more interest expense in 2006, while reductions of outstanding debt during fiscal 2006 reduced interest cost by approximately $2.2 million and improved investment income performance provided approximately $1.5 million of additional income.

Income (Loss) Before Income Taxes ("IBT")  Consolidated loss before taxes in 2006 of $122.5 million represents a decline of $286.2 million, or 174.8%, from IBT of $163.7 million in 2005, with margin comparisons of (4.1)% of net sales versus 6.4% in 2005. Excluding both years’ asbestos charges, consolidated IBT in 2006 would have amounted to $257.5 million, an improvement of $15.8 million, or 6.5%, from adjusted IBT of $241.7 million in 2005, with margin comparisons of 8.6% of net sales versus 9.5% in 2005. This decline in margin year-over-year reflects primarily the one-time costs incurred during the second quarter of fiscal 2006, as previously discussed, the negative margin impact from higher material costs in 2006, and relatively low first-year IBT results, as expected, from the illbruck acquisition.

Industrial segment IBT grew by $32.6 million, or 19.4%, to $201.2 million from $168.6 million in 2005, mainly from the strength of this segment’s organic sales growth. Consumer segment IBT improved by $11.5 million, or 7.8%, to $159.1 million from $147.6 million in 2005, also reflecting mainly organic sales growth along with cost controls, partly offset by the negative margin impact from higher material costs in this segment. Combined operating IBT improved by $44.2 million, or 14.0%, over 2005.

For a reconciliation of IBT to earnings (loss) before interest and taxes, see the Segment Information table located on page 25 of this Annual Report.

Income Tax Rate  The effective income tax benefit rate was 37.8% for 2006 compared to an effective income tax expense rate of 35.8% for 2005.

In 2006, and to a lesser extent in 2005, the effective tax rate differed from the federal statutory rate due to increases principally as a result of an increase in valuation allowances associated with losses incurred by certain of our foreign businesses, valuation allowances related to U.S. federal foreign tax credit carryforwards and other non-deductible business operating expenses. The increases in the effective tax rate were partially offset by the U.S. tax impact of foreign operations and reductions in state and local taxes, including an income tax benefit relating to changes in state tax laws and the effects of lower tax rates enacted during fiscal 2006.

The effective income tax benefit rate for 2006 reflects the impact of the $380.0 million asbestos liability charges. Excluding these asbestos charges, the effective income tax rate for 2006 would have been adjusted to a pro forma effective income tax expense rate of 34.7%. The effective income tax rate for 2005 reflects the impact of the $78.0 million asbestos liability charges that year. Excluding those asbestos charges, the effective income tax rate for 2005 would have been adjusted to a pro forma effective income tax rate of 36.1%.

Net Income (Loss)  Net loss of $76.2 million for 2006 compares to net income of $105.0 million in 2005. This $181.2 million decline reflects the impact of the $244.3 million after-tax asbestos charges taken in 2006, versus $49.5 million in 2005, for a net difference of $194.8 million. Excluding the impact of these asbestos charges, 2006 net income would have been an adjusted $168.1 million, representing an increase of $13.6 million, or 8.8%, from $154.5 million in 2005. Margin on sales would have been an adjusted 5.6% in 2006 compared with 6.0% of sales during 2005, with this 40 bps margin difference mainly the result of the higher year-over-year material costs and lower first-year earnings results, as expected, from the illbruck acquisition.

Diluted earnings (loss) per common share in 2006 of ($0.65) compare with $0.86 in 2005. Excluding the asbestos charges, adjusted 2006 diluted earnings per common share would have increased by 8.0%, to $1.35 from an adjusted $1.25 in 2005.

LIQUIDITY AND CAPITAL RESOURCES

Operating Activities

Operating activities generated positive cash flow of $202.3 million during fiscal 2007 compared with $185.5 million generated during fiscal 2006, an increase of $16.8 million or 9.1%. Factoring out the after-tax asbestos-related cash payments and insurance recoveries of $33.3 million and $37.7 million, respectively, operating activities generated positive cash flow of $235.5 million in fiscal 2007 compared with $223.1 million during fiscal 2006, up $12.4 million or 5.6%. Fiscal 2007 adjusted net income of $198.6 million, which excludes $15.0 million ($9.7 million after-tax) in asbestos-related insurance recoveries, reflects an improvement of $30.5 million over fiscal 2006 adjusted net income of $168.1 million, which was affected by $380.0 million ($244.3 million after-tax) in charges for asbestos-related liabilities but had no effect on cash flow. The improvement in cash flow of $12.4 million, as discussed above, was positively impacted by additional depreciation and amortization of $7.3 million versus the prior period, while trade accounts receivable required a usage of $15.5 million in cash flow year-over-year, principally associated with an increase in sales versus the prior year and an unfavorable increase of 2.1 days in days sales outstanding ("DSO") since May 31, 2006. On the other hand, inventories provided $18.4 million in operating cash year-over-year as a result of a 1.3 days improvement in our days inventory outstanding ("DIO") since May 31, 2006, while accounts payable required the usage of an additional $4.7 million of cash year-over-year as a result of the increased sales volume and the associated inventory purchases necessary to support these levels, offset by timing of payments and a 2.7 day improvement in our days accounts payable outstanding versus the prior fiscal year end. All other remaining year-overyear balance sheet changes related to cash flows from operations had a net unfavorable impact of $23.6 million.