Reserves for estimated contract losses stood at $14 million compared to $16 million 90 days ago. Additions of $3.7 million were offset by reductions of $5.7 million.

During the quarter, we put $9 million into our U.S. defined benefit pension plan.

As most of you know, the FASB has put out, for comment, their proposed new standard to use when accounting for defined benefit pension plans. For Moog, this proposal would be adopted at the end of our fiscal year ending '07. We thought it would be timely to outline the effects on Moog and our plans for managing around these new proposed accounting rules.

The proposal requires that on September 29, 2007 we reflect a liability on our balance sheet equal to the projected benefit obligation (PBO) less the fair value of assets already placed in our qualified plans. The PBO is the projected stream of retirement payments to all your employees and retirees indexed for mortality and wage increases and then discounted back by a current discount rate. At the end of the last year, the PBO for our worldwide underfunded plans amounted to $448 million. This PBO is different than the $407 million of accumulated benefit obligations (ABO) at the end of last year. The ABO is the calculation of our discounted pension liabilities earned without projections for future wage increases. Importantly, the difference between last year's ABO and our plan assets is a number already reflected in our balance sheet.

So FASB's new proposal to use the PBO rather than the ABO when calculating balance sheet effects is a difference of $41 million. That's the increase we would have reflected on our balance sheet at the end of '05 if the proposed FASB rules were applied retroactively. We also have an additional $10 million underfunded retiree health care plan liability that existed at the end of '05. The offsetting entry for recording an incremental $51 million liability at the end of '05 would have been a reduction in shareholders' equity of a similar amount. Our book equity at this March '06 is $648 million, so the new pension rules would have an impact of less than 10% on shareholders' equity.
U.S. tax laws allow a current year tax deduction for all contributions to ERISA qualified plans. We've calculated the max available for our FY05 tax year to be $39 million. We've already paid in $21 million, so we can contribute an additional $18 million before this June 15 and get a tax deduction worth 38.5%, or $7 million back from the IRS from our '05 tax returns. We think it's sensible to increase our contributions to avoid increases in pension liabilities. Instead of new pension liabilities, we'll have some increased bank debt. We are now projecting our FY06 cash contributions to our U.S. Defined Benefit Plans to be $33 million vs. our forecast last quarter of $15 million. Our early studies of '07 suggest contributions in the range of $25-$35 million. The interest costs on higher levels of bank borrowings will be easily exceeded by lower pension costs in '07 and beyond. We have higher levels of assumed asset returns in our pension plans compared to borrowing costs. It also looks like we'll have much higher discount rates than 5 ¼% that we used last year.

Most importantly, following this plan, assuming no reduction in the value of our pension assets means we will have negligible contributions to make in '08 and beyond. We'll have lower expense and more cash flow.

So, let me recap. We'll put $18 million more into our plans in the second half '06, which will lower our tax payments by $7 million. So, the net increase in borrowings would be $11 million. Next year we'll put somewhere between $25-$35 million into our plans, and we'll save on taxes about 38.5% of those amounts.

Hope that's enough on pensions. A couple more topics.

Our pre-tax costs for stock option expensing were $475,000 in the second quarter compared to the $2.0 million we expensed in Q1.

For all of FY06 we now expect cash flow from operations to be about $80 million, resulting in our second half generating about $55 million of that total.