388.5      |   | 34.4 | % | $ | 281.8 |   | 33.4 | % | $ | 251.4 |   | 34.3 | % |
| Interior Systems      |       | 273.9                                                  |       | 24.3 | % | 205.5 |   | 24.4 | % | 200.4 |   | 27.3 | % |
| Distribution          |       | 251.5                                                  |       | 22.3 | % | 173.9 |   | 20.6 | % | 144.2 |   | 19.7 | % |
| Business Jet          |       | 147.5                                                  |       | 13.1 | % | 120.2 |   | 14.2 | % | 75.2 |   | 10.2 | % |
| Engineering  Services |       | 66.8                                                   |       | 5.9 | % | 62.7 |   | 7.4 | % | 62.3 |   | 8.5 | % |
| Net sales             |       | $                                                      | 1,128.2    |   | 100.0 | % | $ | 844.1 |   | 100.0 | % | $ | 733.5 |   | 100.0 | % |

 

28

----

 

Net sales by domestic and foreign operations for the years ended December31, 2006, December 31, 2005 and December 31, 2004 were as follows:
| ** ** | ** ** | **Fiscal Year Ended December 31,** | ** ** |
|------------|------------|--------------------------------------------------------|------------|
| ** ** | ** ** | **2006**                                               | ** ** | **2005** | ** ** | **2004** | ** ** |
| Domestic   |       | $                                                      | 732.9      |   | $ | 588.4 |   | $ | 495.7 |   |
| Foreign    |       | 395.3                                                  |       | 255.7 |   | 237.8 |   |
| Total      |       | $                                                      | 1,128.2    |   | $ | 844.1 |   | $ | 733.5 |   |

 

Net sales by geographic segment (based on destination) for the yearsended December 31, 2006, December 31, 2005 and December 31, 2004 were asfollows:
| ** **                                                 | ** ** | **Fiscal Year Ended December 31,** | ** ** |
|------------------------------------------------------------|------------|--------------------------------------------------------|------------|
| ** **                                                 | ** ** | **2006**                                               | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                                                 | ** ** | **Net  Sales**                                         | ** ** | **% of  Net Sales** | ** ** | **Net  Sales** | ** ** | **% of  Net Sales** | ** ** | **Net  Sales** | ** ** | **% of  Net Sales** | ** ** |
|                                                       |       |                                                   |       |   |   |   |   |   |   |   |   |   |   |
| North America                                              |       | $                                                      | 544.6      |   | 48.3 | % | $ | 433.4 |   | 51.3 | % | $ | 402.6 |   | 54.9 | % |
| Europe                                                     |       | 331.5                                                  |       | 29.4 | % | 202.2 |   | 24.0 | % | 175.1 |   | 23.9 | % |
| Emerging  Markets, i.e., Asia, Pacific Rim and Middle East |       | 252.1                                                  |       | 22.3 | % | 208.5 |   | 24.7 | % | 155.8 |   | 21.2 | % |
| Total                                                      |       | $                                                      | 1,128.2    |   | 100.0 | % | $ | 844.1 |   | 100.0 | % | $ | 733.5 |   | 100.0 | % |

 

Between 1989 and 2001, wesubstantially expanded the size, scope and nature of our business through 22acquisitions for an aggregate purchase price of approximately $1 billion.  From 2002 through June 2006, essentially allof our revenue growth was organic since we did not make any significantacquisitions during that period.

During the third quarterof 2006, we acquired Draeger and New York Fasteners for, in the aggregate,approximately $146 in cash.  Draeger manufacturescomponents and integrated systems to supply oxygen systems for both civil andmilitary aircraft, with well-established strengths in both chemical and gaseousoxygen systems.  Draeger is the primecontractor for the oxygen systems in the Eurofighter Typhoon, and providesmaintenance and repair services for Germany’s Air Force in-service oxygensystems.  The integration of Draeger withour existing oxygen business allows us to offer one of the broadest oxygensystem product lines in the industry.  NewYork Fasteners is a distributor of a wide variety of aerospace fasteners andhardware primarily to the military sector. The integration of New York Fasteners into our distribution segment isexpected to significantly expand our overall penetration into the military anddefense sector.

New product developmentis a strategic initiative for us. Our customers regularly request that weengage in new product development and enhancement activities. We believe thatthese activities protect and enhance our leadership position. We believe ourinvestments in research and development over the past several years have beenthe driving force behind our ongoing market share gains.  Research, development and engineeringspending has been approximately 7% - 8% of sales for the past several years andis expected to comprise a somewhat lower percentage of revenues for the nextyear.

We also believe inproviding our businesses with the tools required to remain competitive. In thatregard, we have invested, and will continue to invest in property and equipmentthat enhances our productivity. Taking into consideration our record backlog,targeted capacity utilization levels, recent capital expenditure investments,recent acquisitions and current industry conditions, we expect that annualcapital expenditures will be approximately $28 - 30 over the next twelvemonths.

International airlinecompetition for higher margin international travelers and improving worldwideindustry conditions have resulted in increasing demand for our products andservices, as demonstrated by record bookings of approximately $1.7 billionduring fiscal 2006 which were up over 40% as compared to fiscal 2005. AtDecember 31, 2006, backlog was in excess of $1.7 billion, an increase ofapproximately 60% as compared to our December 31, 2005 backlog. We expectstrong demand for the next several years as industry conditions continue toimprove.  As worldwide air traffic growsand airlines add capacity and upgrade the cabin interiors of existing activeaircraft, we expect our aftermarket activities to continue to grow. Accordingto IATA, during the year ended December 31, 2006,

29

----

 

the global airline industry expanded airline capacityby approximately 4.6% in response to an approximately 5.9% increase in global airtraffic. In addition, as a result of the severity of the post-September 11,2001 downturn, many carriers, particularly in the United States, have deferredinterior maintenance and upgrades. The U.S. carriers have just begun theprocess of upgrading their international fleets and we believe there aresubstantial additional growth opportunities with domestic carriers for retrofitprograms, particularly for the twin-aisle aircraft that service internationalroutes.

[Remainder of thepage intentionally left blank]

30

----

**RESULTS OF OPERATIONS**

**Year Ended December 31, 2006 Compared to theYear Ended December 31, 2005**

Net sales for the year endedDecember 31, 2006 were $1,128.2, an increase of $284.1 or 33.7% as compared tothe prior year.  Sales in 2006 increasedover the 2005 level primarily due to a higher level of customer demand forproducts offered by each of our five segments, market share gains and recentacquisitions.

Net sales for each of our segments are setforth in the following table:
| ** **           | ** ** | **YEAR ENDED DECEMBER 31,** | ** ** | ** ** | ** ** | ** ** | ** ** |
|----------------------|------------|--------------------------------------------|------------|------------|------------|------------|------------|
| ** **           | ** ** | **2006**                                   | ** ** | **2005**   | ** ** | **Change** | ** ** | **Percent  Change** | ** ** |
| Seating              |       | $                                          | 388.5      |       | $          | 281.8      |       | $ | 106.7 |   | 37.9 | % |
| Interior Systems     |       | 273.9                                      |       | 205.5      |       | 68.4       |       | 33.3 | % |
| Distribution         |       | 251.5                                      |       | 173.9      |       | 77.6       |       | 44.6 | % |
| Business Jet         |       | 147.5                                      |       | 120.2      |       | 27.3       |       | 22.7 | % |
| Engineering Services |       | 66.8                                       |       | 62.7       |       | 4.1        |       | 6.5 | % |
| Total Sales          |       | $                                          | 1,128.2    |       | $          | 844.1      |       | $ | 284.1 |   | 33.7 | % |

 

The increase insales volume for the seating, interior systems, and engineering servicessegments was driven by a higher level of retrofit activity, demand created bynew deliveries of large commercial jets (which increased by 24% versusdeliveries in 2005), and market share gains. Interior systems segment’s revenue growth rate exclusive of the impactof the Draeger acquisition was 20.5%. The distribution segment delivered revenue growth of 44.6% in 2006,primarily due to a broad-based increase in aftermarket demand for aerospacefasteners, continued market share gains and the acquisition of New YorkFasteners.  Distribution segment’srevenue growth rate exclusive of the impact of the New York Fastenersacquisition was 29.7%.  Business jetsegment revenues increased by 22.7% in 2006, reflecting strong business jetdeliveries, offset by a lower level of super first class revenues associatedwith A380 delivery delays.  The recentacquisitions of Draeger (interior systems) and New York Fasteners(distribution) accounted for approximately $52.1 of the consolidated revenuegrowth.  Revenue growth during 2006,exclusive of these acquisitions, was approximately 27.5%.

Gross profit during 2006 of $396.5, or 35.1%, of sales, increased by$100.9 or 34.1%, as compared to 2005. The 2006 gross margin increased by 10 basis points as compared to 2005.The gross margin expansion was negatively impacted by very poor absorption ofoverhead costs due to delays in Airbus A380 deliveries and initially lowermargins associated with recent acquisitions, which together reduced grossmargins by approximately 40 basis points during 2006.

Selling, general and administrative expenses in 2006 were $159.6, or14.2% of sales, versus $136.4 or 16.2% in 2005 reflecting the higher level ofselling, marketing and product support costs ($4.9), the recent acquisitions ofDraeger and New York Fasteners ($4.5), and higher salaries, benefits, incentivecompensation and commissions ($10.3) associated with the 33.7% increase inrevenues and the over 60% increase in backlog from December 31, 2005.  Selling, general and administrative expensesfor 2005 were reduced by $1.8 of net reimbursed legal fees in connection withthe resolution of two legal matters. Selling, general and administrative expenses as a percentage of salesdecreased by 200 basis points, reflecting the operating leverage in ourbusiness.

Research, development and engineering expenses for 2006 were $88.6, or7.9% of sales, versus $65.6 or 7.8% of sales in the prior year and reflect thehigher level of spending associated with customer specific engineering, newproduct development activities, (primarily at the seating products and interiorsystems segments) and recent acquisitions. During 2006, we applied for seventy-three U.S. and foreign patentsversus forty-three during 2005.

Operating earningsof $148.3 for 2006 were $54.7 or 58.4% greater than 2005 due to both the 33.7%revenue growth and a 200 basis point expansion in operating margin to 13.1% ofsales.  Operating earnings growth,exclusive of recent acquisitions was 51.2%. The substantial increase in operating earnings was driven primarily bycontinued revenue growth ($284.1), earnings growth ($54.7) and margin expansionin the seating products, interior systems and engineering servicessegments.  The consolidated 200 basispoint expansion in operating margin was achieved in spite of very poorabsorption of overhead costs due to delays in the A380 deliveries and the initiallylower margins from recent acquisitions.

31

----

The following is a summary of operatingearnings performance by segment:
| ** **            | ** ** | **YEAR ENDED DECEMBER 31,** | ** ** | ** ** | ** ** | ** ** | ** ** |
|-----------------------|------------|--------------------------------------------|------------|------------|------------|------------|------------|
| ** **            | ** ** | **2006**                                   | ** ** | **2005**   | ** ** | **Change** | ** ** | **Percent  Change** | ** ** |
| Seating               |       | $                                          | 37.6       |       | $          | 25.5       |       | $ | 12.1 |   | 47.5 | % |
| Interior Systems      |       | 51.2                                       |       | 32.3       |       | 18.9       |       | 58.5 | % |
| Distribution          |       | 50.4                                       |       | 34.9       |       | 15.5       |       | 44.4 | % |
| Business Jet          |       | 9.4                                        |       | 7.8        |       | 1.6        |       | 20.5 | % |
| Engineering  Services |       | (0.3                                       | )          | (6.9       | )          | 6.6        |       | NM |   |
| Total Sales           |       | $                                          | 148.3      |       | $          | 93.6       |       | $ | 54.7 |   | 58.4 | % |

 

For 2006, theseating segment’s operating earnings of $37.6 increased by 47.5%, due to both a37.9% increase in revenue and continued expansion in operating margin to 9.7%of sales.  Operating earnings at theinterior systems segment of $51.2 increased by $18.9 or 58.5% as compared to2005, due both to a 33.3% increase in revenue and a 300 basis point expansionin operating margin to 18.7% of sales. The margin expansion at the seating andinterior systems segments was primarily due to ongoing manufacturingefficiencies, product mix and operating leverage at the higher sales volume.

The distributionsegment’s operating earnings of $50.4 during the current year increased by$15.5 or 44.4% on a 44.6% increase in sales, reflecting further operatingefficiencies at the higher sales level and despite the temporary drag on marginscaused by the New York Fasteners acquisition. The business jet segment’s operating earnings were $9.4 in 2006, up20.5% versus 2005, reflecting the solid operating performance from the company’score business jet operating results, offset by the improving, but stillunsatisfactory super first class product line operating results.  The operating results at the engineeringservices segment improved by $6.6 as compared to the prior year due to highersales volume, better product mix and ongoing operational efficiencies.

Interest expense was $38.9 for 2006 and decreased by $20.4 as compared to2005, due to the redemption of our $250 of senior subordinated notes due 2008,the redemption of approximately $175.0 of senior notes and the prepayment of$50.0 of bank term debt, which together generated $19.4 of debt prepaymentcosts.

Earnings before income taxes were $90.0 (and which reflected $19.4 ofdebt prepayment costs), as compared to pre-tax earnings of $34.3 for the prioryear.  The large increase in earningsbefore income taxes was due to the $54.7 or 58.4% increase in operatingearnings and the $20.4 decrease in interest expense which was partially offsetby $19.4 of debt prepayment costs.

We recognized ourU.K. deferred tax asset during the third quarter of 2006, resulting in a taxbenefit of approximately $22.9.  Thedeferred tax asset was recorded as a result of the improving financialperformance and improving outlook for our U.K. operations (including substantiallyincreased backlog during 2006 related to U.K. operations).  Previously, we were unable to conclude thatthis asset would be realized due to cumulative losses and lower levels ofbacklog.  At December 31, 2006 we had net operating loss carryforwards in theUnited States, United Kingdom and Germany of approximately $305, $75 and $7,respectively, available to offset future taxable income.

Net earnings for 2006 were $85.6, or $1.10 per diluted sharebased on approximately 78.0 million diluted shares and include one-time debtprepayment costs of $19.4 and a one-time tax benefit of $22.9 associated withthe recognition of our U.K. deferred tax asset. Net earnings for 2005 were $84.6, or $1.39 per diluted share on 60.8million diluted shares and included a one-time tax benefit of $51.9 associatedwith the recognition of our U.S. net operating loss carryforward.

[Remainder of thispage intentionally left blank]

32

----

**RESULTS OF OPERATIONS**

**Year Ended December 31, 2005 Compared to theYear Ended December 31, 2004**

Net sales for the year endedDecember 31, 2005 were $844.1, an increase of $110.6 or 15.1% as compared tothe prior year.  Sales in 2005 increasedover the 2004 level due to a higher level of customer demand for productsoffered by each of our five segments.

Net sales for each of our segments are setforth in the following table:
| ** **            | ** ** | **YEAR ENDED DECEMBER 31,** | ** ** | ** ** | ** ** | **Percent** | ** ** |
|-----------------------|------------|--------------------------------------------|------------|------------|------------|-------------|------------|
| ** **            | ** ** | **2005**                                   | ** ** | **2004**   | ** ** | **Change**  | ** ** | **Change** | ** ** |
| Seating               |       | $                                          | 281.8      |       | $          | 251.4       |       | $ | 30.4 |   | 12.1 | % |
| Interior Systems      |       | 205.5                                      |       | 200.4      |       | 5.1         |       | 2.5 | % |
| Distribution          |       | 173.9                                      |       | 144.2      |       | 29.7        |       | 20.6 | % |
| Business Jet          |       | 120.2                                      |       | 75.2       |       | 45.0        |       | 59.8 | % |
| Engineering  Services |       | 62.7                                       |       | 62.3       |       | 0.4         |       | 0.1 | % |
| Total Sales           |       | $                                          | 844.1      |       | $          | 733.5       |       | $ | 110.6 |   | 15.1 | % |

Seating, interior systems and engineering servicesgenerated revenues of $550.0 in 2005, an increase of $35.9 or 7.0% as comparedto 2004, driven by a higher sales volume of commercial aircraft cabin interiorequipment and integration and engineering design and certificationservices.  The distribution segmentgenerated revenues of $173.9 during 2005, an increase of $29.7 or 20.6%compared to 2004, driven by a broad-based increase in aftermarket demand foraerospace fasteners and continued market share gains.  The business jet segment generated revenuesduring 2005 of $120.2, an increase of $45.0 or 59.8%, as compared to 2004reflecting increased revenues from super first class products and the ongoingrecovery of the business jet industry.

Gross profit for 2005 of $295.6increased by $56.9 or 23.8% on the 15.1% increase in sales.  Gross margin in 2005 of 35.0% increased by250 basis points as compared to 2004. The increase in gross margin was primarily due to manufacturingproductivity initiatives and an improved mix of products sold.

Selling, general and administrative expenses during 2005 were $136.4 or 16.2% of sales, as compared to $119.2 or 16.3% of sales in 2004.  The year over year increase was primarily attributable to higher commissions on increased sales, as well as higher costs associated with the 15.1% increase in revenues and the 57% increase in backlog.  In connection with the resolution of two legal matters during 2005, we received approximately $1.8 of net reimbursed legal fees, which were offset by $1.2 of costs associated with the accelerated vesting of stock options.

Research, development andengineering expenses for the year were $65.6 or 7.8% of net sales, an increaseof $10.5 as compared with $55.1 or 7.5% of sales in 2004. The increase inexpenses as compared to 2004 was attributable to a broad range of activitiesassociated with newly developed products for the Airbus A380 aircraft, thesuper first class suite of products, our lie-flat seating product line, ourPulse OxygenTM system and a number of other new product development activities.

The following is a summary of operatingearnings performance by segment:
| ** **            | ** ** | **YEAR ENDED DECEMBER 31,** | ** ** | ** ** | ** ** | **Percent** | ** ** |
|-----------------------|------------|--------------------------------------------|------------|------------|------------|-------------|------------|
| ** **            | ** ** | **2005**                                   | ** ** | **2004**   | ** ** | **Change**  | ** ** | **Change** | ** ** |
| Seating               |       | $                                          | 25.5       |       | $          | 16.8        |       | $ | 8.7 |   | 51.8 | % |
| Interior Systems      |       | 32.3                                       |       | 30.9       |       | 1.4         |       | 4.5 | % |
| Distribution          |       | 34.9                                       |       | 25.9       |       | 9.0         |       | 34.7 | % |
| Business Jet          |       | 7.8                                        |       | (1.3       | )          | 9.1         |       | NM |   |
| Engineering  Services |       | (6.9                                       | )          | (7.9       | )          | 1.0         |       | NM |   |
| Total Sales           |       | $                                          | 93.6       |       | $          | 64.4        |       | $ | 29.2 |   | 45.3 | % |

 

For 2005, seating segmentoperating earnings of $25.5 increased by $8.7, or 51.8%, versus 2004 due toboth the 12.1% increase in revenue and continued expansion in operating marginto 9.0% of sales.  The substantialincrease in seating operating margin reflects the improved sales volume,product mix, favorable program variances and ongoing manufacturingefficiencies.  Operating earnings at theinterior systems segment of $32.3 increased by $1.4 versus 2004, consistentwith the $5.1, or 2.5% increase in revenues. The engineering services segmentoperating 

33

----

results improved by $1.0 versus 2004, reflecting thesomewhat stronger revenues and product mix. The distribution segment generatedoperating earnings of $34.9 during 2005, an increase of $9.0 or 34.7% ascompared to 2004.  The business jetsegment generated operating earnings of $7.8 during 2005, an increase of $9.1as compared to the prior year.  Thebusiness jet segment’s 2005 incremental operating margin of 20% reflects theinitial shipments of super first class products as well as the impact of fivelost days of operations and the subsequent overtime and expedite costsassociated with hurricane activity during 2005.

Consolidated operating earningswere $93.6 or 11.1% of sales, an increase of $29.2 or 45.3% as compared tooperating earnings of $64.4 in 2004.  Theincrease in operating earnings in 2005 was primarily due to the 15.1% increasein sales and a 230 basis point expansion in operating margin to 11.1% ofsales.  The 45.3% increase in operatingearnings was achieved in spite of substantially higher product development andmarketing expenditures to support the record level of bookings and backlog.

Interest expense, net during2005 of $59.3 decreased by $16.8 as compared to 2004.  The decrease in interest expense wasprimarily due to the early retirement of $200.0 of 9 1⁄2% senior subordinatednotes in November 2004.

We recognized ourdomestic deferred tax asset during the fourth quarter of 2005, resulting in atax benefit of approximately $51.9.  Thedeferred tax asset was recorded as a result of our improving financial performanceand outlook, as well as the expected $20 reduction in interest expense arisingfrom the redemption of $250 of our 8% senior subordinated notes, which occurredin January 2006.

Our 2005consolidated net earnings were $84.6 or $1.39 per diluted share, reflecting the45.3% increase in operating earnings and the $51.9 income tax benefit.  In 2004, we generated a consolidated loss of$22.0 or $0.53 per share.

[Remainder of thispage intentionally left blank]

34

----

 

**LIQUIDITY AND CAPITAL RESOURCES**

***Current FinancialCondition***

Our liquidityrequirements consist of working capital needs, ongoing capital expenditures andpayments of interest and principal on our indebtedness. Our primaryrequirements for working capital are directly related to the level of ouroperations.  Working capital primarilyconsists of accounts receivable and inventories, which fluctuate with the salesof our products. Our working capital was $456.0 as of December 31, 2006, ascompared to $573.4 as of December 31, 2005. The decrease in working capital was caused by an increased level ofaccounts receivable of $41.0 related to our 2006 revenue growth of 33.7%, a$197.2 increase in inventories, offset by a $98.5 increase in accounts payableand accrued liabilities.  Nearly $100.0of the inventory growth was due to investments to provide a broader range ofproducts to a rapidly expanding customer base in our distribution business.  We expect to continue to expand our productlines in the distribution business during 2007. The balance of the inventory growth was due to our 44.6% distributionrevenue growth, the outlook for future distribution revenue growth, the recentDraeger acquisition and to support the 60% increase in our backlog.  Additionally, we redeemed $250.0 aggregateprincipal amount of 8% subordinated notes in January 2006 with the net proceedsof an issuance of common stock in December 2005, and made a prepayment of $50.0of term borrowings under our senior secured credit facility (described below)during the fourth quarter of 2006. At December 31, 2006, there was $250.0 in term debt outstanding underthe senior secured credit facility.

***Cash Flows***

At December 31, 2006,cash and bank credit available under our current bank credit facility was$195.5 as compared to $394.4 at December 31, 2005. Cash provided by operatingactivities was $41.0 for the year ended December 31, 2006 as compared to $12.6during the year ended December 31, 2005. The primary sources of cash provided by operating activities during 2006were net earnings of $85.6 plus non-cash charges for depreciation andamortization of $29.4, plus the non-cash impact from the loss on debtextinguishment of $19.4. The primary use of cash in operating activities duringthe year ended December 31, 2006 was $97.1 related to changes in our operatingassets and liabilities, primarily related to investments in inventory, offsetby an increase in our accounts payable. Inventory growth of approximately $100 million related to the growth in ourdistribution business, including the acquisition of New York Fasteners.  The primary use of cash in operatingactivities during the year ended December 31, 2005 was $82.3 related to changesin our operating assets and liabilities, offset by non-cash charges fromamortization and depreciation of $28.6 and less the net non-cash impact fromthe recognition of our domestic deferred tax asset of $22.9.  In January 2006, we redeemed our $250.0 of 8%senior subordinated notes with the proceeds from our December 2005 common stockoffering.

The primary uses of cashin investing activities during the year ended December 31, 2006 were related tocash paid for acquisitions approximating $145.0 and capital expenditures of$24.1. The primary use of cash from investing activities during the year endedDecember 31, 2005 was related to capital expenditures of $16.9 related to theimplementation of new information system enhancements and plant modernization.

***Capital Spending***

Our capital expenditureswere $24.8 and $16.9 during the years ended December 31, 2006 and 2005,respectively.  We anticipate capitalexpenditures of approximately $28-30 for the next twelve months, reflectingboth the current industry conditions and our recent acquisitions. We have nomaterial commitments for capital expenditures. We have, in the past, generallyfunded our capital expenditures from cash from operations and funds availableto us under bank credit facilities. We expect to fund future capitalexpenditures from cash on hand, from operations and from funds available to usunder our senior secured credit facility.

Between 1989 and 2001, wecompleted 22 acquisitions for an aggregate purchase price of approximately$1,000. Following these acquisitions, we rationalized the businesses, reducedheadcount by approximately 4,500 employees and eliminated 22 facilities.  We have financed these acquisitions primarilythrough issuances of debt and equity securities. As discussed in Note 2 to ourConsolidated Financial Statements, during 2006, we completed two immaterialacquisitions for approximately $145.0 in cash.

***Outstanding Debtand Other Financing Arrangements***

Long-term debt atDecember 31, 2006 consisted principally of our 8-7/8 % senior subordinatednotes due 2011 and $250.0 of indebtedness under our senior secured creditfacility. The $250 of 8-7/8% senior subordinated notes mature on May 11, 2011and are unsecured senior subordinated obligations and are subordinated to allof our senior indebtedness which includes indebtedness under our senior securedcredit facility.  The 8-7/8% seniorsubordinated notes contain restrictive covenants, including limitations onfuture indebtedness, restricted payments, transactions

35

----

 

with affiliates, liens, dividends, mergers andtransfers of assets. A breach of these covenants, or the covenants under oursenior secured credit facility or any future bank credit facility, thatcontinues beyond any grace period can constitute a default, which can limit ourability to borrow and can give rise to a right of the lenders to terminate theapplicable bank credit facility and/or a right of the debt holders to requireimmediate repayment of any outstanding debt.

During the third quarterof 2006, we completed a cash tender offer and consent solicitation for $174.9aggregate principal amount of 8-1/2% senior notes using available cash on handand from borrowings under our Senior Secured Credit Facility.  A loss on debt extinguishment of $17.0related to unamortized debt issue and facility costs and fees and expenses wasrecorded in connection with the cash tender.

During the third quarterof 2006, we amended our existing senior secured credit facility, to provide uswith a $200.0 revolving credit facility and a $300.0 term loan.  The senior secured credit facility alsoprovides us the ability to add additional term loans in the amount of up to$75.0 upon satisfaction of certain customary conditions and obtainingcommitments from lenders.  Proceeds fromthe term loan were used to repay borrowings under the revolving credit facilityand to finance the acquisition of New York Fasteners.  During the fourth quarter of 2006, we prepaid$50.0 of the term bank loan.

Revolving creditborrowings under the senior secured credit facility will initially bearinterest at an annual rate equal to the London interbank offered rate (LIBOR)plus 175 basis points, representing an initial interest rate of 7.2% ascompared to 8.5% of the 8-1/2% senior notes repurchased in the tenderoffer.  There are no amounts outstandingunder the revolving credit facility at December 31, 2006.  Term loan borrowings under the new seniorsecured credit facility bear interest at an annual rate equal to LIBOR plus 175basis points, representing an initial interest rate of 7.2% (interest rate of7.15% at December 31, 2006).

***ContractualObligations***

The following chartsreflect our contractual obligations and commercial commitments as of December31, 2006. Commercial commitments include lines of credit, guarantees and otherpotential cash outflows resulting from a contingent event that requiresperformance by us or our subsidiaries pursuant to a funding commitment.
| **Contractual Obligations**                                      | ** ** | **2007** | ** ** | **2008** | ** ** | **2009** | ** ** | **2010** | ** ** | **2011** | ** ** | **Thereafter** | ** ** | **Total** | ** ** |
|-----------------------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|----------|------------|----------|------------|----------------|------------|-----------|------------|
| Long-term debt  and othernon-current liabilities                      |       | $        | 1.9        |     | $          | 3.5      |       | $        | 3.3        |     | $          | 247.5          |       | $         | 250.5      |   | $ | 7.2 |   | $ | 513.9 |   |
| Operating leases                                                      |       | 15.8     |       | 14.9     |       | 10.4     |       | 7.2      |       | 6.4      |       | 56.9           |       | 111.6     |       |
| Purchase  obligations (1)                                             |       | 17.8     |       | 6.6      |       | 3.9      |       | 1.8      |       | 1.3      |       | 1.6            |       | 33.0      |       |
| Future interest  payments and commitment fees on outstanding debt (2) |       | 41.0     |       | 41.0     |       | 40.9     |       | 40.9     |       | 12.0     |       | —         |       | 175.8     |       |
| Total                                                                 |       | $        | 76.5       |     | $          | 66.0     |       | $        | 58.5       |     | $          | 297.4          |       | $         | 270.2      |   | $ | 65.7 |   | $ | 834.3 |   |
|                                                                  |       |     |       |     |       |     |       |     |       |     |       |           |       |      |       |
| **Commercial  Commitments**                                           |       |     |       |     |       |     |       |     |       |     |       |           |       |      |       |
| Letters of Credit                                                     |       | $        | 4.5        |     | —     |     | —     |     | —     |     | —     |           | —     |      | $          | 4.5 |   |

----

(1)          Occasionally we enterinto purchase commitments for production materials and other items, which arereflected in the table above.  We alsoenter into unconditional purchase obligations with various vendors andsuppliers of goods and services in the normal course of operations throughpurchase orders or other documentation or are undocumented except for aninvoice.  Such obligations are generallyoutstanding for periods less than a year and are settled by cash payments upondelivery of goods and services and are not reflected in the total unconditionalpurchase obligations presented in this line item.

(2)          Interest paymentsinclude estimated amounts due on the $250.0 term loan based on the actualinterest rate at December 31, 2006. Actual interest payments will fluctuate based on the terms of the seniorsecured credit facility and market rate fluctuations.

We believe that our cashflows, together with cash on hand, provide us with the ability to fund ouroperations, make planned capital expenditures and make scheduled debt servicepayments for at least the next twelve months. However, such cash flows aredependent upon our future operating performance, which, in turn, is subject toprevailing economic conditions and to financial, business and other factors,including the conditions of our markets, some of which are beyond our control.If, in the future, we cannot generate sufficient cash from operations to meetour debt service obligations, we will need to refinance such debt obligations,obtain additional financing or sell assets. We cannot assure you that our businesswill generate cash from operations, or that we will be able to obtain financingfrom other sources, sufficient to satisfy our debt service or otherrequirements.

36

----

 

***Off-Balance-Sheet Arrangements***

*Indemnities, Commitments andGuarantees*

During the normal courseof business, we made certain indemnities, commitments and guarantees underwhich we may be required to make payments in relation to certain transactions.These indemnities include non-infringement of patents and intellectual propertyindemnities to our customers in connection with the delivery, design,manufacture and sale of our products, indemnities to various lessors inconnection with facility leases for certain claims arising from such facilityor lease, and indemnities to other parties to certain acquisition agreements.The duration of these indemnities, commitments and guarantees varies, and incertain cases, is indefinite. We believe that substantially all of ourindemnities, commitments and guarantees provide for limitations on the maximumpotential future payments we could be obligated to make. However, we are unableto estimate the maximum amount of liability related to our indemnities,commitments and guarantees because such liabilities are contingent upon theoccurrence of events which are not reasonably determinable. Management believesthat any liability for these indemnities, commitments and guarantees would notbe material to our accompanying consolidated financial statements.

***Deferred Tax Assets***

During the third quarterof 2006 we recognized our U.K. deferred tax asset resulting in a tax benefit ofapproximately $22.9.  The deferred taxasset was recorded as a result of our improved performance and outlook for ourU.K. operations.

We reversed a significantportion of our previously recorded valuation allowance on our U.S. deferred taxassets during the fourth quarter of 2005. The deferred tax asset was recordedas a result of our improving financial performance and outlook, as well as the$20.4 reduction in interest expense arising primarily from the redemption ofthe $250.0 aggregate principal amount of 8% senior subordinated notes due 2008,which occurred in January 2006.

We maintained a valuationallowance of approximately $15.5 as of December 31, 2006 primarily related toour domestic capital loss carryforwards because of uncertainties that precludeus from determining that it is more likely than not that we will be able togenerate sufficient capital gain income and realize this tax benefit during theapplicable carryforward period.

37

----

 

**RECENT ACCOUNTING PRONOUNCEMENTS**

In February 2006, theFASB issued SFAS No. 155, “Accounting for Certain Hybrid Financial Instruments —An Amendment of FASB Statements No. 133 and 140” (SFAS 155) which provides forincreased consistency for the reporting of hybrid financial instruments.  SFAS 155 is effective for all financialinstruments acquired or issued during fiscal 2007.  The adoption of SFAS 155 is not expected tohave a material impact on our financial statements.

In July 2006, the FASBissued FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes”(FIN 48) which clarifies the accounting for uncertainty in income taxesrecognized in the financial statements in accordance with FASB Statement No.109, “Accounting for Income Taxes”.  Thispronouncement recommends a recognition threshold and measurement process forrecording in the financial statements uncertain tax positions taken or expectedto be taken in the company’s tax return. FIN 48 also provides guidance on derecognition, classification, interestand penalties, accounting in interim periods and disclosure requirements foruncertain tax positions.  The accountingprovisions of FIN 48 will be effective for the company beginning January 1,2007.  We have not completed ourevaluation of FIN 48 and its impact on our financial statements.

In September 2006, theFASB issued SFAS No. 157 “Fair Value Measurements” (SFAS 157) which providesguidance for measuring assets and liabilities at fair value.  SFAS 157 is effective for financialstatements issued for fiscal years beginning after November 15, 2007.  The adoption of SFAS 157 is not expected tohave a material impact on our financial statements.

In September 2006, theFASB issued SFAS No. 158, “Employers’ Accounting for Defined Benefit Pensionand Other Post Retirement Plans” (SFAS 158) which requires the recognition ofthe funded status of single-employer defined benefit pension plans, retireehealthcare and other postretirement plans in the financial statements,measurement of the funded status at the end of the year, and recognition ofchanges in the funded status through comprehensive income in the year in whichthe changes occur.  SFAS 158 is effectiveas of December 31, 2006.  The adoption ofSFAS 158 did not have a material impact on our financial statements.

In September 2006, theSEC issued SAB No. 108, “Guidance re: the Use of a Cumulative Effect Adjustmentto Correct Immaterial Misstatements” (SAB 108) which proposed a framework forpublic companies to use in evaluating identified misstatements in financialreporting.  SAB 108 was effective infiscal 2006 and the application of SAB 108 did not have a material impact onour financial statements.

**Critical Accounting Policies**

The discussion andanalysis of our financial condition and results of operations is based upon ourconsolidated financial statements, which have been prepared in accordance withaccounting principles generally accepted in the United States of America. Thepreparation of these financial statements requires us to make estimates andjudgments that affect the reported amount of assets and liabilities, revenuesand expenses, and related disclosure of contingent assets and liabilities atthe date of our financial statements. Actual results may differ from theseestimates under different assumptions or conditions.

Critical accountingpolicies are defined as those that are reflective of significant judgments anduncertainties, and potentially result in materially different results underdifferent assumptions and conditions. We believe that our critical accountingpolicies are limited to those described below. For a detailed discussion on theapplication of these and other accounting policies, see Note 1 to ourConsolidated Financial Statements.

***Revenue Recognition***

Sales of products arerecorded when the earnings process is complete. This generally occurs when theproducts are shipped to the customer in accordance with the contract orpurchase order, risk of loss and title has passed to the customer,collectibility is reasonably assured and pricing is fixed and determinable. Ininstances where title does not pass to the customer upon shipment, we recognizerevenue upon delivery or customer acceptance, depending on the terms of thesales contract.

Service revenuesprimarily consist of engineering activities and are recorded when services areperformed.

Revenues and costs undercertain long-term contracts are recognized using contract accounting under thepercentage-of-completion method, generally using the cost-to-cost method. Thepercentage-of-completion method requires the use of estimates of costs tocomplete long-term contracts. The estimation of these costs requires judgmenton the part of management due to the duration of these contracts as well as thetechnical nature of the

38

----

 

products involved. Adjustments to these estimatedcosts are made on a consistent basis. Revenues associated with any contractualclaims are recognized when it is probable that the claim will result inadditional contract revenue and the amount can be reasonably estimated.  A provision for contract losses is recordedwhen such facts are determinable.

We sell our productsprimarily to airlines and aircraft manufacturers worldwide, includingoccasional sales collateralized by letters of credit. We perform ongoing creditevaluations of our customers and maintain reserves for estimated credit losses.Actual losses have been within management’s expectations. We apply judgment toensure that the criteria for recognizing sales are consistently applied andachieved for all recognized sales transactions.

***Accounts Receivable***

We perform ongoing creditevaluations of our customers and adjust credit limits based upon paymenthistory and the customer’s current creditworthiness, as determined by ourreview of their current credit information. We continuously monitor collectionsand payments from our customers and maintain an allowance for estimated creditlosses based upon our historical experience and any specific customercollection issues that we have identified. If the actual uncollected amountssignificantly exceed the estimated allowance, our operating results would besignificantly adversely affected. While such credit losses have historicallybeen within our expectations and the provisions established, we cannotguarantee that we will continue to experience the same credit loss rates thatwe have in the past.

***Inventories***

We value our inventoriesat the lower of cost to purchase or manufacture the inventory or the currentestimated market value of the inventory. Cost is determined using the standardcost method for our manufacturing businesses and the weighted average costmethod for our distribution businesses. The inventory balance, which includesthe cost of raw material, purchased parts, labor and production overhead costs,is recorded net of a reserve for excess, obsolete or unmarketable inventories.We regularly review inventory quantities on hand and record a reserve forexcess and obsolete inventories based primarily on historical usage and on ourestimated forecast of product demand and production requirements. In accordancewith industry practice, costs in inventory include amounts relating tolong-term contracts with long production cycles and to inventory items withlong procurement cycles, some of which are not expected to be realized withinone year.  As demonstrated since theevents of September 11, 2001, demand for our products can fluctuate significantly.Our estimates of future product demand may prove to be inaccurate, in whichcase we may have understated or overstated the provision required for excessand obsolete inventories. In the future, if our inventories are determined tobe overvalued, we would be required to recognize such costs in our cost ofgoods sold at the time of such determination. Likewise, if our inventories aredetermined to be undervalued, we may have over-reported our costs of goods soldin previous periods and would be required to recognize such additional operatingincome at the time of sale.

***Long-Lived Assets(including Tangible and Intangible Assets and Goodwill)***

To conduct our globalbusiness operations and execute our strategy, we acquire tangible andintangible assets, which affect the amount of future period amortizationexpense and possible impairment expense that we may incur. The determination ofthe value of such intangible assets requires management to make estimates andassumptions that affect our consolidated financial statements. We assess potentialimpairment to goodwill of a reporting unit and other intangible assets on anannual basis or when there is evidence that events or changes in circumstancesindicate that the carrying amount of an asset may not be recovered. Ourjudgment regarding the existence of impairment indicators and future cash flowsrelated to intangible assets are based on operational performance of ouracquired businesses, expected changes in the global economy, aerospace industryprojections, discount rates and other factors. Future events could cause us toconclude that impairment indicators exist and that goodwill or other acquiredtangible or intangible assets associated with our acquired businesses isimpaired. Any resulting impairment loss could have an adverse impact on ourresults of operations.

***Accounting forIncome Taxes***

As part of the process ofpreparing our consolidated financial statements, we are required to determineour income taxes in each of the jurisdictions in which we operate. This processinvolves us calculating our actual current tax together with assessingtemporary differences resulting from differing treatment of items, such as thetreatment of accounting reserves, for tax and accounting purposes. Thesedifferences result in deferred tax assets and liabilities, which are includedwithin our consolidated balance sheets. We must then assess the likelihood thatour deferred tax assets will be recovered from future taxable income, and tothe extent we believe that recovery is not likely, we must establish a valuationallowance. To the extent we establish a valuation allowance or increase thisallowance in a period, we must include an expense within the tax provision inthe consolidated statements of operations.

39

----

 

Significant managementjudgment is required in determining our provision for income taxes, ourdeferred tax assets and liabilities and any valuation allowance recordedagainst our net deferred tax assets. We have recorded a valuation allowance of$15.5 as of December 31, 2006, due to uncertainties related to our ability toutilize our deferred tax assets, primarily consisting of our domestic capitalloss and foreign tax credit carryforwards. The valuation allowance is based onour estimates of taxable income by jurisdictions in which we operate and theperiod over which our deferred tax assets will be recoverable. In the eventthat actual results differ from these estimates, or we revise these estimatesin future periods, we may need to adjust the valuation allowance which couldmaterially impact our financial position and results of operations.

**ITEM 7A.       QUANTITATIVE AND QUALITATIVE DISCLOSURESABOUT MARKET RISK**

We are exposed toa variety of risks, including foreign currency fluctuations and changes ininterest rates affecting the cost of our variable-rate debt.

*Foreign currency* - We have directoperations in Europe that receive revenues from customers primarily in U.S.dollars and purchase raw materials and component parts from foreign vendorsprimarily in British pounds or euros. Accordingly, we are exposed totransaction gains and losses that could result from changes in foreign currencyexchange rates relative to the U.S. dollar. The largest foreign currencyexposure results from activity in British pounds and euros.

From time to time, we and our foreign subsidiaries may enter intoforeign currency exchange contracts to manage risk on transactions conducted inforeign currencies. At December 31, 2006, we had no outstanding forwardcurrency exchange contracts. In addition, we have not entered into any otherderivative financial instruments.

*Interest Rates* - At December 31,2006, we had adjustable rate debt of $250.0 and fixed rate debt of $253.9. Theweighted average interest rate for the fixed rate debt was approximately 8.9%at December 31, 2006. If interest rates were to increase by 10% above currentrates, the impact on our financial statements would be to reduce pretax incomeby $1.8. We do not engage in transactions intended to hedge our exposure tochanges in interest rates.

As of December 31, 2006, we maintained a portfolio of securitiesconsisting mainly of taxable, interest-bearing deposits with weighted averagematurities of less than three months. If short-term interest rates were toincrease or decrease by 10%, we estimate interest income would increase ordecrease by approximately $0.3.

**ITEM 8.****                              FINANCIALSTATEMENTS AND SUPPLEMENTARY DATA**

The informationrequired by this section is set forth beginning from page F-1 of this Form10-K.

**ITEM 9.****                              CHANGESIN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND  FINANCIAL DISCLOSURE**

None.

**ITEM 9A.****                     CONTROLSAND PROCEDURES**

**DisclosureControls and Procedures**

Our principal executiveofficer and our principal financial officer, after evaluating, together withmanagement, the effectiveness of the design and operation of our disclosurecontrols and procedures (as defined in Exchange Act Rules 13a-15(e) and15d-15(e)) as of December 31, 2006, the end of the period covered by thisreport, have concluded that, as of such date, our disclosure controls and procedureswere adequate and effective to reasonably ensure that material informationrequired to be disclosed by us in the reports that we file or submit under theExchange Act is recorded, processed, summarized and reported within the timeperiods specific by Securities and Exchange Commissions’ Rules and Forms andthat such information is accumulated and communicated to our management,including our principal executive officer and principal financial officer, asappropriate, to allow timely decisions regarding required disclosure.

**Internal Control over Financial Reporting**

There were no changes inour company’s internal control over financial reporting that occurred duringthe fourth quarter of 2006 that have materially affected, or are reasonablylikely to materially affect, our company’s internal control over financialreporting.

40

----

 

**MANAGEMENT’S ANNUAL REPORT ON INTERNAL CONTROLOVER FINANCIAL REPORTING**

The management of BEAerospace, Inc. and its subsidiaries (the “Company”) is responsible forestablishing and maintaining adequate internal control over financial reportingfor the Company.  Internal control overfinancial reporting is a process designed by, or under the supervision of theCompany’s principal executive and principal financial officers, and effected bythe Company’s board of directors, management and other personnel, to providereasonable assurance regarding the reliability of financial reporting and thepreparation of the Company’s financial statements for external purposes inaccordance with generally accepted accounting principles.

The Company’s internalcontrol over financial reporting includes those policies and procedures that:(1) pertain to the maintenance of records that, in reasonable detail,accurately and fairly reflect the transactions and dispositions of the assetsof the Company; (2) provide reasonable assurance that transactions are recordedas necessary to permit preparation of financial statements in accordance withgenerally accepted accounting principles, and that receipts and expenditures ofthe Company are being made only in accordance with authorizations of managementand directors of the Company; and (3) provide reasonable assurance regardingprevention or timely detection of unauthorized acquisition, use or dispositionof the Company’s assets that could have a material effect on the financialstatements.

Because of its inherentlimitations, internal control over financial reporting may not prevent ordetect misstatements.  Projections of anyevaluation of effectiveness to future periods are subject to the risk thatcontrols may become inadequate because of changes in conditions, or that thedegree of compliance with the policies or procedures may deteriorate.

The Company’s managementassessed the effectiveness of the Company’s internal control over financialreporting as of December 31, 2006.  Inmaking this assessment, the Company’s management used the criteria set forth bythe Committee of Sponsoring Organizations of the Treadway Commission (COSO) in *Internal Control — Integrated Framework.*  Based on its assessment, management believesthat, as of December 31, 2006, the Company’s internal control over financialreporting is effective.

The registered publicaccounting firm that audited the financial statements included in this annualreport has issued an attestation report on management’s assessment of theCompany’s internal control over financial reporting.

 
| By:    | /s/ Amin J.  Khoury                   | ** ** | By:                                                                  | /s/ Thomas P. McCaffrey |   |
|--------|---------------------------------------|------------|----------------------------------------------------------------------|-------------------------|--------|
|   | Amin J. Khoury                        |       | Thomas P. McCaffrey                                                  |
|   | Chairman and  Chief Executive Officer |       | Senior Vice President of Administration  and Chief Financial Officer |
|   | February 15,  2007                    |       |
|   |                                  |       | February 15, 2007                                                    |

 

41

----

 

**REPORT OFINDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**

To the Board of Directorsand Stockholders of BE Aerospace, Inc.

We have auditedmanagement’s assessment, included in the accompanying Management’s AnnualReport on Internal Control Over Financial Reporting, that BE Aerospace, Inc.and its subsidiaries (the “Company”) maintained effective internal control overfinancial reporting as of December 31, 2006, based on criteria established in *Internal Control — Integrated Framework* issued by theCommittee of Sponsoring Organizations of the Treadway Commission.  The Company’s management is responsible formaintaining effective internal control over financial reporting and for itsassessment of the effectiveness of internal control over financialreporting.  Our responsibility is toexpress an opinion on management’s assessment and an opinion on theeffectiveness of the Company’s internal control over financial reporting basedon our audit.

We conducted ouraudit in accordance with the standards of the Public Company AccountingOversight Board (United States).  Thosestandards require that we plan and perform the audit to obtain reasonableassurance about whether effective internal control over financial reporting wasmaintained in all material respects.  Ouraudit included obtaining an understanding of internal control over financialreporting, evaluating management’s assessment, testing and evaluating thedesign and operating effectiveness of internal control, and performing suchother procedures as we considered necessary in the circumstances.  We believe that our audit provides areasonable basis for our opinions.

A company’sinternal control over financial reporting is a process designed by, or underthe supervision of, the company’s principal executive and principal financialofficers, or persons performing similar functions, and effected by the company’sboard of directors, management, and other personnel, to provide reasonableassurance regarding the reliability of financial reporting and the preparationof financial statements for external purposes in accordance with accountingprinciples generally accepted in the United States of America.  A company’s internal control over financialreporting includes those policies and procedures that (1) pertain to themaintenance of records that, in reasonable detail, accurately and fairlyreflect the transactions and dispositions of the assets of the company; (2)provide reasonable assurance that transactions are recorded as necessary topermit preparation of financial statements in accordance with generallyaccepted accounting principles and that receipts and expenditures of thecompany are being made only in accordance with authorizations of management anddirectors of the company; and (3) provide reasonable assurance regardingprevention or timely detection of unauthorized acquisition, use, or dispositionof the company’s assets that could have a material effect on the financialstatements.

Because of theinherent limitations of internal control over financial reporting, includingthe possibility of collusion or improper management override of controls,material misstatements due to error or fraud may not be prevented or detectedon a timely basis.  Also, projections ofany evaluation of the effectiveness of the internal control over financial reportingto future periods are subject to the risk that the controls may becomeinadequate because of changes in conditions or that the degree of compliancewith the policies or procedures may deteriorate.

In our opinion,management’s assessment that the Company maintained effective internal controlover financial reporting as of December 31, 2006, is fairly stated, in allmaterial aspects, based on the criteria established in *InternalControl — Integrated Framework* issued by the Committee of SponsoringOrganizations of the Treadway Commission. Also in our opinion, the Company maintained, in all material respects,effective internal control over financial reporting as of December 31, 2006,based on the criteria established in *Internal Control —Integrated Framework* issued by the Committee of SponsoringOrganizations of the Treadway Commission.

We have alsoaudited, in accordance with the standards of the Public Company AccountingOversight Board (United States), the consolidated financial statements andfinancial statement schedule as of and for the year ended December 31, 2006, ofthe Company and our report dated February 14, 2007 expressed an unqualifiedopinion on those financial statements and financial statement schedule.
| /s/ Deloitte & Touche  LLP |   |
|--------------------------------|--------|
| Costa Mesa,  California        |   |
| February 14,  2007             |   |

 

42

----

** **

**ITEM 9B.     OTHER INFORMATION**

Not applicable.

**PART III**

**ITEM 10.     DIRECTORS AND EXECUTIVE OFFICERS OF THEREGISTRANT**

The following table sets forth information regardingour directors and executive officers as of February 15, 2007. Officers of theCompany are elected annually by the Board of Directors.
| Title                  | ** ** | ** ** | ** **                                                              | **Age** | ** ** | **Position** | ** ** | ** ** | ** ** | ** ** |
|------------------------|------------|------------|-------------------------------------------------------------------------|---------|------------|--------------|------------|------------|------------|------------|
|                   |       |       |                                                                    |
| Amin J. Khoury         | 67         |       | Chairman of the Board and Chief Executive Officer                       |
|                   |       |       |                                                                    |
| Charles L.  Chadwell   | 66         |       | Director**                                                              |
|                   |       |       |                                                                    |
| Jim C. Cowart          | 55         |       | Director*                                                               |
|                   |       |       |                                                                    |
| Richard G.  Hamermesh  | 59         |       | Director*                                                               |
|                   |       |       |                                                                    |
| David C. Hurley        | 66         |       | Director*                                                               |
|                   |       |       |                                                                    |
| Robert J. Khoury       | 64         |       | Director                                                                |
|                   |       |       |                                                                    |
| Brian H. Rowe          | 75         |       | Director**                                                              |
|                   |       |       |                                                                    |
| Jonathan M.  Schofield | 66         |       | Director**                                                              |
|                   |       |       |                                                                    |
| Arthur E. Wegner       | 63         |       | Director*                                                               |
|                   |       |       |                                                                    |
| Michael B.  Baughan    | 47         |       | President and Chief Operating Officer                                   |
|                   |       |       |                                                                    |
| Thomas P.  McCaffrey   | 52         |       | Senior Vice President of Administration and Chief  Financial Officer    |
|                   |       |       |                                                                    |
| Wayne Exton            | 43         |       | Vice President and General Manager, Business Jet  Segment               |
|                   |       |       |                                                                    |
| Werner  Lieberherr     | 46         |       | Vice President and General Manager, Commercial  Aircraft Products Group |
|                   |       |       |                                                                    |
| Robert A.  Marchetti   | 64         |       | Vice President and General Manager, Distribution  Segment               |
|                   |       |       |                                                                    |
| Edmund J.  Moriarty    | 63         |       | Vice President-Law, General Counsel and Secretary                       |
|                   |       |       |                                                                    |
| Jeffrey P.  Holtzman   | 51         |       | Vice President-Finance and Treasurer                                    |
|                   |       |       |                                                                    |
| Stephen R.  Swisher    | 48         |       | Vice President-Finance and Controller                                   |

----

*          Member, Audit Committee

**       Member, Compensation Committee

[Remainder of thepage intentionally left blank]

 

43

----

 

**DirectorClassification**

Our restatedcertificate of incorporation provides that the Board of Directors is to bedivided into three classes, each nearly as equal in number as possible, so thateach director (in certain circumstances after a transitional period) will servefor three years, with one class of directors being elected each year.  The Board is currently comprised of threeClass I Directors (Brian H. Rowe, Jim C. Cowart and Arthur E. Wegner), threeClass II Directors (David C. Hurley, Robert J. Khoury and Jonathan M.Schofield) and three Class III Directors (Amin J. Khoury, Charles L. Chadwelland Richard G. Hamermesh). The terms of the Class I, Class II and Class IIIDirectors expire at the end of each respective three-year term and upon the electionand qualification of successor directors at annual meetings of stockholdersheld at the end of each fiscal year. Our executive officers are electedannually by the Board of Directors following the annual meeting of stockholdersand serve at the discretion of the Board of Directors.

**CurrentDirectors**

*Amin J.Khoury* has been the company’s Chairman of the Board sinceJuly 1987 when he founded the company. Effective December 31, 2005, with Mr. Robert J. Khoury’s retirement, Mr.Amin J. Khoury was appointed Chief Executive Officer.  Mr. Amin J. Khoury also served as the company’sChief Executive Officer until April 1, 1996. Since 1986, Mr. Khoury has been a director of Synthes, Inc., the world’sleading manufacturer and marketer of orthopedic trauma implants and a leadingglobal manufacturer and marketer of cranial-maxillofacial and spine implants.Mr. Khoury is the brother of Robert J. Khoury.

*CharlesL. Chadwell* has been a Director since January 2007.  He was the Vice President and GeneralManager, Commercial Engine Operations for GE Aircraft Engines, where he retiredin 2002.  After joining General Electricin 1965, he held a variety of management positions, including:  program manager, CF6-80C program; plantmanager, GE Aircraft Engines’ Wilmington, North Carolina, plant; generalmanager, GE Aircraft Engines’ Sourcing Operations; general manager ProductionOperations, GE Aircraft Engines’ Lynn, Massachusetts plant; vice president, GEAircraft Engines Human Resources; and a vice president and general manager,Production and Procurement, GE Aircraft Engines.

*JimC. Cowart* has been a Director since November 1989.  Since September 2005, Mr. Cowart has beenChairman of EAG Holdings LLC, a provider of microanalytic laboratory servicesincluding surface analysis and materials characterization.  Since September 2004, Mr. Cowart has beenChairman and Chief Executive Officer of Auriga Medical Products GmbH, adistributor of medical devices.  He is aPrincipal of Cowart & Co. LLC and Auriga Partners, Inc., private capitalfirms that provide strategic planning, competitive analysis, financialrelations and other services.  FromAugust 1999 to May 2001, he was Chairman of QualPro Corporation, an aerospacecomponents manufacturing company.  FromJanuary 1993 to November 1997, he was the Chairman and CEO of AuroraElectronics Inc. Previously, Mr. Cowart was a founding general partner ofCapital Resource Partners, a private investment capital manager, and he heldvarious positions in investment banking and venture capital with LehmanBrothers, Shearson Venture Capital and Kidder, Peabody & Co.

*RichardG. Hamermesh* has been a Director since July 1987. Dr.Hamermesh is currently a Professor of Management Practice at the HarvardBusiness School. From 1987 to 2001, he was a co-founder and a Managing Partnerof The Center for Executive Development, an executive education and developmentconsulting firm. Prior to this, from 1976 to 1987, Dr. Hamermesh was a memberof the faculty of the Harvard Business School. He is also an active investorand entrepreneur, having participated as a principal, director and investor inthe founding and early stages of more than 15 organizations.

*David C. Hurley*has been a Director since June 2003.  Mr.Hurley is currently the Vice Chairman of PrivatAir, a corporate aviationservices company based in Geneva, Switzerland, where he served as ChiefExecutive Officer from 2000 to February 2003. Prior to 2000, Mr. Hurley was the Chairman and Chief Executive Officerof Flight Services Group (FSG), a corporate aircraft management and salescompany, which he founded in 1984 and which was acquired by PrivatAir in2000.  Before founding FSG, Mr. Hurleyserved as Senior Vice President of Domestic and International Sales for CanadairChallenger.  He currently serves on theBoards of the Smithsonian Institution’s National Air and Space Museum, theCorporate Angel Network, Genesee and Wyoming Railroad, Hexel Corporation andIanatron.

*Arthur E. Wegner*has been a Director since January 2007. He retired in 2000 as Executive Vice President of Raytheon Company andChairman of Raytheon Aircraft.  He joinedRaytheon Company in July 1993 as a Senior Vice President and was appointedChairman and CEO of Raytheon’s Beech Aircraft Corporation.  In September 1994, he was appointed Chairmanand CEO of Raytheon Aircraft, which was formed by the merger of Raytheonsubsidiaries, Beech Aircraft and Raytheon Corporate Jets.  He became Chairman of Raytheon Aircraft in2000.  He was elected an Executive VicePresident of Raytheon Company in March of 1995. Mr. Wegner came to Raytheon Company after 20 years with UnitedTechnologies Corporation (UTC), where he was Executive Vice President andPresident of UTC’s Aerospace and 

44

----

Defense Sector. Prior to that he was President of UTC’s Pratt and Whitney Division.  Mr. Wegner is past Chairman of the Board ofDirectors of the General Aviation Manufacturers Association and the AerospaceIndustries Association.

*RobertJ. Khoury* has been a Director since July 1987, when heco-founded the company.  On December 31,2005, Mr. Khoury retired from service as the company’s President and ChiefExecutive Officer, a position he held since August 2000.  From April 1996 through August 2000, heserved as Vice Chairman.  Mr. Khoury isthe brother of Amin J. Khoury.

*BrianH. Rowe* has been a Director since July 1995. He is currentlyChairman Emeritus of GE Aircraft Engines, a principal business unit of theGeneral Electric Company, where he also served as Chairman from September 1993through January 1995 and as President from 1979 through 1993.  Additionally, since October 2004, Mr. Rowehas served as Chairman of the Board of Landmark Aviation, an aerospacecompany.  Mr. Rowe is also on the boardsof TurboCombuster Technologies, Inc. and Grand Prairie Accessory Services, LLC.

*JonathanM. Schofield* has been a Director since April 2001. FromDecember 1992 through February 2000, Mr. Schofield served as Chairman of theBoard and CEO of Airbus North America Holdings, a subsidiary of AirbusIndustrie, a manufacturer of large civil aircraft, and served as Chairman fromFebruary 2000 until his retirement in March 2001. From 1989 until he joinedAirbus, Mr. Schofield was President of United Technologies InternationalCorporation. Mr. Schofield is currently a member of the board of directors ofAero Sat, Inc.; TurboCombustor Technology, Inc.; and is a trustee of LIFTTrust.

**Executive Officers**

*MichaelB. Baughan* has been President and Chief Operating Officersince December 31, 2005.  From July 2002to December 31, 2005 Mr. Baughan served as Senior Vice President and GeneralManager of Commercial Aircraft Segment. From May 1999 to July 2002, Mr. Baughanwas Vice President and General Manager of Seating Products. From September 1994to May 1999, Mr. Baughan was Vice President, Sales and Marketing for SeatingProducts. Prior to 1994, Mr. Baughan held various positions including Presidentof AET Systems, Manager of Strategic Initiatives at The Boston Company(American Express) and Sales Representative at Dow Chemical Company.

*Thomas P.McCaffrey* has been Senior Vice President of Administrationand Chief Financial Officer since May 1993. From August 1989 through May 1993,Mr. McCaffrey was a Director with Deloitte & Touche LLP, and from 1976through 1989 served in several capacities, including Audit Partner, withColeman & Grant LLP.

*    Wayne R. Exton* has beenVice President and General Manager, Business Jet Segment since May 2006.  From November 2005 to April 2006, Mr. Extonserved as Vice President and General Manager of the super first class divisionof the Business Jet Segment.  Prior tojoining B/E, Mr. Exton spent nine years at the Britax Automotive and AerospaceDivisions of Britax PLC, serving in a variety of senior management positionsincluding President, Vice President Operations and Director of Global Marketingand Sales.  Before joining Britax PLC,Mr. Exton held several senior management positions at Magneti Marelli (adivision of Fiat), and Lucas Electrical.

*  Werner Lieberherr* has been Vice President and GeneralManager of our Commercial Aircraft Products Group, which is comprised of ourSeating, Interior Products and Engineering Systems segments since July,2006.  Prior to joining B/E Aerospace,Mr. Lieberherr spent 20 years with Alstom Power, Inc., where he served in various senior managementpositions in Europe, Asia, and North America, including President, ManagingDirector, Vice President Project Management Worldwide, and GeneralManager-Sales.

*Robert A. Marchetti* has been Vice President and GeneralManager of Fastener Distribution Segment since April 2002. From February 2001to April 2002, Mr. Marchetti was Vice President of Machined Products Group.From 1997 to January 2001 Mr. Marchetti was with Fairchild Corporation’sFasteners Division with his last position being Senior Vice President and ChiefOperating Officer. From 1990 to 1997, Mr. Marchetti served as a corporateofficer of UNC Inc. where he held several senior positions, Corporate VP ofMarketing, President of Tri-Remanufacturing and Chief Operating Officer of theAccessory Overhaul Division. From 1989 to 1990, he served as President of AWAIncorporated. From 1986 through 1989, Mr. Marchetti was Vice President ofMarketing at General Electric Aircraft Engines and he was General Manager for aComponent Repair Division. Prior to that he held several sales and generalmanagement positions from 1965 through 1986 with Copperweld Corporation andCarlisle Corporation.

*Edmund J.Moriarty* has been Vice President-Law, General Counsel andSecretary since November, 1995. From 1991 to 1995, Mr. Moriarty served as VicePresident and General Counsel to Rollins, Inc., a national service company.From 1982 through 1991, Mr. Moriarty served as Vice President and GeneralCounsel to Old Ben Coal Company, a wholly owned coal subsidiary of The StandardOil Company.

45

----

*JeffreyP. Holtzman* has been Vice President-Finance and Treasurersince August 1999. Mr. Holtzman has been a Vice President since November 1996and Treasurer since September 1993. From June 1986 to July 1993, Mr. Holtzmanserved in several capacities at FPL Group, Inc., including Assistant Treasurerand Manager of Financial Planning. Mr. Holtzman previously worked for MellonBank, Gulf Oil Corporation and Ernst & Young LLP.

*StephenR. Swisher* has beenVice President-Finance and Controller since August 1999. Mr. Swisher has beenController since 1996 and served as Director of Finance from 1994 to 1996.Prior to 1994, Mr. Swisher held various management positions at Burger KingCorporation and Deloitte & Touche LLP.

**Audit Committee**

We have a separately-designated standing Audit Committeeestablished in accordance with section 3(a)(58)(A) of the Securities ExchangeAct of 1934, as amended.  Messrs. Cowart,Hurley, Hamermesh and Wegner currently serve as members of the Audit Committee.  Under the current SEC rules and the rules ofthe Nasdaq, all of the members are independent.   Our Board of Directors has determined thatMr. Cowart is an “audit committee financial expert” in accordance with currentSEC rules.  Mr. Cowart is also independent,as that term is used in Item 407 of Regulation S-K of the federal securitieslaws.

**Section16(a) Beneficial Ownership Reporting Compliance**

Section 16(a) of the Securities Exchange Act requiresour directors and executive officers, and persons who own more than ten percentof a registered class of our equity securities, to file with the SEC initialreports of ownership and reports of changes in ownership of our common stockand other equity securities. Officers, directors and greater-than-ten-percentshareholders are required by SEC regulations to furnish us with copies of allSection 16(a) forms they file.

To our knowledge, based solely on a review of thecopies of such reports furnished to us and, with respect to our officers anddirectors, written representations that no other reports were required, duringthe fiscal year ended December 31, 2006, all Section 16(a) filing requirementsapplicable to our officers, directors and greater-than-ten-percent beneficialowners were complied with.

In making the above statements, we have relied on thewritten representations of our directors and officers and copies of the reportsthat have been filed with the SEC.

**Code ofEthics**

We have adopted a code of ethics, or Code of BusinessConduct, to comply with the rules of the SECand Nasdaq.  The Code of Business Conductapplies to our directors, officers and employees worldwide, includingour principal executive officer and senior financial officers.  A copy of our Code of Business Conduct ismaintained on our website at www.beaerospace.com.

[Remainder of thispage intentionally left blank]

46

----

** **
| **ITEM 11.    EXECUTIVE COMPENSATION**                                                                                                                                                                                                                         | ** **                                                                                          |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|-----------------------------------------------------------------------------------------------------|
| ** **                                                                                                                                                                                                                                                                    | ** **                                                                                          |
|       Information set forth under the  caption “Executive Compensation” in the Proxy Statement is incorporated by  reference herein. The Compensation Committee Report will be included in the  Proxy Statement and is not incorporated herein. |
|                                                                                                                                                                                                                                                                          |
| **ITEM 12.**                                                                                                                                                                                                                                                                  | **SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS  AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS** |
|                                                                                                                                                                                                                                                                          |                                                                                                |
|       Information set forth under the  captions “Security Ownership of Certain Beneficial Owners and Management” and  “Equity Compensation Plan Information” in the Proxy Statement is incorporated  by reference herein.             |
|                                                                                                                                                                                                                                                                          |
| **ITEM  13.**                                                                                                                                                                                                                                                                 | **CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS**                                                  |
| ** **                                                                                                                                                                                                                                                                    | ** **                                                                                          |
|       Information set forth under the  caption “Certain Relationships and Related Transactions” in the Proxy  Statement is incorporated by reference herein.                                                                                    |
|                                                                                                                                                                                                                                                                          |
| **ITEM  14.**                                                                                                                                                                                                                                                                 | **PRINCIPAL ACCOUNTANT FEES AND SERVICES**                                                          |
| ** **                                                                                                                                                                                                                                                                    | ** **                                                                                          |
|       Information set forth under the  caption “Principal Accountant Fees and Services” in the Proxy Statement is  incorporated by reference herein.                                                                                            |
|                                                                                                                                                                                                                                                                               |                                                                                                     |  |

 

47

----

**PART IV**

**ITEM15.  EXHIBITS AND FINANCIAL STATEMENTSCHEDULES**

(a)                Documents filed aspart of report on Form 10-K

1.   Financial Statements

Report of IndependentRegistered Public Accounting Firm

Consolidated BalanceSheets, December 31, 2006 and December 31, 2005

Consolidated Statementsof Earnings and Comprehensive Income (Loss) for the Fiscal Years Ended December31, 2006, 2005, and 2004

Consolidated Statementsof Stockholders’ Equity for the Fiscal Years Ended December 31, 2006, 2005, and2004

Consolidated Statementsof Cash Flows for the Fiscal Years Ended December 31, 2006, 2005, and 2004

Notes to ConsolidatedFinancial Statements for the Fiscal Years Ended December 31, 2006, 2005, and2004

2.   Financial Statement Schedules

Schedule II — Valuationand Qualifying Accounts

All other consolidatedfinancial statement schedules are omitted because such schedules are notrequired or the information required has been presented in the aforementionedconsolidated financial statements.

3.         Exhibits — The exhibitslisted in the following “Index to Exhibits” are filed with this Form 10-K orincorporated by reference as set forth below.

(b)               Theexhibits listed in the “Index to Exhibits” below are filed with this Form 10-Kor incorporated by reference as set forth below.

(c)                AdditionalFinancial Statement Schedules — None.

48

----

 

**INDEXTO EXHIBITS**
| Exhibit                                                                                                  | ** ** | ** **                                                                                                                                                                                                                                                                                                    |
|----------------------------------------------------------------------------------------------------------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| **Number**                                                                                               | ** ** | **Description**                                                                                                                                                                                                                                                                                               |
| ** **                                                                                               | ** ** | ** **                                                                                                                                                                                                                                                                                                    |
| Exhibit 3  Articles  of Incorporation and By-Laws                                                   |
|                                                                                                     |
| 3.1                                                                                                      |       | Amended and Restated Certificate of Incorporation  (1)                                                                                                                                                                                                                                                        |
| 3.2                                                                                                      |       | Certificate of Amendment of the Restated Certificate  of Incorporation (2)                                                                                                                                                                                                                                    |
| 3.3                                                                                                      |       | Certificate of Amendment of the Restated Certificate  of Incorporation (4)                                                                                                                                                                                                                                    |
| 3.4                                                                                                      |       | Certificate of Amendment of the Restated Certificate  of Incorporation (13)                                                                                                                                                                                                                                   |
| 3.5                                                                                                      |       | Amended and Restated By-Laws (14)                                                                                                                                                                                                                                                                             |
| 3.6                                                                                                      |       | Certificate of Amendment of the Restated Certificate  of Incorporation (22)                                                                                                                                                                                                                                   |
|                                                                                                     |       |                                                                                                                                                                                                                                                                                                          |
| Exhibit 4  Instruments  Defining the Rights of Security Holders, including debentures               |
|                                                                                                     |
| 4.1                                                                                                      |       | Specimen Common Stock Certificate (1)                                                                                                                                                                                                                                                                         |
| 4.2                                                                                                      |       | Indenture dated April 17, 2001 between The Bank of  New York, as trustee, and the Registrant relating to the Registrant’s 8 7/8%  Senior Subordinated Notes and Series B 8 7/8% Senior Subordinated Notes (9)                                                                                            |
| 4.3                                                                                                      |       | Form of Note for the Registrant’s 8 7/8% Senior  Subordinated Notes and Series B Subordinated Notes (9)                                                                                                                                                                                                  |
| 4.4                                                                                                      |       | Rights Agreement between the Registrant and  BankBoston, N.A., as rights agent, dated as of November 12, 1998 (5)                                                                                                                                                                                             |
| 4.5                                                                                                      |       | Form of Note for the Registrant’s 81⁄2% Series B  Senior Notes (15)                                                                                                                                                                                                                                   |
| 4.6                                                                                                      |       | Indenture dated October 7, 2003 between The Bank of  New York, as trustee, and the Registrant relating to the Registrant’s 81⁄2%  Senior Notes and Series B Senior Notes (15)                                                                                                                         |
| 4.7                                                                                                      |       | Supplemental Indenture dated July 21, 2006 between  The Bank of New York, as trustee, and the Registrant relating to the  Registrant’s cash tender offer and consent solicitation for any and all of  its outstanding $175.0 million aggregate principal amount of 8 1⁄2% Senior  Notes due 2010 (23) |
|                                                                                                     |       |                                                                                                                                                                                                                                                                                                          |
| Exhibit 10(i)  Material Contracts                                                                   |
|                                                                                                     |
| 10.1                                                                                                     |       | Amended and Restated Credit Agreement dated as of  February 12, 2004 between the Registrant, Lenders, JP Morgan Securities Inc.  and JPMorgan Chase Bank (16)                                                                                                                                                 |
| 10.2                                                                                                     |       | Amendment No. 1 to the Amended and Restated Credit  Agreement dated as of October 26, 2004 between the Registrant, Lenders, JP  Morgan Securities Inc. and JPMorgan Chase Bank (17)                                                                                                                           |
| 10.3                                                                                                     |       | Amendment No. 2 to the Amended and Restated Credit  Agreement dated as of December 5, 2005 between the Registrant, Lenders and  JPMorgan Chase Bank, N.A. (21)                                                                                                                                                |
| 10.4                                                                                                     |       | New Credit Agreement dated as of July 26, 2006  between the Registrants, Lenders, JPMorgan Chase Bank, N.A., UBS Securities  LLC and Credit Suisse Securities (USA) LLC (22)                                                                                                                                  |
| 10.5                                                                                                     |       | Amended and Restated Credit Agreement dated as of  August 24, 2006 between Registrants, Lenders, JPMorgan Chase Bank, N.A., UBS  Securities LLC and Credit Suisse Securities (USA) LLC (24)                                                                                                                   |
|                                                                                                     |       |                                                                                                                                                                                                                                                                                                          |
| Exhibit 10(iii)  Management Contracts and Executive  Compensation Plans, Contracts and Arrangements |
|                                                                                                     |
| 10.6                                                                                                     |       | Amended and Restated Employment Agreement as of  August 1, 2005 between the Registrant and Amin J. Khoury. (20)                                                                                                                                                                                               |
| 10.7                                                                                                     |       | Amended and Restated Employment Agreement as of  August 1, 2005 between the Registrant and Robert J. Khoury. (20)                                                                                                                                                                                             |
| 10.8                                                                                                     |       | Amended and Restated Employment Agreement as of  August 1, 2005 between the Registrant and Thomas P. McCaffrey. (20)                                                                                                                                                                                          |
| 10.9                                                                                                     |       | Amended and Restated Employment Agreement dated as  of January 4, 2006 between the Registrant and Michael B. Baughan.(28)                                                                                                                                                                                     |
| 10.10                                                                                                    |       | Employment Agreement dated as of January 15, 2001  between the Registrant and Mark D. Krosney. (12)                                                                                                                                                                                                           |
| 10.11                                                                                                    |       | Employment Agreement dated as of February 26, 2001  between the Registrant and Robert A. Marchetti. (12)                                                                                                                                                                                                      |
| 10.12                                                                                                    |       | Retirement Agreement dated as of December 31, 2005  between the Registrant and Robert J. Khoury.(28)                                                                                                                                                                                                          |
| 10.13                                                                                                    |       | Consulting Agreement dated as of December 31, 2005  between the Registrant and Robert J. Khoury.(28)                                                                                                                                                                                                          |
| 10.14                                                                                                    |       | Amended and Restated 1989 Stock Option Plan. (10)                                                                                                                                                                                                                                                             |
| 10.15                                                                                                    |       | Amendment No. 1 to Amended and Restated 1989 Stock  Option Plan. (7)                                                                                                                                                                                                                                          |
| 10.16                                                                                                    |       | 1991 Directors’ Stock Option Plan. (3)                                                                                                                                                                                                                                                                   |
| 10.17                                                                                                    |       | United Kingdom 1992 Employee Share Option Scheme.  (2)                                                                                                                                                                                                                                                        |
|                                                                                                          |            |                                                                                                                                                                                                                                                                                                               |  |  |

 

49

----

 
| 10.18                                                        |   | 1996 Stock Option Plan. (10)                                                                                       |
|--------------------------------------------------------------|--------|--------------------------------------------------------------------------------------------------------------------|
| 10.19                                                        |   | Amendment No. 1 to the 1996 Stock Option Plan. (7)                                                                 |
| 10.20                                                        |   | Amendment No. 2 to the 1996 Stock Option Plan. (8)                                                                 |
| 10.21                                                        |   | 2001 Stock Option Plan. (11)                                                                                       |
| 10.22                                                        |   | 2001 Directors’ Stock Option Plan. (11)                                                                       |
| 10.23                                                        |   | 1994 Employee Stock Purchase Plan (Amended and  Restated as of January 19, 2000). (8)                              |
| 10.24                                                        |   | Supplemental Executive Deferred Compensation Plan  III. (6)                                                        |
| 10.25                                                        |   | Group Executive Incentive Plan Chairman, CEO, SR.  VPs — FY- 2005. (18)                                       |
| 10.26                                                        |   | Group Executive Incentive Plan Group Vice President  — Distribution Business — FY — 2005. (18)      |
| 10.27                                                        |   | Group Executive Incentive Plan Group Vice Presidents  — FY — 2005. (18)                                  |
| 10.28                                                        |   | 2005 Long-Term Incentive Plan (19)                                                                                 |
| 10.29                                                        |   | Amended and Restated Employment Agreement as of July  31, 2006 between Registrant and Amin J. Khoury (25)          |
| 10.30                                                        |   | Amended and Restated Employment Agreement as of July  31, 2006 between the Registrant and Thomas P. McCaffrey (25) |
| 10.31                                                        |   | Award of restricted stock on November 15, 2006 by  the Registrant to Robert Marchetti (26)                         |
| 10.32                                                        |   | Amended and Restated 1994 Employee Stock Purchase  Plan (27)                                                       |
|                                                         |   |                                                                                                               |
| Exhibit 12  Statements  regarding computation of ratios |
|                                                         |
| 12.1                                                         |   | Statement of computation of ratio of earnings to  fixed charges*                                                   |
|                                                         |   |                                                                                                               |
| Exhibit 14  Code  of Ethics                             |
|                                                         |   |                                                                                                               |
| 14.1                                                         |   | Code of Business Conduct (14)                                                                                      |
|                                                         |   |                                                                                                               |
| Exhibit 21  Subsidiaries  of the Registrant             |
|                                                         |   |                                                                                                               |
| 21.1                                                         |   | Subsidiaries *                                                                                                     |
|                                                         |   |                                                                                                               |
| Exhibit 23  Consents  of Experts and Counsel            |
|                                                         |
| 23.1                                                         |   | Consent of Independent Registered Public Accounting  Firm- Deloitte & Touche LLP*                              |
|                                                         |   |                                                                                                               |
| Exhibit 31  Rule  13a-14(a)/15d-14(a) Certifications    |
|                                                         |
| 31.1                                                         |   | Certification of Chief Executive Officer*                                                                          |
| 31.2                                                         |   | Certification of Chief Financial Officer*                                                                          |
|                                                         |   |                                                                                                               |
| Exhibit 32  Section  1350 Certifications                |
|                                                         |
| 32.1                                                         |   | Certification of Chief Executive Officer pursuant to  18 U.S.C. Section 1350*                                      |
| 32.2                                                         |   | Certification of Chief Financial Officer pursuant to  18 U.S.C. Section 1350*                                      |

----

* Filed herewith.

(1)                                  Incorporatedby reference to the Company’s Registration Statement on Form S-1, as amended(No. 33-33689), filed with the Commission on March 7, 1990.

(2)                                  Incorporatedby reference to the Company’s Registration Statement on Form S-1, as amended(No. 333-54146), filed with the Commission on November 3, 1992.

(3)                                  Incorporatedby reference to the Company’s Registration Statement on Form S-8 (No.333-48010), filed with the Commission on May 26, 1992.

(4)                                  Incorporatedby reference to the Company’s Registration Statement on Form S-3 (No.333-60209), filed with the Commission on July 30, 1998.

(5)                                  Incorporatedby reference to the Company’s Current Report on Form 8-K dated November 12,1998, filed with the Commission on November 18, 1998.

(6)                                  Incorporatedby reference to the Company’s Quarterly Report on Form 10-Q for the quarterended May 29, 1999, filed with the Commission on July 9, 1999.

50

----

(7)                                  Incorporatedby reference to the Company’s Registration Statement on Form S-8 (No.333-89145), filed with the Commission on October 15, 1999.

(8)                                  Incorporatedby reference to the Company’s Registration Statement on Form S-8 (No.333-30578), filed with the Commission on February 16, 2000.

(9)                                  Incorporatedby reference to the Company’s Registration Statement on Form S-4 (No.333-62674) as filed with the Commission on June 8, 2001.

(10)                            Incorporatedby reference to the Company’s Registration Statement on Form S-8 (No.333-14037), filed with the Commission on October 15, 1996.

(11)                            Incorporatedby reference to the Company’s Registration Statement on Form S-8 (No.333-71442), filed with the Commission on October 11, 2001.

(12)                            Incorporatedby reference to the Company’s Annual Report on Form 10-K/A for the fiscal yearended February 23, 2002, filed with the Commission on May 29, 2002.

(13)                            Incorporated by reference to the Company’s RegistrationStatement on Form S-3 (No. 333-112493), as amended, filed with the Commissionon February 5, 2004.

(14)                            Incorporated by reference to the Company’s Transition Reporton Form 10-K for the ten-month transition period ended December 31, 2002, filedwith the Commission March 26, 2003.

(15)                            Incorporated by reference to the Company’s RegistrationStatement on Form S-4 (No. 333-109954), as amended, filed with the Commissionon October 24, 2003.

(16)                            Incorporated by reference to the Company’s Annual Report on Form10-K for the fiscal year ended December 31, 2003, filed with the Commission onMarch 12, 2004.

(17)                            Incorporated by reference to the Company’s Quarterly Reporton Form 10-Q for the quarter ended September 30, 2004, filed with theCommission on November 5, 2004.

(18)                            Incorporatedby reference to the Company’s Current Report on Form 8-K dated April 22, 2005,filed with the Commission on April 22, 2005.

(19)                            Incorporatedby reference to the Company’s Current Report on Form 8-K dated July 26, 2005,filed with the Commission on July 26, 2005.

(20)                            Incorporatedby reference to the Company’s Quarterly Report on Form 10-Q for the quarterended June 30, 2005, filed with the Commission on August 5, 2005.

(21)                            Incorporatedby reference to the Company’s Current Report on Form 8-K dated December 5,2005, filed with the Commission on December 5, 2005.

(22)                            Incorporated by reference to the Company’sQuarterly Report on Form 10-Q for the quarter ended June 30,    2006, filed with the Commission on August 7,2006.

(23)                            Incorporated by reference to the Company’sCurrent Report on Form 8-K dated July 26, 2006, filed with the         Commission on July 31, 2006.

(24)                            Incorporated by reference to the Company’sCurrent Report on Form 8-K dated November 15, 2006, filed with the Commissionon August 29, 2006.

(25)                            Incorporated by reference to the Company’sCurrent Report on Form 8-K dated July 31, 2006, filed with the Commission onAugust 3, 2006.

(26)                            Incorporated by reference to the Company’sCurrent Report on Form 8-K dated November 15, 2006 filed with the Commission onNovember 21, 2006.

(27)                            Incorporated by reference to the Company’sQuarterly Report on Form 10-Q for the quarter ended September 30, 2006, filedwith the Commission on November 7, 2006.

(28)                            Incorporated by reference to the Company’s AnnualReport on Form 10-K for the fiscal year ended December 31, 2005 filedwith the Commission on March 15, 2006.

[Remainder of pageintentionally left blank]

51

----

**SIGNATURES**

Pursuant to therequirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, theregistrant has duly caused this report to be signed on its behalf by theundersigned, thereunto duly authorized.
| .      | BE AEROSPACE, INC                    |               |
|--------|--------------------------------------|--------------------|
|   |                                 |
|   |                                 |
|   | By:                                  | /s/ Amin J. Khoury |
|   | Amin J. Khoury                       |
|   | Chairman and Chief Executive Officer |
|        |                                      |                    |  |

 

Date:  February 15, 2007

Pursuant to therequirements of the Securities Exchange Act of 1934, this report has beensigned below by the following persons on behalf of the registrant and in thecapacities and on the dates indicated.
| Signature                 | ** ** | **Title**                                                                 | ** ** | **Date**          |
|---------------------------|------------|---------------------------------------------------------------------------|------------|-------------------|
|                      |       |                                                                      |       |              |
|                      |       |                                                                      |       |              |
| /s/ Amin J. Khoury        |       | Chairman and Chief Executive Officer                                      |       | February 15, 2007 |
| Amin J. Khoury            |       |                                                                      |       |              |
|                      |       |                                                                      |       |              |
| /s/ Thomas P. McCaffrey   |       | Senior Vice President of Administration                                   |       | February 15, 2007 |
| Thomas P. McCaffrey       |       | and Chief Financial Officer (principal financial and  accounting officer) |       |              |
|                      |       |                                                                      |       |              |
|                      |       |                                                                      |       |              |
| /s/ Charles L. Chadwell   |       | Director                                                                  |       | February 15, 2007 |
| Charles L. Chadwell       |       |                                                                      |       |              |
|                      |       |                                                                      |       |              |
|                      |       |                                                                      |       |              |
| /s/ Jim C. Cowart         |       | Director                                                                  |       | February 15, 2007 |
| Jim C. Cowart             |       |                                                                      |       |              |
|                      |       |                                                                      |       |              |
|                      |       |                                                                      |       |              |
| /s/ Richard G. Hamermesh  |       | Director                                                                  |       | February 15, 2007 |
| Richard G. Hamermesh      |       |                                                                      |       |              |
|                      |       |                                                                      |       |              |
|                      |       |                                                                      |       |              |
| /s/ David C. Hurley       |       | Director                                                                  |       | February 15, 2007 |
| David C. Hurley           |       |                                                                      |       |              |
|                      |       |                                                                      |       |              |
|                      |       |                                                                      |       |              |
| /s/ Robert J. Khoury      |       | Director                                                                  |       | February 15, 2007 |
| Robert J. Khoury          |       |                                                                      |       |              |
|                      |       |                                                                      |       |              |
|                      |       |                                                                      |       |              |
| /s/ Brian H. Rowe         |       | Director                                                                  |       | February 15, 2007 |
| Brian H. Rowe             |       |                                                                      |       |              |
|                      |       |                                                                      |       |              |
|                      |       |                                                                      |       |              |
| /s/ Jonathan M. Schofield |       | Director                                                                  |       | February 15, 2007 |
| Jonathan M. Schofield     |       |                                                                      |       |              |
|                      |       |                                                                      |       |              |
|                      |       |                                                                      |       |              |
| /s/ Arthur E. Wegner      |       | Director                                                                  |       | February 15, 2007 |
| Arthur E. Wegner          |       |                                                                      |       |              |

 

52

----

 

**ITEM 8.  INDEX TO CONSOLIDATED FINANCIAL STATEMENTSAND SCHEDULE**
|                                                          |                                                                                                                               |   |
|----------------------------------------------------------|------------------------------------------------------------------------------------------------------------------------------------|--------|
| Report of Independent Registered Public Accounting  Firm |                                                                                                                               |   |
|                                                     |                                                                                                                               |   |
| Consolidated Financial Statements:                       |                                                                                                                               |   |
|                                                     |                                                                                                                               |   |   |
|                                                     | Consolidated Balance Sheets, December 31, 2006, 2005                                                                               |   |   |
|                                                     |                                                                                                                               |   |   |
|                                                     | Consolidated Statements of Earnings and  Comprehensive Income (Loss)  for the Fiscal Years Ended December 31, 2006, 2005, and 2004 |   |   |
|                                                     |                                                                                                                               |   |   |
|                                                     | Consolidated Statements of Stockholders’ Equity  for the Fiscal Years Ended December 31, 2006, 2005, and 2004                 |   |   |
|                                                     |                                                                                                                               |   |   |
|                                                     | Consolidated Statements of Cash Flows  for the Fiscal Years Ended December 31, 2006, 2005, and 2004                                |   |   |
|                                                     |                                                                                                                               |   |   |
|                                                     | Notes to Consolidated Financial Statements  for the Fiscal Years Ended December 31, 2006, 2005, and 2004                           |   |   |
|                                                     |                                                                                                                               |   |   |
| Consolidated Financial Statement Schedule:               |                                                                                                                               |   |
|                                                     |                                                                                                                               |   |   |
|                                                     | Schedule II - Valuation and Qualifying Accounts  for the Fiscal Years Ended December 31, 2006, 2005, and 2004                      |   |   |
|                                                     |                                                                                                                               |   |   |

 

[Remainder of pageintentionally left blank]

F-1

----

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTINGFIRM

The Board of Directorsand Stockholders

BE Aerospace, Inc.

Wellington,Florida

We have audited the accompanying consolidated balancesheets of BE Aerospace, Inc. and subsidiaries (the “Company”) as of December31, 2006 and December 31, 2005, and the related consolidated statements ofearnings and comprehensive income (loss), stockholders’ equity, and cash flowsfor each of the three fiscal years in the period ended December 31, 2006.  Our audits also included the financialstatement schedule listed in item 15(a)(2). These financial statements and thefinancial statement schedule are the responsibility of the Company’smanagement. Our responsibility is to express an opinion on these financialstatements and the financial statement schedule based on our audits.

We conducted our audits in accordance with thestandards of the Public Company Accounting Oversight Board (United States).Those standards require that we plan and perform the audit to obtain reasonableassurance about whether the financial statements are free of materialmisstatement. An audit includes examining, on a test basis, evidence supportingthe amounts and disclosures in the financial statements. An audit also includesassessing the accounting principles used and significant estimates made bymanagement, as well as evaluating the overall financial statement presentation.We believe that our audits provide a reasonable basis for our opinion.

In our opinion, such consolidated financial statementspresent fairly, in all material respects, the financial position of BEAerospace, Inc. and subsidiaries as of December 31, 2006 and December 31, 2005,and the results of their operations and their cash flows for each of the threefiscal years in the period ended December 31, 2006, in conformity withaccounting principles generally accepted in the United States of America. Also,in our opinion, such financial statement schedule, when considered in relationto the basic consolidated financial statements taken as a whole, presentsfairly, in all material respects, the information set forth therein.

We have alsoaudited, in accordance with the standards of the Public Company AccountingOversight Board (United States), the effectiveness of the Company’s internalcontrol over financial reporting as of December 31, 2006, based on the criteriaestablished in *Internal Control — Integrated Framework*issued by the Committee of Sponsoring Organizations of the Treadway Commissionand our report dated February 14, 2007, expressed an unqualified opinion onmanagement’s assessment of the effectiveness of the Company’s internal controlover financial reporting and an unqualified opinion on the effectiveness of theCompany’s internal control over financial reporting.
| /s/ Deloitte &Touche LLP |
|------------------------------|
|                         |
|                         |
| Costa Mesa, California       |
| February 14, 2007            |

 

F-2

----

CONSOLIDATED BALANCE SHEETS, DECEMBER 31, 2006 AND2005

(In millions,except per share data)

 
| ** **                                                                                                                                                            | ** ** | **December 31,  2006** | ** ** | **December 31,  2005** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------|------------|-----------------------------|------------|
| ASSETS                                                                                                                                                                |       |                        |       |                        |       |
|                                                                                                                                                                  |       |                        |       |                        |       |
| Current Assets:                                                                                                                                                       |       |                        |       |                        |       |
| Cash and cash  equivalents                                                                                                                                            |       | $                           | 65.0       |                        | $          | 356.0 |   |
| Accounts  receivable — trade, less allowance for doubtful accounts ($4.7 and $2.9 at  December 31, 2006 and 2005, respectively)                                  |       | 172.9                       |       | 131.9                       |       |
| Inventories, net                                                                                                                                                      |       | 420.9                       |       | 223.7                       |       |
| Deferred income  tax assets, net                                                                                                                                      |       | 53.1                        |       | 17.5                        |       |
| Other current  assets                                                                                                                                                 |       | 13.8                        |       | 15.1                        |       |
| Total current  assets                                                                                                                                                 |       | 725.7                       |       | 744.2                       |       |
|                                                                                                                                                                  |       |                        |       |                        |       |
| Property and equipment,  net                                                                                                                                          |       | 107.9                       |       | 95.0                        |       |
| Goodwill                                                                                                                                                              |       | 457.2                       |       | 362.9                       |       |
| Identified intangibles,  net                                                                                                                                          |       | 160.6                       |       | 139.9                       |       |
| Deferred income tax  assets, net                                                                                                                                      |       | 27.9                        |       | 62.0                        |       |
| Other assets, net                                                                                                                                                     |       | 18.4                        |       | 22.5                        |       |
|                                                                                                                                                                  |       | $                           | 1,497.7    |                        | $          | 1,426.5 |   |
|                                                                                                                                                                  |       |                        |       |                        |       |
| LIABILITIES AND  STOCKHOLDERS’ EQUITY                                                                                                                            |       |                        |       |                        |       |
|                                                                                                                                                                  |       |                        |       |                        |       |
| Current Liabilities:                                                                                                                                                  |       |                        |       |                        |       |
| Accounts payable  and accrued liabilities                                                                                                                             |       | $                           | 267.8      |                        | $          | 169.3 |   |
| Current portion  of long-term debt                                                                                                                                    |       | 1.9                         |       | 1.5                         |       |
| Total current  liabilities                                                                                                                                            |       | 269.7                       |       | 170.8                       |       |
|                                                                                                                                                                  |       |                        |       |                        |       |
| Long-term debt, net of  current portion                                                                                                                               |       | 502.0                       |       | 677.4                       |       |
| Deferred income tax  liabilities, net                                                                                                                                 |       | 10.0                        |       | 1.8                         |       |
| Other liabilities                                                                                                                                                     |       | 10.0                        |       | 6.9                         |       |
|                                                                                                                                                                  |       |                        |       |                        |       |
| Commitments,  contingencies and off-balance-sheet arrangements (Note 8)                                                                                               |       |                        |       |                        |       |
|                                                                                                                                                                  |       |                        |       |                        |       |
| Stockholders’ Equity:                                                                                                                                            |       |                        |       |                        |       |
| Preferred stock, $0.01  par value; 1.0 million shares authorized; no shares outstanding                                                                               |       | —                      |       | —                      |       |
| Common stock, $0.01 par  value; 200.0 million shares authorized; 79.5 million (December 31, 2006) and  74.3 million (December 31, 2005) shares issued and outstanding |       | 0.8                         |       | 0.7                         |       |
| Additional paid-in  capital                                                                                                                                           |       | 927.2                       |       | 894.0                       |       |
| Accumulated deficit                                                                                                                                                   |       | (234.8                      | )          | (320.4                      | )          |
| Accumulated other  comprehensive income (loss)                                                                                                                        |       | 12.8                        |       | (4.7                        | )          |
| Total stockholders’  equity                                                                                                                                      |       | 706.0                       |       | 569.6                       |       |
|                                                                                                                                                                  |       | $                           | 1,497.7    |                        | $          | 1,426.5 |   |

 

Seenotes to consolidated financial statements.

 

F-3

----

CONSOLIDATED STATEMENTSOF EARNINGS AND COMPREHENSIVE INCOME (LOSS)FOR THE FISCAL YEARS ENDED DECEMBER 31, 2006, 2005 AND 2004

(In millions,except per share data)
| ** **                                         | ** ** | **Fiscal Year Ended December 31,** | ** ** |
|----------------------------------------------------|------------|--------------------------------------------------------|------------|
| ** **                                         | ** ** | **2006**                                               | ** ** | **2005** | ** ** | **2004** | ** ** |
|                                               |       |                                                   |       |   |   |   |   |
| Net sales                                          |       | $                                                      | 1,128.2    |   | $ | 844.1 |   | $ | 733.5 |   |
|                                               |       |                                                   |       |   |   |   |   |
| Cost of sales                                      |       | 731.7                                                  |       | 548.5 |   | 494.8 |   |
|                                               |       |                                                   |       |   |   |   |   |
| Gross profit                                       |       | 396.5                                                  |       | 295.6 |   | 238.7 |   |
|                                               |       |                                                   |       |   |   |   |   |
| Operating expenses:                                |       |                                                   |       |   |   |   |   |
| Selling, general  and administrative               |       | 159.6                                                  |       | 136.4 |   | 119.2 |   |
| Research,  development and engineering             |       | 88.6                                                   |       | 65.6 |   | 55.1 |   |
| Total operating  expenses                          |       | 248.2                                                  |       | 202.0 |   | 174.3 |   |
|                                               |       |                                                   |       |   |   |   |   |
| Operating earnings                                 |       | 148.3                                                  |       | 93.6 |   | 64.4 |   |
|                                               |       |                                                   |       |   |   |   |   |
| Interest expense, net                              |       | 38.9                                                   |       | 59.3 |   | 76.1 |   |
| Loss on debt  extinguishment                       |       | 19.4                                                   |       | —- |   | 8.8 |   |
|                                               |       |                                                   |       |   |   |   |   |
| Earnings (loss) before  income taxes               |       | 90.0                                                   |       | 34.3 |   | (20.5 | ) |
|                                               |       |                                                   |       |   |   |   |   |
| Income tax expense  (benefit)                      |       | 4.4                                                    |       | (50.3 | ) | 1.5 |   |
|                                               |       |                                                   |       |   |   |   |   |
| Net earnings (loss)                                |       | 85.6                                                   |       | 84.6 |   | (22.0 | ) |
|                                               |       |                                                   |       |   |   |   |   |
| Other comprehensive  income (loss):                |       |                                                   |       |   |   |   |   |
| Foreign exchange  translation adjustment and other |       | 17.5                                                   |       | (13.7 | ) | 8.3 |   |
| Comprehensive income  (loss)                       |       | $                                                      | 103.1      |   | $ | 70.9 |   | $ | (13.7 | ) |
|                                               |       |                                                   |       |   |   |   |   |
| Net earnings (loss) per  share - basic             |       | $                                                      | 1.11       |   | $ | 1.44 |   | $ | (0.53 | ) |
| Net earnings (loss) per  share - diluted           |       | $                                                      | 1.10       |   | $ | 1.39 |   | $ | (0.53 | ) |
|                                               |       |                                                   |       |   |   |   |   |
| Weighted average common  shares - basic            |       | 77.1                                                   |       | 58.8 |   | 41.7 |   |
| Weighted average common shares - diluted           |       | 78.0                                                   |       | 60.8 |   | 41.7 |   |

 

Seenotes to consolidated financial statements.

 

F-4

----

CONSOLIDATEDSTATEMENTS OF STOCKHOLDERS’ EQUITY

FOR THE FISCAL YEARSENDED DECEMBER 31, 2006, 2005, AND 2004

(Inmillions)
| ** **                                             | ** ** | ** **            | ** ** | ** **  | ** ** | ** **      | ** ** | ** **        | ** ** | **Accumulated**        | ** ** | ** ** | ** ** |
|--------------------------------------------------------|------------|-----------------------|------------|-------------|------------|-----------------|------------|-------------------|------------|------------------------|------------|------------|------------|
| ** **                                             | ** ** | ** **            | ** ** | ** **  | ** ** | **Additional**  | ** ** | ** **        | ** ** | **Other**              | ** ** | **Total**  | ** ** |
| ** **                                             | ** ** | **Common Stock** | ** ** | **Paid-in** | ** ** | **Accumulated** | ** ** | **Comprehensive** | ** ** | **Stockholders’** | ** ** |
| ** **                                             | ** ** | **Shares**            | ** ** | **Amount**  | ** ** | **Capital**     | ** ** | **Deficit**       | ** ** | **Income (Loss)** | ** ** | **Equity** | ** ** |
| Balance, December 31,  2003                            |       | 36.7                  |       | $           | 0.4        |            | $          | 413.8             |       | $                      | (383.0     | )          | $          | 0.7 |   | $ | 31.9 |   |
| Sale of common  stock under public offering            |       | 18.4                  |       | 0.2         |       | 156.3           |       | —            |       | —                 |       | 156.5      |       |
| Sale of stock  under employee stock purchase plan      |       | 0.6                   |       | —      |       | 2.9             |       | —            |       | —                 |       | 2.9        |       |
| Exercise of  stock options                             |       | 0.6                   |       | —      |       | 2.9             |       | —            |       | —-                |       | 2.9        |       |
| Employee benefit  plan matching contribution           |       | 0.3                   |       | —      |       | 2.3             |       | —            |       | —-                |       | 2.3        |       |
| Net loss                                               |       | —                |       | —-     |       | —          |       | (22.0             | )          | —                 |       | (22.0      | )          |
| Foreign currency  translation adjustment               |       | —                |       | —      |       | —          |       | —            |       | 8.3                    |       | 8.3        |       |
| Balance, December 31,  2004                            |       | 56.6                  |       | 0.6         |       | 578.2           |       | (405.0            | )          | 9.0                    |       | 182.8      |       |
| Sale of common  stock under public offering            |       | 15.0                  |       | 0.1         |       | 268.6           |       | —            |       | —-                |       | 268.7      |       |
| Sale of stock  under employee stock purchase plan      |       | 0.2                   |       | —      |       | 2.8             |       | —            |       | —-                |       | 2.8        |       |
| Exercise of  stock options                             |       | 2.3                   |       | —      |       | 13.5            |       | —            |       | —-                |       | 13.5       |       |
| Employee benefit  plan matching contribution           |       | 0.2                   |       | —      |       | 2.9             |       | —            |       | —-                |       | 2.9        |       |
| Deferred income  tax benefit from share based payments |       | —                |       | —-     |       | 28.0            |       | —            |       | —-                |       | 28.0       |       |
| Net earnings                                           |       | —                |       | —-     |       | —          |       | 84.6              |       | —                 |       | 84.6       |       |
| Foreign currency  translation adjustment               |       | —                |       | —      |       | —          |       | —            |       | (13.7                  | )          | (13.7      | )          |
| Balance, December 31,  2005                            |       | 74.3                  |       | 0.7         |       | 894.0           |       | (320.4            | )          | (4.7                   | )          | 569.6      |       |
| Sale of stock  under employee stock purchase plan      |       | 0.1                   |       | —      |       | 2.6             |       | —            |       | —-                |       | 2.6        |       |
| Exercise of  stock option                              |       | 3.6                   |       | 0.1         |       | 28.5            |       | —            |       | —-                |       | 28.6       |       |
| Restricted stock  grants                               |       | 1.5                   |       | —      |       | 2.2             |       | —            |       | —                 |       | 2.2        |       |
| Deferred income  tax benefit from share based payments |       | —                |       | —-     |       | (0.7            | )          | —            |       | —-                |       | (0.7       | )          |
| Net earnings adjustment  and other                     |       | —                |       | —-     |       | —          |       | 85.6              |       | —                 |       | 85.6       |       |
| Foreign currency  translation                          |       | —                |       | —      |       | 0.6             |       | —            |       | 17.5                   |       | 18.1       |       |
| Balance, December 31, 2006                             |       | 79.5                  |       | $           | 0.8        |            | $          | 927.2             |       | $                      | (234.8     | )          | $          | 12.8 |   | $ | 706.0 |   |

 

Seenotes to consolidated financial statements.

 

F-5

----

CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE FISCAL YEARSENDED DECEMBER 31, 2006, 2005, AND 2004

(In millions)

 
| ** **                                                                                         | ** ** | **Fiscal Year Ended December 31,** | ** ** |
|----------------------------------------------------------------------------------------------------|------------|--------------------------------------------------------|------------|
| ** **                                                                                         | ** ** | **2006**                                               | ** ** | **2005** | ** ** | **2004** | ** ** |
| **CASH FLOWS FROM OPERATING  ACTIVITIES:**                                                         | ** ** | ** **                                             | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net earnings (loss)                                                                                |       | $                                                      | 85.6       |   | $ | 84.6 |   | $ | (22.0 | ) |
| Adjustments to  reconcile net earnings (loss) to net cash flows provided by operating  activities: |       |                                                   |       |   |   |   |   |
| Depreciation and  amortization                                                                     |       | 29.4                                                   |       | 28.6 |   | 28.4 |   |
| Deferred income  taxes                                                                             |       | (0.6                                                   | )          | (51.9 | ) | — |   |
| Excess tax  benefits from share-based payments                                                     |       | (0.7                                                   | )          | 28.0 |   | — |   |
| Non-cash  compensation                                                                             |       | 2.7                                                    |       | 4.1 |   | 2.3 |   |
| Provision for  doubtful accounts                                                                   |       | 1.8                                                    |       | 0.5 |   | 1.0 |   |
| Loss on disposal  of property and equipment                                                        |       | 0.5                                                    |       | 1.0 |   | — |   |
| Debt prepayment  costs                                                                             |       | 19.4                                                   |       | — |   | 8.8 |   |
| Changes in  operating assets and liabilities, net of effects from acquisitions:                    |       |                                                   |       |   |   |   |   |
| Accounts  receivable                                                                               |       | (16.2                                                  | )          | (46.7 | ) | (7.0 | ) |
| Inventories                                                                                        |       | (155.7                                                 | )          | (28.9 | ) | (25.6 | ) |
| Other assets                                                                                       |       | 8.3                                                    |       | (30.8 | ) | 2.5 |   |
| Payables,  accruals and other liabilities                                                          |       | 66.5                                                   |       | 24.1 |   | 11.9 |   |
| Net cash flows provided  by operating activities                                                   |       | 41.0                                                   |       | 12.6 |   | 0.3 |   |
|                                                                                               |       |                                                   |       |   |   |   |   |
| **CASH FLOWS FROM INVESTING  ACTIVITIES:**                                                         | ** ** | ** **                                             | ** ** | ** ** | ** ** | ** ** | ** ** |
| Capital  expenditures                                                                              |       | (24.1                                                  | )          | (16.9 | ) | (14.5 | ) |
| Acquisitions of  businesses, net of cash acquired                                                  |       | (145.3                                                 | )          | — |   | (12.5 | ) |
| Proceeds from  sales of property and equipment                                                     |       | —                                                 |       | — |   | 0.5 |   |
| Other, net                                                                                         |       | —                                                 |       | 1.6 |   | (0.3 | ) |
| Net cash flows used in  investing activities                                                       |       | (169.4                                                 | )          | (15.3 | ) | (26.8 | ) |
|                                                                                               |       |                                                   |       |   |   |   |   |
| **CASH FLOWS FROM FINANCING  ACTIVITIES:**                                                         | ** ** | ** **                                             | ** ** | ** ** | ** ** | ** ** | ** ** |
| Proceeds from  issuance of common stock, net expenses                                              |       | 30.0                                                   |       | 285.1 |   | 162.3 |   |
| Principal  payments on long-term debt                                                              |       | (549.5                                                 | )          | (0.9 | ) | (202.0 | ) |
| Payment of debt  origination costs and prepayment costs                                            |       | (19.2                                                  | )          | — |   | (6.3 | ) |
| Proceeds from  long-term debt                                                                      |       | 373.6                                                  |       | — |   | — |   |
| Repayments on  bank credit facility                                                                |       | (150.0                                                 | )          | — |   | — |   |
| Borrowings on  bank credit facility                                                                |       | 150.0                                                  |       | — |   | — |   |
| Net cash flows (used  in) provided by financing activities                                         |       | (165.1                                                 | )          | 284.2 |   | (46.0 | ) |
|                                                                                               |       |                                                   |       |   |   |   |   |
| Effect of exchange rate  changes on cash and cash equivalents                                      |       | 2.5                                                    |       | (1.8 | ) | 1.2 |   |
|                                                                                               |       |                                                   |       |   |   |   |   |
| Net (decrease) increase  in cash and cash equivalents                                              |       | (291.0                                                 | )          | 279.7 |   | (71.3 | ) |
| Cash and cash  equivalents, beginning of year                                                      |       | 356.0                                                  |       | 76.3 |   | 147.6 |   |
| Cash and cash  equivalents, end of year                                                            |       | $                                                      | 65.0       |   | $ | 356.0 |   | $ | 76.3 |   |
|                                                                                               |       |                                                   |       |   |   |   |   |
| **SUPPLEMENTAL DISCLOSURES OF  CASH FLOW INFORMATION:**                                            | ** ** | ** **                                             | ** ** | ** ** | ** ** | ** ** | ** ** |
| Cash paid during period  for:                                                                      |       |                                                   |       |   |   |   |   |
| Interest, net                                                                                      |       | $                                                      | 49.0       |   | $ | 57.8 |   | $ | 76.9 |   |
| Income taxes,  net                                                                                 |       | 1.6                                                    |       | 3.2 |   | 3.2 |   |
|                                                                                               |       |                                                   |       |   |   |   |   |

 

See notes to consolidatedfinancial statements.

 

F-6

----

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE FISCAL YEARS ENDED DECEMBER 31, 2006, 2005 AND2004

(In millions, except per share data)

**1.**       **SUMMARY OF SIGNIFICANTACCOUNTING POLICIES**

*Organization and Basis of Presentation**—* BE Aerospace, Inc. and its whollyowned subsidiaries (the “Company”) designs, manufactures, sells and servicescommercial aircraft and business jet cabin interior products consisting of abroad range of seating, interior systems, including structures as well as allfood and beverage storage and preparation equipment and distributes aerospacefasteners.  The Company’s principalcustomers are the operators of commercial and business jet aircraft andaircraft manufacturers.  As a result, theCompany’s business is directly dependent upon the conditions in the commercialairline, business jet and aircraft manufacturing industries.  The accompanying consolidated financialstatements are prepared in accordance with accounting principles generallyaccepted in the United States of America.

*Consolidation —* The accompanying consolidated financial statementsinclude the accounts of BE Aerospace, Inc. and its wholly ownedsubsidiaries.  All intercompanytransactions and balances have been eliminated in consolidation.

*FinancialStatement Preparation**—*The preparation of the consolidated financial statements in conformity withaccounting principles generally accepted in the United States of Americarequires management to make estimates and assumptions that affect the reportedamounts of assets and liabilities and disclosure of contingent assets andliabilities at the date of the financial statements and the reported amounts ofrevenues and expenses during the reporting periods.  Actual results could differ from thoseestimates.

*Revenue Recognition**—* Sales of products are recorded when theearnings process is complete.  Thisgenerally occurs when the products are shipped to the customer in accordancewith the contract or purchase order, risk of loss and title has passed to thecustomer, collectibility is reasonably assured and pricing is fixed anddeterminable.  In instances where titledoes not pass to the customer upon shipment, the Company recognizes revenueupon delivery or customer acceptance, depending on the terms of the salescontract.

Service revenuesprimarily consist of engineering activities and are recorded when services areperformed.

Revenues and costs undercertain long-term contracts are recognized using contract accounting under thepercentage-of-completion method, generally using the cost-to-cost method.  The percentage-of-completion method requiresthe use of estimates of costs to complete long-term contracts.  The estimation of these costs requiresjudgment on the part of management due to the duration of these contracts aswell as the technical nature of the products involved.  Adjustments to these estimated costs are madeon a consistent basis.  Revenuesassociated with any contractual claims are recognized when it is probable thatthe claim will result in additional contract revenue and the amount can bereasonably estimated.  A provision forcontract losses are recorded when such facts are determinable.

*Income Taxes**—* The Company provides deferred incometaxes for temporary differences between amounts of assets and liabilitiesrecognized for financial reporting purposes and such amounts recognized forincome tax purposes.  Deferred incometaxes are computed using enacted tax rates that are expected to be in effectwhen the temporary differences reverse. A valuation allowance related to a deferred tax asset is recorded whenit is more likely than not that some portion or the entire deferred tax assetwill not be realized.

*Cash Equivalents —* The Company considers all highly liquid debtinstruments purchased with an original maturity of three months or less to becash equivalents.

*AccountsReceivable —*The Company performs ongoing credit evaluationsof its customers and adjusts credit limits based upon payment history and thecustomer’s current creditworthiness, as determined by review of their currentcredit information.  The Companycontinuously monitors collections and payments from its customers and maintainsa provision for estimated credit losses based upon historical experience andany specific customer collection issues that have been identified.  Credit losses have historically been withinmanagement’s expectations and the provisions established.

*Inventories —*TheCompany values inventory at the lower of cost (FIFO or weighted average costmethod) or market.  The Company regularlyreviews inventory quantities on hand and records a provision for excess andobsolete inventory based primarily on historical demand, as well as, anestimated forecast of product demand

F-7

----

and productionrequirements.  Demand for the Company’sproducts can fluctuate significantly.  Inaccordance with industry practice, costs in inventory include amounts relatingto long-term contracts with long production cycles and to inventory items withlong procurement cycles, some of which are not expected to be realized withinone year.

*Debt Issuance Costs —*Costs incurred to issue debt are deferred and amortized as interest expenseover the term of the related debt.

*Goodwill and Identified IntangibleAssets**—* UnderStatement of Financial Accounting Standards (“SFAS”) No. 142, “Goodwill andOther Intangible Assets”, goodwill and other intangible assets with indefinitelives are not amortized, but are reviewed at least annually forimpairment.  Acquired intangible assetswith definite lives are amortized over their individual useful lives.  In addition to goodwill, intangible assetswith indefinite lives consist of the M & M trademark.  Patents and other intangible assets areamortized using the straight-line method over periods ranging from one tothirty years (see Note 5).  On at leastan annual basis, management assesses whether there has been any impairment inthe value of goodwill or intangible assets with indefinite lives by comparingthe fair value to the net carrying value of reporting units.  If the carrying value exceeds its estimatedfair value, an impairment loss would be recognized if the implied fair value ofthe asset being tested was less than its carrying value.  In this event, the asset is written downaccordingly.  In accordance with SFAS No.142, the Company completed step one of the impairment tests and fair valueanalysis for goodwill and other intangible assets, and there were noimpairments or impairment indicators present and no impairment loss wasrecorded during the fiscal years ended December 31, 2006, 2005 or 2004.

*Long-Lived Assets* — The Companyassesses potential impairments to its long-lived assets when there is evidencethat events or changes in circumstances indicate that the carrying amount of anasset may not be recovered.  Animpairment loss is recognized when the undiscounted cash flows expected to begenerated by an asset (or group of assets) is less than its carryingamount.  Any required impairment loss ismeasured as the amount by which the asset’s carrying value exceeds its fairvalue and is recorded as a reduction in the carrying value of the related assetand a charge to operating results.

*Product Warranty Costs**—* Estimated costs related toproduct warranties are accrued at the time products are sold.  In estimating its future warranty obligations,the Company considers various relevant factors, including the Company’s statedwarranty policies and practices, the historical frequency of claims and thecost to replace or repair its products under warranty.  The following table provides a reconciliationof the activity related to the Company’s accrued warranty expense:
| ** **                      | ** ** | **Fiscal Year Ended December 31,** | ** ** |
|---------------------------------|------------|--------------------------------------------------------|------------|
| ** **                      | ** ** | **2006**                                               | ** ** | **2005** | ** ** | **2004** | ** ** |
|                            |       |                                                   |       |   |   |   |   |
| Balance at  beginning of period |       | $                                                      | 14.3       |   | $ | 13.2 |   | $ | 11.9 |   |
| Charges to costs and expenses   |       | 12.7                                                   |       | 13.6 |   | 6.5 |   |
| Costs incurred                  |       | (9.2                                                   | )          | (12.5 | ) | (6.2 | ) |
| Acquisitions                    |       | 0.6                                                    |       | —- |   | 1.0 |   |
| Balance at end of  period       |       | $                                                      | 18.4       |   | $ | 14.3 |   | $ | 13.2 |   |

 

*Accountingfor Stock-Based Compensation*— Prior to January 1, 2006 theCompany applied Accounting Principles Board Opinion No. 25 “Accounting forStock Issues to Employees”, and related interpretations in accounting for itsstock option and purchase plans. Effective January 1, 2006, the Company began accounting for share-basedcompensation arrangements in accordance with the provisions of SFAS No. 123(R),“Share Based Payment” (SFAS No. 123(R)). Under SFAS No. 123(R), share-based compensation cost is measured onthe date of grant, based on the fair value of the award, and is recognized overthe requisite service period.

The Company usesthe Black-Scholes valuation method to measure fair value.  The Black-Scholes valuation calculationrequires the Company to estimate key assumptions such as expected term,volatility and forfeiture rates to determine the award’s fair value.  The estimate of these key assumptions isbased on historical information and judgment regarding market factors andtrends.  The expected term of optionsgranted is derived from historical data on employee exercises and post-vestingemployment termination behavior.  Therisk-free rate for periods within the contractual life of the option is basedon the U.S. Treasury yield curve, with expected maturities similar to theexpected term of the option, in effect at the time of grant.  Expected volatility is based on both theimplied volatilities from traded options on the Company’s stock and historicalvolatility on the Company’s stock measured over the expected life of theoption.  For options granted prior toJanuary 1, 2006 and valued in accordance with SFAS No. 123, the expected volatilityused to estimate the fair value of the options was based

F-8

----

solely on the historicalvolatility on the Company’s stock.  TheCompany used the graded vested method for expense attribution and recognizedoptions forfeitures as they occurred as allowed by SFAS No. 123.

The Companyadopted the fair value recognition provisions of SFAS No. 123(R) using themodified prospective transition method. Under the modified prospective transition method, prior periods are notrestated for the effects of adopting SFAS No. 123(R).  Commencing January 1, 2006, compensation costincludes all share-based payments granted subsequent to January 1, 2006, basedon the grant date fair value estimated in accordance with the provisions ofSFAS No. 123(R).  No compensation cost hasbeen recognized during 2006 for share-based payments granted prior to January1, 2006 as the vesting of all remaining unvested awards were accelerated inDecember 2005.

The Black-Scholesoption valuation model requires the input of highly subjective assumptions,including the expected life of the stock-based award and stock pricevolatility.  The assumptions utilizedrepresent management’s best estimates, but these estimates involve inherentuncertainties and the application of management’s judgment.  As a result, if other assumptions had beenused, the Company’s recorded and pro forma stock-based compensation expensecould have been materially different from that depicted below.  In accordance with SFAS No. 123(R), theCompany is required to estimate the expected forfeiture rate at the grant dateand recognize expense for those shares expected to vest.  The expected forfeiture rate is periodicallyupdated to reflect actual forfeitures.

No options weregranted during the year ended December 31, 2006.  The following table illustrates the effectsof options and employee purchase rights granted prior to January 1, 2006 on netincome and earnings per share if the Company had applied the fair valuerecognition provisions of SFAS No. 123(R) for the fiscal years ended December2005 and 2004.
| ** **                                                                                   | ** ** | **Fiscal Year Ended December 31,** | ** ** |
|----------------------------------------------------------------------------------------------|------------|--------------------------------------------------------|------------|
| ** **                                                                                   | ** ** | **2005**                                               | ** ** | **2004** | ** ** |
| As reported                                                                                  |       |                                                   |       |   |   |
| Net earnings (loss)                                                                          |       | $                                                      | 84.6       |   | $ | (22.0 | ) |
| Add: Stock-based compensation expense included in  reported net earnings, net of tax effects |       | 0.7                                                    |       | — |   |
| Deduct: Expense per SFAS No. 123 (R), fair value  method, net of related tax effects         |       | (6.3                                                   | )          | (8.0 | ) |
| Pro forma net  earnings (loss)                                                               |       | $                                                      | 79.0       |   | $ | (30.0 | ) |
| Basic and  diluted net earnings (loss) per share:                                            |       |                                                   |       |   |   |
| Net earnings (loss)                                                                          |       |                                                   |       |   |   |
| Per share - basic                                                                            |       |                                                   |       |   |   |
| As reported                                                                                  |       | $                                                      | 1.44       |   | $ | (0.53 | ) |
| Proforma                                                                                     |       | $                                                      | 1.34       |   | $ | (0.72 | ) |
| Net earnings (loss)                                                                          |       |                                                   |       |   |   |
| Per share - diluted                                                                          |       |                                                   |       |   |   |
| As reported                                                                                  |       | $                                                      | 1.39       |   | $ | (0.53 | ) |
| Proforma                                                                                     |       | $                                                      | 1.30       |   | $ | (0.72 | ) |

 

The fair value ofeach option grant is estimated on the date of grant using the Black-Scholesoptions-pricing model with the following weighted average assumptions used foroptions granted during the fiscal years ended December 31, 2005 and 2004:
| ** **                               | ** ** | **Fiscal Year Ended December 31,** | ** ** |
|------------------------------------------|------------|------------------------------------|------------|
| ** **                               | ** ** | **2005**                           | ** ** | **2004** | ** ** |
| Weighted average  valuation assumptions: |       |                               |       |   |   |
| Risk-free interest  rate                 |       | 4.1                                | %          | 2.8 | % |
| Dividend yield                           |       | 0                                  | %          | 0 | % |
| Volatility                               |       | 65                                 | %          | 84 | % |
| Expected life  (years)                   |       | 2.2                                |       | 3.3 |   |

 

F-9

----

 

Prior to theadoption of SFAS No. 123(R), the Company presented all tax benefits resultingfrom the exercise of stock options as operating cash flows in the Statement ofCash Flows.  SFAS No. 123(R) requires thecash flows resulting from the tax benefits from tax deductions in excess ofdeferred tax asset (hypothetical and actual) recorded for stock compensationcosts (excess tax benefits) to be classified as financing cash flows.

The Company hasestablished a qualified Employee Stock Purchase Plan.  The Plan allows qualified employees (asdefined) to participate in the purchase of designated shares of the Company’scommon stock at a price equal to 85% of the closing price at the end of eachsemi-annual stock purchase period.  Thevalue of employee purchase rights granted pursuant to the Company’s EmployeeStock Purchase Plan during the years ended December 31, 2006, 2005 and 2004 was$0.4, $1.7 and $1.3, respectively.  Thefair value of those purchase rights represent the difference between the closingprice of the Company’s shares on the date of purchase and the purchase price ofthe shares.

*Researchand Development —*Research and development expenditures are expensed as incurred.

*ForeignCurrency Translation**—*The assets and liabilities of subsidiaries located outside the United Statesare translated into U.S. dollars at the rates of exchange in effect at thebalance sheet dates.  Revenue and expenseitems are translated at the average exchange rates prevailing during theperiod.  Gains and losses resulting fromforeign currency transactions are recognized currently in income, and thoseresulting from translation of financial statements are accumulated as aseparate component of stockholders’ equity. The Company’s European subsidiaries utilize the British pound or theEuro as their local functional currency.

**Recent Accounting Pronouncements**

In February 2006,the Financial Accounting Standards Board (FASB) issued SFAS No. 155, “Accountingfor Certain Hybrid Financial Instruments — An Amendment of FASB Statements No.133 and 140” (SFAS 155) which provides for increased consistency for thereporting of hybrid financial instruments. SFAS 155 is effective for all financial instruments acquired or issuedduring fiscal 2007.  The adoption of SFAS155 is not expected to have a material impact on the Company’s consolidatedfinancial statements.

In July 2006, theFASB issued FASB Interpretation No. 48, “Accounting for Uncertainty in IncomeTaxes” (FIN 48) which clarifies the accounting for uncertainty in income taxesrecognized in the financial statements in accordance with FASB Statement No.109, “Accounting for Income Taxes”.  Thispronouncement recommends a recognition threshold and measurement process forrecording in the financial statements uncertain tax positions taken or expectedto be taken in the Company’s tax return. FIN 48 also provides guidance on derecognition, classification, interestand penalties, accounting in interim periods and disclosure requirements foruncertain tax positions.  The accountingprovisions of FIN 48 will be effective for the Company beginning January 1,2007.  The Company has not completed its evaluationof FIN 48 and its impact on the Company’s consolidated financial statements.

In September 2006,the FASB issued SFAS No. 157 “Fair Value Measurements” (SFAS 157) whichprovides guidance for measuring assets and liabilities at fair value.  SFAS 157 is effective for financialstatements issued for fiscal years beginning after November 15, 2007.  The adoption of SFAS 157 is not expected tohave a material impact on the Company’s consolidated financial statements.

In September 2006,the FASB issued SFAS No. 158, “Employers’ Accounting for Defined BenefitPension and Other Postretirement Plans” (SFAS 158) which requires therecognition of the funded status of single-employer defined benefit pensionplans, retiree healthcare and other postretirement plans in the financialstatements, measurement of the funded status at the end of the year, andrecognition of changes in the funded status through comprehensive income in theyear in which the changes occur.  SFAS158 is effective as of December 31, 2006. The adoption of SFAS 158 did not have a material impact on the Company’sconsolidated financial statements.

In September 2006,the SEC issued SAB No. 108, “Guidance re: the Use of a Cumulative EffectAdjustment to Correct Immaterial Misstatements” (SAB 108) which proposed aframework for public companies to use in evaluating identified misstatements infinancial reporting.  SAB 108 waseffective in fiscal 2006 and the application of SAB 108 did not have a materialimpact on the Company’s consolidated financial statements.

F-10

----

 

**2.      BUSINESS COMBINATIONS**

During 2006, theCompany completed two acquisitions which were accounted for as purchases under SFAS No. 141, “BusinessCombinations”.  The assets purchased andliabilities assumed for these acquisitions have been reflected in theaccompanying consolidated balance sheet as of December 31, 2006 and the resultsof operations for the acquisitions are included in the accompanyingconsolidated statement of earnings from the respective dates of acquisition.

*Draeger Aerospace GmbH*

On July 26, 2006, the Company acquiredDraeger Aerospace GmbH (Draeger), from Cobham PLC of Dorset, England forapproximately $79.4 in cash.

Draeger manufactures components andintegrated systems to supply chemical and gaseous oxygen systems for both civiland military aircraft.  The integrationof Draeger with the Company’s existing oxygen systems business will provide fora broadening of the Company’s oxygen systems product line and an expansion ofits customer base.

The estimated excess of the purchase priceover the fair value of the identifiable net tangible assets acquiredapproximates $65.3 of which $22.9 has been allocated to intangible assets and$42.4 is included in goodwill.

*New York Fasteners Corp.*

On September 1, 2006, the Company acquiredNew York Fasteners Corp. (New York Fasteners), a privately-held company, forapproximately $66.9 in cash.

New York Fasteners is a distributor ofaerospace fasteners and hardware primarily to the military sector.  The integration of New York Fasteners intothe Company’s distribution segment is expected to create procurement andoperations synergies and significantly expand the Company’s overall penetrationinto the military sector.

The estimated excess of the purchase priceover the fair value of identifiable net tangible assets acquired approximated$47.9 of which $5.5 has been allocated to intangible assets and $42.4 isincluded in goodwill.

The followingtable summarizes the preliminary estimates of fair values of assets acquiredand liabilities assumed which are currently recorded based on management’sestimates and subject to adjustment upon finalization of our purchase priceallocations of the Draeger and New York Fasteners acquisitions.
| Cash and cash equivalents                 |   | $     | 1.0    |   |
|-------------------------------------------|--------|-------|--------|--------|
| Accounts receivable-trade                 |   | 19.9  |   |
| Inventories                               |   | 35.3  |   |
| Other current assets                      |   | 0.1   |   |
| Property and equipment                    |   | 4.4   |   |
| Goodwill                                  |   | 84.8  |   |
| Identified intangibles                    |   | 28.4  |   |
| Other assets                              |   | 1.4   |   |
| Accounts payable  and accrued liabilities |   | (23.1 | )      |
| Long term  deferred tax liability         |   | (5.8  | )      |
| Other liabilities                         |   | (0.1  | )      |
| Total purchase price                      |   | $     | 146.3  |   |

 

Goodwillof $42.4 and other intangibles of $5.5 related to the New York Fastenersacquisition is expected to be deductible for U.S. tax purposes.

Consolidated pro forma revenues for fiscal years 2006 and 2005, givingeffect to the New York Fasteners and Draeger acquisitions as if they hadoccurred on January 1, 2006 and 2005 were approximately $1,190.0 and $919.6,respectively.  Consolidated pro forma netearnings and diluted net earnings per share, giving effect to the New YorkFasteners and Draeger acquisitions as if they had occurred on January 1, 2006and 2005 were approximately $82.8 and $82.5 and $1.06 and $1.36, respectively.

F-11

----

** **

**3.      INVENTORIES**

Inventoriesare stated at the lower of cost or market. Cost is determined using FIFO or the weighted average cost method.  Finished goods and work-in-processinventories include material, labor and manufacturing overhead costs.  Inventories consist of the following:
| ** **                                        | ** ** | **December 31, 2006** | ** ** | **December 31, 2005** | ** ** |
|---------------------------------------------------|------------|---------------------------------|------------|---------------------------------|------------|
| Purchased materials  and component parts          |       | $                               | 96.8       |                            | $          | 59.8 |   |
| Work-in-process                                   |       | 21.7                            |       | 18.5                            |       |
| Finished goods  (primarily aftermarket fasteners) |       | 302.4                           |       | 145.4                           |       |
|                                              |       | $                               | 420.9      |                            | $          | 223.7 |   |

 

**4.      PROPERTYAND EQUIPMENT**

Property andequipment are stated at cost and depreciated and amortized generally on thestraight-line method over their estimated useful lives of three to fiftyyears (or the lesser of the term of the lease for leasehold improvements, asappropriate).  Property and equipmentconsist of the following:
| ** **                        | ** ** | **Useful Life  (Years)** | ** ** | **December 31,  2006** | ** ** | **December 31,  2005** | ** ** |
|-----------------------------------|------------|-------------------------------|------------|-----------------------------|------------|-----------------------------|------------|
| Land, buildings  and improvements |       | 5–50                     |       | $                           | 42.4       |                        | $          | 37.0 |   |
| Machinery                         |       | 5–20                     |       | 68.0                        |       | 58.9                        |       |
| Tooling                           |       | 3–20                     |       | 22.6                        |       | 19.6                        |       |
| Computer  equipment and software  |       | 3–15                     |       | 103.7                       |       | 94.2                        |       |
| Furniture and  equipment          |       | 3-15                          |       | 13.3                        |       | 9.6                         |       |
|                              |       |                          |       | 250.0                       |       | 219.3                       |       |
| Less accumulated  depreciation    |       |                          |       | (142.1                      | )          | (124.3                      | )          |
|                              |       |                          |       | $                           | 107.9      |                        | $          | 95.0 |   |

 

Aggregatedepreciation expense was $19.1, $18.8 and $19.1 for the fiscal years endedDecember 31, 2006, 2005 and 2004 respectively.

**5.**      **GOODWILL AND INTANGIBLEASSETS**

In accordance withSFAS No. 142, the Company’s goodwill and indefinite life intangible assets arenot amortized, but are subject to an annual impairment test.  The following sets forth the intangibleassets by major asset class, all of which were acquired through businessacquisition transactions:
| ** **                                                | ** ** | ** **                    | ** ** | **December 31, 2006** | ** ** | **December 31, 2005** | ** ** |
|-----------------------------------------------------------|------------|-------------------------------|------------|---------------------------------|------------|---------------------------------|------------|
| ** **                                                | ** ** | **Useful Life  (Years)** | ** ** | **Original  Cost**              | ** ** | **Accumulated  Amortization**   | ** ** | **Net  Book  Value** | ** ** | **Original  Cost** | ** ** | **Accumulated  Amortization** | ** ** | **Net  Book  Value** | ** ** |
| Acquired  technologies                                    |       | 10–40                    |       | $                               | 99.5       |                            | $          | 26.4 |   | $ | 73.1 |   | $ | 93.6 |   | $ | 23.4 |   | $ | 70.2 |   |
| Trademarks and  patents                                   |       | 1–20                     |       | 28.1                            |       | 15.2                            |       | 12.9 |   | 26.5 |   | 13.0 |   | 13.5 |   |
| Trademarks  (nonamortizing)                               |       | —                        |       | 20.6                            |       | —                          |       | 20.6 |   | 20.6 |   | — |   | 20.6 |   |
| Technical  qualifications, plans and drawings             |       | 18–30                    |       | 31.5                            |       | 18.7                            |       | 12.8 |   | 30.8 |   | 16.7 |   | 14.1 |   |
| Replacement  parts annuity and product approvals          |       | 18–30                    |       | 42.4                            |       | 28.3                            |       | 14.1 |   | 40.4 |   | 24.8 |   | 15.6 |   |
| Covenant not to  compete and other identified intangibles |       | 3–14                     |       | 43.1                            |       | 16.0                            |       | 27.1 |   | 20.8 |   | 14.9 |   | 5.9 |   |
|                                                      |       |                          |       | $                               | 265.2      |                            | $          | 104.6 |   | $ | 160.6 |   | $ | 232.7 |   | $ | 92.8 |   | $ | 139.9 |   |

 

Aggregateamortization expense of intangible assets was approximately $10.2, $9.8 and$9.3 for the fiscal years ended December 31, 2006, 2005 and 2004,respectively.  Amortization expenseassociated with identified intangible assets is expected to be approximately$10.5 in each of the next five years.

F-12

----

Changes to the original cost basis of goodwill during the calendar yearended December 31, 2006 were due to acquisitions and foreign currencyfluctuations.  The changes in thecarrying amount of goodwill for the fiscal years ended December 31, 2006 and2005 are as follows:
| ** **                                        | ** ** | **Seating** | ** ** | **Interior  Systems** | ** ** | **Distribution** | ** ** | **Business  Jet** | ** ** | **Engineering  Services** | ** ** | **Total** | ** ** |
|---------------------------------------------------|------------|-------------|------------|-----------------------|------------|------------------|------------|-------------------|------------|---------------------------|------------|-----------|------------|
| Balance as of December  31, 2004                  |       | $           | 9.9        |                  | $          | 121.5            |       | $                 | 108.2      |                      | $          | 88.1      |       | $ | 42.7 |   | $ | 370.4 |   |
| Effect of foreign  currency translation           |       | 0.2         |       | (5.4                  | )          | (0.2             | )          | —            |       | (2.1                      | )          | (7.5      | )          |
| Balance as of December  31, 2005                  |       | 10.1        |       | 116.1                 |       | 108.0            |       | 88.1              |       | 40.6                      |       | 362.9     |       |
| Acquisitions                                      |       | —      |       | 42.4                  |       | 42.4             |       | —            |       | —                    |       | 84.8      |       |
| Effect of foreign  currency translation and other |       | 2.7         |       | 3.6                   |       | 0.2              |       | 0.5               |       | 2.5                       |       | 9.5       |       |
| Balance as of December 31, 2006                   |       | $           | 12.8       |                  | $          | 162.1            |       | $                 | 150.6      |                      | $          | 88.6      |       | $ | 43.1 |   | $ | 457.2 |   |

 

**6.**                    **ACCOUNTSPAYABLE AND****ACCRUED LIABILITIES**

Accounts payableand accrued liabilities consist of the following:
| ** **                                       | ** ** | **December 31,  2006** | ** ** | **December 31,  2005** | ** ** |
|--------------------------------------------------|------------|-----------------------------|------------|-----------------------------|------------|
| Accounts payable                                 |       | $                           | 166.9      |                        | $          | 80.7 |   |
| Accrued salaries,  vacation and related benefits |       | 25.5                        |       | 21.6                        |       |
| Accrued interest                                 |       | 5.7                         |       | 14.1                        |       |
| Accrued product  warranties                      |       | 18.4                        |       | 14.3                        |       |
| Other accrued  liabilities                       |       | 51.3                        |       | 38.6                        |       |
|                                             |       | $                           | 267.8      |                        | $          | 169.3 |   |

 

**7.**                    **LONG-TERMDEBT**

Long-termdebt consists of the following:

 
| ** **                              | ** ** | **December 31,  2006** | ** ** | **December 31,  2005** | ** ** |
|-----------------------------------------|------------|-----------------------------|------------|-----------------------------|------------|
| 8 7/8% Senior  Subordinated Notes       |       | $                           | 250.0      |                        | $          | 250.0 |   |
| Bank Term Loan                          |       | 250.0                       |       | —                      |       |
| 8 1/2% Senior Notes                     |       | 0.1                         |       | 175.0                       |       |
| 8% Senior Subordinated  Notes           |       | —                      |       | 249.9                       |       |
| Other long-term  debt                   |       | 3.8                         |       | 4.0                         |       |
|                                    |       | 503.9                       |       | 678.9                       |       |
| Less current portion of  long-term debt |       | (1.9                        | )          | (1.5                        | )          |
|                                    |       | $                           | 502.0      |                        | $          | 677.4 |   |

 

**8 7/8% Senior Subordinated Notes**

The 8 7/8% Notes are unsecured senior subordinatedobligations of the Company, subordinated to any senior indebtedness and matureon May 1, 2011.  Interest on the 8 7/8%Notes is payable semiannually in arrears on May 1 and November 1 of eachyear.  The 8 7/8% Notes are redeemable,at the option of the Company, in whole or in part, at predetermined redemptionprices together with accrued and unpaid interest through the date ofredemption.  Upon a change in control (asdefined in the Indenture), each holder of the 8 7/8% Notes may require theCompany to repurchase such holder’s 8 7/8% Notes at 101% of the principalamount thereof, plus accrued interest to the date of such purchase.

F-13

----

The 8 7/8% Notescontain, and the 8% and 8 1/2% Notes contained, certain restrictive covenants,including limitations on future indebtedness, restricted payments, transactionswith affiliates, liens, dividends, mergers and transfers of assets, all ofwhich were met by the Company as of December 31, 2006.

**Bank Credit Facilities**

On July 26, 2006and, as amended and restated, on August 24, 2006, the Company entered into anew senior secured credit facility (the “Senior Secured Credit Facility”),consisting of a $200.0 revolving credit facility and a $300.0 term loan.  The revolving credit facility terminates onthe earlier of August 24, 2011 or November 1, 2010 which is six months prior tothe maturity of the 8 7/8% notes if they are outstanding as of thatdate.  The term loan terminates on theearlier of August 24, 2012 or November 1, 2010 which is six months prior to thematurity of the 8 7/8% notes if they are outstanding on that date.  The Senior Secured Credit Facility also providesfor the ability of the Company to add additional term loans in the amount of upto $75.0 upon satisfaction of certain customary conditions, includingcommitments from lenders.  The SeniorSecured Credit Facility replaced the Company’s existing $50.0 revolving creditfacility that it had entered into in February 2004.

Revolving creditborrowings under the Senior Secured Credit Facility bear interest at an annualrate equal to the London interbank offered rate (LIBOR) plus 175 basispoints.  Term loan borrowings under theSenior Secured Credit Facility bear interest at an annual rate equal to LIBORplus 175 basis points (7.15% at December 31, 2006).

The Senior Secured CreditFacility contains an interest coverage ratio (as defined in the CreditAgreement) maintenance financial covenant that currently must be maintained ata level greater than 2.00 to 1 through December 31, 2006 and 2.25 to 1 throughmaturity of the term loan.  The SeniorSecured Credit Facility also contains a total leverage ratio covenant (asdefined in the Credit Agreement) which limits net debt to a 4.50 to 1 multipleof EBITDA (as defined in the Credit Agreement) through December 31, 2006 and to4.25 to 1 through maturity.  The SeniorSecured Credit Facility is collateralized by substantially all of the Company’sassets and contains customary affirmative covenants, negative covenants andconditions precedent for borrowings, all of which were met as of December 31,2006.

There are no borrowingsoutstanding on the revolving credit facility portion of the Senior SecuredCredit Facility at December 31, 2006. Term loan borrowings at December 31, 2006were $250.0.  Letters of creditoutstanding under the Senior Secured Credit Facility aggregated approximately$4.5 at December 31, 2006.

Royal InventumB.V., one of the Company’s subsidiaries, has a revolving credit agreementaggregating approximately $0.7 that renews annually.  This credit agreement is collateralized byaccounts receivable and inventories.  Therewere no borrowings outstanding under Royal Invention B.V.’s credit agreement asof December 31, 2006.

**8 1/2% Senior Notes**

The 8 1/2% SeniorNotes (the “8 1/2% Notes”) are senior unsecured obligations of the Company,senior to all subordinated indebtedness, but subordinate to any securedindebtedness of the Company and mature on October 1, 2010.  Interest on the 8 1/2% Notes is payablesemiannually in arrears on April 1 and October 1 of each year.  The 8 1/2% Notes are redeemable at the optionof the Company, in whole or in part, on or after October 1, 2007, atpredetermined redemption prices together with accrued and unpaid interestthrough the date of redemption.  During2006, the Company completed a cash tender offer and consent solicitation andrepurchased $174.9 of the $175.0 8 1/2% Notes. The Company incurred a loss on debt extinguishment of $17.0 related tounamortized debt issue and facility costs and fees and expenses related to therepurchase of the 8 1/2 % Notes.

**8% Senior Subordinated Notes**

The 8% Senior Subordinated Notes (the “8% Notes”) weresenior unsecured obligations of the Company. In January 2006, the Company redeemed the 8% Notes at a redemption priceequal to 100% of the principal amount, together with the interest accruedthrough the redemption date, with the net proceeds of the December 2005 commonstock offering.  The Company incurred aloss on debt extinguishment of $1.8 in the first quarter of 2006 related tounamortized debt issue costs, and fees and expenses related to the redemptionof the 8% Notes.

F-14

----

Maturities oflong-term debt are as follows:
| **Year Ending December 31,** | ** ** | ** ** | ** ** | ** ** | ** ** |
|---------------------------------------------|------------|------------|------------|------------|------------|
| 2007                                        |       | $          | 1.9        |       |
| 2008                                        |       | 2.0        |       |
| 2009                                        |       | 2.8        |       |
| 2010                                        |       | 247.0      |       |
| 2011                                        |       | 250.0      |       |
| Thereafter                                  |       | 0.2        |       |
| Total                                       |       | $          | 503.9      |       |

 

Interest expenseamounted to $42.8 for the fiscal year ended December 31, 2006, $60.8 for thefiscal year ended December 31, 2005 and $77.5 for the fiscal ended December 31,2004.

**8.**                    **COMMITMENTS,CONTINGENCIES AND OFF-BALANCE-SHEET ARRANGEMENTS**

*Lease Commitments —*TheCompany finances its use of certain facilities and equipment under committedlease arrangements provided by various institutions.  Since the terms of these arrangements meetthe accounting definition of operating lease arrangements, the aggregate sum offuture minimum lease payments is not reflected on the consolidated balancesheet.  At December 31, 2006, futureminimum lease payments under these arrangements approximated $112.4, of which$98.3 is related to facility leases.

Rent expense for the fiscal years ended December 31,2006, 2005 and 2004 was approximately $16.8, $15.1 and $15.4,respectively.  Future payments underoperating leases with terms currently greater than one year are as follows:

 
| **Year Ending December 31,** | ** ** | ** ** | ** ** | ** ** | ** ** |
|---------------------------------------------|------------|------------|------------|------------|------------|
| 2007                                        |       | $          | 15.9       |       |
| 2008                                        |       | 15.0       |       |
| 2009                                        |       | 10.5       |       |
| 2010                                        |       | 7.3        |       |
| 2011                                        |       | 6.5        |       |
| Thereafter                                  |       | 57.2       |       |
| Total                                       |       | $          | 112.4      |       |

 

*Litigation —* The Company is a defendant in various legal actionsarising in the normal course of business, the outcomes of which, in the opinionof management, neither individually nor in the aggregate are likely to resultin a material adverse effect on the Company’s consolidated financialstatements.

*Indemnities, Commitments and Guarantees —* During its normal courseof business, the Company has made certain indemnities, commitments andguarantees under which it may be required to make payments in relation tocertain transactions.  These indemnitiesinclude non-infringement of patents and intellectual property indemnities tothe Company’s customers in connection with the delivery, design, manufactureand sale of its products, indemnities to various lessors in connection withfacility leases for certain claims arising from such facility or lease andindemnities to other parties to certain acquisition agreements.  The duration of these indemnities, commitmentsand guarantees varies, and in certain cases, is indefinite.  Substantially all of these indemnities,commitments and guarantees provide for limitations on the Company’s maximumpotential future payments.  The Companyhas not recorded any significant liability for these indemnities, commitmentsand guarantees in the accompanying consolidated balance sheets.

*Employment Agreements —*The Company has employment and compensation agreements withthree key officers of the Company. Agreements for one of the officers provides for the officer to earn aminimum of $0.9 per year through a three-year period ending from any date afterwhich it is measured, adjusted annually for changes in the consumer price index(as defined) or as determined by the Company’s Board of Directors, as well as aretirement compensation equal to 150% of base salary.

A second agreement provides for an officer to receiveannual minimum compensation of $0.4 per year through the two year period endingDecember 31, 2007, unless otherwise extended, and is adjusted annually forchanges in the consumer price index (as defined) or as determined by theCompany’s Board of Directors.

A third agreement provides for an officer to receiveannual minimum compensation of $0.4 per year through a three-year period endingfrom any date after which it is measured, adjusted annually for changes in 

F-15

----

the consumer price index (as defined) or as determinedby the Company’s Board of Directors, as well as a retirement compensation equalto the product of the number of years worked times one-half of this officer’saverage highest three years’ annual salary (as defined).

Retirement compensation has been accrued as providedfor under the above-mentioned employment agreements.  Through December 31, 2006, the Company fullyfunded these and other retirement compensation obligations, all of which weremaintained in grantor trusts on behalf of the individuals.  In addition, the Company has employmentagreements with certain other key members of management that provide for aggregateminimum annual base compensation of $2.4 expiring on various dates through theyear 2007.  The Company’s employmentagreements generally provide for certain protections in the event of a changeof control.  These protections generallyinclude the payment of severance and related benefits under certaincircumstances in the event of a change of control, and for the Company toreimburse such officers for the amount of any excise taxes associated with suchbenefits.

**9.**                    **INCOME TAXES**

The components of net earnings (loss) before incomestaxes were:
| ** **                           | ** ** | **Fiscal Year Ended December 31,** | ** ** |
|--------------------------------------|------------|--------------------------------------------------------|------------|
| ** **                           | ** ** | **2006**                                               | ** ** | **2005** | ** ** | **2004** | ** ** |
| Earnings (loss)  before income taxes |       |                                                   |       |   |   |   |   |
| United States                        |       | $                                                      | 43.0       |   | $ | 23.5 |   | $ | (9.3 | ) |
| Foreign                              |       | 47.0                                                   |       | 10.8 |   | (11.2 | ) |
| Earnings (loss) before income  taxes |       | $                                                      | 90.0       |   | $ | 34.3 |   | $ | (20.5 | ) |

Income tax expense (benefit) consists of thefollowing:
| ** **                  | ** ** | **Fiscal Year Ended December 31,** | ** ** |
|-----------------------------|------------|--------------------------------------------------------|------------|
| ** **                  | ** ** | **2006**                                               | ** ** | **2005** | ** ** | **2004** | ** ** |
| Current:                    |       |                                                   |       |   |   |   |   |
| Federal                     |       | $                                                      | —     |   | $ | — |   | $ | — |   |
| State                       |       | —                                                 |       | — |   | 0.1 |   |
| Foreign                     |       | 5.6                                                    |       | 1.6 |   | 1.4 |   |
|                        |       | 5.6                                                    |       | 1.6 |   | 1.5 |   |
| Deferred:                   |       |                                                   |       |   |   |   |   |
| Federal                     |       | 16.4                                                   |       | (48.7 | ) | — |   |
| State                       |       | 2.9                                                    |       | (3.2 | ) | — |   |
| Foreign                     |       | (20.5                                                  | )          | — |   | — |   |
|                        |       | (1.2                                                   | )          | (51.9 | ) | — |   |
| Total tax expense (benefit) |       | $                                                      | 4.4        |   | $ | (50.3 | ) | $ | 1.5 |   |

 

 

F-16

----

The differencebetween income tax expense and the amount computed by applying the statutoryU.S. federal income tax rate (35%) to the pretax earnings or loss consists ofthe following:
| ** **                                      | ** ** | **Fiscal Year Ended December 31,** | ** ** |
|-------------------------------------------------|------------|--------------------------------------------------------|------------|
| ** **                                      | ** ** | **2006**                                               | ** ** | **2005** | ** ** | **2004** | ** ** |
| Statutory  federal income tax expense (benefit) |       | $                                                      | 31.5       |   | $ | 12.0 |   | $ | (7.2 | ) |
| U.S. State  income taxes                        |       | 2.9                                                    |       | (2.1 | ) | 0.1 |   |
| Dividend income  from foreign affiliate         |       | .4                                                     |       | 3.0 |   | — |   |
| Foreign tax rate  differential                  |       | (1.2                                                   | )          | (2.2 | ) | 5.4 |   |
| Non-deductible  charges                         |       | 1.8                                                    |       | 1.3 |   | 0.5 |   |
| Change in  valuation allowance                  |       | (27.4                                                  | )          | (62.3 | ) | 2.7 |   |
| Research and  development credit                |       | (4.2                                                   | )          | — |   | — |   |
| Other                                           |       | 0.6                                                    |       | — |   | — |   |
|                                            |       | $                                                      | 4.4        |   | $ | (50.3 | ) | $ | 1.5 |   |

 

For the year endedDecember 31, 2004, the Company had maintained a valuation allowance to fullyreserve its net deferred tax assets based on the Company’s assessment that therealization of the net deferred tax assets did not meet the “more likely thannot” criterion under SFAS No. 109, “Accounting for Income Taxes”.  The Company reversed a significant portion ofits valuation allowance on its U.S. deferred tax asset during the year ended2005.  The deferred tax asset wasrecorded as a result of the Company’s improving financial performance andoutlook, as well as the expected $20 million reduction in interest expensearising from the redemption of $250 of the Company’s 8% Notes, which occurredin January 2006.  During the thirdquarter of 2006, the Company reversed $22.9 of its valuation allowance on itsU.K. deferred tax asset as a result of improved performance and outlook for itsU.K. operations.

The tax effects oftemporary differences and carryforwards that give rise to deferred income taxassets and liabilities consist of the following:
| ** **                                         | ** ** | **December 31,  2006** | ** ** | **December 31,  2005** | ** ** | **December 31,  2004** | ** ** |
|----------------------------------------------------|------------|-----------------------------|------------|-----------------------------|------------|-----------------------------|------------|
| Deferred tax  assets:                              |       |                        |       |                        |       |                        |       |
| Inventory reserves                                 |       | $                           | 9.6        |                        | $          | 9.4                         |       | $ | 8.3 |   |
| Warranty accruals                                  |       | 4.9                         |       | 4.1                         |       | 3.7                         |       |
| Accrued liabilities                                |       | 4.2                         |       | 6.5                         |       | 13.4                        |       |
| Net operating loss carryforward                    |       | 121.8                       |       | 139.1                       |       | 137.7                       |       |
| Federal capital loss carryforward                  |       | 13.0                        |       | 13.0                        |       | 13.0                        |       |
| Research and development credit carryforward       |       | 7.9                         |       | 3.7                         |       | 3.7                         |       |
| Other                                              |       | 4.1                         |       | 6.0                         |       | 2.4                         |       |
|                                               |       | 165.5                       |       | 181.8                       |       | 182.2                       |       |
| Deferred tax  liabilities:                         |       |                        |       |                        |       |                        |       |
| Acquisition accruals                               |       | (12.8                       | )          | (11.7                       | )          | (9.4                        | )          |
| Intangible assets                                  |       | (58.3                       | )          | (39.1                       | )          | (31.1                       | )          |
| Depreciation                                       |       | (1.5                        | )          | (5.8                        | )          | (7.6                        | )          |
| Software development costs                         |       | (6.4                        | )          | (7.0                        | )          | (6.3                        | )          |
|                                               |       | (79.0                       | )          | (63.6                       | )          | (54.4                       | )          |
|                                               |       |                        |       |                        |       |                        |       |
| Net deferred tax  asset before valuation allowance |       | 86.5                        |       | 118.2                       |       | 127.8                       |       |
| Valuation  allowance                               |       | (15.5                       | )          | (40.5                       | )          | (129.3                      | )          |
| Net deferred tax asset  (liability)                |       | $                           | 71.0       |                        | $          | 77.7                        |       | $ | (1.5 | ) |

 

The Companymaintained a valuation allowance of $15.5 as of December 31, 2006 primarilyrelated to the Company’s domestic capital loss carryforwards because ofuncertainties that preclude the Company from determining that it is more likelythan not that we will be able to generate sufficient capital gain income andrealize this tax benefit during the applicable carryforward period.

As of December 31, 2006, theCompany had federal, state and foreign net operating loss carryforwards ofapproximately $305, $168 and $83, respectively. The federal and state net operating loss carryforwards begin to expirein 2012 and 2007, respectively.  Inaddition, the Company has a federal capital loss carryover of approximately$30.0 which is scheduled to expire in 2008.

F-17

----

As ofDecember 31, 2006, the Company had a federal research and development taxcredit carryforward of approximately $7.9 which begins to expire in 2007.

The Company hasnot provided for any residual U.S. income taxes on the approximately $53.6 ofearnings from its foreign subsidiaries because such earnings are intended to beindefinitely reinvested.  Such residualU.S. income taxes, if provided for, would not be material.

During 2006, theCompany recognized tax deductions of approximately $63.0 related to stockoption exercises.  In accordance with theCompany’s methodology for determining when these stock options deductions aredeemed realized under SFAS No. 123(R), the Company will assume that itutilizes its net operating loss carryforwards to reduce its taxes payableduring 2006 rather than these stock option deductions.  Pursuant to the principles of SFAS No. 123(R),the stock option deductions are not deemed realized until they provide anincremental benefit by reducing taxes payable. Approximately $0.7 of this deduction reduced current taxes payable in2006.  To the extent that the Company’sremaining stock option deductions of $62.3 are treated as reducing taxespayable in the future, the Company expects to record a credit to additionalpaid-in capital of $24.3.

**10.**   **EMPLOYEERETIREMENT PLANS**

The Companysponsors and contributes to a qualified, defined contribution Savings andInvestment Plan covering substantially all U.S. employees.  In addition, the Company and its subsidiariesparticipate in government-sponsored programs in certain Europeancountries.  In general, the Company’spolicy is to fund these plans based on legal requirements, tax considerations,local practices and investment opportunities.

The BE AerospaceSavings and Investment Plan was established pursuant to Section 401(k) of theInternal Revenue Code.  Under the termsof the plan, covered employees may contribute up to 100% of their pay, limitedto certain statutory maximum contributions for 2006.  Prior to January 1, 2006 the Company matched50% of employee contributions, subject to a maximum of 8% of an employee’s basepay, with employee stock.  EffectiveJanuary 1, 2006 matching contributions are made in cash.  Prior to July 1, 2006 participants vested100% in the Company match after three years of service.  Effective July 1, 2006, participants arevested in matching contributions immediately and the matching percentage wasrevised to 100% of the first 3% of employee contributions and 50% on the next2% of employee contributions.  Totalexpense for the plan was $3.9, $3.0 and $2.9 for the calendar years endedDecember 31, 2006, 2005 and 2004, respectively.

The BE Aerospace,Inc. Hourly Tax-Sheltered Retirement Plan was established pursuant to Section401(k) of the Internal Revenue Code. Under terms of the plan, covered employees may contribute from 1% to 20%of their compensation, limited to certain statutory maximum contributions for2006.  The Company matches 50% ofemployee contributions, up to 8% of a participant’s compensation.  Participants become fully vested in theCompany’s contributions after six years of service with the Company.  Total expense for the plan was $0.3, $0.2 and$0.2 for the calendar years ended December 31, 2006, 2005 and 2004,respectively.

The Company alsohas two defined benefit plans, The SMR Technologies, Inc. Defined BenefitPension Plan for Union Employees and The Draeger Aerospace GmbH Defined BenefitPlan.  These plans were adopted by theCompany when the related subsidiary companies were acquired.  Under terms of these plans participants areentitled to certain defined benefits upon retirement.  The number of employees covered by theseplans as of December 31, 2006 totaled 358. The Company’s funding contribution to these plans was $0.2, $0.0 and$0.3 for the calendar years ended December 31, 2006, 2005 and 2004,respectively.

**11**.   **STOCKHOLDERS’EQUITY**

*Earnings(Loss) Per Share.* Basic earnings (loss) per common share is determined by dividing netearnings (loss) applicable to common stockholders by the weighted averagenumber of shares of common stock outstanding. Diluted earnings (loss) per share is determined by dividing net earnings(loss) applicable to common stockholders by the weighted average number ofshares of common stock and dilutive common stock equivalents outstanding.

F-18

----

Thefollowing table sets forth the computation of basic and diluted net earnings(loss) per share for the fiscal years ended December 31, 2006, 2005 and 2004:
| ** **                                                                                   | ** ** | **Fiscal Year Ended December 31,** | ** ** |
|----------------------------------------------------------------------------------------------|------------|--------------------------------------------------------|------------|
| ** **                                                                                   | ** ** | **2006**                                               | ** ** | **2005** | ** ** | **2004** | ** ** |
|                                                                                         |       |                                                   |       |   |   |   |   |
| Numerator — Net  earnings (loss)                                                        |       | $                                                      | 85.6       |   | $ | 84.6 |   | $ | (22.0 | ) |
| Denominator:                                                                                 |       |                                                   |       |   |   |   |   |
| Denominator for  basic earnings (loss) per share —   Weighted average shares            |       | 77.1                                                   |       | 58.8 |   | 41.7 |   |
| Effect of  dilutive securities — Dilutive securities                                    |       | 0.9                                                    |       | 2.0 |   | — |   |
| Denominator for  diluted earnings (loss) per share —   Adjusted weighted average shares |       | 78.0                                                   |       | 60.8 |   | 41.7 |   |
| Basic net  earnings (loss) per share                                                         |       | $                                                      | 1.11       |   | $ | 1.44 |   | $ | (0.53 | ) |
| Diluted net earnings  (loss) per share                                                       |       | $                                                      | 1.10       |   | $ | 1.39 |   | $ | (0.53 | ) |

 

TheCompany excluded potentially dilutive securities from the calculation of netearnings (loss) per share of approximately 1.6 million for the fiscal yearended 2004 because the effect would have been antidilutive.

*Long TermIncentive Plan. *TheCompany has a Long Term Incentive Plan (“LTIP”) under which the Company’s StockOption and Compensation Committee may grant stock options, stock appreciationrights, restricted stock, restricted stock units or other forms of equity basedor equity related awards.  The LTIPreplaced the Company’s 2001 Stock Option Plan, the 1996 Stock Option Plan, theUnited Kingdom 1992 Employee Share Option Scheme and the Company’s Amended andRestated 1989 Stock Option Plan (collectively, the “Prior Plans”).  As further described below, as of December31, 2006 stock options and restricted stock have been granted in accordancewith the terms of the LTIP and the Prior Plans. The number of shares available for grant under the LTIP as of December31, 2006 were 2,174,723.

*Stock Option Grants. *In December 2005, theCompensation Committee of the Board of Directors approved the acceleration ofthe vesting of 1.9 million stock options, which represented all remainingunvested stock options at that time.  TheCompany recorded a charge of $1.2 during the fourth quarter of 2005 as a resultof the acceleration of the vesting of such stock options.  By accelerating the stock option vesting, theCompany expects to reduce non-cash compensation by approximately $2.5 over the2006-2008 plan period.  The estimated pershare fair value of options granted during the years ended December 31,2005 and 2004 was $4.52 and $3.86, respectively.  No options were granted during the year endedDecember 31, 2006.

The followingtables summarizes options granted, canceled, forfeited and outstanding:
| ** **                        | ** ** | **December 31, 2006** | ** ** | **December 31, 2005** | ** ** | **December 31, 2004** | ** ** |
|-----------------------------------|------------|---------------------------------|------------|---------------------------------|------------|---------------------------------|------------|
| ** **                        | ** ** | **Options**                     | ** ** | **Weighted Average**       | ** ** | **Options**                     | ** ** | **Weighted Average** | ** ** | **Options** | ** ** | **Weighted Average** | ** ** |
| ** **                        | ** ** | **(in thousands)**         | ** ** | **Price Per Share**   | ** ** | **(in thousands)**         | ** ** | **Price Per Share** | ** ** | **(in thousands)** | ** ** | **Price Per Share** | ** ** |
| Outstanding,  beginning of period |       | 4,806                           |       | $                          | 8.83       |                            | 7,071      |   | $  | 7.99 |   | 4,483 |   | $ | 7.55 |   |
| Options granted                   |       | —                          |       | —                          |       | 160                             |       | 18.45 |   | 3,639 |   | 7.66 |   |
| Options  exercised                |       | (3,626                          | )          | 7.44                            |       | (2,362                          | )          | 5.73 |   | (582 | ) | 5.04 |   |
| Options  forfeited                |       | (10                             | )          | 14.55                           |       | (63                             | )          | 11.06 |   | (469 | ) | 10.21 |   |
| Outstanding, end  of period       |       | 1,170                           |       | 13.53                           |       | 4,806                           |       | 8.83 |   | 7,071 |   | 7.67 |   |
|                              |       |                            |       |                            |       |                            |       |   |   |   |   |   |   |
| Exercisable at end of  period     |       | 1,170                           |       | $                          | 13.53      |                            | 4,806      |   | $  | 8.83 |   | 3,910 |   | $ | 7.99 |   |

 

**Options Outstandingat December 31, 2006**
| ** **              | ** ** | ** **              | ** ** | ** **                               | ** ** | **Weighted Average** | ** ** |
|-------------------------|------------|-------------------------|------------|------------------------------------------|------------|---------------------------|------------|
| ** **              | ** ** | **Options**             | ** ** | ** **                               | ** ** | **Remaining**             | ** ** |
| **Range of**       | ** ** | **Outstanding**         | ** ** | **Weighted Average**                | ** ** | **Contractual Life** | ** ** |
| **Exercise Price** | ** ** | **(in thousands)** | ** ** | **Exercise Price Outstanding** | ** ** | **(years)**               | ** ** |
| $4.08–$6.59        |       | 316                     |       | $                                        | 5.38       |                      | 6.35       |   |
| 6.75–10.42         |       | 349                     |       | 9.72                                     |       | 5.77                      |       |
| 10.70–22.18        |       | 353                     |       | 17.58                                    |       | 5.50                      |       |
| 28.13–30.25        |       | 152                     |       | 29.82                                    |       | 0.69                      |       |
|                         |            |                         |            |                                          |            |                           |            |  |

 

F-19

----

The Company issues newshares of common stock upon exercise of stock options.  During the year ended December 31, 2006, 3.6million stock options were exercised with an aggregate intrinsic value of $62.6determined as of the date of option exercise. The aggregate intrinsic value of outstanding options as of December 31,2006 was $14.8.

*Restricted Stock Grants —*During2006, the Company granted restricted stock to certain members of the Company’s Boardof Directors and management.  Restrictedstock grants vest over two or four year terms and are granted at the discretionof the Compensation Committee of the Board of Directors.  Compensation cost is recorded on astraight-line basis over the vesting term of the shares based on the grant datevalue.  Share based compensation of $2.0was recorded during 2006 related to these share grants.  Unrecognized compensation cost related tothese grants approximated $34.4 at December 31, 2006.  The following table summarizes share grants,shares forfeited and shares outstanding at December 31, 2006.
| ** **                        | ** ** | **Shares**              | ** ** | **Weighted  Average  Grant Date  Value** | ** ** | **Weighted  Average  Remaining  Vesting Period** | ** ** |
|-----------------------------------|------------|-------------------------|------------|-----------------------------------------------|------------|-------------------------------------------------------|------------|
| ** **                        | ** ** | **(in thousands)** | ** ** | ** **                                    | ** ** | **(in years)**                                   | ** ** |
| Outstanding,  beginning of period |       | —                  |       | —                                        |       | —                                                |       |
| Shares granted                    |       | 1,425                   |       | $                                             | 26.15      |                                                  | —     |   |
| Shares forfeited                  |       | (2                      | )          | 26.99                                         |       | —                                                |       |
| Outstanding, end of  period       |       | 1,423                   |       | $                                             | 26.15      |                                                  | 3.7        |   |

 

**12.**   **EMPLOYEE STOCK PURCHASE PLAN**

The Company hasestablished a qualified Employee Stock Purchase Plan, the terms of which allowfor qualified employees (as defined in the Plan) to participate in the purchaseof designated shares of the Company’s common stock at a price equal to 85% ofthe closing price at the end of each semi-annual stock purchase period.  The Company issued approximately 110,000,241,000 and 576,000 shares of common stock during the fiscal years ended December31, 2006, 2005 and 2004, respectively, pursuant to this plan at a weightedaverage price per share of $20.51, $11.45, and $4.94, respectively.

**13.**   **SEGMENTREPORTING**

The Company isorganized based on the products and services it offers.  Under this organizational structure, theCompany has five reportable segments: Seating, Interior Systems, Distribution,Business Jet and Engineering Services. The Seating, Interior Systems and Distribution segments consists ofthree, five and two principal operating facilities, respectively.  Business Jet and Engineering Servicessegments consist of three and one principal operating facilities, respectively.

Each segmentreports its results of operations and makes requests for capital expendituresand acquisition funding to the Company’s chief operational decision-makinggroup.  This group is presently comprisedof the Chairman and Chief Executive Officer, the President and Chief OperatingOfficer, and the Senior Vice President of Administration and Chief FinancialOfficer.  Each operating segment hasseparate management teams and infrastructures dedicated to providing a full rangeof products and services to their commercial, business jet andaircraft-manufacturing customers.

The followingtable presents net sales and other financial information by business segment:
| ** **                     | ** ** | **YEAR ENDED DECEMBER 31, 2006** | ** ** |
|--------------------------------|------------|------------------------------------------------------|------------|
| ** **                     | ** ** | **Seating**                                          | ** ** | **Interior  Systems** | ** ** | **Distribution** | ** ** | **Business  Jet** | ** ** | **Engineering  Services** | ** ** | **Consolidated** | ** ** |
| Net sales                      |       | $                                                    | 388.5      |   | $ | 273.9 |   | $ | 251.5 |   | $ | 147.5 |   | $ | 66.8 |   | $ | 1,128.2 |   |
| Operating  earnings (loss)     |       | 37.6                                                 |       | 51.2 |   | 50.4 |   | 9.4 |   | (0.3 | ) | 148.3 |   |
| Total assets (1)               |       | 266.1                                                |       | 374.7 |   | 492.9 |   | 251.6 |   | 112.4 |   | 1,497.7 |   |
| Goodwill                       |       | 12.8                                                 |       | 162.1 |   | 150.6 |   | 88.6 |   | 43.1 |   | 457.2 |   |
| Capital  expenditures          |       | 8.2                                                  |       | 6.1 |   | 3.3 |   | 5.1 |   | 1.4 |   | 24.1 |   |
| Depreciation and  amortization |       | 10.2                                                 |       | 8.8 |   | 3.5 |   | 4.2 |   | 2.7 |   | 29.4 |   |
|                                |            |                                                      |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

F-20

----

 
| ** **                    | ** ** | **YEAR ENDED DECEMBER 31, 2005** | ** ** |
|-------------------------------|------------|------------------------------------------------------|------------|
| ** **                    | ** ** | **Seating**                                          | ** ** | **Interior  Systems** | ** ** | **Distribution** | ** ** | **Business  Jet** | ** ** | **Engineering  Services** | ** ** | **Consolidated** | ** ** |
| Net sales                     |       | $                                                    | 281.8      |   | $ | 205.5 |   | $ | 173.9 |   | $ | 120.2 |   | $ | 62.7 |   | $ | 844.1 |   |
| Operating earnings  (loss)    |       | 25.5                                                 |       | 32.3 |   | 34.9 |   | 7.8 |   | (6.9 | ) | 93.6 |   |
| Total assets (1)              |       | 223.0                                                |       | 326.7 |   | 421.0 |   | 286.7 |   | 169.1 |   | 1,426.5 |   |
| Goodwill                      |       | 10.1                                                 |       | 116.1 |   | 108.0 |   | 88.1 |   | 40.6 |   | 362.9 |   |
| Capital expenditures          |       | 6.1                                                  |       | 3.3 |   | 2.4 |   | 4.0 |   | 1.1 |   | 16.9 |   |
| Depreciation and amortization |       | 9.0                                                  |       | 8.7 |   | 3.7 |   | 4.2 |   | 3.0 |   | 28.6 |   |
|                               |            |                                                      |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 
| ** **                    | ** ** | **YEAR ENDED DECEMBER 31, 2004** | ** ** |
|-------------------------------|------------|------------------------------------------------------|------------|
| ** **                    | ** ** | **Seating**                                          | ** ** | **Interior  Systems** | ** ** | **Distribution** | ** ** | **Business  Jet** | ** ** | **Engineering  Services** | ** ** | **Consolidated** | ** ** |
| Net sales                     |       | $                                                    | 251.4      |   | $ | 200.4 |   | $ | 144.2 |   | $ | 75.2 |   | $ | 62.3 |   | $ | 733.5 |   |
| Operating earnings  (loss)    |       | 16.8                                                 |       | 30.9 |   | 25.9 |   | (1.3 | ) | (7.9 | ) | 64.4 |   |
| Total assets (1)              |       | 157.3                                                |       | 257.2 |   | 295.9 |   | 188.7 |   | 125.7 |   | 1,024.8 |   |
| Goodwill                      |       | 9.9                                                  |       | 121.5 |   | 108.2 |   | 88.1 |   | 42.7 |   | 370.4 |   |
| Capital expenditures          |       | 3.3                                                  |       | 5.3 |   | 2.4 |   | 2.2 |   | 1.3 |   | 14.5 |   |
| Depreciation and amortization |       | 8.6                                                  |       | 8.7 |   | 3.7 |   | 4.3 |   | 3.1 |   | 28.4 |   |
|                               |            |                                                      |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

----

(1)  Corporateassets (including cash and cash equivalents) of $117.7, $462.1 and $105.1 atDecember 31, 2006, 2005 and 2004, respectively, have been allocated to theabove segments based on each segments respective percentage of total assets.

Net sales forthese business segments for the fiscal years ended December 31, 2006, 2005 and2004 are presented below:
| ** **           | ** ** | **Year Ended**             | ** ** | **Year Ended**             | ** ** | **Year Ended**             | ** ** |
|----------------------|------------|---------------------------------|------------|---------------------------------|------------|---------------------------------|------------|
| ** **           | ** ** | **December 31, 2006** | ** ** | **December 31, 2005** | ** ** | **December 31, 2004** | ** ** |
| ** **           | ** ** | **Net  Sales**                  | ** ** | **% of  Net Sales**   | ** ** | **Net  Sales**                  | ** ** | **% of  Net Sales** | ** ** | **Net  Sales** | ** ** | **% of  Net Sales** | ** ** |
| Seating              |       | $                               | 388.5      |                            | 34.4       | %                               | $          | 281.8 |   | 33.4 | % | $ | 251.4 |   | 34.3 | % |
| Interior Systems     |       | 273.9                           |       | 24.3                            | %          | 205.5                           |       | 24.4 | % | 200.4 |   | 27.3 | % |
| Distribution         |       | 251.5                           |       | 22.3                            | %          | 173.9                           |       | 20.6 | % | 144.2 |   | 19.7 | % |
| Business Jet         |       | 147.5                           |       | 13.1                            | %          | 120.2                           |       | 14.2 | % | 75.2 |   | 10.2 | % |
| Engineering Services |       | 66.8                            |       | 5.9                             | %          | 62.7                            |       | 7.4 | % | 62.3 |   | 8.5 | % |
| Net sales            |       | $                               | 1,128.2    |                            | 100.0      | %                               | $          | 844.1 |   | 100.0 | % | $ | 733.5 |   | 100.0 | % |

 

*GeographicOrigination*

The Company operatedprincipally in three geographic areas, the United States, Europe (primarily theUnited Kingdom) and emerging markets, i.e., Asia, Pacific Rim, Middle East,etc. during the fiscal years ended December 31, 2006, 2005 and 2004.  There were no significant transfers betweengeographic areas during these periods. Identifiable assets are those assets ofthe Company that are identified with the operations in each geographic area.

The following table presents net sales and operatingearnings (loss) for the fiscal years ended December 31, 2006, 2005 and 2004 andidentifiable assets as of December 31, 2006, 2005 and 2004 by geographic area:

 
| ** **                      | ** ** | **Fiscal Year Ended December 31,** | ** ** |
|---------------------------------|------------|--------------------------------------------------------|------------|
| ** **                      | ** ** | **2006**                                               | ** ** | **2005** | ** ** | **2004** | ** ** |
| **Net  sales:**                 |       |                                                   |       |   |   |   |   |
| Domestic                        |       | $                                                      | 732.9      |   | $ | 588.4 |   | $ | 495.7 |   |
| Foreign                         |       | 395.3                                                  |       | 255.7 |   | 237.8 |   |
| Total:                          |       | $                                                      | 1,128.2    |   | $ | 844.1 |   | $ | 733.5 |   |
|                            |       |                                                   |       |   |   |   |   |
| **Operating  earnings (loss):** |       |                                                   |       |   |   |   |   |
| Domestic                        |       | $                                                      | 100.7      |   | $ | 72.1 |   | $ | 73.1 |   |
| Foreign                         |       | 47.6                                                   |       | 21.5 |   | (8.7 | ) |
| Total:                          |       | $                                                      | 148.3      |   | $ | 93.6 |   | $ | 64.4 |   |
|                            |       |                                                   |       |   |   |   |   |
| **Identifiable  assets:**       | ** ** | ** **                                             | ** ** | ** ** | ** ** | ** ** | ** ** |
| Domestic                        |       | $                                                      | 1,068.6    |   | $ | 1,214.2 |   | $ | 804.6 |   |
| Foreign                         |       | 429.1                                                  |       | 212.3 |   | 220.2 |   |
| Total:                          |       | $                                                      | 1,497.7    |   | $ | 1,426.5 |   | $ | 1,024.8 |   |

 

F-21

----

 

*GeographicDestination*

Export sales from the United States to customers inforeign countries amounted to approximately $307.6, $241.9 and $179.3 in thefiscal years ended December 31, 2006, 2005 and 2004, respectively.

Net sales by geographicsegment (based on destination) for the years December 31, 2006, December 31,2005 and December 31, 2004 were as follows:
| ** **                                                 | ** ** | **Fiscal Year Ended December 31,** | ** ** |
|------------------------------------------------------------|------------|--------------------------------------------------------|------------|
| ** **                                                 | ** ** | **2006**                                               | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                                                 | ** ** | **Net  Sales**                                         | ** ** | **% of  Net Sales** | ** ** | **Net  Sales** | ** ** | **% of  Net Sales** | ** ** | **Net  Sales** | ** ** | **% of  Net Sales** | ** ** |
|                                                       |       |                                                   |       |   |   |   |   |   |   |   |   |   |   |
| North America                                              |       | $                                                      | 544.6      |   | 48.3% |   | $ | 433.4 |   | 51.3% |   | $ | 402.6 |   | 54.9% |   |
| Europe                                                     |       | 331.5                                                  |       | 29.4% |   | 202.2 |   | 24.0% |   | 175.1 |   | 23.9% |   |
| Emerging  Markets, i.e., Asia, Pacific Rim and Middle East |       | 252.1                                                  |       | 22.3% |   | 208.5 |   | 24.7% |   | 155.8 |   | 21.2% |   |
|                                                       |       | $                                                      | 1,128.2    |   | 100.0% |   | $ | 844.1 |   | 100.0% |   | $ | 733.5 |   | 100.0% |   |

 

Major customers(i.e., customers representing more than 10% of net sales) change from year toyear depending on the level of refurbishment activity and/or the level of newaircraft purchases by such customers. There were no major customers in each ofthe three-year periods ended December 31, 2006.

**14.**             **FAIR VALUEINFORMATION**

The followingdisclosure of the estimated fair value of financial instruments at December 31,2006 and 2005 is made in accordance with the requirements of SFAS No. 107*,*“Disclosuresabout Fair Value of Financial Instruments”.  The estimated fair value amounts have beendetermined by the Company using available market information and appropriatevaluation methodologies; however, considerable judgment is required ininterpreting market data to develop the estimates of fair value. Accordingly,the estimates presented herein are not necessarily indicative of the amountsthat the Company could realize in a current market exchange. The use ofdifferent market assumptions and/or estimation methodologies may have amaterial effect on the estimated fair value amounts.

The carryingamounts of cash and cash equivalents, accounts receivable-trade, and accountspayable and term debt are a reasonable estimate of their fair values asinterest is based upon floating market rates. The fair values of the Company’s Notes as of December 31, 2006 and 2005are as follows:
| ** **   | ** ** | **December 31,  2006** | ** ** | **December 31,  2005** | ** ** |
|--------------|------------|-----------------------------|------------|-----------------------------|------------|
| 8 1/2% Notes |       | $                           | 0.1        |                        | $          | 186.4 |   |
| 8% Notes     |       | —                      |       | 250.0                       |       |
| 8 7/8% Notes |       | 260.0                       |       | 262.5                       |       |
|              |            |                             |            |                             |            |  |  |

 

The fair valueinformation presented herein is based on pertinent information available tomanagement at December 31, 2006 and December 31, 2005, respectively. Althoughmanagement is not aware of any factors that would significantly affect theestimated fair value amounts, such amounts have not been comprehensivelyrevalued for purposes of these consolidated financial statements since thosedates, and current estimates of fair value may differ significantly from theamounts presented herein.

F-22

----

 

**15.    SELECTED QUARTERLY DATA**(Unaudited)

Summarizedquarterly financial data for the fiscal years ended December 31, 2006 andDecember 31, 2005 are as follows:
| ** **                         | ** ** | **Year Ended December 31, 2006** | ** ** |
|------------------------------------|------------|------------------------------------------------------|------------|
| ****                               | ** ** | **First  Quarter**                                   | ** ** | **Second  Quarter** | ** ** | **Third  Quarter** | ** ** | **Fourth  Quarter** | ** ** |
| Net sales                          |       | $                                                    | 247.2      |   | $ | 271.5 |   | $ | 287.9 |   | $ | 321.6 |   |
| Gross profit                       |       | 86.5                                                 |       | 96.4 |   | 100.8 |   | 112.8 |   |
| Net earnings                       |       | 13.8                                                 |       | 18.7 |   | 31.4 | (2) | 21.7 |   |
| Basic net earnings per  share (1)  |       | 0.18                                                 |       | 0.24 |   | 0.40 |   | 0.28 |   |
| Diluted net earnings per share (1) |       | 0.18                                                 |       | 0.24 |   | 0.40 |   | 0.28 |   |
|                                    |            |                                                      |            |  |  |  |  |  |  |  |  |  |  |

 
| ** **                        | ** ** | **Year Ended December 31, 2005** | ** ** |
|-----------------------------------|------------|------------------------------------------------------|------------|
| ****                              | ** ** | **First  Quarter**                                   | ** ** | **Second  Quarter** | ** ** | **Third  Quarter** | ** ** | **Fourth  Quarter** | ** ** |
| Net sales                         |       | $                                                    | 196.5      |   | $ | 207.6 |   | $ | 217.1 |   | $ | 222.9 |   |
| Gross profit                      |       | 68.0                                                 |       | 72.8 |   | 76.6 |   | 78.2 |   |
| Net earnings                      |       | 4.1                                                  |       | 8.4 |   | 10.0 |   | 62.1 | (2) |
| Basic net earnings per  share(1)  |       | 0.07                                                 |       | 0.15 |   | 0.17 |   | 0.99 |   |
| Diluted net earnings per share(1) |       | 0.07                                                 |       | 0.14 |   | 0.16 |   | 0.96 |   |
|                                   |            |                                                      |            |  |  |  |  |  |  |  |  |  |  |

----

(1)          Netearnings per share are computed individually for each quarter presented.  Therefore, the sum of the quarterly netearnings per share may not necessarily equal the total for the year.

(2)          See Note 9 to theConsolidated Financial Statements regarding the reversal of a significantportion of the deferred tax asset valuation allowance.

[Remainder of pageintentionally left blank]

 

F-23

----

 

SCHEDULE II -VALUATION AND QUALIFYING ACCOUNTS

FOR THE FISCAL YEARSENDED DECEMBER 31, 2006, 2005, AND 2004(In millions)

 
| ** **                               | ** ** | **BALANCE  AT  BEGINNING  OF  PERIOD** | ** ** | **EXPENSES** | ** ** | **OTHER** | ** ** | **WRITE-  OFFS/  DISPOSALS** | ** ** | **BALANCE  AT END  OF  PERIOD** | ** ** |
|------------------------------------------|------------|----------------------------------------|------------|--------------|------------|-----------|------------|------------------------------|------------|--------------------------------------|------------|
| **DEDUCTED FROM ASSETS:**                |       |                                   |       |         |       |      |       |                         |       |                                 |       |
|                                     |       |                                   |       |         |       |      |       |                         |       |                                 |       |
| Allowance for doubtful  accounts:        |       |                                   |       |         |       |      |       |                         |       |                                 |       |
| Fiscal year ended  December 31, 2006     |       | $                                      | 2.9        |         | $          | 1.4       |       | $                            | 1.6        |                                 | $          | 1.2 |   | $ | 4.7 |   |
| Fiscal year ended  December 31, 2005     |       | 2.8                                    |       | 0.5          |       | (0.1      | )          | 0.3                          |       | 2.9                                  |       |
| Fiscal year ended  December 31, 2004     |       | 2.2                                    |       | 1.0          |       | 0.2       |       | 0.6                          |       | 2.8                                  |       |
|                                     |       |                                   |       |         |       |      |       |                         |       |                                 |       |
| Reserve for obsolete  inventories:       |       |                                   |       |         |       |      |       |                         |       |                                 |       |
| Fiscal year ended  December 31, 2006     |       | 27.1                                   |       | 3.3          |       | 2.6       |       | 3.9                          |       | 29.1                                 |       |
| Fiscal year ended  December 31, 2005     |       | 26.9                                   |       | 16.0         |       | (0.7      | )          | 15.1                         |       | 27.1                                 |       |
| Fiscal year ended  December 31, 2004     |       | 27.3                                   |       | 3.8          |       | 1.5       |       | 5.7                          |       | 26.9                                 |       |
|                                     |       |                                   |       |         |       |      |       |                         |       |                                 |       |
| Deferred tax asset  valuation allowance: |       |                                   |       |         |       |      |       |                         |       |                                 |       |
| Fiscal year ended  December 31, 2006     |       | 40.5                                   |       | (27.4        | )          | 2.4       |       | —                       |       | 15.5                                 |       |
| Fiscal year ended  December 31, 2005     |       | 129.3                                  |       | (62.3        | )          | (26.5     | )          | —                       |       | 40.5                                 |       |
| Fiscal year ended  December 31, 2004     |       | 136.3                                  |       | —       |       | (7.0      | )          | —                       |       | 129.3                                |       |
| ** **                               |       |                                   |       |         |       |      |       |                         |       |                                 |       |
|                                          |            |                                        |            |              |            |           |            |                              |            |                                      |            |  |  |  |  |  |

 

F-24

----