OVERVIEW

Wabtec is one of the world's largest providers of value-added, technology-based products and services for the global rail industry. Our products are found on virtually all U.S. locomotives, freight cars and passenger transit vehicles, as well as in more than 104 countries throughout the world. Our products enhance safety, improve productivity and reduce maintenance costs for customers, and many of our core products and services are essential in the safe and efficient operation of freight rail and passenger transit vehicles. Wabtec is a global company with operations in 16 countries. In 2008, about 41% of the Company's revenues came from customers outside the U.S.

Management Review and Outlook

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

The Company monitors a variety of factors and statistics to gauge market activity. The freight rail industry is largely driven by general economic conditions, which can cause fluctuations in rail traffic. Based on those fluctuations, railroads can increase or decrease purchases of new locomotive and freight cars. Growth in the U.S. economy slowed in 2008, which led to a decrease in rail traffic during the year. Deliveries of new locomotives increased about 25% during the year, in part due to strong international demand for U.S.-built locomotives. Deliveries of new freight cars decreased about 5.0% in 2008, due in part to the slowing economic conditions and resulting decrease in rail traffic. About 20% of the Company's revenues are directly related to deliveries of new freight cars. At December 31, 2008, the industry backlog of freight cars ordered was 31,921, compared to 75,860 at the end of the prior year.

The North American transit rail industry is primarily driven by government spending and ridership, which increased 8% and 5%, respectively, in 2008. In February 2009, the U.S. federal government passed new spending legislation designed to stimulate the U.S. economy. Of the $789 billion spending package, up to $20 billion is to be spent on freight and passenger transportation, as follows: $8.4 billion for public transportation, $8 billion for high-speed rail, $1.5 billion for discretionary intermodal projects, and $1.3 billion for AMTRAK. The majority of this money is to be spent by September 2010. Wabtec expects to benefit from this additional spending, as transit authorities invest in expansion, new equipment and other related projects.

In 2009, the Company expects conditions to slow in its freight rail and to remain generally stable in its passenger transit rail markets. Demand for new freight cars is expected to be lower. In the passenger transit rail market, the Company believes that increases in ridership and federal funding will continue to have a positive effect on the demand for new equipment and aftermarket parts. In addition, the Company has a strong backlog of transit-related projects, some of which are expected to generate increased revenues in 2009. In response to current market conditions, Wabtec expects to take certain actions to reduce costs, including plant consolidations, work force reductions and general spending cuts. Management believes these actions will not affect the company's ability to continue to invest in its strategic growth initiatives.

In 2009 and beyond, we will continue to face many challenges, including a weaker economy, higher costs for medical and insurance premiums, and foreign currency fluctuations. Unfavorable general economic and market conditions in the United States and internationally could have a negative impact on our sales and operations. To the extent that these factors result in continued instability of capital markets, shortages of raw

materials or component parts, longer sales cycles, deferral or delay of customer orders or an inability to market our products effectively, our business and results of operations could be materially adversely affected. In addition, we face risks associated with our four-point growth strategy include the level of investment that customers are willing to make in new technologies developed by the industry and the Company, and risks inherent in global expansion. When necessary, we will modify our financial and operating strategies to reflect changes in market conditions and risks.

Wabtec downsized two of its Canadian plants, in Stoney Creek and Wallaceburg, by moving certain products to lower-cost facilities and outsourcing. For the years ended December 31, 2008, 2007 and 2006, Wabtec recorded charges of $4.6 million, $3.6 million and $6.8 million, respectively. For the year ended December 31, 2007, additional severance, pension, and asset impairment charges of $1.5 million were recorded related to other Canadian operations. All of these costs were paid as of December 31, 2008.

Total charges for restructuring and other expenses recorded to date have been $16.5 million, comprised of the $5.7 million for employee severance costs associated for approximately 400 salaried and hourly employees; $5.5 million of pension and postretirement benefit curtailment for those employees; $4.8 million related to asset impairments for structures, machinery, and equipment; and $541,000 for goodwill impairment. Severance costs are contractual liabilities and payment is dependent on the waiver by or expiration of certain seniority rights of those employees. As of December 31, 2008, $3.9 million of this amount had been paid.

RESULTS OF OPERATIONS

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

                                                                 Year Ended December 31,
In millions                                                2008           2007           2006
Net sales                                                $ 1,574.8      $ 1,360.1      $ 1,087.6
Cost of sales                                              1,147.6         (990.5 )       (790.8 )

Gross profit                                                 427.2          369.6          296.8
Selling, general and administrative expenses                (170.6 )       (148.5 )       (130.3 )
Engineering expenses                                         (39.0 )        (37.4 )        (32.7 )
Amortization expense                                          (5.1 )         (4.0 )         (3.6 )

Total operating expenses                                    (214.7 )       (189.9 )       (166.6 )

Income from operations                                       212.5          179.7          130.2
Interest expense, net                                         (8.5 )         (3.6 )         (2.2 )
Other income (expense), net                                    0.3           (3.6 )         (1.4 )

Income from continuing operations before income taxes        204.3          172.5          126.6
Income tax expense                                           (73.7 )        (63.1 )        (40.1 )

Income from continuing operations                            130.6          109.4           86.5
Discontinued operations (net of tax)                            -             0.2           (1.7 )

Net income                                               $   130.6      $   109.6      $    84.8

                             2008 COMPARED TO 2007

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



                                        For the year ended December 31,
                                                                   Percent
            In thousands                 2008           2007       Change
            Net sales                $   1,574,749   $ 1,360,088      15.8 %
            Income from operations         212,516       179,741      18.2 %
            Net income                     130,551       109,570      19.2 %

Net sales increased by $214.7 million to $1,574.8 million in 2008 from $1,360.1 million in 2007. The increase is primarily due to internal growth from increased sales of $55.3 million for brake products, $36.8 million for contracts related to transit authorities, $21.8 million in remanufacturing, overhaul and build of locomotives, and $16.6 million for heat exchangers. Sales related to acquisitions also contributed $59.3 million to the increase. Sales related to international expansion also contributed $18 million to the increase. Offsetting these increases, the Company did realize a net sales decrease of $12.2 million due to foreign exchange but net earnings are mostly not impacted by foreign exchange.

Net income for 2008 was $130.6 million or $2.67 per diluted share. Net income for 2007 was $109.6 million or $2.23 per diluted share. Net income improved primarily due to sales increases.

Net sales by Segment The following table shows the Company's net sales by business segment:

                                         For the year ended
                                            December 31,
                      In thousands       2008          2007
                      Freight Group   $   773,523   $   734,173
                      Transit Group       801,226       625,915

                      Net sales       $ 1,574,749   $ 1,360,088

Freight Group sales increased by $39.4 million or 5.4% due to increased sales from international expansion of $18 million, increased sales from heat exchangers of $16.6 million, sales of $11.2 million for aftermarket brake products, and sales of $11.1 million from an acquisition completed in the fourth quarter of 2008. Offsetting these increases were decreases of $20.9 million in locomotive component, repair and refurbishment services. Transit Group sales increased by $175.3 million or 28% due to increased sales of brake products of $52.1 million, contracts related to transit authorities of $37.6 million, increased sales of $21.8 million related to refurbishment of transit cars, and sales of $48 million for the full year results from acquisitions completed in 2007 and the acquisitions completed in the second quarter of 2008.

Gross profit Gross profit increased to $427.2 million in 2008 compared to $369.6 million in 2007. Gross profit is dependent on a number of factors including pricing, sales volume and product mix. In 2008, gross profit, as a percentage of sales, was 27.1% compared to 27.2% in 2007. The gross profit percentage was flat due to the changing mix of revenues from Freight to Transit as Transit margins tend to be lower than Freight. This was offset by ongoing efficiency and cost saving initiatives. The provision for warranty expense is generally established for specific losses, along with historical estimates of customer claims as a percentage of sales. The provision for warranty expense was $10.7 more in 2008 compared to 2007 because of increased sales, particularly for large transit authority contracts which ramped up in 2008. The warranty reserve increased at December 31, 2008 compared to December 31, 2007 by $8.4 million due to $4 million from acquisitions completed in 2008, and primarily from customer claims or transit authority contracts.

Operating expenses The following table shows our operating expenses:

                                                   For the year ended December 31,
                                                                               Percent
 In thousands                                       2008            2007       Change
 Selling, general and administrative expenses   $    170,597    $    148,437      14.9 %
 Engineering expenses                                 38,981          37,434       4.1 %
 Amortization expense                                  5,092           4,007      27.1 %

 Total operating expenses                       $    214,670    $    189,878      13.1 %

Selling, general, and administrative expenses increased $22.2 million in 2008 compared to 2007 mostly due to the acquisitions that were completed during the fourth quarter of 2008. Engineering expenses increased by $1.5 million in 2008 compared to 2007 mostly due to those same acquisitions. Amortization expense increased $1.0 million due to acquisitions. Total operating expenses were 13.6% and 14.0% of sales for 2008 and 2007, respectively.

Income from operationsIncome from operations totaled $212.5 million (or 13.5% of sales) in 2008 compared to $179.7 million (or 13.2% of sales) in 2007. Income from operations improved primarily due to sales increases.

Interest expense, net Interest expense, net increased $4.9 million in 2008 compared to 2007 primarily due to the Company's overall lower cash balances, resulting in lower interest income, and acquisition financing incurred in the fourth quarter in connection with the acquisition of Standard Car Truck.

Other expense, net Other expense, net decreased $3.9 million in 2008 compared to 2007. The Company recorded foreign exchange expense of $300,000 and $3.2 million, respectively, in 2008 and 2007, due to the effect of currency exchange rate changes on intercompany transactions that are non U.S. dollar denominated amounts and charged or credited to earnings.

Income taxes The effective income tax rate was 36.1% and 36.6% in 2008 and 2007, respectively. The decrease in the effective tax rate is primarily the result of a $1.0 million net tax benefit recognized in 2008 due to the expiration of statutory review periods and current examinations in various tax jurisdictions.

Net income Net income for 2008 increased $21.0 million, compared to 2007. Net income improved primarily due to sales increases.

                             2007 COMPARED TO 2006

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



                                        For the year ended December 31,
                                                                   Percent
            In thousands                 2007           2006       Change
            Net sales                $   1,360,088   $ 1,087,620      25.1 %
            Income from operations         179,741       130,151      38.1 %
            Net income                     109,570        84,804      29.2 %

Net sales increased by $272.5 million to $1,360.1 million in 2007 from $1,087.6 million in 2006. The increase is primarily due to internal growth from increased sales of $69.4 million for locomotives, $30.3 million for refurbishing transit cars, $38.1 million for heat exchangers, $20.6 million for contracts related to transit authorities, and $99.4 million from acquisitions completed in the fourth quarter of 2006 and second quarter of 2007. Offsetting those increases was a decrease of $22.3 million primarily related to lower industry deliveries of freight cars. The Company did realize a net sales improvement of $22.7 million due to foreign exchange but net earnings are mostly not impacted by foreign exchange.

Net income for 2007 was $109.6 million or $2.23 per diluted share. Net income for 2006 was $84.8 million or $1.73 per diluted share. Net income improved primarily due to sales increases and higher operating margins.

Net sales by Segment The following table shows the Company's net sales by business segment:

                                         For the year ended
                                            December 31,
                      In thousands       2007          2006
                      Freight Group   $   734,173   $   709,353
                      Transit Group       625,915       378,267

                      Net sales       $ 1,360,088   $ 1,087,620

Freight Group sales increased by $24.8 million or 3.5% due to increased sales from heat exchangers of $38.1 million, sales of $18.0 million from an acquisition completed in the fourth quarter of 2006, and a net sales improvement of about $1.6 million due to foreign exchange. Offsetting these increases were decreases of $14.0 million in locomotive component, repair and refurbishment services, and decreases of $22.3 million primarily related to lower industry deliveries of freight cars. Transit Group sales increased by $247.7 million or 65.5% due to increased commuter locomotive sales of $83.4 million, increased sales of $41.7 million related to refurbishment of transit cars, contracts related to transit authorities of $20.4 million, sales of $81.4 million from acquisitions completed in the fourth quarter of 2006 and second quarter of 2007, and a net sales improvement of about $21.1 million due to foreign exchange.

Gross profit Gross profit increased to $369.6 million in 2007 compared to $296.8 million in 2006. Gross profit is dependent on a number of factors including pricing, sales volume and product mix. In 2007, gross profit, as a percentage of sales, was 27.2% compared to 27.3% in 2006. The gross profit percentage was flat due to the changing mix of revenues from Freight to Transit as Transit margins tend to be lower than Freight. This was offset by ongoing efficiency and cost saving initiatives. In 2007, restructuring plan expenses of $5.5 million were recorded in cost of sales. 2007 gross profit, as a percentage of sales, excluding these charges, would have been 27.6%. In 2006, restructuring plan expenses of $6.3 million were recorded in cost of sales. 2006 gross profit, as a percentage of sales, excluding these charges, would have been 27.9%.

The provision for warranty expense was $180,000 less in 2007 compared to 2006. The warranty reserve increased at December 31, 2007 compared to December 31, 2006 by $4.9 million due to $4.7 million from an acquisition completed in the second quarter of 2007.

Operating expenses The following table shows our operating expenses:

                                                   For the year ended December 31,
                                                                               Percent
 In thousands                                       2007            2006       Change
 Selling, general and administrative expenses   $    148,437    $    130,294      13.9 %
 Engineering expenses                                 37,434          32,701      14.5 %
 Amortization expense                                  4,007           3,631      10.4 %

 Total operating expenses                       $    189,878    $    166,626      14.0 %

Selling, general, and administrative expenses increased $18.1 million in 2007 compared to 2006 mostly due to the acquisitions that were completed during the fourth quarter of 2006 and second quarter of 2007. In addition, during 2007, the Company recorded a provision of $4.4 million for the settlement with Bombardier (see Note 19 of "Notes to Condensed Consolidated Financial Statements"). Engineering expenses increased by $4.7 million in 2007 compared to 2006 mostly due to those same acquisitions. Total operating expenses were 14.0% and 15.3% of sales for 2007 and 2006, respectively.

Income from operations Income from operations totaled $179.7 million (or 13.2% of sales) in 2007 compared to $130.2 million (or 12.0% of sales) in 2006. Income from operations improved primarily due to sales increases and higher operating margins.

Interest expense, net Interest expense, net increased $1.4 million in 2007 compared to 2006 primarily due to the Company's overall lower cash balances, resulting in lower interest income.

Other expense, net Other expense, net increased $2.2 million in 2007 compared to 2006. The Company recorded foreign exchange expense of $3.2 million and $1.1 million, respectively, in 2007 and 2006, due to the effect of currency exchange rate changes on intercompany transactions that are non U.S. dollar denominated amounts and charged or credited to earnings.

Income taxes The effective income tax rate was 36.6% and 31.7% in 2007 and 2006, respectively. The increase in effective tax rate is primarily the result of the Company's 2007 adoption of FIN 48 as well as the reversal of certain valuation allowances in 2006. Approximately $3.1 million and $5.3 million of tax benefits were recognized in 2007 and 2006, respectively, related to the reversal of deferred tax valuation allowances.

Net income Net income for 2007 increased $24.8 million, compared to 2006. Net income improved primarily due to sales increases and higher operating margins.

Liquidity and Capital Resources

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

                                                   For the year ended
                                                      December 31,
          In thousands                      2008          2007           2006
          Cash provided by (used for):
          Operating activities           $  159,384     $ 142,509     $  151,027
          Investing activities             (417,441 )     (93,536 )     (104,762 )
          Financing activities:
          Proceeds from debt                236,000            -              -
          Payments of debt                     (385 )        (657 )           -
          Stock repurchase                  (45,796 )     (17,888 )      (18,874 )
          Other                                (108 )       5,560         17,067

Operating activities. Cash provided by operations in 2008 was $159.4 million as compared to $142.5 million in 2007. This $16.9 million increase was the result of increased earnings offset by certain changes in operating assets and liabilities. Net income for the Company increased $21.0 million primarily as a result of increased sales. Although account receivable continued to increase due to higher overall sales, the increase was less than the increase in 2007 which resulted in a $10.8 million improvement. Inventories increased in 2008 about $28.4 million more than 2007 due to higher inventory on hand for large contracts requirements and overall higher sales activity. Accounts payable increased less in 2008 compared to 2007 by $18.4 million resulting in less cash generated. Customer deposits and other accruals increased compared to 2007 resulting in a cash increase of $35.8 million. Cash was generated due to the collection of large customer deposits on certain long term contracts. Other assets and liabilities, including accrued income taxes, used cash of $9.1 million compared to 2007.

Cash provided by operations in 2007 was $142.5 million as compared to $151.0 million in 2006. This $8.5 million decrease was the result of increased earnings offset by certain changes in operating assets and liabilities. Net income for the Company increased $24.8 million primarily as a result of increased sales and higher operating margins. Accounts receivable decreased operating cash flows by $77.2 million due to large customer receivables collected for certain locomotive contracts in 2006. Accounts payable provided cash of $40.1 million due to increased purchases for new businesses. Accrued liabilities used cash of $9.3 million as the result of applying customer deposits against customer contract revenue in 2007. Other assets and liabilities used cash of $782,000.

Investing activities. In 2008 and 2007, cash used in investing activities was $417.4 million and $93.5 million, respectively. In 2008, Wabtec acquired 100% of the stock of Poli SpA and Standard Car Truck for $82.3 million and $302.9 million, respectively, net of cash received. Other investments include $8.4 million for certain operations in China, and $4.5 million for certain assets to support our train management business. In 2007, Wabtec acquired 100% of the stock of Ricon Corporation for $73.6 million, net of cash received. In 2006, Wabtec acquired 100% of the stock of Schaefer Equipment and Becorit for $36.3 million and $50.9 million, respectively, net of cash received. Capital expenditures were $19.7 million, $20.4 million, and $20.9 million in 2008, 2007 and 2006, respectively. In 2006, the Company sold a non-core division for $1.4 million.

Financing activities. In 2008, cash provided by financing activities was $189.7 million, which included $236.0 million of borrowings under the new credit facility, offset by $45.8 million of Wabtec stock repurchases. In 2007, cash used by financing activities was $13.0 million compared to cash used by financing activities of $1.8 million in 2006.

The following table shows outstanding indebtedness at December 31, 2008 and 2007.

                                                    December 31,
                In thousands                      2008        2007
                6.875% senior notes, due 2013   $ 150,000   $ 150,000
                Term Loan Facility                200,000          -
                Revolving Credit Facility          36,000          -
                Capital Leases                      1,080         250

                Total                             387,080     150,250
                Less-current portion               30,381          73

                Long-term portion               $ 356,699   $ 150,177

Cash balance at December 31, 2008 and 2007 was $141.8 million and $234.7 million, respectively.

2008 Refinancing Credit Agreement

On November 4, 2008, the Company refinanced its existing unsecured revolving credit agreement with a consortium of commercial banks. This "2008 Refinancing Credit Agreement" provides the company with a $300 million five-year revolving credit facility and a $200 million five-year term loan facility. The Company incurred $2.9 million of deferred financing cost related to the 2008 Refinancing Credit Agreement. Both facilities expire in January 2013. The 2008 Refinancing Credit Agreement borrowings bear variable interest rates indexed to the indices described below. At December 31, 2008 the weighted average interest rate on the Company's variable rate debt was 3.32%. At December 31, 2008, the Company had available bank borrowing capacity, net of $57.3 million of letters of credit, of approximately $242.7 million, subject to certain financial covenant restrictions.

Under the 2008 Refinancing Credit Agreement, the Company may elect a Base Rate of interest or an interest rate based on the London Interbank Offered Rate ("LIBOR") of interest ("the Alternate Rate"). The Base Rate adjusts on a daily basis and is the greater of the PNC, N.A. prime rate, 30-day LIBOR plus 150 basis points or the Federal Funds Effective Rate plus 0.5% per annum, plus a margin that ranges from 25 to 50 basis points. The Alternate rate is based on . . .