10-K

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

(Mark One)

ý        Annual report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

for the fiscal year ended January 31, 2006 (“Fiscal 2005”) or

o        Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

for the transition period from                to               

Commission file number 0-8493

STEWART & STEVENSON SERVICES, INC.

(Exact name of registrant as specified in its charter)

Texas	74-1051605
(State or other jurisdiction of	(I.R.S. Employer Identification No.)
incorporation or organization)
2707 North Loop West, Houston, Texas	77008
(Address of principal executive offices)	(Zip Code)

Registrant’s telephone number, including area code:  (713) 868-7700

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

Common Stock, without par value	New York Stock Exchange
(Title of class)	(Name of exchange on which registered)

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

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ý  No o

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o  No ý

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

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

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.

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

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes  o No ý

The aggregate market value of voting securities held by non-affiliates of the registrant as of July 30, 2005, the date of the registrant’s most recently completed second fiscal quarter, was $639,225,087, based upon the closing price of the registrant’s common stock on the New York Stock Exchange as of such date.

Number of shares outstanding of each of the registrant’s classes of common stock, as of April 5, 2006:

Common Stock, Without Par Value:  29,495,398 Shares

PART I

FORWARD LOOKING STATEMENTS

Certain of the statements contained in this document, including those made under the captions “Business,” “Legal Proceedings,” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” are “forward-looking” statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Other than statements of historical fact included herein, all statements herein, including in particular, but not limited to, statements regarding potential future products and markets, our future financial position or results of operations, business strategy, other plans and objectives for future operations, relating to trends, expressing our belief, referring to expectations, relating to future margins, referring to backlogs as to future product deliveries, relating to long-term contracts in progress or using the words “should,” “could,” “may,” and words of similar import and prospective focus, are forward-looking statements. We can give no assurance that any forward-looking statement of ours will prove to have been correct and such statements are not guarantees of future performance. They involve certain risks, uncertainties and assumptions that are difficult to predict, and actual outcomes and results may differ materially from what is expressed or forecasted or implied in such forward-looking statements. We undertake no obligation to update publicly any forward-looking statements, whether as a result of new information, future events or otherwise. Specific important factors that could cause actual results, performance, or achievements to differ materially from our forward-looking statements, and that otherwise may affect our operations, are identified below. All written and oral forward-looking statements attributable to us or to persons acting on our behalf are expressly qualified in their entirety by such factors.

Item 1. Business.

Stewart & Stevenson Services, Inc. (together with its wholly-owned subsidiaries, the “Company” or “Stewart & Stevenson”) was founded in Houston, Texas in 1902 and was incorporated under the laws of the State of Texas in 1947. Since its beginning, the Company has been primarily engaged in the custom fabrication of engine-driven products. At the beginning of Fiscal 2004, the Company operated in five business segments: the Tactical Vehicle Systems segment, the Power Products segment, the Engineered Products segment, the Airline Products segment, and the Distributed Energy Solutions segment. The Company announced its plan to exit the Distributed Energy Solutions business in September 2003 and, after substantial progress in the wind-down activities, the Company reported this segment as a discontinued operation in the fourth quarter of Fiscal 2004. The Company sold the Airlines Products business in January 2005 for $56 million, after adjustment, plus the assumption of certain liabilities. In January 2006, the Company completed the sale of substantially all the operating assets and business of the Power Products segment and the Engineered Products segment for cash consideration of approximately $283 million, after adjustment, and the assumption of certain liabilities, leaving the Company with the Tactical Vehicle Systems business described below.

On February 27, 2006, the Company entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Armor Holdings, Inc. (“Armor Holdings”) and one of its wholly-owned subsidiaries, pursuant to which Armor Holdings agreed to acquire all of the outstanding common stock of the Company for $35.00 per share in a cash merger transaction. Upon completion of the merger, the Company will be a subsidiary of Armor Holdings and there will be no further market for the Company’s common stock. The transaction is subject to Company shareholder approval, the expiration or termination of the Hart-Scott-Rodino waiting period and other customary conditions. Under specified circumstances, if the Merger Agreement is terminated, the Company would be required to pay Armor Holdings a termination fee. In addition, the Merger Agreement contains conditions to Armor Holdings’ obligations to consummate the merger, including the absence of a material adverse change (as defined in the Merger Agreement) since the date of the Merger Agreement. The Company has scheduled a special meeting of shareholders for May 9, 2006 to consider and vote upon the proposed merger. The Company anticipates that the transaction will close during the second quarter of Fiscal 2006. See “Legal Proceedings.”

The Company’s Tactical Vehicle Systems business assembles the Family of Medium Tactical Vehicles (“FMTV”) under contracts with the U.S. Army, and provides sustaining design engineering, service and support. The initial FMTV contract was awarded in 1991 and called for the production of approximately 11,200 2-1/2-ton and 5-ton trucks in several configurations, including troop carriers, wreckers, cargo trucks, vans and dump trucks. Production pursuant to the initial FMTV contract was completed as of January 31, 1999.

During October 1998, the Company received a second multi-year contract from the U.S. Army that provided for continued production of the FMTV through December 2004, including exercised option years. Production under the second contract, including all option years, totaled approximately 11,491 trucks and 2,292 trailers, with a total contract value of $2.05 billion.

In April 2003, the Company received a third multi-year contract from the U.S. Army that provided for continued production of the FMTV through September 2008. Base production under the third contract includes 7,063 trucks and 3,826 trailers at an initial contract value of approximately $1.2 billion. The U.S. Army also has the option to order up to an additional 10,889 units over the term of the contract, which could extend production beyond September 2008 depending on options exercised. Base

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production under this contract has been funded by the U.S. government through September 2007, and as of March 31, 2006, the U.S. Army has exercised options for 3,382 trucks and 1,702 trailers under this contract.

During Fiscal 2004 and early Fiscal 2005, the Company received additional contract awards, which supplement the FMTV production under the U.S. Army contract. These awards included contracts for the production of 1,743 Low Signature Armored Cabs (“LSAC”) for use on the FMTV, which had a total contract value of approximately $153 million. Additionally, the Company received contract awards from the U.S. Army and Lear Siegler, Inc. to “reset” vehicles that have sustained damage in support of Operation Iraqi Freedom and Operation Enduring Freedom. Under these contracts, the Company has reset approximately 1,254 FMTVs which have been placed in service since 1992, along with 186 of the U.S. Army’s Heavy Expanded Mobility Tactical Trucks (“HEMTT”) to their full operational standards. The total contract value under the reset contracts is approximately $76 million. The LSAC contracts and the reset contracts began in Fiscal 2004 and were substantially completed during Fiscal 2005.

The Company also received modifications to the FMTV contract from the U.S. Army in June 2005, valued at approximately $483 million. These modifications, which were funded by the 2005 U.S. Congress Supplemental Spending Bill, added 3,016 truck and trailer deliveries to the contract, including the exercise of options for 1,310 of the trucks and trailers described above. The Company is currently expanding the capacity of its Sealy, Texas production facility in order to meet these additional order deliveries, which are scheduled from June 2006 to September 2008. Total capital expenditures related to the expansion are expected to be approximately $25 million, approximately $13 million of which was incurred in Fiscal 2005. The expansion is expected to be completed by mid-2006.

In April 2005, the Company acquired all outstanding shares of Automotive Technik (Holdings) Limited (“ATHL”), the manufacturer of the Pinzgauer light tactical vehicle headquartered in the United Kingdom, for a total purchase price of approximately $48.2 million. The acquisition of ATHL broadens the Company’s product offerings and provides additional marketing opportunities worldwide. ATHL currently has contracts to produce vehicles for the United Kingdom Ministry of Defence and the New Zealand Ministry of Defence, in addition to other programs worldwide.

The U.S. government is the Company’s primary customer, accounting for over 85% of its sales from continuing operations. The FMTV contracts are subject to termination at the election of the customer and provide for termination charges that would reimburse the Company for allowable costs, but not necessarily all costs incurred. The loss of this customer would have a material adverse effect on the Company’s future financial condition and results of operations.

The Company also sells the FMTV to other government contractors as a platform for installation of other equipment which is then resold to the U.S. Armed Forces. The Company also has sold vehicles to branches of the U.S. Armed Forces other than the U.S. Army, and believes there will be opportunities to sell additional vehicles to the U.S. Army, other branches of the U.S. Armed Forces and the armed forces of certain foreign countries.

The FMTV incorporates engines, transmissions, axles and a number of other components that are specified by the U.S. Army and are available only from the source or sources selected by the U.S. Army. In addition, the Company uses other suppliers for certain components of the FMTV, some of which are small businesses that are not well capitalized. Interruption in the supply of any of these components, for any reason, could have a material adverse effect on the results of operations of the Company. The Company believes that the U.S. Army would compensate the Company for any delays arising from the interruption in the supply of source-specified components under the FMTV contracts.

COMPETITION

The Company’s primary competitor for U.S. sales is Oshkosh Truck Corporation. In addition to Oshkosh, the Company’s primary competitors for international contracts for the sale of vehicles to foreign governments include DaimlerChrysler AG, Tatra, MAN and other companies that may have greater international recognition as vehicle manufacturers than the Company.

Competition involves pricing, delivery, quality, vehicle reliability and readiness, range of products and services, technology and other factors. Some of the Company’s competitors have greater financial resources than the Company. The Company believes that its reputation for on-time delivery, quality engineering, vehicle reliability and readiness are important to the Company’s market position.

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INTERNATIONAL OPERATIONS

International operations are subject to risks caused by political and economic factors such as foreign governmental decrees, currency exchange rate volatility and inflation. The Company maintains operations in the United Kingdom, and historically had operations in other foreign jurisdictions, including Colombia, Venezuela and Argentina. The Company monitors the political and economic developments in those countries.

UNFILLED ORDERS

The Company’s unfilled orders consist of written purchase orders and signed contracts. Historically, cancellations are rare; however, these unfilled orders are generally subject to cancellation or modification due to customer relationships or other conditions. Purchase options are not included in unfilled orders until exercised. Due to the inherent uncertainties of the Congressional appropriations process, the Company includes only the funded portions of awarded U.S. government contracts in unfilled orders. Unfilled orders relating to continuing operations increased to $957.8 million at January 31, 2006, from $456.6 million at January 31, 2005. Approximately $737 million of the unfilled orders at January 31, 2006 are expected to be recognized as sales in Fiscal 2006.

Unfilled orders at January 31, 2006 consisted primarily of vehicle production funded under the FMTV contract, production of Pinzgauer trucks in the U.K. operation and uncompleted reset contracts for vehicles ongoing in Sealy and Ft. Hood, Texas. During the first quarter of Fiscal 2005, the third program year of the FMTV contract was funded, extending production through September 2006 and increasing backlog by $316 million. During the second quarter of Fiscal 2005, we received contract modifications from the U.S. Army resulting from the 2005 U.S. Congress Supplemental Spending Bill, increasing backlog by $483 million. During the first quarter of Fiscal 2006, the fourth program year of the FMTV contract was funded, extending production through September 2007 and increasing backlog by approximately $344 million.

ENVIRONMENTAL MATTERS

The Company’s operations are subject to numerous local, state and federal laws and regulations, including the regulations promulgated by the Occupational Safety and Health Administration, the U.S. Environmental Protection Agency and the U.S. Department of Transportation. The Company believes that it is in substantial compliance with these laws and regulations. In addition, the costs and expenditures related to compliance and remedial action under these laws and regulations were not material in Fiscal 2005, 2004 or 2003, and the Company currently expects that such costs and expenditures will not be material in Fiscal 2006.

Environmental laws, particularly those governing emissions standards, noise and disposal of hazardous wastes, have become more stringent in recent years. While the Company is not currently aware of any situation involving an environmental claim that would likely have a material adverse effect on its business, it is always possible that an environmental claim with respect to one or more of the Company’s current or former product offerings or facilities could arise that could have a material adverse effect on the Company’s financial condition, results of operations or cash flows.

EMPLOYEES

As of January 31, 2006, the Company employed approximately 1,245 full and part-time employees, none of which were represented by collective bargaining agreements. In the normal course of business, the Company utilizes the services of subcontractors. The Company believes that its employee relations are generally satisfactory.

AVAILABLE INFORMATION

The Company will make available its Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and amendments to those reports, filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, free of charge through our internet website at www.ssss.com as soon as reasonably practicable after we electronically file such material with, or furnish it to, the Securities and Exchange Commission (the “Commission”).

The information contained on the Company’s website is not incorporated by reference into this Annual Report on Form 10-K and should not be considered to be a part of this Annual Report on Form 10-K.

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Item 1A. Risk Factors.

Potential Sale of the Company:  For additional information with respect to the potential merger with Armor Holdings, see the second paragraph of “Item 1. Business.”

Risks of Dependence on Government and Failure to Obtain New Government Contracts:  Because the U.S. government is one of our key customers, decreased government spending or termination of significant government programs could adversely affect our business. U.S. government contracts account for a substantial portion of our annual revenues and operating income. In November 2004, we began full rate production under a third multi-year contract with the U.S. Army that provides for continued production of the FMTV through September 2008 at an initial contract value of $1.1 billion, excluding the exercise of any production options. Funding of the FMTV contract beyond September 2007 is subject to the inherent uncertainties of Congressional appropriations. As is typical of multi-year defense contracts that may be canceled or adjusted by the government, the FMTV contract must be funded annually by the U.S. Army and may be terminated at any time for the convenience of the government. If the FMTV contract is terminated, other than for our default (in which event there could be serious adverse consequences and claims made against us), the contract includes a provision under which we will be reimbursed for certain allowable costs, but not necessarily for all costs incurred.

We have realized and expect to continue to realize lower margins under the third multi-year contract than under the FMTV contract completed in the fourth quarter of Fiscal 2004. There can be no assurance as to whether future governmental spending will adequately support our business in this area, and substantial decreases in government spending, the loss of the U.S. government as a customer or the cancellation of key significant government programs could materially and adversely affect our operations. Even if government spending in general continues at current levels, we are not assured that we can compete effectively as to the receipt of specific government orders and contract awards or as to the timing thereof. The U.S. Army is our primary customer, accounting for over 85% of our sales from continuing operations. The loss of this customer would have a material adverse effect on our consolidated financial condition and results of operations. In our forward-looking statements, we have assumed that we will continue to have satisfactory performance in our government contracting business.

Inherent Risks of Government Contracts:  Government contracts present us with numerous special risks that are inherent in their nature and that could adversely affect our operations. Major contracts for military systems are often “fixed-price” contracts that are performed over extended periods of time and are subject to changes in scope of work and delivery schedules. Pricing negotiations on changes and settlement of claims often extend over prolonged periods of time. Our ultimate profitability on such contracts may depend on the eventual outcome of an equitable settlement of contractual issues with the U.S. government. Furthermore, there are significant risks in projecting actual costs on multi-year fixed-price government contracts because of unforeseen factors, including price and wage inflation and supply shortages. While we attempt to negotiate supply contracts with key suppliers that are synchronized with our long-term fixed-price obligations, we are not able to do that with a precision that eliminates risks that our actual costs of necessary items will not exceed the costs taken into account in the original contract pricing. Further, as to some suppliers and some items we do not have contracts that are synchronized at all with our long-term fixed-price obligations. As to such items, which include raw materials such as steel, as to which there have been recent substantial price increases, we are at continuous risk that we will have cost increases that were not taken into account in our contract pricing.

Our government contract operations are subject to U.S. government investigations of business practices and cost classifications from which legal or administrative proceedings can result. Based on government procurement regulations, under certain circumstances a contractor can be fined, as well as suspended or debarred from government contracting. In that event, we would also be prohibited from selling equipment or services to customers that depend on loans or financial commitments from the Export Import Bank, Overseas Private Investment Corporation and similar government agencies during a suspension or debarment. In such events we might otherwise not be able to receive the benefits of federal assistance payments during a suspension or debarment. The U.S. Customs Service and the Department of Justice have conducted an investigation of potential violations by us of laws relating to the export of controlled military vehicles, weapons mounting systems and firearms. Such investigation could result in the filing of civil or administrative sanctions against us and/or individual employees, and could result in a suspension or debarment. In our forward-looking statements, we have assumed our reasonable management of risks inherent in our government contracting business, and that we will not experience a materially adverse outcome in any U.S. government investigations.

Risks of Supply Interruptions:  The FMTV incorporates engines, transmissions, axles and a number of other components that are specified by the U.S. Army and are available only from the source or sources selected by the U.S. Army. Identifying additional or replacement suppliers approved by the U.S. Army for any of the numerous components used in the FMTV may not be accomplished quickly or on commercially reasonable terms, if at all. In addition to suppliers specified by the U.S. Army, we

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use other suppliers for certain components of the FMTV, some of which are small businesses that are not well capitalized. In the event we were unable to mitigate the impact or find an alternate supplier in a timely manner, significant interruption in the supply of any of these components, for any reason, including insolvency of a supplier, work stoppages at suppliers and transportation interruptions, could involve significant additional costs and result in delays in production and product deliveries and could have a material adverse effect on our results of operations. In our forward-looking statements, we have assumed that we will not experience significant supply interruptions.

Risks Associated with Distributed Energy Solutions Business:  In the third quarter of Fiscal 2003, we announced our plans to exit the turnkey engineering, procurement, and construction, or EPC, activities of the Distributed Energy Solutions segment. Since that time, we have incurred significant losses in the process of exiting this business related to the completion of remaining construction projects, costs to satisfy customer warranty obligations, valuation adjustments related to the liquidation of inventory and costs associated with the settlement of customer disputes. During the fourth quarter of Fiscal 2004, we reached the point in this wind down effort in which we are substantially complete with our construction activities, and as a result, the identified assets, liabilities and results of operations for that segment have been reported as discontinued operations. We continue to have substantial risk with respect to the performance on such contracts, including warranty, product performance and other contractual obligations, as well as certain claims and litigation that have arisen against us with respect to contracts entered into in past years. While we have recognized all known estimated losses on these uncompleted contracts, warranty obligations and other customer disputes, continued uncertainty remains related to the execution of the remaining obligations. These uncertainties may result in additional unexpected losses until all contractual issues are resolved and remaining obligations are completed. Additionally, we expect to continue to recognize some general and administrative costs required to support the remaining warranty and contract performance aspects of this business. We are also obligated to execute under certain fixed-price operation and/or maintenance contracts related to previously completed EPC projects, which have terms potentially extending up to five years. We have assumed in our forward-looking statements that we will be able to manage this circumstance in an overall satisfactory manner, having already taken significant charges with respect to these matters in prior years.

Risks of Fixed-Price Contracts:  Many of our equipment sales contracts are “fixed-price” contracts as to which the original price may be set at an early stage of the process. The terms of these contracts require us to guarantee the price of products and services we provide and to assume the risk that the costs to provide such products and services will be greater than anticipated. The profitability of these contracts is therefore dependent on the ability to reasonably predict the costs associated with performing the contracts. These costs may be affected by a variety of factors, some of which are beyond our control. For example, U.S. manufacturers and distributors of steel products, which are used in many of our products, have in recent years experienced difficulties with the pricing and availability of steel. The volatility of steel prices and increase in steel demand worldwide has had and is expected to continue to have a negative effect on our expected costs under certain of our fixed-price contracts in the near future. Our failure to accurately estimate the resources required for a project, or our failure to complete our contractual obligations in a manner consistent with the project plan upon which our fixed-price contract was based, could adversely affect our profitability and could have a material adverse effect on our business, financial condition and results of operations. In recent years, as a result of incurring greater costs than were taken into account in original contract pricing, we have incurred significant losses on certain EPC projects in our discontinued Distributed Energy Solutions business. In our forward-looking statements, we have assumed that fixed-price contracts will have no further material adverse impact on our business, financial condition or results of operations.

Risks as to Rising Steel Prices:  While noted above generally in connection with other risk factors, we specifically note that since early 2004, manufacturers and distributors of steel, which is used in many of our products, have experienced sharply increased prices and limited availability of steel and component parts containing steel. These increased steel prices have had and are expected to continue to have a negative impact on our margins in the near future, particularly on fixed-price contracts and other contracts for which we are unable to pass such cost increases on to our customers.  If these steel price conditions continue, and if we are unable to raise our prices to keep pace with the material cost increases, our operating margins and results of operations could be adversely impacted in future periods.

Risks as to Cost Controls:  As a manufacturing and service company operating within “tight” margins, with substantial facilities and inventories, our operations have been, and can be, adversely affected by our inability to control costs and to accurately estimate and plan our costs. We continuously endeavor to implement cost identification, estimation and savings measures in our operations. Our forward-looking statements assume that we will be able to contain our costs and expense increases at reasonable levels consistent with expected revenues.

Risks of Dependence on Third Party for Support Services:  In connection with the disposition of the Engineered Products and Power Products businesses, including a significant portion of our information technology assets and personnel, we entered into

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a transition services agreement with the buyer of those businesses pursuant to which the buyer is obligated to provide certain support services to us in the areas of information technology, telecommunications, accounting and payroll, record retention, tax compliance assistance and operational support for up to 18 months following the sale of those businesses, depending on the particular service. Because we no longer own the assets or employ the personnel necessary to perform those services, we are substantially dependent on the buyer to provide such support services. The buyer’s failure to provide these services to us in a timely manner, or at all, could have material adverse effect on our business, operating results and financial condition.

Risk of a Decline in Defense Spending:  Our government contracts are dependent upon the U.S. defense budget. Since the invasion of Iraq by the U.S. and other forces in March 2003, we have benefited from an upward trend in overall defense spending. Under the Bush Administration’s fiscal 2007 budget, the defense budget is expected to continue to increase through fiscal year 2009. However, future defense spending could be negatively impacted by several factors, including, but not limited to, the U.S. government’s budget deficits, a change in spending priorities and the costs of sustaining the U.S. military operations in Iraq and Afghanistan. A decrease in U.S. government defense spending or changes in spending allocation could result in a material decrease to our sales, earnings and cash flow.

Risks of General Economic Conditions:  Our operations are to some extent dependent for success on the general economic well-being of the United States and certain international markets. A general economic downturn could adversely affect government military spending which could impact demand for our products and services. Although economic activity has improved in recent years, general economic conditions remain uncertain, particularly in light of the war in Iraq, other international tensions and related factors. If the U.S. or world economies decline or fail to further recover, the demand for our products and services could be adversely affected, thus adversely affecting our financial condition and results of operations. Further, other general market conditions such as increased inflation and higher interest rates could also adversely impact our results of operations. In our forward-looking statements, we have assumed that general market conditions will not worsen in Fiscal 2006 and that we are not entering a down-cycle in our markets or a period of significantly increasing inflation and interest rates.

Risk of Competition:  Our international and domestic competitors may use their resources and product and service offerings to increase competition, both in terms of pricing and product and service offerings, thereby reducing our market shares and/or sales and profitability. Some of our existing and potential competitors have substantially greater marketing, financial and technical resources than we have, and these resources might be used in effective competition with us. We have assumed in our forward-looking statements that we will continue to be a reasonably effective competitor in our markets.

Risks Relating to Technology:  Our business will suffer if we are unable to keep up with rapid technological change and product development. Our success will depend on our ability to anticipate changes in technology and industry requirements and to respond to technological developments on a timely basis, either internally or through strategic alliances. We will likely be constantly threatened by current competitors or new market entrants who may develop new technologies or products or establish new standards that could render our products less marketable or obsolete. Thus, we can offer no assurances that we will be successful in developing and marketing, on a timely and cost effective basis, products or product enhancements that respond to our competition, to technological developments, to changing industry standards and to marketplace acceptability. We have assumed in our forward-looking statements that we can reasonably keep pace with our competitors in technology changes and product development.

Risks Relating to Personnel:  Labor shortages and our inability to recruit and retain key employees and workers could limit our operations and increase our labor costs and, in turn, adversely affect our results of operations. Our manufacturing operations are substantially dependent upon our ability to recruit and retain key managers and qualified machinists, welders, factory workers and other laborers. A strong labor market can adversely impact us by limiting our manufacturing capacity or resulting in significantly increased wages and other benefits to attract additional key employees and workers. We have assumed in our forward-looking statements that we will continue to be able to recruit and retain necessary personnel at overall costs that are comparable with our ability to produce revenues.

Risks of Claims and Litigation:  Outcomes of pending litigation and governmental proceedings, as well as future unexpected litigation and legal disputes could have a material adverse impact on our operations. If we experience materially adverse outcomes or other unexpected results in our existing litigation and government proceedings, which in turn have a material adverse effect on our results of operations, the accuracy of our forward-looking statements would be affected. Similarly, if we experience in the future new, unexpected litigation or adverse results from new, unexpected litigation, there could also be a material adverse effect on our results, again affecting the accuracy of our forward-looking statements. Our forward-looking statements assume that there will be no materially adverse unexpected outcomes or results that we have not already adequately provided for.

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Risks of Product Defects:  Our customers often require demanding specifications for product performance and reliability. Because many of our products are complex and often use state-of-the-art components, processes, and techniques, undetected errors and design flaws may occur. Product defects result in higher product service, warranty and replacement costs and may cause damage to our customer relationships and industry reputation, all of which may negatively impact our results of operations. We have assumed in our forward-looking statements that we will not in the future incur material difficulties with respect to product defects and warranty claims.

Risks as to Foreign Sales and Global Trade Matters:  Foreign sales are subject to special risks inherent in doing business outside of the United States, including the risk of war, terrorist activities, civil disturbances, embargoes, and government activities, all of which may disrupt markets. Foreign sales are also generally subject to the risk of compliance with additional laws, including tariff regulations and import and export restrictions. Sales in certain foreign countries require prior U.S. government approval in the form of an export license. We cannot assure you that we will not experience difficulties in connection with future foreign sales. Moreover, changes in global trade policies in our markets could impact our sales in these markets. We have assumed in our forward-looking statements that there will be no material changes in global trade policies, such as embargoes, new and large tariffs or other tax assessments and the like or other new and material restrictions on trade that apply in particular to our operations.

Risks as to Acquisitions and Restructuring Activities:  Our success is dependent upon the integration of newly acquired businesses with our existing businesses. Our success is also dependent upon executing our restructuring plans in such a manner that we extricate value from facility closures and product offering and business exits, and that we structure continuing business activities in an efficient and tactical manner. This process involves some amount of realignment and reintegration of business processes. There can be no assurance as to the ultimate success of our integration and realignment efforts. Our forward-looking statements assume the successful integration of acquired businesses and realigned business activities and their future contribution to our operations.

Risks as to Currency Fluctuations:  A material change in currency exchange rates in our markets could affect our future results as well as affect the carrying values of certain of our assets. World currencies have been subject to volatility in recent years. The U.S. dollar has continued to weaken somewhat against other key currencies (particularly the Euro and the British pound) in recent years. While a weakened U.S. dollar is not necessarily adverse to our business in general, it could be generally adverse for the U.S. economy in a number of ways, including putting upward pressure on interest rates. In addition, our U.K. manufacturing operation primarily conducts its business in British pounds sterling, but a portion of its costs are in Euros. Consequently, significant weakening of the U.K. pound in relation to the Euro would negatively impact the profitability of our U.K. operation. Significant weakening of the U.K. pound in relation to the U.S. dollar would reduce the carrying value of our U.K. assets, and would negatively impact the U.S. dollar-equivalent values of revenues and profits of our U.K. operation. Our forward-looking statements assume no material impact from future changes in currency exchange rates.

Risks as to Environmental and Safety Matters:  Our operations and products, and the use thereof, are regulated under a number of federal, state, local and foreign environmental laws and regulations, which govern, among other things, the discharge of hazardous materials into the air and water as well as the handling, storage and disposal of hazardous materials. Compliance with these environmental laws is a major consideration in the manufacturing of our products and in their servicing and distribution, as we use and generate hazardous substances and wastes in our manufacturing operations and as we may be subject to material financial liability for any investigation and clean-up of such hazardous materials. In addition, many of our current and former properties are or have been used for industrial purposes. Accordingly, we also may be subject to financial liabilities relating to the investigation and remediation of hazardous materials resulting from the action of previous owners or operators of industrial facilities on those sites. Liability in many instances may be imposed on us regardless of the legality of the original actions relating to hazardous or toxic substances or whether or not we knew of, or were responsible for, the presence of those substances. We are also subject to various federal, state, local and foreign laws and regulations relating to safety and health conditions in our manufacturing facilities and with respect to our products and the use thereof. Those laws and regulations may also subject us to material financial penalties or liabilities for any noncompliance, as well as potential business disruption if any portion of any of our facilities is required to be temporarily closed as a result of any violation of those laws and regulations. Any financial liability or business disruption from environmental, health or safety issues could have a material adverse effect on our financial condition and results of operations. Our forward-looking statements assume no material adverse impact from environmental and safety issues.

Item 1B. Unresolved Staff Comments.

None.

8

Item 2. Properties.

The Company maintains its corporate executive and administrative offices at 2707 North Loop West, Houston, Texas, which occupy approximately 18,300 square feet of leased space.

The Company’s Tactical Vehicle Systems business is headquartered in a 822,000 square foot Company-owned facility in Sealy, Texas, which includes the 202,000 square foot expansion of the facility in Fiscal 2005. The business also leases approximately 31,500 square feet within 7 facilities located in Virginia, North Carolina, Georgia, Tennessee, and Michigan, and approximately 59,000 square feet within two facilities in the United Kingdom, which includes the production facility and administrative offices for the ATHL business acquired in April 2005.

The Company also owns a 255,000 square foot manufacturing facility in Houston, Texas, which is being leased to the buyer of the Company’s Engineered Products business, which was sold in January 2006. The lease of the Engineered Products facility expires in July 2008, and has a purchase option that expires in July 2007. In addition, the Company owns an approximately 29,430 square foot facility which is currently being marketed for sale, and leases approximately 237,000 square feet within 12 locations in the former Engineered Products and Power Products businesses, all of which are currently sub-leased to third parties.

The Company considers all property owned or leased by it to be well maintained, adequately insured and suitable for its purposes.

Item 3. Legal Proceedings.

U.S. Government Contingencies:  During 1998, the U.S. Customs Service detained a medium tactical vehicle that was being shipped by the Company for display in a European trade show. The U.S. Customs Service and the Department of Justice have conducted an investigation of potential violations by the Company of laws relating to the export of controlled military vehicles, weapons mounting systems and firearms. Such investigation could result in the filing of civil or administrative sanctions against the Company and/or individual employees, and could result in a suspension or debarment of the Company from receiving new contracts or subcontracts with agencies of the U.S. government or the benefit of federal assistance payments. While they are possible, the Company does not believe that criminal sanctions will be sought. The Company believes that resolution of this matter will not have a material adverse effect on its consolidated results of operations, financial condition or liquidity and believes that the resolution of the matter that is possibly most adverse to the Company will involve the payment of a civil penalty that will not materially adversely affect the Company.

Klickitat Litigation:  The Company and several of its subsidiaries in the Distributed Energy Solutions business are defendants in a suit filed by the Klickitat County Public Utility District No. 1 on December 11, 2003 arising out of claims relating to a landfill gas power generation facility in Roosevelt, Washington, Cause No. CY-03-3175-LRS; Klickitat County Public Utility District No. 1 v. Stewart & Stevenson Services, Inc., Stewart & Stevenson Power, Inc., Sierra Detroit Diesel Allison, Inc., Pamco International, Inc. and Waukesha Engine Dresser, Inc.; in the U.S. District Court for the Eastern District of Washington. The plaintiff has asserted claims with respect to equipment installed and used since 1999 for breach of contract; promissory estoppel; violations of the Washington Products Liability Act; breach of warranties; intentional or negligent misrepresentation; and violations of the Washington Consumer Protection Act and seeks recovery of damages in excess of $15 million. The Company is vigorously defending this suit. In an order filed April 7, 2006, the court granted partial summary judgment dismissing all but two of plaintiff’s nine causes of action with prejudice. As to the remaining claims, it is not yet possible for the Company to determine the ultimate outcome of the suit or whether its resolution will, in the future, have a material adverse effect on the Company’s consolidated results of operations, financial position or liquidity. The Company is presently unable to determine whether a material liability has been incurred in this matter or to reasonably estimate the amount of any loss that may result from this matter. Consequently, the Company has recorded no accrual for any losses related to the ultimate outcome of this litigation. The Company has, however, recorded accruals that it believes are adequate for estimated legal fees that it expects to incur associated with this matter.

Antitrust Litigation:  The Company, which was a distributor of Detroit Diesel parts through its Power Products business, is a co-defendant with Detroit Diesel Corporation and other Detroit Diesel distributors in two putative class action suits filed on February 9, 2005, Civil Action No. 05-616; Cumberland Truck Equipment Co. et al. v. Detroit Diesel Corp., et al. (the “Cumberland Litigation”), and Civil Action No. 05-625; Diamond International Trucks, Inc. et al. v. Detroit Diesel Corp., et al. (the “DIT Litigation”). The suits were initially filedin the U.S. District Court for the Eastern District of Pennsylvania. On November 14, 2005, the cases were transferred to the Eastern District of Michigan. In the Cumberland Litigation, plaintiffs

9

were dealers of Detroit Diesel parts whose agreements were terminated or not renewed on or after February 9, 2001. The plaintiffs are claiming antitrust violations arising out of the termination or non-renewal of their dealer agreements. In the DIT Litigation, plaintiffs are dealers of Detroit Diesel parts whose dealership classification was changed on or after February 9, 2001. The plaintiffs in the DIT Litigation are claiming antitrust violations arising out of changes to the classification of their dealerships. The plaintiffs in each suit have also alleged price fixing and group boycott in violation of Section 1 of the Sherman Act and have made claims for treble damages and injunctive and other relief. The Company is vigorously defending both suits. It is presently impossible for the Company to determine the ultimate outcome of either suit, but the Company currently believes that the resolution of these suits will not have a material adverse effect on the Company’s consolidated results of operations, financial position or liquidity. The Company has recorded accruals that it currently believes are adequate for the estimated amount of costs and legal fees that it expects to incur associated with these matters.

Purported Class Action involving Merger:  The Company and six of its directors are defendants in a purported class action lawsuit relating to the proposed merger transaction with Armor Holdings described above in “Business”.  The lawsuit was filed on April 11, 2006, and alleges, among other things, that the defendants have breached their fiduciary duties to the shareholders of the Company by failing to maximize shareholder value when selling the Company, by favoring Armor Holdings in the proposed merger transaction and precluding superior offers for the Company and by failing to disclose material information or disclosing materially false information in its proxy materials relating to the shareholders’ meeting to be held on May 9, 2006.  The lawsuit was filed in District Court in Harris County, Texas, by a purported shareholder of the Company on behalf of all other similarly situated shareholders.  The lawsuit alleges that a class should be certified and the plaintiff named as representative of the purported class.  No class has been certified at present and accordingly, we regard the action as a purported class action. Additional lawsuits could be filed in the future.  The lawsuit seeks, among other things, a declaration that the merger agreement was entered into in breach of the fiduciary duties of the individual defendants and is therefore unlawful and unenforceable, an injunction against the Company proceeding with the transaction or consummating the transaction or any other business combination unless certain procedures are in place and damages, attorneys’ and experts’ fees, expenses and other relief.  The Company believes that this lawsuit is wholly without merit and intends to vigorously defend it. 

Environmental Contingencies:  In 2001, the Company received from the U.S. Environmental Protection Agency (the “EPA”) a Request for Information under Section 104(e) of the Comprehensive Environmental Response, Compensation, and Liability Act of 1980, for information pertaining to the R&H Oil Company Site in San Antonio, Texas (the “Site”). Information provided to the Company by the EPA indicates that the Company may have sent waste oils to the Site for recycling in the late 1980s, and that such waste oils may potentially account for between one and two percent of the volume of total wastes received by the oil recycler at the Site. Since the Company expects to receive a claim for cleanup and other costs related to this site, it has established reserves which it believes to be adequate at this time. As additional facts are developed and definitive remediation plans and necessary regulatory approvals for implementation of remediation are established, changes in these and other factors may result in actual costs exceeding the amounts accrued. While uncertainties are inherent in the final outcome of these environmental matters, and it is presently impossible to determine the actual costs that ultimately may be incurred, management currently believes that the resolution of such uncertainties should not have a material adverse effect on the Company’s consolidated results of operations, financial position or liquidity. The Company believes that the most likely outcome in this environmental matter is the expenditure of an immaterial amount of consideration as a contribution to the remediation effort.

The Company is also a defendant in a number of lawsuits relating to contractual, product liability, personal injury and warranty matters normally incident to the Company’s business. No individual case, or group of cases presenting substantially similar issues of law or fact, is expected to have a material effect on the manner in which the Company conducts its business or on its consolidated results of operations, financial position or liquidity. The Company maintains certain insurance policies that provide coverage for product liability and personal injury cases. The Company has established reserves that it believes to be adequate based on current evaluations and its experience in these types of claim situations. Nevertheless, an unexpected outcome or adverse development in any such case could have a material adverse impact on the Company’s consolidated results of operations in the period it occurs.

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

None.

10

PART II

Item 5. Market Price of and Dividends on the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.

The Company’s common stock is traded on the New York Stock Exchange under the symbol “SVC”. There were 492 shareholders of record as of April 5, 2006. The following table sets forth the high and low sales prices relating to the Company’s common stock and the dividends declared by the Company in each quarterly period within the last two fiscal years.

Fiscal Year 2004	High		Low		Dividend
First Quarter	$	17.20	$	12.46	$	0.085
Second Quarter	18.25		14.02		0.085
Third Quarter	18.14		14.55		0.085
Fourth Quarter	20.63		16.57		0.085
Fiscal Year 2005	High		Low		Dividend
First Quarter	$	25.00	$	19.74	$	0.085
Second Quarter	25.24		20.86		0.085
Third Quarter	26.00		21.08		0.085
Fourth Quarter	26.37		20.00		0.085
Fiscal Year 2006 (through April 12, 2006)	High		Low		Dividend
First Quarter	$	37.03	$	24.60	$	0.085

On December 7, 2005, the Board of Directors approved a dividend of $0.085 per share for shareholders of record on January 31, 2006, which dividends were paid on February 10, 2006. On April 6, the Board of Directors approved a dividend of $0.085 per share for shareholders of record on April 24, 2006, which dividends will be paid on May 8, 2006. Declaration and payment of dividends in the future is dependent upon the Company’s earnings and liquidity position and limitations under the Company’s revolving credit facility and senior notes agreement, among other factors. Based on the Company’s financial condition at January 31, 2006, the restrictions imposed by the Company’s senior notes and revolving credit facility do not currently restrict the Company’s ability to declare and pay dividends at historical levels.

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Item 6. Selected Financial Data.

The Selected Financial Data set forth below have been derived from the audited consolidated financial statements of the Company and should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the consolidated financial statements of the Company and notes thereto, included elsewhere herein.

	Year Ended January 31,
(In thousands, except per share data)	2006			2005			2004			2003			2002
Income Statement Data:
Sales	$	726,352		$	549,803		$	445,686		$	450,599		$	424,818
Gross profit	43,760			73,798			78,992			88,790			75,660
Selling, administrative and other expenses	19,258			25,938			27,617			34,421			26,579
Recovery of costs incurred, net	—			—			—			—			(39,000		)
Pension curtailment expense	—			—			2,400			—			—
Other expense (income), net	(44		)	407			(362		)	(40		)	(2,293		)
Operating profit	24,546			47,453			49,337			54,409			90,374
Net earnings from continuing operations before cumulative effect of change in accounting	17,216			30,727			31,157			25,933			52,337
Net earnings (loss)	26,128			4,978			(53,203		)	(7,201		)	42,223
Per Share Data:
Net earnings from continuing operations per share:
Basic	$	0.59		$	1.07		$	1.09		$	0.91		$	1.85
Diluted	0.58			1.06			1.08			0.90			1.81
Net earnings (loss) from discontinued operations per share:
Basic	0.31			(0.90		)	(2.95		)	(1.16		)	(0.36		)
Diluted	0.30			(0.89		)	(2.92		)	(1.15		)	(0.35		)
Net earnings (loss) per share:
Basic	0.90			0.17			(1.86		)	(0.25		)	1.49
Diluted	0.88			0.17			(1.84		)	(0.25		)	1.46
Weighted average shares outstanding:
Basic	29,117			28,749			28,560			28,479			28,325
Diluted	29,593			28,984			28,887			28,690			28,865
Cash dividends declared per share	$	0.34		$	0.34		$	0.34		$	0.34		$	0.34
Balance Sheet Data:
Cash and cash equivalents	$	333,171		$	128,515		$	52,186		$	102,798		$	81,438
Working capital	266,740			302,577			322,483			394,327			437,721
Total assets	577,711			613,342			602,663			652,635			649,055
Short-term debt	25,158			—			—			30,000			—
Long-term debt	65			25,000			25,160			25,181			55,000
Shareholders’ equity	315,786			284,720			297,483			362,008			391,231

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Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

The following discussion and analysis, as well as the accompanying consolidated financial statements and the notes thereto, will aid in understanding our results of operations as well as our financial position, cash flows, indebtedness and other key financial information. The following discussion may contain forward-looking statements. In connection therewith, please see “Risk Factors” in Item 1A herein, which identify important factors that could cause actual results to differ materially from those predicted or implied in the forward-looking statements.

RESULTS OF OPERATIONS

Strategic Overview

In September 2003, we began a strategic review of all of our primary businesses in an effort to identify and implement necessary actions to enhance value for our shareholders. Since then, we exited the turnkey engineering, procurement and construction activities of the Distributed Energy Solutions segment and sold substantially all operating assets and businesses within the Airline Products, Power Products, and Engineered Products operating segments. The significant divestiture activities during Fiscal 2005 are described below.

In August 2005, we completed the sale of substantially all of the inventory, property, plant and equipment, distribution rights, and operations of four Power Products distribution locations in California for cash consideration of approximately $9.4 million. As a result of this sale, we recorded a $3.4 million pre-tax charge during Fiscal 2005, which included a $3.6 million estimated withdrawal liability from a union pension plan.

In January 2006, we completed the sale of substantially all remaining operating assets and business of the Power Products and Engineered Products segments for cash consideration of approximately $277 million and the assumption of certain liabilities. In March 2006, the cash consideration was adjusted upward by $6.4 million, based on the net asset value delivered at closing. As a result of the sale, we recognized a pre-tax gain of $9.7 million during Fiscal 2005.

As a result of these actions, we transformed our company into a single-focused manufacturer of tactical military vehicles and related products. During Fiscal 2005, we took significant actions in this business to continue to supplement our U.S. Army production contract.

In April 2005, we acquired all outstanding shares of Automotive Technik (Holdings) Limited (“ATHL”), the manufacturer of the Pinzgauer light tactical vehicle headquartered in the United Kingdom, for a total purchase price of approximately $48.2 million. The acquisition of ATHL broadens our product offerings and provides additional marketing opportunities worldwide. ATHL currently has contracts to produce vehicles for the United Kingdom Ministry of Defence and the New Zealand Ministry of Defence, in addition to other programs worldwide.

Additionally, we received contract modifications from the U.S. Army in June 2005, valued at approximately $483 million. These modifications, which are funded by the 2005 U.S. Congress Supplemental Spending Bill, added 3,016 truck and trailer deliveries to the current U.S. Army production contract. Currently, we are expanding the capacity of our Sealy, Texas production facility in order to meet these additional order deliveries, which are scheduled from June 2006 to September 2008.

On February 27, 2006, we entered into a merger agreement with Armor Holdings, Inc. (“Armor Holdings”) and one of its wholly-owned subsidiaries, pursuant to which Armor Holdings agreed to acquire all of our outstanding common stock for $35.00 per share in a cash merger transaction. Upon completion of the merger, we will be a subsidiary of Armor Holdings and there will be no further market for our common stock. The transaction is subject to the approval of our shareholders, the expiration or termination of the Hart-Scott-Rodino waiting period and other customary conditions. Under specified circumstances, if the Merger Agreement is terminated, we would be required to pay Armor Holdings a termination fee. In addition, the Merger Agreement contains conditions to Armor Holdings’ obligations to consummate the merger, including the absence of a material adverse change (as defined in the Merger Agreement) since the date of the Merger Agreement. We have scheduled a special meeting of shareholders for May 9, 2006 to consider and vote upon the proposed merger. We anticipate that the transaction will close during the second quarter of Fiscal 2006.

Fiscal 2005 vs. Fiscal 2004

Continuing Operations

As a result of the divestitures of the Engineered Products and Power Products businesses in Fiscal 2005, continuing operations primarily consist of the Tactical Vehicle Systems business, which manufactures the Family of Medium Tactical Vehicles (“FMTV”) and related armoring under contracts with the U.S. Army and provides sustaining design engineering, service and support. With the ATHL acquisition described above, this business also manufactures Pinzgauer light tactical vehicles for the

13

United Kingdom Ministry of Defence, the New Zealand Ministry of Defence and other customers. Continuing operations also include certain corporate office expenses, including the facility-related costs of maintaining the corporate office, chief executive, legal, finance, internal audit, investor relations, human resources, tax and other similar costs.

Sales from continuing operations during Fiscal 2005 were $726.4 million, a $176.6 million (32%) increase from $549.8 million of sales recorded in Fiscal 2004. The sales increase is primarily attributable to production of Low Signature Armored Cabs (“LSAC”) in Fiscal 2005. A breakdown of unit deliveries follows:

	Year Ended January 31,
	2006	2005
Trucks	2,953	2,804
Trailers	1,554	730
LSAC	1,765	270

We recorded $152.1 million of sales in Fiscal 2005 associated with the LSAC production, compared to $23.0 million recorded in Fiscal 2004. Additionally, we recorded $48.0 million of sales in Fiscal 2005 attributable to Pinzgauer truck sales from our U.K. manufacturing operation, which was acquired in April 2005. These sales increases were partially offset by declines in sales attributable to the U.S. Army FMTV production contracts. Equipment sales under the FMTV contracts declined $55.0 million (12%) from $443.8 million in Fiscal 2004 to $388.8 million in Fiscal 2005, primarily due to lower pricing under the current FMTV production contract compared to the contract completed in late 2004. Parts and service sales increased $54.8 million (66%) to $137.5 million in Fiscal 2005, compared to $82.7 million in Fiscal 2004. The increase in parts and service sales includes $36.5 million of sales in Fiscal 2005 related to vehicle reset programs awarded during Fiscal 2004, a $16.7 million increase from the $19.8 million of sales in Fiscal 2004, along with stronger spare parts requirements and sales generated by the ATHL operation acquired in April 2005.

Gross profit decreased to $43.8 million in Fiscal 2005 from $73.8 million in Fiscal 2004, reflecting a decline in gross profit margin from 13.4% to 6.0% on the higher revenue base. The decrease in gross profit margin for Fiscal 2005 is attributable to a number of factors, including the transition to the current multi-year FMTV production contract, which began in the fourth quarter of Fiscal 2004, higher cost for certain raw materials such as steel and an unfavorable product mix, which included a higher proportion of option trucks, trailers and reset work, all of which generate a relatively low gross profit margin compared to base FMTV trucks. Lower gross profit margins on the new FMTV production contract were partially offset by higher profit margins generated from the LSAC production.

Selling and administrative expenses, which include our corporate office expenses along with selling and product development expenses within the Tactical Vehicle Systems business, decreased to $19.3 million (2.7% of sales) in Fiscal 2005 from $25.9 million (4.7% of sales) in Fiscal 2004. These expenses include the costs associated with the corporate office, which declined to $13.4 million in Fiscal 2005 from $17.9 million in Fiscal 2004. This decline in corporate office spending is the result of cost control programs combined with lower compliance costs associated with the implementation of Section 404 of the Sarbanes-Oxley Act of 2002. Selling and administrative expenses within the Tactical Vehicle Systems business declined to $5.8 million in Fiscal 2005 from $8.0 million in Fiscal 2004, primarily attributable to LSAC product development costs incurred in Fiscal 2004 which did not recur in Fiscal 2005.

Net interest income in Fiscal 2005 was $1.0 million, a $1.6 million improvement from net interest expense of $0.6 million incurred in Fiscal 2004. This improvement is driven primarily by a $1.5 million increase in interest income, resulting from higher invested cash balances and higher interest rates on invested cash.

The effective tax rate was 32.7% in Fiscal 2005 compared to 34.4% in Fiscal 2004. The decrease in Fiscal 2005 effective tax rate is primarily attributable to various permanent deductions, including the deduction for Qualified Production Activities created by the American Jobs Creation Act of 2004.

During the first quarter of Fiscal 2005, the third program year of the current FMTV contract valued at $316 million was funded, extending production through September 2006. Additionally, as described above, we received contract modifications from the U.S. Army in June 2005 valued at approximately $483 million. Consequently, total backlog for the Tactical Vehicle Systems business at January 31, 2006 was $958 million, compared to $457 million at January 31, 2005.

Projected deliveries for Fiscal 2006 currently include 5,566 trucks and 1,829 trailers. The current delivery schedule is subject to change at the request of the customer. The average operating margin on our existing backlog is expected to be higher than the operating margin achieved on Fiscal 2005 sales. However, expected operating margins on the components of backlog vary considerably among the numerous contracts and variants provided. This variability is attributable to a number of factors

14

including recent volatility in prices for steel and other commodities, base versus option versus supplemental production, the material content within each variant and other factors, many of which are not within our control. Consequently, depending on the mix of vehicles, LSACs, parts and services delivered in each quarter, the operating margin could vary significantly from one fiscal quarter to the next. Operating margins may also be impacted by additional contract awards and modifications, the level of engineering service and spare parts provided, and the timing and recognition of other costs and revenues during each period.

Discontinued Operations

As noted above, pursuant to sales of substantially all assets and operations of the Power Products and Engineered Products businesses, the assets and liabilities, along with the results of operations for these two operating segments have been re-classified to discontinued operations for all periods presented. In addition, discontinued operations include the results of our exited Distributed Energy Solutions and Airline Products businesses, as well as certain Power Products distribution locations in California which were sold in August 2005 and costs associated with retained obligations from our discontinued blowout preventer and controls, valve and drilling riser business, which was sold during Fiscal 2002.

Sales and operating profit (loss) from discontinued operations were as follows (in thousands):

	Year Ended January 31,
	2006			2005			2004
Sales
Power Products	$	535,122		$	508,378		$	509,981
Engineered Products	167,372			100,178			113,545
Airline Products	—			86,287			63,733
Distributed Energy Solutions	7,265			20,037			44,867
Total Sales	$	709,759		$	714,880		$	732,126
Operating profit (loss)
Power Products	$	12,091		$	13,352		$	(51,854	)
Engineered Products	11,631			(11,574		)	(15,358		)
Airline Products	—			(5,752		)	(12,594		)
Distributed Energy Solutions	(8,125		)	(42,188		)	(53,475		)
Total operating profit (loss)	15,597			(46,162		)	(133,281		)
Income tax expense (benefit)	6,325			(18,143		)	(48,921		)
Net earnings (loss) from discontinued operations	$	9,272		$	(28,019	)	$	(84,360	)

In addition to the discontinued operating results above, we recorded a loss on sale of discontinued operations of $0.4 million (net of tax benefit of $0.2 million) in Fiscal 2005, and a gain on sale of discontinued operations of $2.3 million (net of tax expense of $1.3 million) in Fiscal 2004, related to the sale of the Airline Products, Power Products and Engineered Products businesses. The Fiscal 2005 loss on sale of discontinued operations included a $7.0 million pretax charge related to the settlement of a dispute arising from the Fiscal 2004 sale of the Airline Products business and a net pre-tax gain of $6.4 million resulting from sales of the Power Products and Engineered Products businesses. The Fiscal 2004 gain on sale of discontinued operations resulted from the sale of the Airline Products business.

Power Products:The Power Products business, which was responsible for marketing and aftermarket support of a wide range of industrial equipment, recorded sales of $535.1 million in Fiscal 2005, a $26.7 million (5%) increase from $508.4 million recorded in Fiscal 2004. The improved sales volume in Fiscal 2005 from the comparable periods of Fiscal 2004 is primarily attributable to improved pricing and sales execution, partially offset by a decline in sales volume associated with the sale of four California locations in August 2005 and the remainder of the business in January 2006.

The Power Products business recorded an operating profit of $12.1 million in Fiscal 2005 compared to $13.4 million in Fiscal 2004. The decline in operating profit in Fiscal 2005 is primarily attributable to the inclusion in Fiscal 2004 of $2.3 million of gains on sales of assets and a $2.4 million LIFO inventory valuation reserve adjustment that did not recur in Fiscal 2005.

Engineered Products:The Engineered Products business included two primary product lines, petroleum equipment and utilities equipment. The petroleum equipment operation manufactured equipment primarily for the well stimulation segment of the oil service industry. The utilities equipment products included mobile railcar movers, snowblowers and off-road seismic vehicles. This business also includes certain retained obligations, which have substantially been completed, attributable to the blowout preventer and drilling riser business that was sold in Fiscal 2002. Engineered Products sales increased to $167.4 million in

15

Fiscal 2005 from $100.2 million in Fiscal 2004, representing an increase of $67.2 million (67%). The sales increase resulted from the increased worldwide demand for acidizing and fracturing equipment, as evidenced by several large petroleum equipment orders that were received during Fiscal 2004 and 2005.

Operating profit for Fiscal 2005 was $11.6 million, a $23.2 million improvement from the $11.6 million operating loss in Fiscal 2004. The improvement in operating profit is primarily attributable to the Fiscal 2004 settlement of outstanding litigation related to the exited blowout preventer and drilling riser business, which resulted in a $11.2 million pre-tax charge. The remaining improvement from Fiscal 2004 is primarily attributable to the increased sales volume along with margin improvements realized through pricing, manufacturing efficiencies and other cost reductions on the Fiscal 2005 equipment projects.

Airline Products:During the fourth quarter of Fiscal 2004, we sold substantially all of the assets and business of the Airline Products segment for proceeds of $60 million as well as the assumption of certain liabilities, subject to final adjustment based on the amount of working capital conveyed at closing. In November 2005, we reached an agreement with the buyer regarding certain contractual issues related to the sale, pursuant to which we agreed to refund $4.0 million of purchase price to the buyer. Primarily as a result of this dispute, we recorded pre-tax charges totaling $7.0 million to loss on sale of discontinued operations during Fiscal 2005, including the write-off of a $3.0 million receivable from the buyer.

Distributed Energy Solutions:  During Fiscal 2003, we announced our decision to discontinue the turnkey engineering, procurement and construction activities of the Distributed Energy Solutions segment. The continued wind-down activities associated with retained warranty and other contractual obligations of this business are reflected in discontinued operations. The operating loss for Fiscal 2005 includes a $4.3 million pre-tax charge related to the settlement of a customer dispute and a $1.5 million pre-tax charge related to revised estimates of the cost of remaining customer warranty obligations. Remaining costs primarily represent general and administrative expenses to manage the completion of retained warranty and other contractual obligations.

Fiscal 2004 vs. Fiscal 2003

Continuing Operations

Sales from continuing operations during Fiscal 2004 were $549.8 million, a $104.1 million (23%) increase from $445.7 million of sales recorded in Fiscal 2003. The sales increase is primarily attributable to the increase in unit deliveries, as follows:

	Year Ended January 31,
	2005	2004
Trucks	2,804	2,481
Trailers	730	509
LSAC	270	—

The LSAC deliveries in Fiscal 2004 generated $23.0 million of additional sales and increases in truck and trailer deliveries generated an additional $51.8 million of sales. Also, parts and service sales increased by $29.3 million, primarily due to the reset contracts mentioned above, as well as the continued demand on replacement parts for vehicles deployed in Iraq.

Gross profit in Fiscal 2004 was $73.8 million (13.4% gross margin), down from $79.0 million (17.7% gross margin) in Fiscal 2003. This decline in gross profit is primarily attributable to the expected decline in margins associated with the transition to the current FMTV production contract, combined with $7.3 million of increased material costs associated with cost increases in steel components, partially offset by the impact of the higher sales volume.

Selling and administrative expenses decreased to $25.9 million (4.7% of sales) in Fiscal 2004 from $27.6 million (6.2% of sales) in Fiscal 2003. These expenses include the costs associated with the corporate office, which declined to $17.9 million in Fiscal 2004 from $20.4 million in Fiscal 2003. This decrease was largely attributable to $4.6 million of employee separation expenses incurred in Fiscal 2003. This cost decrease was partially offset by $1.8 million of costs incurred in Fiscal 2004 associated with the implementation of the internal control reporting requirements of the Sarbanes-Oxley Act of 2002, and changes in other operating expenses. Selling and administrative expenses within the Tactical Vehicle Systems business decreased to $8.0 million in Fiscal 2004 from $9.7 million in Fiscal 2003. This decrease is primarily attributable to lower bid and proposal costs associated with potential production contracts, partially offset by increased LSAC product development costs incurred in Fiscal 2004.

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Net interest expense in Fiscal 2004 was $0.6 million, a $1.1 million decline from $1.7 million in Fiscal 2003. This reduction was primarily attributable to the scheduled payment of $30.0 million on long-term borrowings that was made in May 2003.

The effective tax rate was 34.4% in Fiscal 2004, relatively unchanged from the 34.6% in Fiscal 2003.

Discontinued Operations

Power Products:  The Power Products business recorded sales of $508.4 million in Fiscal 2004, down slightly from the $510.0 million of sales recorded in Fiscal 2003. The slight reduction is primarily due to $46 million of sales declines associated with the exit of various product offerings and distribution locations throughout Fiscal 2003 and Fiscal 2004. These declines were nearly offset by sales growth attributable to improved sales execution and general economic improvements in the markets served by this business.

This business recorded an operating profit of $13.4 million in Fiscal 2004 compared to a $51.9 million operating loss in Fiscal 2003. The improvement in operating profit is partially attributable to $13.2 million of charges recorded in Fiscal 2003, including $4.5 million for the impairment of goodwill and other intangible assets, $4.5 million associated with the liquidation of slow-moving inventory, $2.5 million of legal defense and settlement costs and $1.7 million of employee separation costs. Additionally, Fiscal 2004 benefited from on-going cost reduction programs in this business. Workforce reductions resulted in an $18.1 million decrease in employee compensation costs and changes in employee benefit programs resulted in an additional $7.3 million decrease in operating expenses. This business also recognized $2.3 million of gains associated with the sale of assets and operations, a $2.4 million improvement in the LIFO inventory valuation reserve due to reductions in inventory levels, a $4.8 million reduction in bad debt expense and the $1.4 million of direct compensation from a parts and equipment supplier. Other cost reductions associated with product exits and branch closures, along with improved sales mix account for the remaining $15.8 million of operating profit improvement.

Engineered Products:   Engineered Products sales decreased to $100.2 million in Fiscal 2004 from $113.5 million in Fiscal 2003, representing a decrease of $13.3 million (12%). Declines in petroleum equipment sales resulting from the completion of certain large equipment projects accounted for approximately $32 million of sales decline from Fiscal 2003. This decrease was partially offset by approximately $8 million of increased off-road seismic vehicle sales, $7 million of increased railcar mover sales, and other sales increases.

This business posted an operating loss of $11.6 million in Fiscal 2004, a $3.8 million improvement from the $15.4 million operating loss in Fiscal 2003. This change is partially attributable to $5.9 million of charges in Fiscal 2003, including $1.6 million associated with liquidation of slow-moving inventory, $1.8 million of costs associated with the consolidation of manufacturing operations, and a $2.5 million charge for the impairment of long-lived assets in accordance with SFAS No. 144. This business also recorded $0.7 million of improvement in the LIFO inventory valuation reserve in Fiscal 2004 due to reductions in inventory levels, along with an $8.3 million operating profit improvement attributable to higher margins on sales, which is due to improving order execution and cost controls, as well as general economic improvements in the markets that we serve. These improvements were offset by $11.2 million of charges associated with the settlement of two customer disputes in Fiscal 2004.

Airline Products:  Airline Products sales increased to $86.3 million in Fiscal 2004, a $22.6 million (35%) increase over the $63.7 million of sales recorded in Fiscal 2003. Operating losses in this business were $5.8 million in Fiscal 2004, a $6.8 million improvement from the $12.6 million operating loss in Fiscal 2003. The reduction in operating loss was primarily attributable to a $3.1 million non-recurring charge in Fiscal 2003 related to inventory impairment, combined with the improvements resulting from the increased sales volumes.

Distributed Energy Solutions:   Distributed Energy Solutions sales decreased to $20.0 million in Fiscal 2004 from $44.9 million of sales recorded in Fiscal 2003. Operating losses in this business were $42.2 million in Fiscal 2004 and $53.5 million in Fiscal 2003. The losses incurred in this business were the result of actions taken to liquidate the assets of the business, satisfy remaining customer obligations, and settle outstanding disputes following the announcement the exit this business in September 2003.

LIQUIDITY AND CAPITAL RESOURCES

The January 2006 sales of the Power Products and Engineered Products businesses for $277 million in cash provided substantial liquidity. Our sources of cash liquidity include cash and cash equivalents, short-term investments, amounts available under credit facilities and cash from operations. We believe that these sources will provide sufficient capital to fund our working capital requirements, capital expenditure needs, foreseeable acquisition activity, dividends and other financial commitments.

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We have a $100 million unsecured revolving credit facility which expires in January 2009. To date, no borrowings have been made under this facility. The revolving credit facility has a $25 million sub-facility which may be used for letters of credit. Approximately $7.0 million in letters of credit under the revolving credit facility were outstanding at January 31, 2006 and $93.0 million was available for borrowing.

This revolving credit facility was issued pursuant to agreements containing covenants that restrict indebtedness, guarantees, sales of assets and other items, and require us to maintain a minimum fixed charge coverage ratio and maximum leverage ratio. Based on our financial condition as of January 31, 2006, the restrictions imposed by our revolving credit facility do not restrict our ability to meet our obligations or to declare and pay dividends at historical levels.

We have $25.0 million in unsecured senior notes outstanding, which bear interest at a rate of 7.38% and are due and payable in May 2006. The senior notes agreement limits sales of assets and other items and contains a maximum debt-to-total capitalization covenant. Based on our financial condition as of January 31, 2006, the restrictions imposed by our senior notes do not restrict our ability to meet our obligations or to declare and pay dividends at historical levels.

For additional information related to the revolving credit facility and senior notes, see Note 7 to the consolidated financial statements.

Selected Statements of Cash Flows Data

	Fiscal			Fiscal			Fiscal
(In thousands)	2005			2004			2003
Net cash provided by (used in):
Operating activities of continuing operations	$	37,874		$	24,122		$	18,071
Operating activities of discontinued operations	(67,883		)	11,716			(12,734		)
Investing activities	238,857			48,534			(18,112		)
Financing activities	(3,666		)	(8,043		)	(37,837		)
Effect of exchange rate changes on cash	(526		)	—			—
Increase (decrease) in cash and cash equivalents	$	204,656		$	76,329		$	(50,612	)
Selected Balance Sheet Data
	Fiscal			Fiscal			Fiscal
(In thousands)	2005			2004			2003
Cash, cash equivalents, and short-term investments	$	336,971		$	130,995		$	59,931
Working capital	266,740			302,577			327,464
Total debt	25,223			25,000			25,160

Fiscal 2005 vs. Fiscal 2004

Net cash provided by operating activities of continuing operations increased by $13.8 million (57%) from $24.1 million in Fiscal 2004 to $37.9 million in Fiscal 2005. This increase is primarily attributable to a $10.2 million reduction of working capital, while net earnings adjusted for non-cash items provided a $3.6 million improvement. Cash flows from discontinued operations, on the other hand, decreased from $11.7 million of cash provided in Fiscal 2004 to a $67.9 million use of cash in Fiscal 2005, primarily resulting from increases in working capital to support the growth in the Power Products and Engineered Products businesses prior to their sale in January 2006.

Net cash provided by investing activities improved to $238.9 million in Fiscal 2005 from $48.5 million in Fiscal 2004. This improvement is primarily attributable to proceeds from sales of businesses, which generated $301.7 million in Fiscal 2005 compared to $51.6 million in Fiscal 2004. The higher sales proceeds were partially offset by $44.6 million of cash used to acquire the ATHL business in April 2005, combined with an $8.0 million increase in capital expenditures, primarily relating the to the expansion of the Sealy, Texas manufacturing facility. We expect to incur approximately $12 million of capital expenditures during Fiscal 2006 to complete the facility expansion.

Net cash used in financing activities decreased by $4.4 million to $3.7 million in Fiscal 2005 compared to $8.0 million in Fiscal 2004. This decrease is primarily attributable to higher proceeds from the exercise of stock options.

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Fiscal 2004 vs. Fiscal 2003

Net cash provided by operating activities of continuing operations was $24.1 million in Fiscal 2004, a $6.0 million improvement from the $18.1 million in Fiscal 2003. Net earnings from continuing operations adjusted for non-cash items generated a $3.7 million decline in operating cash flow, while changes in working capital balances generated a $9.7 million increase to cash provided by operating activities. Discontinued operations provided $11.7 million of cash in Fiscal 2004, a $24.4 million improvement from the $12.7 million of cash used in Fiscal 2003. The improved cash flow from discontinued operations is primarily the result of reduced operating losses in Fiscal 2004, as compared to Fiscal 2003.

Net cash from investing activities improved to $48.5 million of cash provided in Fiscal 2004 from $18.1 million of cash used in Fiscal 2003. This improvement is primarily attributable to $51.6 million of proceeds from the sale of the Airline Products business combined with a $13.0 million improvement resulting from changes in short-term investments.

Net cash used in financing activities decreased by $29.8 million to $8.0 million in Fiscal 2004 compared to Fiscal 2003. This decrease is primarily attributable to the scheduled repayment of $30.0 million in senior notes in May 2003.

CONTRACTUAL OBLIGATIONS AND COMMERCIAL COMMITMENTS

We occasionally enter into certain financing arrangements in the ordinary course of business, including non-cancelable operating leases, letters of credit and debt guarantees.

We enter into operating leases for some of our facility and equipment needs. Such lease arrangements enable us to conserve cash by paying monthly lease rental fees for the applicable assets rather than purchasing them. At the end of the lease period, we have no further obligation to the lessor. If we decide to cancel or terminate a lease prior to the end of its term, we are typically obligated to pay the remaining lease payments over the term of the lease, and in certain cases may be allowed to sublet the asset to another party.

We are occasionally required to issue performance indemnities or to post letters of credit, generally issued by a bank, to collateralize certain insurance programs, to secure credit facilities or to ensure performance under contracts. A letter of credit commits the issuer to remit specified amounts to the holder, if the holder demonstrates that we have failed to meet our obligations under the letter of credit. If this were to occur, we would be obligated to reimburse the issuer for any payments the issuer was required to remit to the holder of the letter of credit. Generally, a letter of credit is released when we have satisfied the obligations that the letter of credit is securing.

Our contractual obligations at January 31, 2006, excluding interest on debt balances, are summarized as follows (in thousands):

	Less than		Fiscal		Fiscal		Fiscal		Fiscal
	one year		2007		2008		2009		2010		Thereafter		Total
Debt obligations	$	25,158	$	51	$	14	$	—	$	—	$	—	$	25,223
Operating leases	1,384		1,311		1,220		1,187		772		2,564		8,438
Total contractual cash obligations	$	26,542	$	1,362	$	1,234	$	1,187	$	772	$	2,564	$	33,661

In addition, our other commercial commitments expire as follows (in thousands):

	Less than		Fiscal		Fiscal		Fiscal		Fiscal
	one year		2007		2008		2009		2010		Thereafter		Total
Letters of credit	$	9,100	$	2,515	$	1,958	$	—	$	—	$	368	$	13,941
Contingent performance indemnities	—		2,230		—		—		—		—		2,230
	$	9,100	$	4,745	$	1,958	$	—	$	—	$	368	$	16,171

In addition to the above, we have frozen noncontributory defined benefit pension plans that covered substantially all of our full-time employees. Effective July 1, 2003, we froze the benefits earned under these plans, with the exception of a small transition group. We do not anticipate making any contributions to these plans in Fiscal 2006.

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EMPLOYEE DEFINED BENEFIT PLANS

We have a frozen noncontributory defined benefit pension plan that covered substantially all of our full-time employees and an unfunded defined benefit supplemental executive retirement plan covering certain highly compensated employees. The pension benefits were based on years of service, limited to 45 years, and the employee’s highest consecutive five-year average compensation out of the last 10 years of employment. We fund pension costs in conformity with the funding requirements of applicable government regulations. In an effort to reduce ongoing operating costs and improve our competitive position, we froze the benefits earned under such plans effective July 1, 2003, with the exception of a small transition group.

Since our accumulated benefit obligation exceeds the fair value of our plan assets, we are required to reflect on our balance sheet a minimum pension liability for the difference totaling $45.9 million as of January 31, 2006. Minimum pension liability adjustments are non-cash adjustments that are reflected as an increase in pension liability with an offsetting charge to shareholders’ equity (net of income tax) through other comprehensive income (rather than net income).

The calculations of liability and expense associated with our pension plans are dependent on key assumptions, including the discount rate, the expected long-term rate of return on plan assets, and the assumed rate of compensation increases. For purposes of calculating our benefit obligations as of January 31, 2006, we increased the assumed discount rate used for this calculation from 5.5% at January 31, 2005 to 5.6%, based on the change in the Moody’s Aa long-term corporate bond yield from January 31, 2005 to January 31, 2006.

We assumed our expected long-term rate of return on plan assets to be 8.5%, which is consistent with Fiscal 2004. In determining the expected long-term rate of return on plan assets, we considered the current level of expected returns on risk-free investments (primarily government bonds), the historical level of risk premiums associated with other asset classes and the expectations of future returns over a 20-year time horizon on each asset class, based on the views of leading financial advisors and economists. The expected return for each asset class was then weighted based on the plan’s target asset allocation. We also gave consideration to the returns being earned by the plan assets in the fund and the rates of return expected to be available for reinvestment using capital market projections, an estimated long-term asset allocation strategy based on the plan’s statement of investment policy, objectives and guidelines and an estimate of annual administrative, investment management and trading expenses.

Consistent with the prior year, we used 4.1% in Fiscal 2005 as the assumed rate of compensation increase for our employee population, based on historical trends and the expectation that long-term rates of compensation increase should approximate growth in overall gross domestic product.

We continuously review all assumptions used in the pension calculations and may revise them in the future. If we were to decrease the expected long-term rate of return on plan assets assumption by 100 basis points, the pension expense we recognized in Fiscal 2005 would have increased by $1.1 million. If we were to decrease the discount rate by 100 basis points, the pension expense we recognized in Fiscal 2005 would have increased by approximately $1.6 million.

During Fiscal 2005, 2004 and 2003 we recognized $2.5 million, $1.6 million and $5.9 million, respectively, of expense associated with our defined benefit pension plans. We made funding contributions of $0.4 million, $10.9 million and $13.1 million in Fiscal 2005, Fiscal 2004 and Fiscal 2003, respectively. Based on the best available information we have at this time, we expect that in Fiscal 2006 we will recognize approximately $3.5 million of pension expense and will contribute less than $1.0 million to our defined benefit pension plans. These estimates for Fiscal 2006 include a discount rate of 5.6%, an expected long-term rate of return on plan assets of 8.0% and a 4.1% rate of compensation increase. Increases in future pension funding requirements could occur if the actual return on plan assets in future periods does not approximate the long-term rate of return assumed by us, and the amount of such increases could be material.

In addition to our defined benefit pension plans, we have a defined benefit postretirement medical plan, which provides for the payment of medical costs of eligible employees and dependents upon retirement. The plan is currently not funded. We expect to continue paying postretirement medical costs as covered claims are incurred. Effective July 1, 2003, we decided that postretirement medical benefits will not be provided to future retirees, with the exception of a small transition group. In addition, plan participants pay a higher portion of total plan costs in subsequent years.

Like the pension plans discussed above, the defined benefit postretirement medical plan is dependent on key assumptions, including the discount rate and future healthcare cost trend rates. For this actuarial calculation, we used a discount rate of 5.6% and assumed an annual rate of increase of approximately 10% for pre-age 65 covered health care benefits, eventually and

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gradually decreasing to 5% by 2016 and remaining at that level thereafter. A one percentage point increase in the healthcare cost trend rate assumption in each future year would impact the postretirement benefit obligation by approximately $0.1 million and would impact the total service and interest cost by approximately $0.1 million.

In December 2003, the Medicare Prescription Drug, Improvement and Modernization Act of 2003 (the “Act”) was signed into law. The Act introduced a prescription drug benefit under Medicare (“Medicare Part D”) as well as a federal subsidy to sponsors of retiree health care benefit plans that provide a benefit that is at least actuarially equivalent to Medicare Part D. The defined benefit postretirement medical plan has been amended such that, effective January 1, 2006, prescription medication coverage was discontinued for all participants who were both eligible for prescription drug benefits under Medicare and for whom Medicare is the primary payor. This plan change has reduced the plan’s net periodic benefit cost beginning in Fiscal 2005.

CRITICAL ACCOUNTING POLICIES

Preparation of financial statements in accordance with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts and related disclosures during the period. We evaluate our estimates on an ongoing basis, based on historical experience and various other assumptions that we believe to be reasonable under the circumstances. Actual results may differ from these estimates. If actual market conditions are less favorable than those projected by us, additional adjustments to reserve items might be required. We consider the following policies to be the most critical and pervasive accounting policies we use, and the areas most sensitive to material change from external factors.

Revenue Recognition:  The majority of our sales are derived from fixed price contracts to provide equipment. Revenue on equipment and parts sales is recognized when contract terms are met, collectibility is reasonably assured and a product is shipped or risk of ownership has been transferred to and accepted by the customer. Revenue from service agreements is recognized as earned, when services have been rendered. With respect to cost-plus-fixed-fee contracts, we recognize the fee ratably as the actual costs are incurred, based upon the total fee amounts expected to be realized upon completion of the contracts. Amounts collected in advance of being earned are reflected on the balance sheet as unearned revenue. Bid and proposal costs are expensed as incurred.

Warranty Costs:  Based on historical experience and contract terms, we provide for the estimated cost of product and service warranties at the time of sale or, in some cases, when specific warranty problems are identified. Accrued warranty costs are adjusted periodically to reflect actual experience. Certain warranty and other related claims involve matters of dispute that ultimately are resolved by negotiation, arbitration or litigation. Occasionally, a material warranty issue can arise that is beyond our historical experience. We provide for any such warranty issues as they become known and estimable. Should actual product failure rates or repair costs differ from our current estimates, revisions to the estimated warranty liability would be required.

Inventories:  Inventories are stated at the lower of cost or market, with cost determined on a first-in, first-out (“FIFO”) basis, and market determined on the basis of estimated realizable values. Production cost includes material, labor and manufacturing overhead. When circumstances dictate, we write inventory down to its estimated realizable value based upon assumptions about future demand, technological innovations, market conditions, plans for disposal and the physical condition of products. If circumstances change, causing us to reduce our estimate of realizable value for specific inventory items or categories, additional provisions to cost of sales may be required.

Asset Impairment:  We assess the valuation of components of our property, plant and equipment and other long-lived assets whenever events or circumstances dictate that the carrying value might not be recoverable. We base our evaluation on indicators such as the nature of the assets, the future economic benefit of the assets, any historical or future profitability measurements and other external market conditions or factors that may be present. If such factors indicate that the carrying amount of an asset or asset group may not be recoverable, we determine whether impairment has occurred by analyzing an estimate of undiscounted future cash flows at the lowest level for which identifiable cash flows exist. If our estimate of undiscounted future cash flows during the estimated useful life of the asset is less than the carrying value of the asset, we recognize a loss for the difference between the carrying value of the asset and its estimated fair value, measured by the present value of estimated future cash flows or other means, as appropriate under the circumstances.

Deferred Income Tax Assets:  We record deferred tax assets and liabilities for differences between the book basis and tax basis of our net assets. We record a valuation allowance, when appropriate, to adjust deferred tax asset balances to the amount we expect to realize. We consider, as applicable, the amount of taxable income available in carryback years, future taxable income and potential tax planning strategies in assessing the potential need for a valuation allowance. We will require future taxable

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income in order to fully realize our net deferred tax assets. Should we determine that we will not likely realize all or part of our net deferred income tax assets in the future, an adjustment to the deferred tax asset balance would be charged to the income tax provision in the period such determination is made.

Stock-Based Compensation:  As permitted under SFAS No. 123, we use the intrinsic value method of accounting to account for our employee stock options and other stock-based compensation programs. Accordingly, no compensation expense is recognized when the exercise price of an employee stock option is equal to or greater than the market price of our common stock on the grant date and all other provisions of the award are fixed. Had we used the fair value method of accounting for stock-based compensation prescribed by SFAS No. 123, net earnings would have been negatively impacted by $2.5 million, $1.4 million and $1.1 million for Fiscal 2005, 2004 and 2003, respectively.

In connection with the sale of our Power Products and Engineered Products businesses in January 2006, we entered into termination and release agreements with three former executives. Pursuant to such agreements, the Company accelerated the vesting of all stock option agreements held by the three executives, and extended their exercise term from 30 days after the date of termination to December 31, 2006. As a result of these modifications of terms, the Company recorded non-cash compensation expense totaling $3.3 million in Fiscal 2005, which was charged to gain (loss) on sale of discontinued operations in the consolidated statement of operations.

Insurance:  We maintain a variety of insurance for our operations that we believe to be customary and reasonable. Although we believe we currently maintain insurance coverage that is adequate for the risks involved, there is always a risk that our insurance may not be sufficient to cover any particular loss or that our insurance may not cover all losses. For example, it is possible that an adverse product liability claim could arise in excess of our coverage. In addition, insurance rates and availability are subject to wide fluctuation, and changes in our coverage and the insurance industry could result in increases in our insurance cost and higher deductibles and retentions.

We are self-insured up to certain levels in the form of deductibles and retentions for general liability, vehicle liability, group medical and workers compensation claims. Other than normal business and contractual risks that are not insurable, our risk is commonly insured against and the effect of a loss occurrence is not expected to be significant. We accrue for estimated self-insurance costs and uninsured exposures based on estimated development of claims filed and an estimate of claims incurred but not reported. We regularly review estimates of reported and unreported claims and provide for losses accordingly. Although we believe that adequate reserves have been provided for expected liabilities arising from our self-insured obligations, uninsured claims and exposures, our estimates of these liabilities may change as claims develop, and adjustments to reserves may be required.

Pensions and Other Postretirement Benefits:  We account for our defined benefit pension plan and our defined benefit postretirement medical plan in accordance with SFAS No. 87, “Employers’ Accounting for Pensions” and SFAS No. 106, “Employers’ Accounting for Postretirement Benefits Other Than Pensions,” respectively. These standards require that amounts recognized in the financial statements be determined on an actuarial basis. Significant assumptions involved in determining our pension and other postretirement benefit expense include the expected return on plan assets, expected healthcare cost trend rates and expected compensation increases, and the discount rate for calculating future liability. See “Employee Defined Benefit Plans” for further discussion.

RECENT ACCOUNTING PRONOUNCEMENTS

In December 2004, the FASB issued SFAS No. 123 (revised 2004), “Share-Based Payment,” which requires all share-based payments to employees, including grants of employee stock options, to be recognized as compensation expense in the statements of operations based on their fair values. SFAS No. 123R is effective in the first quarter of Fiscal 2006. Pursuant to the provisions of the Company’s stock option plans, as a result of the Board of Directors approving the Armor Holdings merger, substantially all outstanding stock options became fully vested and exercisable on February 26, 2006, subject to certain restrictions. As a result of this event, we expect that the adoption of the provisions of SFAS No. 123R will result in a pre-tax charge to compensation expense in the first quarter of Fiscal 2006 totaling approximately $7.0 million. See Note 1 and Note 2 to our consolidated financial statements included elsewhere herein for further discussion.

In November 2004, the FASB issued SFAS No. 151, “Inventory Costs, an amendment of ARB 43, Chapter 4,” which clarifies that abnormal amounts of idle facility expense, freight, handling costs and wasted materials (spoilage) should be recognized as current period charges and requires the allocation of fixed production overheads to inventory based on the normal utilization of capacity of the production facilities. SFAS No. 151 is effective for inventory costs incurred by us beginning in Fiscal 2006. We do not believe the implementation of SFAS No. 151 will have a material impact on our consolidated financial statements.

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Item 7a. Quantitative and Qualitative Disclosures about Market Risk.

Foreign Currency Risk:  In April 2005, we acquired all outstanding shares of ATHL, a light tactical vehicle manufacturer headquartered in the United Kingdom, for a total purchase price, denominated in British pounds, of approximately $48.2 million. The functional currency for ATHL is the British pound. In connection with the acquisition, we established a British pound-denominated intercompany note in the amount of £12.5 million (approximately $22.1 million at January 31, 2006), which is to be repaid in annual installments through December 2009. Subsequently, we advanced ATHL an additional £4.2 million (approximately $7.4 million at January 31, 2006), under intercompany notes which are due to be repaid in Fiscal 2006. In order to mitigate the exposure related to the intercompany notes receivable denominated in British pounds we entered into a series of forward foreign exchange contracts.

Substantially all of the sales of ATHL are denominated in British pounds. Purchases of materials and component parts are also substantially denominated in British pounds; however, some component purchases are denominated in Euros and other foreign currencies. As a result, the earnings from ATHL are affected by fluctuation in the value of the British pound against the Euro, the U.S. dollar and other currencies.

Fluctuations in currency exchange rates may also impact our shareholders’ equity. Amounts invested in non-U.S. subsidiaries are translated into U.S. dollars at the exchange rates in effect at the balance sheet date. The resulting translation adjustments are recorded in shareholders’ equity as cumulative translation adjustments. With regard to the ATHL acquisition, the intercompany note and hedging program described above are intended to mitigate the exposure related to £12.5 million, or $23.5 million of the original purchase price. The remaining portion of the initial investment is impacted by fluctuations in the U.S. dollar equivalent to the British pound.

In addition, certain suppliers of our U.S. operations bill in foreign currencies, particularly the Euro. We occasionally enter into foreign exchange forward contracts with maturities of up to 12 months to hedge these specific purchase commitments and anticipated transactions but not for speculative or trading purposes.

Interest Rate Risk:  We have $25.1 million in fixed rate debt, of which $0.1 million is denominated in foreign currency.

The table below provides information about our market sensitive financial instruments, all of which are due in Fiscal 2006 and none of which was entered into for trading purposes. This table constitutes a forward-looking statement (in thousands, except interest rate data).

	Book Value at January 31, 2006			Fair Value at January 31, 2006
Notes Payable, denominated in foreign currency	$	50		$	50
Average interest rate	2.00		%
Long-term debt	$	25,000		$	25,136
Average interest rate	7.38		%

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Item 8.  Financial Statements and Supplementary Data.

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

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MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING

Management of the Company is responsible for establishing and maintaining adequate internal control over financial reporting as such term is defined in the Securities Exchange Act of 1934 Rule 13a-15(f).  The Company’s internal controls were designed to provide reasonable assurance as to the reliability of our financial reporting and the preparation of financial statements for external purposes in accordance with U.S. generally accepted accounting principles.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements.  Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

Management assessed the effectiveness of the Company’s internal control over financial reporting as of January 31, 2006, excluding the operations of Automotive Technik (Holdings) Limited and its subsidiaries.  These businesses were acquired in April 2005 and represent approximately 4% of the Company’s total assets as of January 31, 2006 and 7% of total revenues for the year then ended.  Automotive Technik (Holdings) Limited’s net loss constituted approximately 13% of the Company’s consolidated net income for the year ended January 31, 2006.  In making its assessment, management has utilized the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control – Integrated Framework. 

Based on this assessment, management concluded that, as of January 31, 2006, the Company’s internal control over financial reporting was effective.

Our assessment of the effectiveness of the Company’s internal control over financial reporting has been audited by Ernst & Young LLP, an independent registered public accounting firm, as stated in their report, which is included herein.

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

Board of Directors and Shareholders

Stewart & Stevenson Services, Inc.

We have audited the accompanying consolidated balance sheets of Stewart & Stevenson Services, Inc. and subsidiaries as of January 31, 2006 and 2005 and the related consolidated statements of operations, shareholders’ equity, comprehensive income and cash flows for each of the three years in the period ended January 31, 2006.  These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

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

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Stewart & Stevenson Services, Inc. and subsidiaries as of January 31, 2006 and 2005 and the consolidated results of their operations and their cash flows for each of the three years in the period ended January 31, 2006, in conformity with U.S. generally accepted accounting principles.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of Stewart & Stevenson Services, Inc.’s internal control over financial reporting as of January 31, 2006, based on criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated April 11, 2006 expressed an unqualified opinion thereon.

	/s/ Ernst & Young LLP
April 11, 2006
Houston, Texas

26

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
ON INTERNAL CONTROL OVER FINANCIAL REPORTING

Board of Directors and Shareholders

Stewart & Stevenson Services, Inc.

We have audited management’s assessment, included in the accompanying Management’s Report on Internal Control over Financial Reporting, that Stewart & Stevenson Services, Inc. and subsidiaries maintained effective internal control over financial reporting as of January 31, 2006, based on criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the “COSO criteria”).  Stewart & Stevenson Services, Inc.’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting.  Our responsibility is to express an opinion on management’s assessment and an opinion on the effectiveness of the Company’s internal control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States).  Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects.  Our audit included obtaining an understanding of internal control over financial reporting, evaluating management’s assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we considered necessary in the circumstances.  We believe that our audit provides a reasonable basis for our opinion.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.  A company’s internal control 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 assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements.  Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

As indicated in the accompanying Management’s Report on Internal Control over Financial Reporting, management’s assessment of and conclusion on the effectiveness of internal control over financial reporting did not include the internal controls of Automotive Technick (Holdings) Limited and its subsidiaries, which are included in the Fiscal 2005 consolidated financial statements of Stewart & Stevenson Services, Inc. and constituted 4% of total assets as of January 31, 2006 and 7% of total consolidated revenues for the year then ended.  Automotive Technick (Holdings) Limited’s net loss constituted 13% of Stewart & Stevenson Services, Inc.’s consolidated net income for the year ended January 31, 2006.  Our audit of internal control over financial reporting of Stewart & Stevenson Services, Inc. also did not include an evaluation of the internal control over financial reporting of Automotive Technick (Holdings) Limited.

In our opinion, management’s assessment that Stewart & Stevenson Services, Inc. and subsidiaries maintained effective internal control over financial reporting as of January 31, 2006, is fairly stated, in all material respects, based on the COSO criteria.  Also, in our opinion, Stewart & Stevenson Services, Inc. and subsidiaries maintained, in all material respects, effective internal control over financial reporting as of January 31, 2006, based on the COSO criteria.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets as of January 31, 2006 and 2005 and the related consolidated statements of operations, shareholders’ equity, comprehensive income and cash flows for each of the three years in the period ended January 31, 2006 of Stewart & Stevenson Services, Inc. and subsidiaries and our report dated April 11, 2006 expressed an unqualified opinion thereon.

	/s/ Ernst & Young LLP
April 11, 2006
Houston, Texas

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STEWART & STEVENSON SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS

	January 31,
(In thousands, except share data)	2006			2005
Assets
Current Assets:
Cash and cash equivalents	$	333,171		$	128,515
Short-term investments	3,800			2,480
Accounts receivable, net	66,244			62,136
Inventories	22,140			17,803
Deferred income tax asset	7,165			5,872
Income tax receivable	189			7,223
Other current assets	3,967			1,655
Total assets of discontinued operations	33,681			318,753
Total Current Assets	470,357			544,437
Property, Plant and Equipment, net	49,179			37,856
Deferred Income Tax Asset	10,940			26,438
Intangibles and Other Assets, net	47,235			4,611
Total Assets	$	577,711		$	613,342
Liabilities and Shareholders’ Equity
Current Liabilities:
Notes payable and current portion of long-term debt	$	25,158		$	—
Accounts payable	64,165			43,441
Accrued payrolls and incentives	8,947			13,178
Unearned revenue	53,146			63,335
Other current liabilities	26,258			22,713
Total liabilities of discontinued operations	25,943			99,193
Total Current Liabilities	203,617			241,860
Long-Term Debt, net of current portion	65			25,000
Accrued Postretirement Benefits and Pension	53,543			57,621
Other Long-Term Liabilities	4,700			4,141
Total Liabilities	261,925			328,622
Shareholders’ Equity:
Common stock, without par value, 100,000,000 shares authorized; 29,303,260 and 28,865,070 shares issued, respectively	70,588			59,616
Accumulated other comprehensive loss	(32,155		)	(36,048		)
Retained earnings	277,353			261,152
Total Shareholders’ Equity	315,786			284,720
Total Liabilities & Shareholders’ Equity	$	577,711		$	613,342

See accompanying notes to the consolidated financial statements.

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STEWART & STEVENSON SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS

	Year Ended January 31,
(In thousands, except per share data)	2006			2005			2004
Sales	$	726,352		$	549,803		$	445,686
Cost of sales	682,592			476,005			366,694
Gross profit	43,760			73,798			78,992
Selling and administrative expenses	19,258			25,938			27,617
Pension curtailment expense	—			—			2,400
Other expense (income), net	(44		)	407			(362		)
Operating profit	24,546			47,453			49,337
Interest expense	1,897			2,029			3,202
Interest income	(2,934		)	(1,388		)	(1,475		)
Earnings from continuing operations before income taxes	25,583			46,812			47,610
Income tax expense	8,367			16,085			16,453
Net earnings from continuing operations	17,216			30,727			31,157
Earnings (loss) from discontinued operations, net of tax expense (benefit) of $6,325, ($18,143) and ($48,921)	9,272			(28,019		)	(84,360		)
Gain (loss) on sale of discontinued operations, net of tax expense (benefit) of ($246) and $1,311	(360		)	2,270			—
Net earnings (loss)	$	26,128		$	4,978		$	(53,203	)
Weighted average shares outstanding:
Basic	29,117			28,749			28,560
Diluted	29,593			28,984			28,887
Earnings (loss) per share:
Basic:
Continuing operations	$	0.59		$	1.07		$	1.09
Discontinued operations	0.31			(0.90		)	(2.95		)
Net earnings (loss) per share	$	0.90		$	0.17		$	(1.86	)
Diluted:
Continuing operations	$	0.58		$	1.06		$	1.08
Discontinued operations	0.30			(0.89		)	(2.92		)
Net earnings (loss) per share	$	0.88		$	0.17		$	(1.84	)

See accompanying notes to the consolidated financial statements.

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STEWART & STEVENSON SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

							Accumulated
							Other
	Shares	Common		Retained			Comprehensive
(In thousands)	Outstanding	Stock		Earnings			Loss			Total
Balance, January 31, 2003	28,491	$	54,843	$	328,868		$	(21,703	)	$	362,008
Net loss	—	—		(53,203		)	—			(53,203		)
Cash dividends	—	—		(9,704		)	—			(9,704		)
Other comprehensive loss	—	—		—			(3,831		)	(3,831		)
Exercise of stock options	154	2,213		—			—			2,213
Balance, January 31, 2004	28,645	57,056		265,961			(25,534		)	297,483
Net earnings	—	—		4,978			—			4,978
Cash dividends	—	—		(9,787		)	—			(9,787		)
Other comprehensive loss	—	—		—			(10,514		)	(10,514		)
Exercise of stock options	220	2,560		—			—			2,560
Balance, January 31, 2005	28,865	59,616		261,152			(36,048		)	284,720
Net earnings	—	—		26,128			—			26,128
Cash dividends	—	—		(9,927		)	—			(9,927		)
Other comprehensive income	—	—		—			3,893			3,893
Exercise of stock options	438	10,972		—			—			10,972
Balance, January 31, 2006	29,303	$	70,588	$	277,353		$	(32,155	)	$	315,786

STEWART & STEVENSON SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

	Year Ended January 31,
	2006		2005			2004
Net earnings (loss)	$	26,128	$	4,978		$	(53,203	)
Change in additional minimum pension liability, net of tax of $1,658, ($5,559) and ($2,191)	2,948		(9,882		)	(3,896		)
Unrealized income (loss) on forward contracts, net of tax of $3, ($174) and ($10)	5		(310		)	163
Currency translation gain (loss), net of tax of $2,368, ($181) and ($54)	940		(322		)	(98		)
Comprehensive income (loss)	$	30,021	$	(5,536	)	$	(57,034	)

See accompanying notes to the consolidated financial statements.

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STEWART & STEVENSON SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS

	Year Ended January 31,
(In thousands)	2006			2005			2004
Operating Activities
Net earnings (loss)	$	26,128		$	4,978		$	(53,203	)
Adjustments to reconcile net earnings (loss) to net cash provided by operating activities:
Net (earnings) loss from discontinued operations	(8,912		)	25,749			84,360
Deferred tax provision (benefit)	10,190			(6,371		)	(2,216		)
Depreciation and amortization	9,708			9,844			9,649
Unrealized foreign exchange losses	1,502			—			—
(Gain) loss on sale of business assets	(147		)	685			—
Change in operating assets and liabilities net of the effect of acquisition, divestiture and discontinued operations:
Accounts receivable, net	(11,529		)	(36,598		)	(14,593		)
Inventories	2,390			(2,115		)	(8,237		)
Income tax receivable	7,033			25,813			(28,144		)
Accounts payable	17,559			11,778			24,291
Accrued payrolls and incentives	(6,291		)	4,244			1,137
Unearned revenue	(9,592		)	(5,008		)	6,510
Other current liabilities	(5,418		)	1,246			6,562
Accrued postretirement benefits and pension	529			(9,809		)	(6,965		)
Other, net	4,724			(314		)	(1,080		)
Net Cash Provided by Continuing Operations	37,874			24,122			18,071
Net Cash Provided by (Used in) Discontinued Operations	(67,883		)	11,716			(12,734		)
Net Cash Provided by (Used in) Operating Activities	(30,009		)	35,838			5,337
Investing Activities
Capital expenditures	(17,370		)	(9,344		)	(10,606		)
Proceeds from sale of businesses	301,727			51,559			1,414
Acquisition of businesses, net of cash acquired	(44,559		)	—			(1,788		)
Disposal of property, plant and equipment, net	313			904			133
Short-term investments	(1,320		)	5,265			(7,745		)
Net investing activities of discontinued operations	66			150			480
Net Cash Provided by (Used in) Investing Activities	238,857			48,534			(18,112		)
Financing Activities
Loan acquisition costs	(76		)	(412		)	—
Payments on long-term borrowings	—			—			(30,000		)
Dividends paid	(9,927		)	(9,787		)	(9,704		)
Proceeds from exercise of stock options	6,337			2,156			1,867
Net Cash Used in Financing Activities	(3,666		)	(8,043		)	(37,837		)
Effect of exchange rate changes on cash	(526		)	—			—
Increase (decrease) in cash and cash equivalents	204,656			76,329			(50,612		)
Cash and cash equivalents, beginning of fiscal year	128,515			52,186			102,798
Cash and cash equivalents, end of fiscal year	$	333,171		$	128,515		$	52,186
Cash Paid For:
Interest	$	2,092		$	2,139		$	3,581
Income taxes (excluding refunds)	550			1,351			3,628

See accompanying notes to the consolidated financial statements.

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STEWART & STEVENSON SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 1: Organization and Business

Stewart & Stevenson Services, Inc. (together with its subsidiaries, the “Company”), a Texas corporation founded in 1902, is primarily engaged in the design, manufacture and service of medium and light tactical vehicles for the U.S. Army and others worldwide. During its history, the Company has also been engaged in the manufacture, distribution and service of a wide range of industrial products and diesel-powered equipment to various industries, including power generation, defense, marine, petroleum and transportation. During Fiscal 2005, the Company sold substantially all of the assets and business of its Power Products segment and Engineered Products segment (see Note 4), leaving the Company with one operating segment—Tactical Vehicle Systems. All financial statements and notes included herein have been restated to reflect the Power Products segment, the Engineered Products segment and other former businesses as discontinued operations.

On February 27, 2006, the Company entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Armor Holdings, Inc. (“Armor Holdings”) and one of its wholly-owned subsidiaries, pursuant to which Armor Holdings agreed to acquire all of the outstanding common stock of the Company for $35.00 per share in a cash merger transaction. Upon completion of the merger, the Company will be a subsidiary of Armor Holdings and there will be no further market for the Company’s common stock. The transaction is subject to Company shareholder approval, the expiration or termination of the Hart-Scott-Rodino waiting period and other customary conditions. Under specified circumstances, if the Merger Agreement is terminated, the Company would be required to pay Armor Holdings a termination fee. In addition, the Merger Agreement contains conditions to Armor Holdings’ obligations to consummate the merger, including the absence of a material adverse change (as defined in the Merger Agreement) since the date of the Merger Agreement. The Company has scheduled a special meeting of shareholders for May 9, 2006 to consider and vote upon the proposed merger. The Company anticipates that the transaction will close during the second quarter of Fiscal 2006. See Note 11.

Note 2: Summary of Significant Accounting Policies

Fiscal Year: The Company’s fiscal year begins on February 1 of the year stated and ends on January 31 of the following year. For example, “Fiscal 2005” commenced on February 1, 2005 and ended on January 31, 2006. The Company reports results on the fiscal quarter method with each quarter comprising approximately 13 weeks.

Use of Estimates and Assumptions: The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenue and expenses during the reporting period. Actual results may differ from these estimates.

Consolidation: The consolidated financial statements include the accounts of Stewart & Stevenson Services, Inc. and all enterprises in which the Company has a controlling interest. All intercompany accounts and transactions have been eliminated.

Cash Equivalents: Interest-bearing deposits, investments in government securities, commercial paper, money market funds and other highly liquid investments with original maturities of three months or less are considered cash equivalents.

Short-Term Investments: Short-term investments include floating-rate municipal bonds and other marketable securities with original maturities of greater than three months. These investments are highly liquid and historical gains and losses on these types of investments have not been material.

Allowance for Doubtful Accounts: The Company extends credit to customers and other parties in the normal course of business and maintains an allowance for doubtful accounts for estimated losses resulting from the inability or unwillingness of customers to make required payments. The Company bases such estimates on its historical experience, existing economic conditions and any specific customer collection issues the Company has identified. Uncollectible accounts receivable are written off when a settlement is reached for an amount less than the outstanding balance or when the Company determines that the balance will not be collected. The allowance for doubtful accounts balance was $0.1 million at January 31, 2006 and 2005. As discussed in Note 10, the U.S. government is the Company’s primary customer and government contracts account for over 85% of the Company’s sales from continuing operations.

Inventories: Inventories are stated at the lower of cost or market, with cost determined on a first-in, first-out (“FIFO”) basis, and market determined on the basis of estimated realizable values. Production cost includes material, labor and manufacturing overhead. When circumstances dictate, the Company writes inventory down to its estimated realizable value based upon assumptions about future demand, technological innovations, market conditions, plans for disposal and the physical condition of

32

products. Shipping and handling costs related to non-manufactured products are expensed as incurred in cost of sales. Shipping and handling costs related to manufactured products are capitalized into inventory and expensed as products are sold.

Revenue Recognition: The majority of the Company’s sales are derived from fixed price contracts to provide equipment. Revenue on equipment and parts sales is recognized when contract terms are met, collectibility is reasonably assured and a product is shipped or risk of ownership has been transferred to and accepted by the customer. Revenue from service agreements is recognized as earned, when services have been rendered. With respect to cost-plus-fixed-fee contracts, the Company recognizes the fee ratably as the actual costs are incurred, based upon the total fee amounts expected to be realized upon completion of the contracts. Amounts collected in advance of being earned are reflected on the balance sheet as unearned revenue. Bid and proposal costs are expensed as incurred.

Property, Plant and Equipment: Property, plant and equipment is stated at historical cost. Depreciation is computed over the estimated useful lives of the assets, using the straight-line method. When items are retired or otherwise disposed of, income is charged or credited for the difference between net book value and proceeds realized thereon. Ordinary maintenance and repairs are charged to expense as incurred, and replacements and betterments are capitalized. The range of estimated service lives used to calculate financial reporting depreciation for principal items of property, plant and equipment are as follows:

Machinery and equipment	2 – 7 years
Computer hardware and software	3 – 5 years
Building and leasehold improvements	10 – 25 years

The Company assesses the valuation of components of its property, plant and equipment and other long-lived assets whenever events or circumstances dictate that the carrying value might not be recoverable. The Company bases its evaluation on indicators such as the nature of the assets, the future economic benefit of the assets, any historical or future profitability measurements and other external market conditions or factors that may be present. If such factors indicate that the carrying amount of an asset or asset group may not be recoverable, the Company determines whether impairment has occurred by analyzing an estimate of undiscounted future cash flows at the lowest level for which identifiable cash flows exist. If the estimate of undiscounted future cash flows during the estimated useful life of the asset is less than the carrying value of the asset, the Company recognizes a loss for the difference between the carrying value of the asset and its estimated fair value, measured by the present value of estimated future cash flows or third party appraisal, as appropriate under the circumstances.

Goodwill and Other Intangible Assets: Goodwill represents the excess of the aggregate purchase price over the fair value of net identifiable assets of businesses acquired. Goodwill and other intangible assets are evaluated at least annually for impairment, during the fourth quarter or when events or circumstances indicate that it is more likely than not that an impairment loss has been incurred. The goodwill impairment test is a two-step test and involves comparing the estimated fair value of each reporting unit to the reporting unit’s carrying value, including goodwill. If the fair value of a reporting unit exceeds its carrying amount, goodwill attributable to the reporting unit is not considered impaired, and the second step is unnecessary. If the fair value of a reporting unit is less than its carrying value, an indication of goodwill impairment exists, and in the second step, the fair value of the reporting unit is allocated to all of its assets and liabilities. The fair value of tangible net assets and both recognized and unrecognized intangible assets is deducted from the fair value of the reporting unit to determine the implied fair value of reporting unit goodwill. If the implied fair value of reporting unit goodwill is lower than its carrying amount, goodwill is impaired and is written down to its implied fair value.

Deferred Income Tax Assets and Liabilities: The Company records deferred tax assets and liabilities for differences between the book basis and tax basis of net assets as well as taxable net operating loss carry forwards. The Company records a valuation allowance, when appropriate, to adjust deferred tax asset balances to the amount the Company expects to realize. The Company considers the amount of taxable income available in carryback years, future taxable income and potential tax planning strategies in assessing the potential need for a valuation allowance.

Insurance: The Company maintains a variety of insurance for its operations that it believes to be customary and reasonable. The Company is self-insured up to certain levels in the form of deductibles and retentions for general liability, vehicle liability, group medical and workers compensation claims. Other than normal business and contractual risks that are not insurable, the Company’s risk is commonly insured against and the effect of a loss occurrence is not expected to be significant. The Company accrues for estimated self-insurance costs and uninsured exposures based on estimated development of claims filed and an estimate of claims incurred but not reported. The Company regularly reviews estimates of reported and unreported claims and provides for losses accordingly.

33

Internal-Use Software Costs: Internal and external costs incurred to develop internal-use computer software are capitalized. The cost of business process reengineering activities, data migration and training are expensed as incurred.

Capitalized Interest: The Company capitalizes interest costs related to the Company’s construction of long-lived assets to be used in operations. The amount of interest capitalized is calculated based on the Company’s average cost of borrowed funds. The Company capitalized $0.1 million during Fiscal 2005. No interest was capitalized during Fiscal 2004 or 2003. The capitalized amount was deducted from interest expense on the Company’s consolidated statement of operations and was included in the cost of the related asset on the consolidated balance sheet.

Foreign Exchange Contracts: In April 2005, the Company acquired all outstanding shares of a light tactical vehicle manufacturer headquartered in the United Kingdom, for a total purchase price of approximately $48.2 million denominated in British pounds (see Note 4). The functional currency for this acquired business is the British pound. In connection with the acquisition, the Company established a British pound-denominated intercompany note in the amount of £12.5 million (approximately $22.1 million at January 31, 2006), which is to be repaid in annual installments through December 2009. Subsequently, the Company advanced an additional £4.2 million (approximately $7.4 million at January 31, 2006), under intercompany notes which are due to be repaid in Fiscal 2006. The Company entered into foreign currency forward contracts as a hedge against the economic exposure of these intercompany notes receivable and not for speculative or trading purposes. While these contracts affect the Company’s results of operations, they do so only in connection with the underlying transactions. All derivative instruments are recognized as assets or liabilities in the balance sheet and are measured at fair value at the end of each period.

In addition, certain suppliers of the Company’s U.S. operations bill in foreign currencies, particularly the Euro. The Company occasionally enters into foreign exchange forward contracts with maturities of up to 12 months, designated as cash flow hedges, to hedge these specific purchase commitments and anticipated transactions but not for speculative or trading purposes.

Translation of Foreign Currency: The British pound is the functional currency for the Company’s United Kingdom subsidiaries which were acquired in Fiscal 2005. As such, assets and liabilities are translated into U.S. dollars at year-end exchange rates. Income and expense items are translated at average exchange rates during the year. Translation adjustments resulting from changes in exchange rates are reported in other comprehensive income. Gains or losses from foreign currency transactions are recognized in current earnings. Net foreign currency exchange gains included in other (income) expense, net in the consolidated statements of operations were $0.2 million during Fiscal 2005 and immaterial in Fiscal 2004 and 2003.

Fair Value of Financial Instruments: The Company’s financial instruments consist primarily of cash equivalents, short-term investments, trade receivables, trade payables and debt instruments. The recorded values of cash equivalents, short-term investments, trade receivables, and trade payables are considered to be representative of their respective fair values. Generally, the Company’s notes payable have interest rates which are tied to current market rates. The senior notes had a carrying value of $25 million at January 31, 2006 and 2005, and a fair value of $25 million and $26 million at January 31, 2006 and 2005, respectively. The fair values of the senior notes were estimated based on market quotes obtained from brokers. The Company estimates that the recorded value of all of its other financial instruments approximates their fair values.

Warranty Costs: The Company generally provides product and service warranties for periods of 12 months to 24 months. Based on historical experience and contract terms, the Company provides for the estimated cost of product and service warranties at the time of sale or, in some cases, when specific warranty problems are identified. Accrued warranty costs are adjusted periodically to reflect actual experience. Certain warranty and other related claims involve matters of dispute that ultimately are resolved by negotiation, arbitration or litigation. Occasionally, a material warranty issue can arise that is beyond the Company’s historical experience. The Company provides for any such warranty issues as they become known and estimable.

Pensions and Other Postretirement Benefits: The Company accounts for its defined benefit pension plans and its defined benefit postretirement medical plan in accordance with SFAS No. 87, “Employers’ Accounting for Pensions” and SFAS No. 106, “Employers’ Accounting for Postretirement Benefits Other Than Pensions,” respectively. These standards require that amounts recognized in the financial statements be determined on an actuarial basis. Significant assumptions involved in determining the Company’s pension and other postretirement benefit expense include the expected return on plan assets, expected healthcare cost and compensation increases and the discount rate for calculating future liability. The assumed long-term rate of return on assets is applied to a calculated value of plan assets which results in an estimated return on plan assets that

34

is included in current year pension income or expense. When the accumulated benefit obligation exceeds the fair value of defined benefit plan assets, the Company reflects the difference as an increase in pension liability with an offsetting charge to shareholder’s equity (net of tax) through other comprehensive income (rather than net income).

Stock-Based Compensation: As permitted under Statement of Financial Accounting Standards (“SFAS”) No. 123, the Company continues to use the intrinsic value method of accounting prescribed by Accounting Principles Board Opinion (“APB”) No. 25, “Accounting for Stock Issued to Employees,” to account for its stock-based compensation programs. Accordingly, no compensation expense is recognized when the exercise price of an employee stock option is equal to or greater than the market price of the Company’s common stock on the grant date and all other provisions of the award are fixed. In December 2004, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 123 (revised 2004), “Share-Based Payment,” which requires all share-based payments to employees, including grants of employee stock options, to be recognized as compensation expense in the statements of operations based on their fair values. The Company is required to adopt the provisions of SFAS No. 123R in Fiscal 2006.

Pursuant to the provisions of the Company’s stock option plans (see Note 9), as a result of the Board of Directors approving the Armor Holdings merger (See Note 1), all outstanding stock options became fully vested and exercisable on February 26, 2006. Primarily as a result of this accelerated vesting, the Company expects that the adoption of the provisions of SFAS No. 123R will result in a non-cash pre-tax charge to compensation expense in Fiscal 2006 totaling approximately $7.0 million. No additional future impact of SFAS No. 123R is anticipated unless the Company grants additional stock options in the future.

In connection with the sale of our Power Products and Engineered Products businesses in January 2006 (see Note 4), the Company entered into termination and release agreements with three former executives. Pursuant to such agreements, the Company accelerated the vesting of all stock option agreements held by the three executives, and extended their exercise term from 30 days after the date of termination to December 31, 2006. As a result of these modifications of terms, the Company recorded non-cash compensation expense totaling $3.3 million in Fiscal 2005, which was charged to gain (loss) on sale of discontinued operations in the consolidated statements of operations.

The following pro forma data are calculated as if compensation expense for the Company’s stock option plans was determined based on the fair value at the grant date for awards under these plans, amortized to expense on a pro rata basis over the option vesting period:

(In thousands, except per share data)	Fiscal 2005			Fiscal 2004			Fiscal 2003
Net earnings (loss):
As reported	$	26,128		$	4,978		$	(53,203	)
Pro forma compensation expense, determined under fair value method, net of tax	(2,483		)	(1,424		)	(1,094		)
Pro forma	$	23,645		$	3,554		$	(54,297	)
Basic earnings (loss) per share:
As reported	$	0.90		$	0.17		$	(1.86	)
Pro forma	0.81			0.12			(1.90		)
Diluted earnings (loss) per share:
As reported	$	0.88		$	0.17		$	(1.84	)
Pro forma	0.80			0.12			(1.88		)

For purposes of the pro forma disclosures, the fair value of each option grant is estimated on the date of grant using the Black-Scholes option pricing model with the following weighted-average assumptions used for grants in Fiscal 2005, 2004 and 2003:

	Fiscal 2005		Fiscal 2004		Fiscal 2003
Risk free interest rates	3.98	%	3.00	%	2.83	%
Expected dividend yields	1.45	%	2.97	%	3.18	%
Expected volatility	62.90	%	64.80	%	65.10	%
Expected life (years)	4		5		5

Based on the above assumptions, the weighted average fair value of stock options granted in Fiscal 2005, 2004 and 2003 was $11.33, $5.72 and $5.13, respectively.

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The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options which have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions including the expected stock price volatility. Because the Company’s employee stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management’s opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its employee stock options.

Earnings Per Share: Basic earnings per share have been calculated by dividing net earnings (loss) by the weighted average number of common shares outstanding during the year. Diluted earnings per share are computed considering the potential dilution that would occur if all securities or other contracts to issue common stock were exercised or converted into common stock. See Note 9.

Reclassifications: The accompanying consolidated financial statements and notes for prior fiscal years contain certain reclassifications, including the consistent classification of discontinued operations (see Note 5), to conform with the presentation used in Fiscal 2005.

Recent Accounting Pronouncements: In November 2004, the FASB issued SFAS No. 151, “Inventory Costs, an amendment of ARB 43, Chapter 4,” which clarifies that abnormal amounts of idle facility expense, freight, handling costs and wasted materials (spoilage) should be recognized as current period charges and requires the allocation of fixed production overheads to inventory based on the normal utilization of capacity of the production facilities. SFAS No. 151 is effective for inventory costs incurred by the Company beginning in Fiscal 2006. The Company does not believe the implementation of SFAS No. 151 will have a material impact on its consolidated financial statements.

Note 3: Accumulated Other Comprehensive Loss

Accumulated other comprehensive loss consisted of the following components, net of tax, at January 31:

	Fiscal			Fiscal
(In thousands)	2005			2004
Accumulated additional minimum pension liability	$	(29,414	)	$	(32,362	)
Unrealized income on forward contracts	5			—
Currency translation loss	(2,746		)	(3,686		)
Accumulated other comprehensive loss	$	(32,155	)	$	(36,048	)

Note 4: Acquisitions and Divestitures

In January 2006, the Company completed the sale of substantially all the operating assets and business of the Engineered Products and Power Products Divisions for cash consideration of approximately $277 million and the assumption of certain liabilities. In March 2006, the cash consideration was adjusted upward by $6.4 million, based on the net asset value delivered at closing. The Company recognized a pre-tax gain of $9.7 million ($5.8 million after-tax) associated with these sales.

In August 2005, the Company sold substantially all of the inventory, property, plant and equipment, distribution rights, and operations of four Power Products Division distribution locations in California for cash consideration of approximately $9.4 million. As a result of this sale, the Company recorded a $3.4 million pre-tax ($2.0 million after-tax) loss on disposal of discontinued operations during Fiscal 2005, which included a $3.6 million estimated withdrawal liability from a union pension plan.

In April 2005, the Company acquired all outstanding shares of Automotive Technik (Holdings) Limited (“ATHL”), a light tactical vehicle manufacturer headquartered in the United Kingdom. The aggregate purchase price for the transaction was approximately $48.2 million, including cash of $47.0 million, notes of $0.2 million and transaction costs of approximately $1.0 million. The acquisition of ATHL broadens the Company’s product offerings and provides additional marketing opportunities for the Company’s Tactical Vehicle Systems business. The results of operations for ATHL are included in the Company’s consolidated financial statements since the date of acquisition. Since the date of acquisition, the ATHL operations generated sales of $51.6 million and a pre-tax operating loss of $5.1 million during Fiscal 2005. Pro forma results from continuing

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operations for Fiscal 2005 and Fiscal 2004, including the operating results of ATHL for this period are as follows (in thousands):

	Fiscal 2005		Fiscal 2004
Sales	$	735,035	$	598,774
Net earnings from continuing operations	17,105		30,586
Diluted earnings per share - continuing operations	$	0.58	$	1.06

The following table summarizes the estimated fair value of the assets acquired and liabilities assumed at the date of acquisition:

(In thousands)	April 8, 2005
Cash and cash equivalents	$	3,552
Other current assets	15,642
Property, plant and equipment	2,553
Identifiable intangible assets	16,684
Goodwill	30,593
Total assets acquired	69,024
Notes payable	149
Other current liabilities	17,901
Deferred tax liability	2,702
Long-term debt, net of current portion	68
Total liabilities assumed	20,820
Purchase price allocated	$	48,204

In January 2005, the Company sold substantially all of the assets and business of the Airline Products business for proceeds of $60 million as well as the assumption of certain liabilities, subject to final adjustment based on the amount of working capital conveyed at closing. In November 2005, the Company reached an agreement with the buyer regarding certain contractual issues related to the sale, pursuant to which the Company agreed to refund $4.0 million of purchase price to the buyer. Primarily as a result of this dispute, the Company recorded pre-tax charges of $7.0 million ($4.2 million after-tax) to loss on sale of discontinued operations during Fiscal 2005, including the write-off of a $3.0 million receivable from the buyer.

Note 5: Discontinued Operations

As a result of the divestitures described in Note 4, the identified assets, liabilities and results of operations for the Airline Products, Power Products and Engineered Products businesses are reported as discontinued operations for all periods presented. Pursuant to the sales agreements for Power Products and Engineered Products divestitures, the Company retained certain assets including certain accounts receivable balances, three vacated facilities from the Power Products business, and the Engineered Products manufacturing facility which is being leased to the buyer of the business. The lease of the Engineered Products facility expires in July 2008, and has a purchase option that expires in July 2007. Additionally, the Company retained certain obligations of these businesses, for which the Company has recorded accruals it believes to be adequate.

The Company’s discontinued operations also include the wind-down of the turnkey engineering, procurement and construction activities of the Distributed Energy Solutions business, which the Company decided to exit in Fiscal 2003, and the retained warranty and contract obligations from the Fiscal 2002 sale of the blowout preventer and controls, valve and drilling riser business previously included in the Engineered Products segment.

During Fiscal 2005, the Company recorded $4.3 million in pre-tax charges related to the settlement of a customer dispute in the Distributed Energy Solutions business, which was paid in August 2005.

Sales and operating profit (loss) from discontinued operations were as follows (in thousands):

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	Year Ended January 31,
	2006			2005			2004
Sales
Power Products	$	535,122		$	508,378		$	509,981
Engineered Products	167,372			100,178			113,545
Airline Products	—			86,287			63,733
Distributed Energy Solutions	7,265			20,037			44,867
Total Sales	$	709,759		$	714,880		$	732,126
Operating profit (loss)
Power Products	$	12,091		$	13,352		$	(51,854	)
Engineered Products	11,631			(11,574		)	(15,358		)
Airline Products	—			(5,752		)	(12,594		)
Distributed Energy Solutions	(8,125		)	(42,188		)	(53,475		)
Total operating profit (loss)	15,597			(46,162		)	(133,281		)
Income tax expense (benefit)	6,325			(18,143		)	(48,921		)
Net earnings (loss) from discontinued operations	$	9,272		$	(28,019	)	$	(84,360	)

In addition to the discontinued operating results above, the Company recorded a loss on sale of discontinued operations of $0.4 million (net of tax benefit of $0.2 million) in Fiscal 2005, and a gain on sale of discontinued operations of $2.3 million (net of tax expense of $1.3 million) in Fiscal 2004, related to the sale of the Airline Products, Power Products and Engineered Products businesses. The Fiscal 2005 loss on sale of discontinued operations includes a $7.0 million pretax charge related to the settlement of a dispute arising from the Fiscal 2004 sale of the Airline Products business and a net pre-tax gain of $6.4 million resulting from sales of the Power Products and Engineered Products businesses. The Fiscal 2004 gain on sale of discontinued operations resulted from the sale of the Airline Products business.

Assets and liabilities of discontinued operations as of January 31, 2006 and 2005 consisted of the following (in thousands):

	Fiscal		Fiscal
(In thousands)	2005		2004
Cash and cash equivalents	$	39	$	1,942
Accounts receivable, net	5,315		111,317
Recoverable costs and accrued profits not yet billed	656		27,557
Inventories	1,322		71,788
Property, plant and equipment, net	10,726		81,728
Deferred tax assets	12,846		12,167
Other assets	2,777		12,254
Total assets of discontinued operations	$	33,681	$	318,753
Notes payable	$	—	$	1,671
Accounts payable	1,659		41,688
Accrued payrolls and incentives	5,146		10,812
Other liabilities	19,138		45,022
Total liabilities of discontinued operations	$	25,943	$	99,193

The property, plant and equipment balance at January 31, 2006 includes $8.7 million associated with a manufacturing facility that is under lease to the buyer of the Engineered Products business. The lease term expires in July 2008, and has a purchase option that expires in July 2007.

The Company believes it is more likely than not that the net deferred income tax assets as of January 31, 2006 will be realized, based on expected future taxable income from continuing operations.

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Note 6: Inventories

Summarized below are the components of inventories related to continuing operations, net of customer deposits:

	January 31,		January 31,
(In thousands)	2006		2005
Raw materials and spare parts	$	12,431	$	8,422
Work in process	9,709		9,381
Total Inventories	$	22,140	$	17,803

Raw materials and spare parts include OEM equipment and components used in the manufacturing segment. The inventory balances above are stated net of inventory valuation allowances totaling $2.2 million and $0.2 million at the end of Fiscal 2005 and 2004, respectively.

Note 7: Debt Arrangements

Outstanding debt, which is generally unsecured, consists of the following:

	January 31,			January 31,
(In thousands)	2006			2005
Senior notes, 7.38%, due May 2006	$	25,000		$	25,000
Other, denominated in foreign currency	223			—
	25,223			25,000
Less current portion	(25,158		)	—
Long-term debt, net of current portion	$	65		$	25,000

In January 2005, the Company entered into a $100 million unsecured revolving credit facility which expires in January 2009. To date, no borrowings have been made under this facility. A commitment fee ranging from 17.5 to 37.5 basis points per annum is paid on the daily average unused balance of the facility based on the Company’s leverage ratio. The revolving credit facility has a $25 million sub-facility which may be used for letters of credit. Approximately $7.0 million in letters of credit under the revolving credit facility were outstanding at January 31, 2006 and $93.0 million was available for borrowing. The Company has alternative interest rates that can be applied to any borrowings under the facility, which include prime rate and a LIBOR plus 75 to 150 basis points, depending on the Company’s leverage ratio. The borrowing rate would have been 5.56% at January 31, 2006, which represents LIBOR plus 75 basis points.

The Company’s revolving credit facility and senior notes are unsecured and their related agreements contain covenants that restrict indebtedness, guarantees, sales of assets and other customary items. Additional covenants in the revolving credit facility require the Company to maintain a minimum fixed charge coverage ratio and maximum leverage ratio. Based on the Company’s financial condition as of January 31, 2006, the restrictions imposed by the Company’s senior notes and revolving credit facility do not currently restrict the Company’s ability to meet its obligations or to declare and pay dividends at historical levels.

The Company has additional letter of credit facilities totaling $12.5 million with financial institutions, to allow the issuance of letters of credit as needed to support ongoing commercial operations. These facilities expire in Fiscal 2007. Approximately $6.9 million of letters of credit under these facilities were outstanding as of January 31, 2006.

Note 8: Income Taxes

The components of the income tax provision from continuing operations are as follows:

	Fiscal			Fiscal			Fiscal
(In thousands)	2005			2004			2003
Current provision (benefit)	$	(1,823	)	$	22,456		$	18,669
Deferred provision (benefit)	10,190			(6,371		)	(2,216		)
Income tax provision	$	8,367		$	16,085		$	16,453

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The components of the income tax provision (benefit) from discontinued operations are as follows:

	Fiscal			Fiscal			Fiscal
(In thousands)	2005			2004			2003
Current provision (benefit)	$	8,759		$	(23,928	)	$	(44,393	)
Deferred provision (benefit)	(2,680		)	7,096			(4,528		)
Income tax provision (benefit)	$	6,079		$	(16,832	)	$	(48,921	)

The sources of earnings from continuing operations before income taxes are as follows:

	Fiscal			Fiscal			Fiscal
(In thousands)	2005			2004			2003
United States	$	30,115		$	46,814		$	47,608
Foreign	(4,532		)	(2		)	2
	$	25,583		$	46,812		$	47,610

A reconciliation between the income tax provision from continuing operations and income taxes computed by applying the statutory U.S. Federal income tax rate of 35% in Fiscal 2005, 2004 and 2003 is as follows:

	Fiscal			Fiscal			Fiscal
(In thousands)	2005			2004			2003
Provision at statutory rate of 35%	$	8,954		$	16,384		$	16,664
Other, net	(587		)	(299		)	(211		)
Income tax provision	$	8,367		$	16,085		$	16,453

The net deferred tax assets from continuing operations are determined under the liability method based on the difference between the financial statement and tax basis of assets and liabilities as measured by the enacted statutory tax rates. The deferred tax provision (benefit) is the result of changes in these temporary differences. The tax effects of the temporary differences which comprise the deferred tax asset at the end of Fiscal 2005 and 2004 are as follows:

(In thousands)	Fiscal 2005			Fiscal 2004
Deferred Tax Assets
Postretirement benefit obligation	$	4,564		$	5,394
Accrued expenses and other reserves	9,023			7,943
Pension accounting	14,743			15,461
Net operating loss carryforwards	3,346			11,585
Other	314			1,202
Gross deferred tax assets	31,990			41,585
Deferred Tax Liabilities
Property, plant, and equipment	1,578			2,878
Intangible assets	4,239			—
Prepaid expenses and deferred charges	5,937			5,087
Other	3,023			1,310
Gross deferred tax liabilities	14,777			9,275
Net deferred tax asset	$	17,213		$	32,310
Current portion of deferred tax asset	$	7,165		$	5,872
Non-current portion of deferred tax liability	(892		)	—
Non-current portion of deferred tax asset	10,940			26,438
Net deferred tax asset	$	17,213		$	32,310

The Company believes it is more likely than not that the net deferred income tax assets as of January 31, 2006 will be realized, based on expected future taxable income. During Fiscal 2005, the Company fully utilized its $2.2 million and $0.6 million of tax credit carryforwards for Research and Experimental expenses and Alternative Minimum Tax, respectively, to reduce current

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taxes payable. In addition, the Company utilized all of its $37 million of U.S. federal net operating loss carryforwards to reduce Fiscal 2005 taxable income. At January 31, 2006, the Company has approximately $11.2 million of foreign net operating loss carryforwards, which are available to reduce future taxable income primarily in the United Kingdom, subject to certain restrictions.

Note 9: Common Stock

Cash Dividend: Cash dividends of $0.085 per common share were declared and paid in each quarter of Fiscal 2005, 2004 and 2003. Declaration and payment of dividends in the future is dependent upon the Company’s earnings and liquidity position and limitations under the Company’s revolving credit facility and senior note agreement, among other factors.

Stock Issuance: Pursuant to the 1996 Director Stock Plan, the Company issued 4,014 shares in Fiscal 2005, 6,888 shares in Fiscal 2004 and 7,315 shares in Fiscal 2003 to certain directors of the Company for services rendered. Total expense recognized related to these stock issuances was approximately $0.1 million in each year.

Stock Option Plans: The Company has various stock option plans pursuant to which stock options may be granted to officers, employees and non-employee directors of the Company. Options may be granted with a per share exercise price not less than the per share market value of common stock at the date of grant. The options have terms not to exceed ten years and vest over periods not to exceed four years. As of January 31, 2006 a total of 3,998,099 shares were reserved for issuance pursuant to such stock option plans, of which, 2,179,188 stock options with a weighted average price of $16.48 were outstanding. Pursuant to the provisions of the Company’s stock option plans, as a result of the Board of Directors approving the Armor Holdings merger (see Note 1), substantially all outstanding stock options became fully vested and exercisable on February 26, 2006, subject to certain restrictions.

A summary of the status of the Company’s stock option plans during Fiscal 2005, 2004, and 2003 is presented in the tables below:

	Shares under Option		Option Price Range Per Share
Outstanding at end of Fiscal 2002	2,090,775		$	8.91 - $ 50.25
Granted	853,250		$	9.52 - $ 17.00
Exercised	(145,950	)	$	9.52 - $ 10.50
Canceled	(657,725	)	$	8.91 - $ 50.25
Outstanding at end of Fiscal 2003	2,140,350		$	9.52 - $ 50.25
Granted	1,104,000		$	14.62 - $ 19.05
Exercised	(213,750	)	$	9.52 - $ 20.00
Canceled	(409,575	)	$	9.52 - $ 50.25
Expired	(24,550	)	$	50.25
Outstanding at end of Fiscal 2004	2,596,475		$	9.52 - $ 35.13
Granted	307,500		$	22.28 - $ 23.66
Exercised	(435,001	)	$	9.52 - $ 23.55
Canceled	(246,786	)	$	9.52 - $ 24.38
Expired	(43,000	)	$	33.75 - $ 35.13
Outstanding at end of Fiscal 2005	2,179,188		$	9.52 - $ 33.90
Options available for future grants at end of Fiscal 2005	1,818,911

	Fiscal 2005		Fiscal 2004		Fiscal 2003
Options exercisable at end of year	1,315,626		1,054,679		916,165
Weighted average exercise price of options exercisable	$	16.88	$	17.68	$	19.66

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A reconciliation of basic earnings (loss) per share to diluted earnings (loss) per share is below:

	Fiscal			Fiscal			Fiscal
(In thousands, except per share amounts)	2005			2004			2003
Numerator:
Earnings (loss) available to common stockholders
From continuing operations	$	17,216		$	30,727		$	31,157
From discontinued operations	9,272			(28,019		)	(84,360		)
From disposal of discontinued operations	(360		)	2,270			—
Net earnings (loss)	$	26,128		$	4,978		$	(53,203	)
Denominator:
Denominator for basic earnings per share:
Weighted average shares	29,117			28,749			28,560
Effect of dilutive securities:
Employee and director stock options	476			235			327
Denominator for diluted earnings per share-
Adjusted weighted average shares	29,593			28,984			28,887
Basic earnings (loss) per share:
From continuing operations	$	0.59		$	1.07		$	1.09
From discontinued operations	0.32			(0.97		)	(2.95		)
From disposal of discontinued operations	(0.01		)	0.07			—
Net earnings (loss) per share	$	0.90		$	0.17		$	(1.86	)
Diluted earnings (loss) per share:
From continuing operations	$	0.58		$	1.06		$	1.08
From discontinued operations	0.31			(0.97		)	(2.92		)
From disposal of discontinued operations	(0.01		)	0.08			—
Net earnings (loss) per share	$	0.88		$	0.17		$	(1.84	)
Number of anti-dilutive stock options outstanding	301			1,057			1,193

Note 10: Government Contracts

The U.S. government is the Company’s primary customer and the business depends largely on U.S. government expenditures. As such, decreased government spending or termination of significant government programs could adversely affect the Company. Government contracts account for over 85% of the Company’s sales and operating income from continuing operations. During the fourth quarter of Fiscal 2004, the Company completed production under the second multi-year contract with the U.S. Department of the Army (“U.S. Army”) for production of the Family of Medium Tactical Vehicles (“FMTV”), and began production under the third multi-year contract. The third U.S. Army contract includes production of 10,889 FMTV trucks and trailers over a five-year period, with options for approximately 12,000 additional trucks and trailers. Funding of the current contract beyond the first four program years is subject to the inherent uncertainties of Congressional appropriations. As is typical of multi-year defense contracts that may be canceled or adjusted by the government, the contract must be funded annually by the U.S. Army and may be terminated at any time for the convenience of the government. If the contract is terminated, other than for the Company’s default (in which event there could be serious adverse consequences and claims against the Company), it provides for termination charges that will reimburse the Company for certain allowable costs, but not necessarily for all costs incurred.

The U.S. government has accounted for $630.5 million, $532.0 million and $432.5 million of sales in Fiscal 2005, 2004 and 2003, respectively. Additionally, the U.S. government accounts for approximately 89% and 71% of total accounts receivable at January 31, 2006 and 2005, respectively. The loss of this customer would have a material adverse effect on the Company’s consolidated financial condition and results of operations. Additionally, the FMTV incorporates components that are specified by the U.S. Army and are available only from the source or sources selected by the U.S. Army. In addition, the Company uses other suppliers for certain components of the FMTV, some of which are small businesses that are not well capitalized. Interruption in the supply of any of these components, for any reason, could have a material adverse effect on the results of operations.

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Major contracts for military systems are performed over extended periods of time and are subject to changes in scope of work and delivery schedules. Pricing negotiations on changes and settlement of claims often extend over prolonged periods of time. The Company’s ultimate profitability on such contracts may depend on the eventual outcome of an equitable settlement of contractual issues with the U.S. government. In the fourth quarter of Fiscal 2005, the Company recorded a $3.3 million charge to cost of sales to write off previously anticipated cost recoveries under the FMTV contract.

The Company’s government contract operations are subject to U.S. government investigations of business practices and cost classifications from which legal or administrative proceedings can result. Based on government procurement regulations, under certain circumstances a contractor can be fined, as well as suspended or debarred from government contracting. In that event, the Company would also be prohibited from selling equipment or services to customers that depend on loans or financial commitments from the Export Import Bank, Overseas Private Investment Corporation and similar government agencies during a suspension or debarment.

Note 11: Guarantees and Contingencies

Warranties: Based on historical experience and contract terms, the Company provides for the estimated cost of product and service warranties at the time of sale or, in some cases, when specific warranty problems are identified. Accrued warranty costs are adjusted periodically to reflect actual experience. Certain warranty and other related claims involve matters of dispute that ultimately are resolved by negotiation, arbitration or litigation. Occasionally, a material warranty issue can arise that is beyond the Company’s historical experience. The Company provides for any such warranty issues as they become known and estimable.

A summary of warranty activity associated with continuing operations follows:

	Fiscal			Fiscal
(in thousands)	2005			2004
Accrued warranty costs at beginning of year	$	1,817		$	1,353
Payments for warranty obligations	(1,015		)	(845		)
Warranty accrual for current period sales	2,609			1,309
Changes related to pre-existing warranties	(355		)	—
Accrued warranty costs at end of year	$	3,056		$	1,817

Guarantees: The Company is occasionally required to issue performance indemnities or to post letters of credit, generally issued by a bank, to collateralize certain insurance programs, to secure credit facilities or to ensure performance under contracts. A letter of credit commits the issuer to remit specified amounts to the holder, if the holder demonstrates that the Company has failed to meet its obligations under the letter of credit. If this were to occur, the Company would be obligated to reimburse the issuer for any payments the issuer was required to remit to the holder of the letter of credit. Generally, a letter of credit is released when the Company has satisfied the obligations that the letter of credit is securing. As of January 31, 2006 and 2005, the Company had letters of credit outstanding totaling approximately $13.9 million and $13.2 million, respectively. In addition, the Company had contingent performance indemnities of approximately $2.2 million and $3.8 million as of January 31, 2006 and 2005, respectively.

Operating Lease Commitments: The Company leases certain facilities and equipment from third parties under operating lease arrangements of varying terms. Under the terms of these operating lease arrangements, the Company is generally obligated to make monthly rental payments to the lessors, and include no further obligations at the end of the lease terms. If the Company elects to cancel or terminate a lease prior to the end of its term, the Company is typically obligated to make all remaining lease payments. In certain cases, however, the Company is allowed to sublet the assets to another party. Total rent expense associated with operating lease agreements was $3.6 million, $2.5 million, and $3.7 million in Fiscal 2005, 2004 and 2003, respectively.

Operating lease obligations as of January 31, 2006, with noncancelable lease terms in excess of one year are as follows, net of subrental income (in thousands):

Fiscal 2006	$	1,384
Fiscal 2007	1,311
Fiscal 2008	1,220
Fiscal 2009	1,187
Fiscal 2010	772
Thereafter	2,564
Total operating lease obligations	$	8,438

43

U.S. Government Contingencies: During 1998, the U.S. Customs Service detained a medium tactical vehicle that was being shipped by the Company for display in a European trade show. The U.S. Customs Service and the Department of Justice have conducted an investigation of potential violations by the Company of laws relating to the export of controlled military vehicles, weapons mounting systems and firearms. Such investigation could result in the filing of civil or administrative sanctions against the Company and/or individual employees, and could result in a suspension or debarment of the Company from receiving new contracts or subcontracts with agencies of the U.S. government or the benefit of federal assistance payments. While they are possible, the Company does not believe that criminal sanctions will be sought. The Company believes that resolution of this matter will not have a material adverse effect on its consolidated results of operations, financial condition or liquidity and believes that the resolution of the matter that is possibly most adverse to the Company will involve the payment of a civil penalty that will not materially adversely affect the Company.

The Company was a defendant in a suit filed in 1996 under the qui tam provision of the False Claims Act, United States of America, ex rel. Werner Stebner v. Stewart & Stevenson Services, Inc. and McLaughlin Body Co., Civil Action No. H-96-3363, in the U.S. District Court for the Southern District of Texas, Houston Division. The plaintiff’s complaint sought penalties and damages in an unspecified amount. The suit alleged that the Company made false statements and certifications in connection with claims for payment for medium tactical vehicles delivered to the U.S. Army before 1998, and that the vehicles were substandard because of corrosion problems. Following an investigation by the Justice Department, the United States declined to intervene in the suit. In February 2004, the District Court found in favor of the Company and dismissed all of the plaintiff’s claims by summary judgment without proceeding to trial. The U.S. Court of Appeals for the Fifth Circuit affirmed the district court’s decision in August 2005. The U.S. Supreme Court denied the plantiff’s petition for writ of certiorari in January 2006, bringing an end to the suit.

Klickitat Litigation: The Company and several of its subsidiaries in the Distributed Energy Solutions business are defendants in a suit filed by the Klickitat County Public Utility District No. 1 on December 11, 2003 arising out of claims relating to a landfill gas power generation facility in Roosevelt, Washington, Cause No. CY-03-3175-LRS; Klickitat County Public Utility District No. 1 v. Stewart & Stevenson Services, Inc., Stewart & Stevenson Power, Inc., Sierra Detroit Diesel Allison, Inc., Pamco International, Inc. and Waukesha Engine Dresser, Inc.; in the U.S. District Court for the Eastern District of Washington. The plaintiff has asserted claims with respect to equipment installed and used since 1999 for breach of contract; promissory estoppel; violations of the Washington Products Liability Act; breach of warranties; intentional or negligent misrepresentation; and violations of the Washington Consumer Protection Act and seeks recovery of damages in excess of $13 million. The Company is vigorously defending this suit. In an order filed April 7, 2006, the court granted partial summary judgment dismissing all but two of plaintiff’s nine causes of action with prejudice. As to the remaining claims, it is not yet possible for the Company to determine the ultimate outcome of the suit or whether its resolution will, in the future, have a material adverse effect on the Company’s consolidated results of operations, financial position or liquidity. The Company is presently unable to determine whether a material liability has been incurred in this matter or to reasonably estimate the amount of any loss that may result from this matter. Consequently, the Company has recorded no accrual for any losses related to the ultimate outcome of this litigation. The Company has, however, recorded accruals that it believes are adequate for estimated legal fees that it expects to incur associated with this matter.

Antitrust Litigation: The Company, which was a distributor of Detroit Diesel parts through its Power Products business, is a co-defendant with Detroit Diesel Corporation and other Detroit Diesel distributors in two putative class action suits filed on February 9, 2005, Civil Action No. 05-616; Cumberland Truck Equipment Co. et al. v. Detroit Diesel Corp., et al. (the “Cumberland Litigation”), and Civil Action No. 05-625; Diamond International Trucks, Inc. et al. v. Detroit Diesel Corp., et al. (the “DIT Litigation”). The suits were initially filedin the U.S. District Court for the Eastern District of Pennsylvania. On November 14, 2005, the cases were transferred to the Eastern District of Michigan. In the Cumberland Litigation, plaintiffs were dealers of Detroit Diesel parts whose agreements were terminated or not renewed on or after February 9, 2001. The plaintiffs are claiming antitrust violations arising out of the termination or non-renewal of their dealer agreements. In the DIT Litigation, plaintiffs are dealers of Detroit Diesel parts whose dealership classification was changed on or after February 9, 2001. The plaintiffs in the DIT Litigation are claiming antitrust violations arising out of changes to the classification of their dealerships. The plaintiffs in each suit have also alleged price fixing and group boycott in violation of Section 1 of the Sherman Act and have made claims for treble damages and injunctive and other relief. The Company is vigorously defending both suits. It is presently impossible for the Company to determine the ultimate outcome of either suit, but the Company currently believes that the resolution of these suits will not have a material adverse effect on the Company’s consolidated results of operations, financial position or liquidity. The Company has recorded accruals that it currently believes are adequate for the estimated amount of costs and legal fees that it expects to incur associated with these matters.

44

Environmental Contingencies: In 2001, the Company received from the U.S. Environmental Protection Agency (the “EPA”) a Request for Information under Section 104(e) of the Comprehensive Environmental Response, Compensation, and Liability Act of 1980, for information pertaining to the R&H Oil Company Site in San Antonio, Texas (the “Site”). Information provided to the Company by the EPA indicates that the Company may have sent waste oils to the Site for recycling in the late 1980s, and that such waste oils may potentially account for between one and two percent of the volume of total wastes received by the oil recycler at the Site. Since the Company expects to receive a claim for cleanup and other costs related to this site, it has established reserves which it believes to be adequate at this time. As additional facts are developed and definitive remediation plans and necessary regulatory approvals for implementation of remediation are established, changes in these and other factors may result in actual costs exceeding the amounts accrued. While uncertainties are inherent in the final outcome of these environmental matters, and it is presently impossible to determine the actual costs that ultimately may be incurred, management currently believes that the resolution of such uncertainties should not have a material adverse effect on the Company’s consolidated results of operations, financial position or liquidity. The Company believes that the most likely outcome in this environmental matter is the expenditure of an immaterial amount of consideration as a contribution to the remediation effort.

Purported Class Action involving Merger:  The Company and six of its directors are defendants in a purported class action lawsuit relating to the proposed merger transaction with Armor Holdings described in Note 1. The lawsuit was filed on April 11, 2006, and alleges, among other things, that the defendants have breached their fiduciary duties to the shareholders of the Company by failing to maximize shareholder value when selling the Company, by favoring Armor Holdings in the proposed merger transaction and precluding superior offers for the Company and by failing to disclose material information or disclosing materially false information in its proxy materials relating to the shareholders’ meeting to be held on May 9, 2006. The lawsuit was filed in District Court in Harris County, Texas, by a purported shareholder of the Company on behalf of all other similarly situated shareholders. The lawsuit alleges that a class should be certified and the plaintiff named as representative of the purported class. No class has been certified at present and accordingly, we regard the action as a purported class action. Additional lawsuits could be filed in the future. The lawsuit seeks, among other things, a declaration that the merger agreement was entered into in breach of the fiduciary duties of the individual defendants and is therefore unlawful and unenforceable, an injunction against the Company proceeding with the transaction or consummating the transaction or any other business combination unless certain procedures are in place and damages, attorneys’ and experts’ fees, expenses and other relief. The Company believes that this lawsuit is wholly without merit and intends to vigorously defend it.

The Company is also a defendant in a number of lawsuits relating to contractual, product liability, personal injury and warranty matters normally incident to the Company’s business. No individual case, or group of cases presenting substantially similar issues of law or fact, is expected to have a material effect on the manner in which the Company conducts its business or on its consolidated results of operations, financial position or liquidity. The Company maintains certain insurance policies that provide coverage for product liability and personal injury cases. The Company has established reserves that it believes to be adequate based on current evaluations and its experience in these types of claim situations. Nevertheless, an unexpected outcome or adverse development in any such case could have a material adverse impact on the Company’s consolidated results of operations in the period it occurs.

Note 12: Employee Pension and Other Benefit Plans

Defined Benefit Plans

The Company has a frozen noncontributory defined benefit pension plan that covered substantially all of its full-time employees and an unfunded frozen defined benefit supplemental executive retirement plan covering certain highly compensated employees. The pension benefits are based on years of service, limited to 45 years, and the employee’s highest consecutive five-year average compensation out of the last 10 years of employment. The Company funds pension costs in conformity with the funding requirements of applicable government regulations. Effective July 1, 2003, the Company froze the benefits earned under both defined benefit pension plans, with the exception of a small transition group. These plan changes resulted in a non-cash charge of $2.4 million to write off previously unamortized prior service costs (pension curtailment expense) during Fiscal 2003.

The Company also has a defined benefit postretirement medical plan, which provides for the payment of certain medical costs of eligible employees and dependents upon retirement. The plan is currently not funded. The Company expects to continue paying postretirement medical costs as covered claims are incurred. Effective July 1, 2003, the Company decided that postretirement medical benefits will not be provided to future retirees, with the exception of a small transition group, and required plan participants to pay a higher portion of total plan costs in subsequent years.

In December 2003, the Medicare Prescription Drug, Improvement and Modernization Act of 2003 (the “Act”) was signed into law. The Act introduced a prescription drug benefit under Medicare (“Medicare Part D”) as well as a federal subsidy to sponsors of retiree health care benefit plans that provide a benefit that is at least actuarially equivalent to Medicare Part D. The defined benefit postretirement medical plan has been amended such that, effective January 1, 2006, prescription medication coverage was discontinued for all participants who were both eligible for prescription drug benefits under Medicare and for whom Medicare is the primary payor. This plan change has reduced the plan’s net periodic benefit cost beginning in Fiscal 2005.

The following tables include pension benefits information for the noncontributory defined benefit pension plans and the postretirement medical plan discussed above, as well as an unfunded defined benefit retirement plan for non-employee directors. The changes in benefit obligation, plan assets and funded status of the plans, measured as of January 31, 2006 and 2005, and the amounts recognized in the consolidated balance sheets follow:

45

	Pension Benefits						Other Postretirement Benefits
(In thousands)	Fiscal 2005			Fiscal 2004			Fiscal 2005			Fiscal 2004
Change in benefit obligation:
Benefit obligation at beginning of year	$	147,355		$	128,371		$	3,253		$	10,852
Service cost	472			532			—			—
Interest cost	7,950			7,755			132			631
Amendments	—			—			183			(8,650		)
Participant contributions	—			—			512			407
Benefits paid	(6,402		)	(5,976		)	(1,199		)	(1,351		)
Actuarial loss (gain)	66			16,673			(577		)	1,364
Benefit obligation at end of year	$	149,441		$	147,355		$	2,304		$	3,253
Change in plan assets:
Fair value of plan assets at beginning of year	$	104,348		$	91,563		$	—		$	—
Actual return on plan assets	10,604			7,852			—			—
Employer contributions	426			10,909			687			944
Participant contributions	—			—			512			407
Benefits paid	(6,402		)	(5,976		)	(1,199		)	(1,351		)
Fair value of plan assets at end of year	$	108,976		$	104,348		$	—		$	—
Reconciliation of funded status:
Funded status	$	(40,465	)	$	(43,007	)	$	(2,304	)	$	(3,253	)
Unrecognized actuarial loss	46,034			50,661			5,490			6,563
Unrecognized prior service cost (gain)	1			1			(16,340		)	(18,019		)
Net amount at year-end	$	5,570		$	7,655		$	(13,154	)	$	(14,709	)
Amounts recognized in the consolidated balance sheet:
Accrued benefit liability	$	(40,389	)	$	(42,912	)	$	(13,154	)	$	(14,709	)
Accumulated other comprehensive loss	45,959			50,567			—			—
Net amount at year-end	$	5,570		$	7,655		$	(13,154	)	$	(14,709	)

At January 31, 2006 and 2005, the Company recorded a non-cash charge (credit) to accumulated other comprehensive loss to recognize the change in its additional minimum pension liability in accordance with SFAS No. 87. SFAS No. 87 requires that this liability be recognized at fiscal year end in the amount by which the accumulated benefit obligation exceeds the fair value of defined benefit pension plan assets. The additional minimum pension liability adjustments totaling ($4.6) million, $15.4 million and $6.1 million for Fiscal 2005, 2004 and 2003, respectively, are reflected in accumulated other comprehensive loss, net of related tax effect, in the consolidated balance sheets.

Additional information about the Company’s pension plans with accumulated benefit obligations in excess of plan assets, measured as of January 31, 2006 and 2005, follows (in thousands):

	Fiscal 2005		Fiscal 2004
Projected benefit obligation	$	149,441	$	147,355
Accumulated benefit obligation	149,364		147,260
Fair value of plan assets	108,976		104,348

Net periodic benefit cost for Fiscal 2005, 2004 and 2003 included the following components (in thousands):

	Pension Benefits									Other Postretirement Benefits
	Fiscal 2005			Fiscal 2004			Fiscal 2003			Fiscal 2005			Fiscal 2004			Fiscal 2003
Service cost	$	472		$	532		$	2,595		$	—		$	—		$	552
Interest cost	7,950			7,755			7,752			132			631			1,038
Expected return on plan assets	(8,923		)	(8,453		)	(7,635		)	—			—			—
Amortization of prior service cost (deferred gains)	—			—			125			(1,496		)	(826		)	(452		)
Recognized actuarial loss	3,010			1,718			677			497			449			372
Curtailment loss (gain) recognized	—			—			2,369			—			173			(142		)
Net periodic benefit cost (income)	$	2,509		$	1,552		$	5,883		$	(867	)	$	427		$	1,368

46

The Company used the following weighted average actuarial assumptions to determine its benefit obligations at January 31, 2006 and 2005, and its net periodic benefit cost for Fiscal 2005, 2004, and 2003, as measured at January 31:

	Fiscal 2005		Fiscal 2004
Benefit obligations:
Discount rate	5.60	%	5.50	%
Rate of compensation increase	4.11	%	4.11	%

	Fiscal 2005		Fiscal 2004		Fiscal 2003
Net periodic benefit cost:
Discount rate	5.50	%	6.00	%	6.75	%
Expected long-term rate of return on plan assets	8.50	%	8.50	%	8.50	%
Rate of compensation increase	4.11	%	4.11	%	4.11	%

The assumed healthcare cost trend rate, used to calculate the Company’s obligations and cost under its postretirement medical plan, is an annual rate of increase of approximately 10% of pre-age 65 covered healthcare benefits, eventually and gradually decreasing to 5% by 2016 and remaining at that level thereafter, based on the assumption that the rate of healthcare cost increases would level off and eventually approximate the overall growth in gross domestic product. A one percentage point change in the healthcare cost trend rate assumption in each future year would have the following effects (in thousands):

	One Percentage		One Percentage
	Point Increase		Point Decrease
Increase (decrease) in total service and interest cost	$	10	$	(9	)
Increase (decrease) in postretirement benefit obligation	117		(102		)

Future expected benefit payments under the defined benefit plans are as follows (in thousands):

	Pension		Other Postretirement
	Benefits		Benefits
Fiscal 2006	$	6,919	$	224
Fiscal 2007	6,840		223
Fiscal 2008	7,237		221
Fiscal 2009	7,733		206
Fiscal 2010	8,188		204
Fiscal 2011 - 2015	47,153		933

In determining the expected long-term rate of return on plan assets, the Company considered the current level of expected returns on risk-free investments (primarily government bonds), the historical level of risk premiums associated with other asset classes and the expectations of future returns over a 20-year time horizon on each asset class, based on the views of leading financial advisors and economists. The expected return for each asset class was then weighted based on the plan’s target asset allocation. The Company also gave consideration to the returns being earned by the plan assets in the fund and the rates of return expected to be available for reinvestment using capital market projections, an estimated long-term asset allocation strategy based on the plan’s statement of investment policy, objectives and guidelines and an estimate of annual administrative, investment management and trading expenses. The Company used the Moody’s Aa long-term corporate bond yield at January 31 as the basis for determining the discount rate. If the expected long-term rate of return on plan assets decreased by 100 basis points, the pension expense recognized in Fiscal 2005 would have increased by $1.1 million. If the discount rate decreased by 100 basis points, the pension expense recognized in Fiscal 2005 would have increased by $1.6 million.

47

The weighted-average asset allocation for the Company’s pension plan assets at the end of Fiscal 2005 and 2004, as well as the target allocation for Fiscal 2006, follows:

	2006 Target		Fiscal		Fiscal
	Allocation		2005		2004
Equities	55	%	53	%	53	%
Fixed income	20		28		36
Real estate	8		2		1
Other investments	17		17		10
	100	%	100	%	100	%

Other investments include private equity, venture capital, hedge funds and funds that invest in these types of securities.

The investment strategy for pension plan assets is to utilize a diversified blend of global public and private equity portfolios, fixed income portfolios, real estate and alternative investments to earn a long-term investment return that meets or exceeds the long-term expected rate of return for actuarial purposes of 8.5%. Active investment management strategies are used to measure each investment portfolio’s returns and risk levels against applicable market indices. The Company expects to contribute less than $1.0 million to its defined benefit pension plans in Fiscal 2006.

Other Employee Benefit Plans

The Company has a defined contribution savings plan, which qualifies under Section 401(k) of the Internal Revenue Code. Pursuant to this plan, employees may contribute up to 80% of their pre-tax salary, subject to statutory limitations. The plan was amended effective January 1, 2005 to modify Company matching contributions. As a result of this amendment, the Company contributes a matching payment equal to 50% of amounts contributed by employees up to 6% of their eligible annual compensation, subject to certain limitations. Employees are immediately vested in company matching contributions made since July 1, 2003. The Company’s matching contributions to the 401(k) savings plan totaled $3.0 million, $2.8 million and $2.7 million in Fiscal 2005, 2004 and 2003, respectively.

The Company also has an unfunded defined contribution supplemental executive retirement plan for certain highly compensated employees. Under this plan, which began July 1, 2003, the Company credits each participant in an unfunded account with an amount equal to a specified percentage of the participant’s total compensation. The applicable percentage ranges from 0–15%, depending on the participant’s age. Participants become fully vested in their account balances after five years of service. The Company recorded $0.1 million of compensation expense in Fiscal 2005 and $0.2 million of compensation expense in each of Fiscal 2004 and Fiscal 2003 related to this plan.

Under an unfunded nonqualified deferred compensation plan for certain employees, eligible employees could defer a portion of their compensation. These deferred funds accrue interest payable to the employee at the prime rate in effect on specified dates. In Fiscal 2001, the Company implemented a new nonqualified elective salary deferral plan and ceased accepting contributions to the previous nonqualified deferred compensation plan. The successor plan also allows certain employees to defer a portion of their compensation. These deferred funds accrete value through deemed investments in equity or other instruments and are then distributed to the employee at time of separation from the Company or may be distributed under an optional pre-retirement interim distribution. The Company froze the successor deferred compensation plan from future salary deferrals effective January 1, 2006.

The Company has severance agreements with its executive officers, which require certain payments to the executive upon termination of employment following a change in control of the Company.

Note 13: Supplemental Financial Data

Sales by Geographic Area: Sales based on the geographic location of the customer were as follows:

	Fiscal		Fiscal		Fiscal
(In thousands)	2005		2004		2003
United States	$	663,218	$	542,659	$	437,233
United Kingdom	31,507		—		—
All other countries	31,627		7,144		8,453
	$	726,352	$	549,803	$	445,686

48

Property, Plant and Equipment:  Components of Property, plant and equipment, net are as follows:

	Fiscal			Fiscal
(In thousands)	2005			2004
Machinery and equipment	$	67,347		$	60,042
Buildings and leasehold improvements	28,234			26,159
Computer hardware and software	19,075			16,859
Accumulated depreciation	(78,283		)	(70,830		)
Net depreciable assets	36,373			32,230
Construction in progress	12,306			5,028
Land	500			598
Property, plant and equipment, net	$	49,179		$	37,856
Located in United States	$	46,717		$	37,856
Located in foreign countries	2,462			—
	$	49,179		$	37,856

In response to contract modifications in Fiscal 2005 adding 3,016 truck and trailer deliveries to the current U.S. Army production contract, the Company is incurring approximately $25 million in capital expenditures in order to expand the production facility in Sealy, Texas, to meet the increased volume requirements.  Capital expenditures in Fiscal 2005 were $17.4 million, including $13.3 million related to the Sealy facility expansion project.

Depreciation expense was $8.5 million, $9.7 million and $9.5 million in Fiscal 2005, 2004 and 2003, respectively. 

During the fourth quarter of Fiscal 2004, the Company extended the estimated useful lives of certain machinery and equipment assets within the Tactical Vehicle Systems segment from four years to ten years.  This change in estimated life was made due to the expected usage of such assets over the current five-year contract with the U.S. Army.  As a result of this change in estimate, depreciation expense declined by $2.5 million ($1.6 million after-tax, or $0.05 per diluted share) and $0.6 million ($0.4 million after tax, or $0.01 per diluted share) in Fiscal 2005 and 2004, respectively.

Intangibles and Other Assets:  Components of Intangibles and other assets, net are as follows:

	Fiscal		Fiscal
(In thousands)	2005		2004
Goodwill, net	$	29,571	$	1,507
Other intangibles, net of accumulated amortization of $1,276 and $349	14,533		107
Other assets	3,131		2,997
Intangibles and other assets, net	$	47,235	$	4,611

The weighted average amortization period for intangible and other assets acquired in Fiscal 2005 is 17.1 years.  Estimated aggregate amortization expense for the next five years is as follows (in thousands):

Fiscal 2006	$	883
Fiscal 2007	609
Fiscal 2008	464
Fiscal 2009	443
Fiscal 2010	443
Thereafter	6,311
	$	9,153

49

A summary of goodwill activity follows:

	Fiscal			Fiscal
(In thousands)	2005			2004
Balance at beginning of year	$	1,507		$	1,507
Additions to goodwill related to ATHL acquisition (see Note 4)	30,593			—
Impact of foreign currency translation	(2,529		)	—
Balance at end of year	$	29,571		$	1,507

Note 14:  Consolidated Quarterly Data (Unaudited)

	Fiscal 2005
	First			Second			Third			Fourth			Total
(In thousands, except per share data)	Quarter			Quarter			Quarter			Quarter (a)			Year
Sales	$	165,518		$	204,174		$	161,821		$	194,839		$	726,352
Gross profit	15,265			20,499			6,400			1,596			43,760
Net earnings (loss) from continuing operations	6,541			10,288			639			(252		)	17,216
Earnings (loss) from discontinued operations, net	1,771			3,225			4,660			(384		)	9,272
Gain (loss) on sale of discontinued operations, net	(620		)	(4,211		)	(1,949		)	6,420			(360		)
Net earnings	$	7,692		$	9,302		$	3,350		$	5,784		$	26,128
Net earnings (loss) per share:
Basic
Continuing operations	$	0.23		$	0.35		$	0.02		$	(0.01	)	$	0.59
Discontinued operations	0.04			(0.03		)	0.09			0.21			0.31
Net earnings per share	$	0.27		$	0.32		$	0.11		$	0.20		$	0.90
Diluted
Continuing operations	$	0.22		$	0.35		$	0.02		$	(0.01	)	$	0.58
Discontinued operations	0.04			(0.04		)	0.09			0.20			0.30
Net earnings per share	$	0.26		$	0.31		$	0.11		$	0.19		$	0.88
	Fiscal 2004
	First			Second			Third			Fourth			Total
(In thousands, except per share data)	Quarter			Quarter			Quarter			Quarter			Year
Sales	$	138,783		$	140,737		$	133,431		$	136,852		$	549,803
Gross profit	21,256			21,472			18,471			12,599			73,798
Net earnings from continuing operations	9,745			9,126			8,490			3,366			30,727
Loss from discontinued operations, net	(4,303		)	(3,249		)	(6,407		)	(14,060		)	(28,019		)
Gain on sale of discontinued operations, net	—			—			—			2,270			2,270
Net earnings (loss)	$	5,442		$	5,877		$	2,083		$	(8,424	)	4,978
Net earnings (loss) per share:
Basic
Continuing operations	$	0.34		$	0.32		$	0.30		$	0.12		$	1.07
Discontinued operations	(0.15		)	(0.12		)	(0.23		)	(0.41		)	(0.90		)
Net earnings (loss) per share	$	0.19		$	0.20		$	0.07		$	(0.29	)	$	0.17
Diluted
Continuing operations	$	0.34		$	0.31		$	0.29		$	0.11		$	1.06
Discontinued operations	(0.15		)	(0.11		)	(0.22		)	(0.40		)	(0.89		)
Net earnings (loss) per share	$	0.19		$	0.20		$	0.07		$	(0.29	)	$	0.17

(a)Includes $3.3 million charge in cost of sales to write off previously anticipated cost recoveries under the FMTV contract, of which $1.2 million had been recorded in Fiscal 2004 and the remainder in earlier quarters of Fiscal 2005.  See Note 10.

50

Quarterly earnings per share is not necessarily additive to the annual calculation of earnings per share, as each quarter’s calculation is based on that quarter’s weighted average shares outstanding. 

Item 9.  Changes in and Disagreements With Accountants on Accounting and Financial Disclosure.

None.

Item 9A.  Controls and Procedures.

Evaluation of Disclosure Controls and Procedures

At the end of the period covered by this Annual Report on Form 10-K, the Company carried out an evaluation required by the Securities Exchange Act of 1934, as amended (the “Exchange Act”), under the supervision and with the participation of the Company’s management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness of the Company’s disclosure controls and procedures pursuant to Rule 13a-15 under the Exchange Act.  Based upon that evaluation, the Company’s Chief Executive Officer and Chief Financial Officer have concluded that the Company’s disclosure controls and procedures are effective as of the end of the period covered by this report in alerting them on a timely basis to material information relating to the Company and required to be included in the Company’s periodic filings under the Exchange Act. 

Internal Controls over Financial Reporting

Management’s report on the Company’s internal controls over financial reporting can be found in Item 8 of this report.  The Independent Registered Public Accounting Firm’s attestation report on management’s assessment of the effectiveness of the Company’s internal controls over financial reporting can also be found in Item 8 of this report.  There have been no changes in the Company’s internal controls over financial reporting that occurred during the fourth quarter of Fiscal 2005 that have materially affected, or are reasonably likely to materially affect, the Company’s internal controls over financial reporting.

Item 9B.  Other Information.

None.

PART III

Item 10.  Directors and Executive Officers of the Registrant.

Board of Directors

The Board of Directors of the Company consists of seven directors divided into two classes of two members and one class of three members.  At each Annual Meeting of Shareholders one class is elected to hold office for a term of three years.  Members of the other classes continue to serve for the remainder of their respective terms.  In accordance with the Bylaws of the Company, a director must retire upon the expiration of such director’s term following his 73^rd birthday.  Monroe M. Luther and Charles R. Ofner are members of the class of Directors whose term expires at the 2006 Annual Meeting of Shareholders.The following individuals are currently directors of Stewart & Stevenson Services, Inc.:

PERSONS WHOSE TERM EXPIRES IN 2006

Name and Principal Occupation	Age	Director Since
MONROE M. LUTHER(2)(3)	65	2000
Mr. Luther is Chairman of Wind River Capital Company, a venture capital company, Chairman of The Prague Post, a newspaper publisher, and Chairman of Bigger Than That Productions, a magazine publisher. Mr. Luther was the founder and former Chief Executive Officer of Eagle Management & Trust Company, an investment management and trust company.
CHARLES R. OFNER(1)(2)(4)	60	2000
Mr. Ofner is a Private Investor and Consultant in the international oil and gas business. He previously served as Senior Vice President of R&B Falcon Corporation, an offshore drilling company, until its merger with Transocean Sedco Forex, Inc. in January 2001. Mr. Ofner also previously served as Senior Vice President of Reading & Bates Corporation, an offshore drilling company. Mr. Ofner’s thirty plus years in the oil and gas business include assignments in operations, marketing and finance, with eighteen years in foreign assignments in the Middle East, Southeast Asia and Europe.

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DIRECTORS WHOSE TERM EXPIRES IN 2007

Name and Principal Occupation	Age	Director Since
MAX L. LUKENS(1)	57	2000
Mr. Lukens is President and Chief Executive Officer of the Company. He previously served the Company as Interim Chief Executive Officer and President from September 2003 to March 2004, and as Chairman of the Board of the Company from December 2002 to March 2004. He also previously served as Chairman of the Board, President and Chief Executive Officer of Baker Hughes Incorporated, an oilfield services company, from 1997 to January 2000. Mr. Lukens is a Director of NCI Building Systems, Inc., a maker of engineered metal building systems and components, and a Director of Westlake Chemical Corporation, a vertically integrated manufacturer and marketer of petrochemicals, vinyls, polymers and fabricated products.
ROBERT S. SULLIVAN(4)	62	1992
Dr. Sullivan is Dean of the University of California, San Diego, Rady School of Management. He previously served as Chairman of the Board of the Company, Dean of the Kenan-Flagler Business School of the University of North Carolina at Chapel Hill, Director of the IC2 Institute at The University of Texas at Austin, and Dean of the Graduate School of Industrial Administration, Carnegie Mellon University, Pittsburgh, Pennsylvania.
JAMES M. TIDWELL(1)(2)(3)	59	2004
Mr. Tidwell is Vice President of Finance and Chief Financial Officer of WEDGE Group Incorporated, a privately owned investment firm with holdings in manufacturing, hotels, commercial real estate, and oilfield services. He previously served as President of Daniel Measurement & Control, a division of Emerson Electric Co. and provider of flow measurement equipment and services to the energy industry. Mr. Tidwell was Executive Vice President and Chief Financial Officer of Daniel Industries, Inc. from 1996 to 1999 before its acquisition by Emerson Electric Co., and Vice President and Chief Financial Officer of Hydril Company LP, a manufacturer of blowout preventers and premium connections for oilfield tubulars, from 1993 to 1996. Mr. Tidwell is a Director of Pioneer Drilling Company, a provider of land contract drilling services to oil and gas operators, and T-3 Energy Services, Inc., a provider of oilfield products and services. Mr. Tidwell is also a member of the National Board of Directors of the National Multiple Sclerosis Society.

DIRECTORS WHOSE TERM EXPIRES IN 2008

Name and Principal Occupation	Age	Director Since
HOWARD WOLF(1)(2)	71	1999
Mr. Wolf is Chairman of the Board of the Company, a private investor and attorney. He previously was a Senior Partner in the international law firm of Fulbright & Jaworski L.L.P. In December 2003, Mr. Wolf was appointed by the Texas Lieutenant Governor, David Dewhurst, to serve a two year term as a member of the Texas Sunset Advisory Commission, which reports to the Legislature of Texas and recommends the termination or modification of State agencies and commissions. In 2005, Mr. Wolf was reappointed to a second two year term as a member of the Texas Sunset Advisory Commission. Also in 2005, Mr. Wolf was appointed by the Texas Governor, Rick Perry, to the Texas Tax Reform Commission.
CHARLES S. REAM(3)(4)	62	2004
Mr. Ream is Executive Vice President and Chief Financial Officer of Anteon International Corporation, a $1.5 billion provider of information technology, systems engineering, technology management, and logistics modernization services, primarily to the U.S. government. He previously served as Senior Vice President and Chief Financial Officer of Newport News Shipbuilding, Inc. from 2000 to 2001, Senior Vice President of Finance of Raytheon Systems Company from 1998 to 2000, and Chief Financial Officer of Hughes Aircraft Company, a subsidiary of Hughes Electronics, from 1994 to 1998. Prior to joining Hughes Aircraft Company, Mr. Ream was a Partner with Deloitte and Touche LLP. Mr. Ream is a Director of DynCorp International, Inc.

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(1)Member of Executive Committee.

(2)Member of Compensation and Management Development Committee.

(3)Member of Audit Committee.

(4)Member of Nominating and Governance Committee.

Executive Officers

The names, ages and positions of all the executive officers of the Company as of March 31, 2006 are listed below.  Except as noted below, each officer was last elected as an executive officer at the meeting of directors immediately following the 2005 Annual Meeting of Shareholders.  There exist no arrangements or understandings between any officer and any other person pursuant to which the officer was elected.

Name	Age	Position	OfficerSince
Max L. Lukens	57	President and Chief Executive Officer	2004
Carl B. King	63	Senior Vice President, Secretary and General Counsel	2001
Stephen A. Hines	57	Vice President	2000
Dennis M. Dellinger	53	Vice President	2002
L. Scott Biar	43	Chief Financial Officer, Treasurer and Controller	2002

Mr. Lukens was elected as President and Chief Executive Officer of the Company in March 2004.  Prior to that time he served as Interim President and Chief Executive Officer since September 2003 and Chairman of the Board of Directors since December 2002.  He previously served as Chairman of the Board, President and Chief Executive Officer of Baker Hughes Incorporated, an oilfield services company.

Mr. King was elected as Senior Vice President, Secretary and General Counsel of the Company in 2001.  He previously served as Senior Vice President and General Counsel of Seagull Energy Corporation from 1998 to 1999, and Senior Vice President and General Counsel of PanEnergy Corporation from 1990 to 1997.

Mr. Hines was elected as a Vice President of the Company in 2000.  He previously served the Company as Corporate Human Resources Manager.

Mr. Dellinger was elected as a Vice President of the Company in 2002. He has served as President of Stewart & Stevenson TVS, Inc., the general partner of Stewart & Stevenson Tactical Vehicle Systems, L.P, since February 2001.  Previous to that he served in numerous leadership positions with Rolls Royce PLC, Allison, and General Motors.

Mr. Biar was elected as Chief Financial Officer and Treasurer of the Company in January 2006.  He was elected as Controller and Chief Accounting Officer of the Company in 2002.  He previously served as Vice President and Chief Accounting Officer for Encompass Services Corporation from 2000 to 2002, as Vice President and Controller for Corporate Brand Foods America, Inc. from 1998 to 2000, and as Corporate Controller for Weatherford International, Inc. from 1995 to 1998.  Mr. Biar is a certified public accountant.

Audit Committee Matters

The Board of Directors has a standing Audit Committee.  The Audit Committee is comprised of Messrs. Tidwell (Chairman), Luther, and Ream.  The Board of Directors has determined that the Audit Committee members meet the New York Stock Exchange standards for independence.  The Board of Directors has confirmed that all members of the Audit Committee are “independent” within the meaning of Item 7(d)(3)(iv) of Schedule 14A under the Securities Exchange Act of 1934, as amended (the “Exchange Act”).  The Board of Directors has reviewed the experience of the members of the Audit Committee and has found that all members meet the qualifications to be an “audit committee financial expert” under the rules of the Securities and Exchange Commission (the “Commission”).  The Board has designated Messrs. Tidwell, Luther and Ream as the members of the Audit Committee who will serve as the “audit committee financial experts” of the Company’s Audit Committee.

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Section 16(a) Beneficial Ownership Reporting Compliance

Section 16(a) of the Exchange Act requires the Company’s officers, directors and persons who own more than 10% of a registered class of the Company’s equity securities to file reports of ownership and changes in ownership with the Commission. Officers, directors and greater than 10% shareholders are required to furnish the Company with copies of all Section 16(a) reports they file.

Based solely upon a review of such reports received by it, or written representations from certain reporting persons that no Form 5 reports were required for those persons, the Company believes that, during Fiscal 2005, all filing obligations applicable to the reporting persons were complied with.

Code of Ethics

The Company has a code of business conduct and ethics for directors, officers (including the Company’s principal executive officer, principal financial officer and principal accounting officer) and employees, known as the Standards of Business Practices, which are available on the Company’s website at http://www.ssss.com/Services/AboutSS/BusinessPractices.  Shareholders may request a free copy of the Standards of Business Practices from:

Stewart & Stevenson Services, Inc.
Attention: Corporate Secretary
2707 North Loop West
Houston, TX  77008
(713) 868-7700

Corporate Governance Guidelines

The Company has adopted Guidelines on Corporate Governance and Nominating and Governance Committee Charter, which are available on the Company’s website at http://www.ssss.com/Services/AboutSS/CorporateGovernance.  Shareholders may request a free copy of the Guidelines on Corporate Governance and Nominating and Governance Committee Charter from the address and phone numbers set forth above under “Code of Ethics.”

Item 11.  Executive Compensation.

The following Summary Compensation Table shows the aggregate compensation paid or accrued by the Company during each of the last three fiscal years to or for (i) each person that held the office of Chief Executive Officer or acted in a similar capacity during Fiscal 2005 and (ii) each of the other four highest compensated executive officers who were serving as executive officers on January 31, 2006 and (iii) two additional persons, each of whom would have been one of such four highest compensated executive officers except that he was not serving as an executive officer on January 31, 2006.

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SUMMARY OF COMPENSATION

		Annual Compensation							Long-Term Compensation
Name and Principal Position	Fiscal Year(1)	Salary		Bonus			Other Annual Compensation	Options Granted	LTIP Payout	All Other Compensation(2)
Max L. Lukens	2005	$	750,000	$	1,500,000	(3)	(4)	—	—	$	159,420	(5)
President and Chief	2004	750,000				(3)	(4)	300,000	—	48,855		(5)
Executive Officer	2003	—		—			(4)	165,000	—	193,125		(5)
Carl B. King	2005	325,000		325,000			(4)	—	—	96,717		(6)
Senior Vice President,	2004	305,000		305,000			(4)	90,000	—	50,621		(6)
Secretary and General	2003	305,000		—			(4)	73,500	—	27,294		(6)
Counsel							(4)
Dennis M. Dellinger	2005	290,000		290,000			(4)	—	—	47,420		(7)
Vice President	2004	270,000		270,000			(4)	75,000	—	38,200		(7)
	2003	235,000		170,000			(4)	45,000	—	17,292		(7)
L. Scott Biar	2005	185,000		148,000			(4)	10,000	—	18,423		(8)
Chief Financial Officer,	2004	165,000		132,000			(4)	7,500	—	11,114		(8)
Treasurer and Controller	2003	165,000		—			(4)	—	—	7,627		(8)
Stephen A. Hines	2005	200,000		160,000			(4)	—	—	32,460		(9)
Vice President	2004	179,000		143,200			(4)	30,000	—	16,588		(9)
	2003	179,000		—			(4)	17,500	—	10,769		(9)
Don K. Kyle	2005	270,000		1,447,200		(10)	(4)	—	—	61,687		(11)
Vice President	2004	240,000		240,000			(4)	75,000	—	14,154		(11)
	2003	—		37,120			(4)	25,000	—	—
Mark Whitman	2005	215,000		1,372,000		(12)	(4)	—	—	100,823		(13)
Vice President	2004	200,000		160,000			(4)	40,000	—	10,627		(13)
	2003	—		—			—	—	—	—

(1)	The Company’s fiscal year ends on January 31 of the following year.
(2)	Unless otherwise indicated, All Other Compensation consists of the dollar value of insurance premiums for term life insurance policies for the benefit of the named executive.
(3)	Pursuant to his employment agreement, Mr. Lukens was eligible for a bonus award for both Fiscal 2004 and Fiscal 2005.  Mr. Lukens was paid $1,500,000 in consideration of the achievement of the performance goals established with respect to the contingent bonus award contemplated by his employment agreement which is further discussed below in this Item 11.
(4)	Except as otherwise described, the total amount with respect to each named executive officer of all perquisites and other personal benefits, securities or property paid or accrued by the Company is less than the lesser of (i) $50,000 or (ii) 10% of the total of annual salary and bonus.  There have been no amounts paid or accrued with respect to above-market or preferential earnings on restricted stock, options, SARs or deferred compensation or with respect to earnings on long-term incentive plans or tax reimbursements.
(5)	All Other Compensation for Mr. Lukens for the fiscal year ended January 31, 2006 and 2005, respectively, consists of contributions by the Company to a supplemental retirement plan of $157,500 and $47,452, and term life insurance premiums of $1,920 and $1,403.  All Other Compensation for Mr. Lukens for the fiscal year ended January 31, 2004 consists of a special fee paid to him for his interim service to the Company.
(6)	For the fiscal years ended January 31, 2006, 2005 and 2004, respectively, All Other Compensation for Mr. King consists of contributions by the Company to a supplemental retirement plan of $93,808, $46,930 and $23,603, term life insurance premiums of $1,851, $1,758 and $1,679, and contributions by the Company to a defined contribution pension plan of $1,058, $1,933 and $2,012.
(7)	For the fiscal years ended January 31, 2006, 2005 and 2004, respectively, All Other Compensation for Mr. Dellinger consists of contributions by the Company to a supplemental retirement plan of $38,877, $31,301 and $11,901, term life insurance premiums of $2,197, $2,104 and $1,641, and contributions by the Company to a defined contribution pension plan of $6,346, $4,795 and $3,750.

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(8)	For the fiscal years ended January 31, 2006, 2005 and 2004, respectively, All Other Compensation for Mr. Biar consists of contributions by the Company to a supplemental retirement plan of $11,633, $5,755 and $2,999, term life insurance premiums of $1,044, $951 and $915, and contributions by the Company to a defined contribution pension plan of $5,746, $4,408 and $3,713.
(9)	For the fiscal years ended January 31, 2006, 2005 and 2004, respectively, All Other Compensation for Mr. Hines consists of contributions by the Company to a supplemental retirement plan of $25,435, $12,530 and $6,473, term life insurance premiums of $1,130, $1,032 and $1,046, and contributions by the Company to a defined contribution pension plan of $5,895, $3,026 and $3,250.
(10)	Pursuant to the Kyle Termination Agreement discussed below, Mr. Kyle resigned from employment in connection with the sale of the Power Products business.  The Company paid Mr. Kyle $152,200 to satisfy amounts owed to him under the Company’s Management Incentive Compensation Plan and $1,295,000 in connection with the sale of the Power Products business and the non-compete agreements that are part of the Kyle Termination Agreement.
(11)	For the fiscal year ended January 31, 2006 and 2005, respectively, All Other Compensation for Mr. Kyle consists of contributions by the Company to a supplemental retirement plan of $50,760 and $7,754, term life insurance premiums of $1,523 and $1,277, and contributions by the Company to a defined contribution pension plan of $9,404 and $5,123.  Mr. Kyle ceased to be an executive officer effective January 23, 2006.
(12)	Pursuant to the Whitman Termination Agreement discussed below, Mr. Whitman resigned from employment in connection with the sale of the Engineered Products business.  The Company paid Mr. Whitman $172,000 to satisfy amounts owed to him under the Company’s Management Incentive Compensation Plan and $1,200,000 in connection with the sale of the Engineered Products business and the non-compete agreements that are part of the Whitman Termination Agreement.
(13)	For the fiscal year ended January 31, 2006 and 2005, respectively, All Other Compensation for Mr. Whitman consists of contributions by the Company to a supplemental retirement plan of $87,162 and $5,788, term life insurance premiums of $1,223 and $916, and contributions by the Company to a defined contribution pension plan of $12,438 and $3,923.  Mr. Whitman ceased to be an executive officer effective January 23, 2006.

Grants and Exercises of Stock Options and Stock Appreciation Rights

The Company has three stock option plans pursuant to which options may be granted.  The Company has a 1994 Director Stock Plan pursuant to which there are no options available for future grant and 1,000 options outstanding.  The 1988 Nonstatutory Stock Option Plan (as amended and restated effective as of June 10, 1997) (the “1988 Plan”) authorizes the grant of options to employees, including officers, to purchase an aggregate of up to 1,500,000 shares of Common Stock and provides that limited stock appreciation rights may be granted in connection with such options.  The 1993 Plan authorizes the grant of options to employees other than officers of the Company.  As of January 31, 2006, there were 964,086 options available for grant and 578,563 options outstanding under the 1993 Plan.  Stock appreciation rights may not be granted under the 1993 Plan. The 1996 Plan authorizes the grant of options to directors other than officers or employees of the Company.

The recipients and terms of options granted pursuant to the 1988 Plan and the 1993 Plan are determined by the Compensation and Management Development Committee of the Board of Directors, no member of which is an employee of the Company or eligible for any benefits under such plans.  The 1996 Plan provides for an automatic grant of an option to purchase 5,000 shares of the Company’s Common Stock on the date of each Annual Meeting of Shareholders to each eligible director who was elected to serve as a director at, or whose term as a director continued after, such meeting.

During Fiscal 2005, the Company granted options to purchase an aggregate of (i) 10,000 shares of Common Stock under the 1988 Plan, (ii) 267,500 shares of Common Stock under the 1993 Plan and (iii) 30,000 shares of Common Stock under the 1996 Plan. No limited stock appreciation rights were granted under the 1988 Plan during Fiscal 2004 or during any previous fiscal year.  The following tables set forth information as to options under the Company’s stock option plans granted to or exercised by the individuals described in the Summary Compensation Table during 2005 and the value of all outstanding options owned as of January 31, 2006 by the individuals named in the Summary Compensation Table.

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OPTION GRANTS DURING FISCAL 2005

	Individual Grants
	Options	% of Total Options Granted to	Exercise Price per		Expiration	Potential Realizable Value at Assumed Annual Rates of Stock Price Appreciation for Option Term
Name	Granted(1)	Employees	Share(2)		Date(3)	5%		10%
Max L. Lukens	-0-	-0-	-0-		-0-	-0-		-0-
Carl B. King	-0-	-0-	-0-		-0-	-0-		-0-
Dennis M. Dellinger	-0-	-0-	-0-		-0-	-0-		-0-
L. Scott Biar	10,000	3.7	$	23.66	04/05/2015	$	148,796	$	377,079
Stephen A. Hines	-0-	-0-	-0-		-0-	-0-		-0-
Don. K. Kyle(4)	-0-	-0-	-0-		-0-	-0-		-0-
Mark Whitman(4)	-0-	-0-	-0-		-0-	-0-		-0-

(1)All options become exercisable in four 25% cumulative annual installments commencing April 5, 2006.  However, as result of the Board of Directors approving the Merger Agreement with Armor Holdings, substantially all outstanding stock options became fully vested and exercisable on February 26, 2006, subject to certain restrictions.

(2)All options are exercisable at the prices shown. The prices shown are not less than the closing market price on the date of grant.

(3)All options expire ten years after the date of grant.

(4)Messrs.  Kyle and Whitman ceased to be executive officers effective January 23, 2006.

OPTION EXERCISES DURING FISCAL 2005

AND YEAR-END VALUES

	Shares Acquired on	Value	Number of Unexercised Options at January 31, 2006(1)		Value of Unexercised In-the-Money Options at January 31, 2006(1)
Name	Exercise	Realized	Exercisable	Unexercisable	Exercisable		Unexercisable
Max L. Lukens	-0-	N/A	476,000	100,000	$	4,639,810	$	1,135,000
Carl B. King	-0-	N/A	101,750	111,750	1,023,173		1,422,473
Dennis M. Dellinger	-0-	N/A	91,250	88,750	812,588		1,083,613
L. Scott Biar	-0-	N/A	9,375	18,125	128,231		122,594
Stephen A. Hines	-0-	N/A	34,050	32,750	315,999		409,558
Don K. Kyle(2)	-0-	N/A	100,000	-0-	1,156,501		-0-
Mark Whitman(2)	-0-	N/A	40,000	-0-	454,000		-0-

(1)As a result of the Board of Directors approving the Merger Agreement with Armor Holdings, substantially all outstanding stock options became fully vested and exercisable on February 26, 2006, subject to certain restrictions.

(2)Messrs. Kyle and Whitman ceased to be executive officers effective January 23, 2006 and, pursuant to their termination and release agreements, all of their unvested stock options became immediately exercisable.

Retirement Plans

The Company has a defined benefit pension plan (the “Pension Plan”) which was closed so that employees hired after June 30, 2003 are not eligible to participate. Pension Plan benefits were “frozen” on June 30, 2003 reflecting the fact that future pay and service credits would not be taken into account. Pension Plan benefits were 100% vested for all Pension Plan participants on June 30, 2003.  Benefits are determined primarily by average final base salary as of June 30, 2003 and years of service through June 30, 2003.  The Pension Plan covers substantially all of the Company’s full-time employees, including officers, and is subject to certain limitations described below.

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Pension benefits accrued through June 30, 2003 are based on 1.5% of (a) the employee’s highest consecutive five-year average base salary out of the ten years prior to June 30, 2003, or (b) $200,000, whichever is lower, times the employee’s years of credited service through June 30, 2003.  This benefit is offset by a percentage of estimated Social Security benefits.  The Code limits benefits that may be paid under the Pension Plan to $175,000 per year in 2006.

The Company has a Supplemental Executive Retirement Plan (the “SERP”) under which certain key executives will receive retirement benefits in addition to those provided under the Pension Plan.  The Compensation and Management Development Committee determines which executive officers are eligible for benefits under the SERP. Consistent with the Pension Plan, SERP participation and benefits were also “frozen” on June 30, 2003. Supplemental benefits are based upon the average final compensation and years of service without regard to the limitations imposed by the Code, and using the total of base salary and bonus as of June 30, 2003 to compute final average compensation.  Benefits under the SERP are limited to an amount such that the aggregate of all retirement benefits paid under the Pension Plan and the SERP will not exceed 75% of the executive’s highest consecutive five-year average salary as of June 30, 2003, not including bonus payments.

The following table sets forth the estimated annual benefits payable upon retirement to persons in specified compensation and years-of-service classifications pursuant to the Stewart & Stevenson Employee Pension Plan and the Stewart & Stevenson Supplemental Executive Retirement Plan.

Final
Average
Compensation		Years of Accrued Service as of June 30, 2003**
As of June 30, 2003**		15		20		25		30		35		40
$	100,000	$	17,648	$	23,531	$	29,414	$	35,296	$	41,718	$	49,218
200,000		40,148		63,531		66,914		80,296		94,218		109,218
300,000		62,648		53,531		104,414		125,296		146,718		169,218
400,000		85,148		113,531		141,914		170,296		199,218		229,218
500,000		107,648		143,531		179,414		215,296		251,718		289,218
600,000		130,148		173,531		216,914		260,296		304,218		349,218
700,000		152,648		203,531		254,414		305,296		356,718		409,218
800,000		175,148		233,531		291,914		350,296		409,218		469,218
900,000		197,648		263,531		329,414		395,296		461,718		529,218
1,000,000		220,148		293,531		366,914		440,296		514,218		589,218

The Stewart & Stevenson Pension Plan provides benefits based on compensation less than or equal to the maximum amount under IRC Section 401(a)(17). Qualified plan benefits are limited by IRC Section 415. Benefits that exceed these limits are provided through a non-qualified plan to eligible SERP participants.

**Effective June 30, 2003 the Pension Plan and SERP were frozen.  Pension plan participants who had attained age 55 and accumulated 70 age and service points as of December 31, 2003 will continue to accrue benefits at a rate of .75% of average monthly pay times years of service after July 1, 2003.  Participants in the SERP on June 30, 2003 will only accrue benefits from the defined contribution SERP plan after July 1, 2003.

(1)Computation of estimated annual retirement benefit based on a straight-line annuity for the life of the employee, net of base Social Security benefits under the Social Security law currently in effect, assuming the employee retires in 2005 at age 65.

The Stewart & Stevenson Pension Plan provides benefits, which were “frozen” on June 30, 2003, based on the highest consecutive 5-year average compensation as of June 30, 2003 less than or equal to the maximum amount under the Code, Section 401(a)(17).  Qualified plan benefits are limited by the Code, Section 415.  Benefits that exceed these limits are provided through a non-qualified plan which was also “frozen” on June 30, 2003 to eligible SERP participants.

Former SERP participants will accrue benefits under a defined contribution SERP plan (the “DC SERP”) and will not accrue any additional defined benefit plan benefits.  The DC SERP formula provides for an age based annual employer contribution, expressed as a contribution to an account, based on the following table:

Age	Annual Employer Contribution
30 – 39	1.5% of pay
40 – 49	3.5% of pay
50 – 59	7.0% of pay
60 and older	15.0% of pay

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The total benefit payable to former SERP participants will be the sum of the accrued benefits under the Pension Plan and SERP as well as benefit accrued under the DC SERP.

The Estimated Annual Retirement Benefit Table shown above does not include any benefits under the DC SERP.

The five-year average compensation of each executive officer listed in the Summary of Compensation Table differs from the present salary and bonus in such table as a result of changes in the rate of pay during the average period.  The following table sets forth the years of credited service, five-year average compensation and consecutive five-year average base salary for each of the individuals listed in the Summary of Compensation Table.

NAME	Years of Service(1)	Average Total Compensation		Average Base Salary
Max L. Lukens	2	N/A		N/A
Carl B. King	5	$	437,029	$	299,385
Dennis M. Dellinger	5	$	431,507	$	243,241
L. Scott Biar	3	N/A		N/A
Stephen A. Hines	24	$	253,283	$	178,354
Don K. Kyle(2)	2	N/A		N/A
Mark Whitman(2)	2	N/A		N/A

(1)Calculated as of March 1, 2006.

(2)Messrs. Kyle and Whitman ceased to be executive officers effective January 23, 2006.

Compensation of Directors

During Fiscal 2005, directors whose principal occupation was other than employment with the Company were compensated in cash at the rate of $20,000 per year plus $2,000 for each meeting of the Board of Directors and each committee meeting attended in person and $1,000 for each meeting attended by telephone.  Each committee chairman received an annual fee of $5,000, except the Chairman of the Audit Committee received an annual fee of $7,500.  Mr. Wolf received additional cash compensation in the amount of $144,000 for his service as Chairman of the Board.  The directors were also reimbursed for any out-of-pocket expenses incurred to attend meetings.

During Fiscal 2005, each director who was not an officer or employee of the Company participated in the Stewart & Stevenson Services, Inc. Amended and Restated 1996 Director Stock Plan, as amended (the “1996 Plan”).  Under the 1996 Plan, such directors received, on the date of the 2005 Annual Meeting of Shareholders, (i) the number of shares of the Company’s Common Stock determined by dividing (A) the sum of $15,000 by (B) the fair market value of a share of the Company’s Common Stock, and (ii) options to purchase 5,000 shares of the Company’s Common Stock.  All options were granted at the closing price on the date of grant and will become exercisable on the first anniversary of the grant.  All options granted under the 1996 Plan expire on the tenth anniversary of the grant.

For Fiscal 2006, directors whose principal occupation is other than employment with the Company will be compensated in cash at the rate of $20,000 per year plus $2,000 for each meeting of the Board of Directors and each committee meting attended in person and $1,000 for each meeting attended by telephone. Each committee chairman will receive an annual fee of $5,000, except the Chairman of the Audit Committee will receive an annual fee of $7,500.  The Chairman of the Board will receive additional compensation in the amount of $12,000 per month.  The directors will also be reimbursed for any out-of-pocket expenses incurred to attend meetings.

Employment Contracts and Severance Agreements

Lukens Employment Agreement

The Company entered into an employment agreement with Max L. Lukens dated February 1, 2004 (the “Prior Employment Agreement”) that provided for, among other things, in the case of his employment agreement, a cash payment to him if his employment was terminated by him for good reason or by us without cause, and in the case of the severance agreement, a cash payment to him if his employment was terminated by him for good reason or by us or our successor without cause following a change in control of our company.  As a result of the scheduled expiration of these agreements in February 2006, on December 23, 2005 the Company entered into an employment agreement (the “Employment Agreement”) with Mr. Lukens to remain

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President and Chief Executive Officer of the Company.  The Employment Agreement supersedes the Prior Employment Agreement.

Term and Duties.  The term of the Employment Agreement begins December 23, 2005 (the “Commencement Date”) and ends February 1, 2010, subject to termination provisions therein (the “Term”).  From the Commencement Date until February 1, 2007, Mr. Lukens will be employed by the Company as President and Chief Executive Officer (the “Base Term”).  During the last three years of the Employment Agreement, Mr. Lukens will be employed as an advisor to the senior executives of the Company and will be obligated to provide such advisory services no more than fifteen days per year (the “Ancillary Term”).

Base Salary and Contingent Bonus Award.   The Employment Agreement provided for Mr. Lukens to be paid $1,500,000 in consideration of the achievement of the performance goals established with respect to the contingent bonus award contemplated by the Prior Employment Agreement, which has been paid to Mr. Lukens by the Company.

During the Base Term, Mr. Lukens will be paid an annual salary of $750,000 (the “Base Salary”).  At the end of the Base Term, Mr. Lukens will be eligible for a discretionary bonus (the “Discretionary Bonus”) of up to 100 percent (for target level performance) of his annual Base Salary during the Term (up to $750,000), which will take into account criteria specified in the Employment Agreement; provided, however, in the event there is a change of control as defined in the Severance Agreement (as defined below), the Discretionary Bonus shall be $750,000 (subject to the termination provisions of the Severance Agreement).

Ancillary Term Compensation.  During the Ancillary Term, Mr. Lukens will be paid (the “Ancillary Term Compensation”) an annual salary of $35,000, and in the event Mr. Lukens and the Company agree to increase the time Mr. Lukens is obligated to provide services during such period, the Company will pay Mr. Lukens an additional $6,250 per day for such services.

Option Grant.  If Mr. Lukens is employed by the Company on February 1, 2006, he will be granted on such date an option to purchase 5,000 shares of the Company’s common stock (the “2006 Option”) under the Company’s 1988 Nonstatutory Stock Option Plan, as amended to date (the “1988 Plan”), with the same terms specified in the option granted to Mr. Lukens pursuant to the Prior Employment Agreement, except as indicated below.

If the 2006 Option is granted, the per share exercise price of the 2006 Option will be the fair market value of a share of Company Common Stock on February 1, 2006 and the option will be fully exercisable on February 1, 2007.  The 2006 Option, if granted, would terminate upon the earliest to occur of (i) February 1, 2016, (ii) the 30th day after Mr. Lukens’ employment is terminated for any reason other than death, Disability, Retirement, or for Cause (as such terms are defined in the 1988 Plan), (iii) the first anniversary of the termination of Mr. Lukens’ employment due to death, Disability or Retirement, or (iv) the date of termination of Mr. Lukens’ employment for Cause.  If Mr. Lukens’ employment is terminated for any reason other than death, Disability, Retirement or Cause, the 2006 Option would not continue to vest after such termination of employment; provided, that notwithstanding the foregoing vesting schedule, upon Mr. Lukens’ death, Disability or Retirement prior to the expiration of the 2006 Option, the 2006 Option will be exercisable in full.  Further, notwithstanding the foregoing vesting schedule or any provision of the 1988 Plan, upon the occurrence of a Change in Control prior to the expiration of the 2006 Option, the 2006 Option will be exercisable in full, and upon the termination of Mr. Lukens’ employment other than for “cause” or by Mr. Lukens for “good reason” (as such terms are defined in the Employment Agreement) prior to the expiration of the 2006 Option, the 2006 Option will be exercisable in full.  Any termination of Mr. Lukens’ employment by the Company without “cause” or by Mr. Lukens for “good reason” (as such terms are defined in the Employment Agreement) prior to the expiration of the 2006 Option will be treated as a Retirement for all purposes of the 1988 Plan and the stock option agreement.

Death and Disability.  Mr. Lukens’ employment will terminate upon his death, and the Company may terminate Mr. Lukens’ employment due to a Disability (as defined in the Employment Agreement).  During any period of Mr. Lukens’ Disability, prior to his termination of employment with the Company, he will continue to receive his Base Salary or Ancillary Term Compensation, as applicable, as if he were not Disabled until the term of the Employment Agreement has expired, subject to certain reductions for payments received as a result of such Disability.  Upon termination of Mr. Lukens’ employment for death or Disability, the Company will be obligated to pay a lump sum cash amount equal to the sum of (i) the Base Salary or Ancillary Term Compensation, as the case may be, through the Date of Termination (as defined in the Employment Agreement), (ii) any accrued vacation pay and (iii) any other amounts due to him as of the date of termination, in each case to the extent not yet paid (the “Accrued Obligation”), plus a pro rata portion to the Date of Termination of the aggregate value of the Discretionary Bonus based on certain specified assumptions and calculations (the “Pro-Rata Discretionary Bonus Payment”).

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Termination by the Company for Cause or by Mr. Lukens Without Good Reason.  If Mr. Lukens’ employment is terminated by the Company for Cause (as defined in the Employment Agreement) or by Mr. Lukens without Good Reason (as defined in the Employment Agreement), the term of the Employment Agreement will expire on the Date of Termination, the Company will pay Mr. Lukens the Accrued Obligation, and the Company will have no further obligations to Mr. Lukens other than as required by law or the terms of employee benefit plans or stock option plans of the Company.

Termination by the Company without Cause or by Mr. Lukens for Good Reason.  If Mr. Lukens’ employment is terminated by the Company without Cause or by Mr. Lukens for Good Reason, then:

•the Company will pay Mr. Lukens the Accrued Obligation;

•the Company will pay to Mr. Lukens a lump sum amount equal to the Base Salary and Ancillary Term Compensation (at the rate in effect as of the Date of Termination) for the remainder of the Base Term and the Ancillary Term;

•all equity-based awards then held by Mr. Lukens will become fully vested and exercisable;

•the Company will continue to provide to Mr. Lukens benefits under the Company’s benefit plans and arrangements (other than equity compensation and bonus plans) in which he is entitled to participate, to the extent legally permitted until the end of the Term, subject to certain limitations and notifications;

•the termination of Mr. Lukens’ employment will be deemed a retirement under the 1988 Plan;

•the Company will pay to Mr. Lukens a lump sum cash amount equal to the aggregate value of the Discretionary Bonus that he would have earned as of the last day of the Base Term, assuming the achievement, at the expected value target level, of the performance goals established with respect to such award (it being understood that such amount is $750,000); and

•if Mr. Lukens’ employment is terminated before he has been granted the 2006 Option, then in lieu of granting such stock option the Company will pay to Mr. Lukens a lump sum cash payment equal to the Black-Scholes value, as reasonably determined by the Company as of February 1, 2006, of an option to purchase 5,000 shares of the Company’s Common Stock, assuming for this purpose the option was granted on February 1, 2006, the per share exercise price under the option is the fair market value of a share of the Company’s Common Stock on the date of Mr. Lukens’ termination and certain other specified terms and conditions (the “Cash Payment in Lieu of Option Grant”).

Confidentiality; Non-Competition; Non-Solicitation.  Mr. Lukens has agreed not to use or disclose confidential information obtained by him during his employment with the Company. In addition, during his employment and for a period of two years thereafter, Mr. Lukens has agreed not to solicit the Company’ s employees, compete with the Company’s business or solicit the Company’s customers.

Lukens Severance Agreement

Term.  The Company entered into a Severance Agreement with Mr. Lukens dated February 1, 2004 (the “Prior Severance Agreement”).  On December 23, 2005, the Company entered into a Severance Agreement (the “Severance Agreement”), which supersedes the Prior Severance Agreement.  The Severance Agreement provides for payment of certain benefits to Mr. Lukens if his employment is terminated following a Change of Control (as defined in the Severance Agreement) of the Company.  The Severance Agreement became effective December 23, 2005 and continues through February 1, 2007 (the “Severance Term”).

Severance Payments.  Pursuant to the Severance Agreement, the Company will pay severance benefits to Mr. Lukens if his employment is terminated following a Change of Control and during the Severance Term unless his employment is terminated by the Company for Cause (as defined in the Severance Agreement), by reason of death or Disability (as defined in the Severance Agreement), or by Mr. Lukens without Good Reason (as defined in the Severance Agreement).  If Mr. Lukens meets the criteria for payment of severance benefits due to termination of his employment following a Change of Control and during the Severance Term as described above, he will receive the following benefits:

•a lump sum cash payment equal to $2,250,000;

•continuation of life, disability, accident and health insurance benefits and all perquisites until February 1, 2010;

•notwithstanding any provision of his Employment Agreement, a lump sum cash payment equal to the aggregate value of the Discretionary Bonus that he would have earned as of the last day of the Base Term,

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assuming achievement, at the expected value target level, of the performance goals established with respect to such award (it being understood that amount being $750,000);

•the termination of Mr. Lukens’ employment will be deemed a retirement under the 1988 Plan; and

•if a Change in Control occurs prior to February 1, 2006, the Cash Payment in Lieu of Option Grant.

If any payment made by the Company to or for the benefit of Mr. Lukens would be subject to the excise tax imposed by Section 4999 of the Internal Revenue Code of 1986, as amended, the Company is required to pay Mr. Lukens an additional amount to cover any such taxes and any interest or penalties imposed with respect to such taxes.

Compensation other than Severance Payments.  Following a Change in Control and during the Severance Term: (i) during any period that Mr. Lukens fails to perform his duties as a result of incapacity due to physical or mental illness, he will continue to receive his salary, compensation and benefits payable to him during such period, until his employment is terminated by the Company for Disability (as defined in the Severance Agreement), (ii) if Mr. Lukens’ employment is terminated for any reason, Mr. Lukens will receive his salary through the Date of Termination (as defined in the Severance Agreement) and his normal post-termination compensation and benefits as such payments become due, and (iii) upon termination of Mr. Lukens’ employment due to death or Disability, Mr. Lukens shall receive the Accrued Obligation and the Pro-Rata Discretionary Bonus Payment. Upon a Change in Control, all stock options, restricted stock and all other equity incentives held by Mr. Lukens will become immediately vested, exercisable and nonforfeitable and all conditions thereof will be deemed to have been satisfied.

Severance Agreements For Other Current Executive Officers

Term.  The Company has entered into a severance agreement with each of its current executive officers (other than Mr. Lukens, whose severance agreement has been described earlier in this Report) (each, an “Executive”).  Each severance agreement provides for payment of certain benefits to the Executive if his employment is terminated following a Change in Control (as defined in the severance agreement) of the Company.  The severance agreement became effective on July 19, 2004 and continues through December 31, 2006.

Severance Payments.  Pursuant to the severance agreement, the Company will pay severance benefits to each Executive if his employment is terminated following a Change in Control and during the term of the severance agreement unless the Executive’s employment is terminated:

•by the Company for Cause (as defined in the severance agreement);

•by reason of death or Disability (as defined in the severance agreement); or

•by the Executive without Good Reason (as defined in the severance agreement).

If the Executive’s employment is terminated as set forth above, he will receive the following:

•a lump sum cash payment equal to two times the sum of the Executive’s base salary and the average cash value of annual bonus (whether paid in cash or stock) earned by the Executive in the three fiscal years prior to the Date of Termination (as defined in the severance agreement), provided the Executive has participated in the Company annual bonus or incentive plan for that period. If not, then the average is calculated using the lesser number of bonuses actually earned;

•continuation of life, disability, accident and health insurance benefits and perquisites for an additional three years;

•notwithstanding any provision of the Company’s incentive compensation plan, a lump sum cash payment equal to the sum of any unpaid incentive compensation allocated or awarded to the Executive and a pro rata portion to the Date of Termination of the aggregate value of all contingent incentive compensation awards;

•outplacement services suitable to Executive’s position for a period of one year;

•a nonforfeitable interest in the Executive’s benefits accrued under the Company’s retirement plan; and

•an additional amount (a “gross-up” payment) to cover any excise taxes that may be imposed under the “golden parachute” rules on payments and benefits received in connection with a Change in Control, so that the Executive would receive the total payment initially allocated by the Company.

Compensation other than Severance Payments.  Following a Change in Control and during the term of the severance agreement, during any period that the Executive fails to perform his duties as a result of incapacity due to physical or mental illness, he will continue to receive his salary, compensation and benefits payable to him during such period, until his employment is terminated by the Company for Disability (as defined in the severance agreement).

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If the Executive’s employment is terminated for any reason following a Change of Control and during the term of the severance agreement, the Executive will receive his salary through the Date of Termination and his normal post-termination compensation and benefits as such payments become due.

Upon a Change in Control, all stock options, restricted stock and all other equity incentives held by the Executive will become immediately vested, exercisable and nonforfeitable and all conditions thereof will be deemed to have been satisfied.

Severance Agreements for Certain Former Executive Officers

Simmons Severance Agreement

In connection with the sale of its Engineered Products and Power Products businesses in January 2006, the Company entered into a termination and release agreement with John B. Simmons (“Mr. Simmons”), the Company’s then-Senior Vice President, Chief Financial Officer and Treasurer (the “Simmons Termination Agreement”).  Pursuant to the Simmons Termination Agreement, Mr. Simmons resigned from his officer positions with the Company effective on and as of the closing of the sale of the Engineered Products and Power Products businesses in January 2006.  He continued his employment with the Company until March 31, 2006 (the “Separation Date”) to perform certain financial related activities for the Company, including helping the Company to carry out its financial reporting obligations in respect of its fiscal year ending January 31, 2006.  Mr. Simmons has also agreed to restrictions on competition and interference with the Company, which survive for two years after the Separation Date, restrictions on the disclosure of confidential information and certain cooperation obligations.

The Simmons Termination Agreement provides that:

•the Company and Mr. Simmons acknowledge, and the stock option agreements shall be amended to reflect, that the Company’s Compensation Committee of the Board of Directors has the discretion to accelerate the vesting of all stock option agreements held by Mr. Simmons under the 1988 Nonstatutory Stock Option Plan immediately upon the Separation Date and to permit the exercise thereof at any time after the Separation Date and prior to 3:00 p.m. on December 31, 2006.

•the Company will pay Mr. Simmons amounts owed to him in accordance with the Company’s Management Incentive Compensation Plan (“MICP”) for his performance during the fiscal year ending January 31, 2006.

•the Company will pay Mr. Simmons the accrued unpaid vacation benefits due to him under the Company’s vacation policy through the Separation Date.

•the Severance Agreement between Mr. Simmons and the Company dated July 19, 2004 is expressly superseded.  The Simmons Termination Agreement provides that, if Mr. Simmons has satisfied his cooperation obligations and carried out his duties and responsibilities until the Separation Date in good faith and with appropriate care and attention as reasonably directed by the Company’s President and Chief Executive Officer, the Company will pay Mr. Simmons $974,000 if there is a change in control of the Company before December 31, 2006.

•the Company will make a gross-up payment to Mr. Simmons, subject to certain conditions and limitations, in the event that any part of the payments to Mr. Simmons would be subject to an excise tax. 

Whitman Severance Agreement

In December 2005, the Company signed a termination and release agreement with Mark L. Whitman, the chief executive officer of the Company’s former Engineered Products business (the “Whitman Termination Agreement”).  Pursuant to the Whitman Termination Agreement, Mr. Whitman resigned from his position and employment with the Company as an employee and officer effective on and as of the closing date of the sale of the Engineered Products business.

The Company paid Mr. Whitman $172,000 to satisfy amounts owed to him under the MICP and $1,200,000 in connection with the sale of the Engineered Products business and the non-compete agreements that are part of the Whitman Termination Agreement.  The Company also paid Mr. Whitman the accrued unpaid vacation due to him under the Company’s vacation policy through the closing date of the sale of the Engineered Products business.  The Whitman Termination Agreement also provides that all stock option agreements held by Mr. Whitman shall be amended to provide the Compensation Committee of the Board of Directors the discretion to accelerate the vesting of such stock options, to the extent not previously vested, immediately upon the closing of the sale of the Engineered Products business and to permit the exercise thereof at any time after

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the closing date of the sale of the Engineered Products business and prior to 3:00 p.m. on December 31, 2006.  The Whitman Termination Agreement also provides for a gross-up payment, subject to certain conditions and limitations, in the event any part of the payments to Mr. Whitman would be subject to an excise tax (as defined in the Whitman Termination Agreement).

Pursuant to the Whitman Termination Agreement, Mr. Whitman has agreed to certain customary non-disclosure, non-interference and cooperation obligations.  Mr. Whitman also has agreed not to compete with the Company for two years following the sale of the Engineered Products business, subject to certain customary exceptions.  Mr. Whitman and the Company have also agreed to mutual releases from any claims each may have against the other.

Kyle Severance Agreement

In December 2005, the Company signed a termination and release agreement with Don K. Kyle, the chief executive officer of the Company’s former Power Products business (the “Kyle Termination Agreement”).  Pursuant to the Kyle Termination Agreement, Mr. Kyle resigned from his position and employment with the Company as an employee and officer effective on and as of the closing date of the sale of the Power Products business.

The Company paid Mr. Kyle $152,200 to satisfy amounts owed to him under the MICP and $1,295,000 in connection with the sale of the Power Products business and the non-compete agreements that are part of the Kyle Termination Agreement.  The Company also paid Mr. Kyle the accrued unpaid vacation due to him under the Company’s vacation policy through the closing date of the sale of the Power Products business.  The Kyle Termination Agreement also provides that all stock options agreements held by Mr. Kyle shall be amended to provide the Compensation Committee of the Board of Directors the discretion to accelerate the vesting of such stock options, to the extent not previously vested, immediately upon the closing of the sale of the Power Products business and to permit the exercise thereof at any time after the closing date of the sale of the Power Products business and prior to 3:00 p.m. on December 31, 2006.  The Kyle Termination Agreement also provides for a gross-up payment, subject to certain conditions and limitations, in the event any part of the payments to Mr. Kyle would be subject to an excise tax (as defined in the Kyle Termination Agreement).

Pursuant to the Kyle Termination Agreement, Mr. Kyle has agreed to certain customary non-disclosure, non-interference and cooperation obligations. Mr. Kyle also has agreed not to compete with the Company for two years following the sale of the Power Products business, subject to certain customary exceptions.  Mr. Kyle and the Company have also agreed to mutual releases from any claims each may have against the other.

Compensation Committee Interlocks and Insider Participation

The Company’s Compensation and Management Development Committee consists of Messrs. Charles R. Ofner (Chairman), Monroe M. Luther, James M. Tidwell and Howard Wolf, all of whom are non-employee directors.  None of the Compensation and Management Development Committee members has served as an officer of the Company, and none of the Company’s executive officers has served as a member of a compensation committee or board of directors of any other entity that has an executive officer serving as a member of the Company’s Board of Directors.  In December 2003, Mr. Howard Wolf retired as a partner in the international law firm of Fulbright & Jaworski L.L.P., which firm provides legal services to the Company.

Item 12.  Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.

Securities Authorized for Issuance Under Equity Compensation Plans

This table shows information about securities to be issued upon exercise of outstanding options, warrants and rights under the Company’s equity compensation plans, along with the weighted-average exercise price of the outstanding options, warrants and rights and the number of securities remaining available for future issuance under the plans as of January 31, 2006.

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Plan Category	Number of securities to be issued upon exercise of outstanding options, warrants and rights(1) (a)	Weighted- average exercise price of outstanding options, warrants and rights(1) (b)		Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a)) (c)
Equity compensation plans approved by security holders	2,179,188	$	16.48	1,818,911
Equity compensation plans not approved by security holders	—	—		—
Total	2,179,188	$	16.48	1,818,911

(1)The Company has not granted any warrants or rights under any equity compensation plans.

Security Ownership of Certain Beneficial Owners and Management

At the close of business on April 5, 2006, the record date for the special meeting, we had outstanding 29,495,398 shares of common stock.  The following table lists the beneficial ownership of shares of the Company’s Common Stock by (i) all persons and groups known by the Company to own beneficially more than 5% of the outstanding shares of the Company’s Common Stock, (ii) each director, (iii) each person who held the office of Chief Executive Officer during the last fiscal year and the four additional highest compensated executive officers who were serving as executive officers on January 31, 2006, (iv) each person who would have been one of such four highest compensated executive officers but was not serving as an executive officer on January 31, 2006, and (v) all current directors and officers as a group.  None of the directors, nominees or officers of the Company owned any equity security issued by the Company’s subsidiaries other than director’s qualifying shares.  Information with respect to officers, directors and their families is as of April 5, 2006 and is based on the books and records of the Company and information obtained from each individual.  All shareholders set forth below have our principal business address (except as indicated).  Additionally, unless otherwise indicated, the owner has sole voting and investment power with respect to the shares indicated.

Name and Address of Beneficial Owner	Shares Owned	Shares Subject to Options(1)	Total Shares Beneficially Owned(2)	Percentage of Shares Outstanding as of April 5, 2006(2)
J. & W. Seligman & Co. Incorporated (3)	1,524,873	—	1,524,873	5.2	%
Ramius Capital Group, L.L.C. (4)	1,654,011	—	1,654,011	5.6	%
Citadel Limited Partnership (5)	2,286,253	—	2,286,253	7.8	%
Max L. Lukens	31,266	581,000	612,266	2.0	%
Carl B. King	—	213,500	213,500	*
Dennis M. Dellinger	1,762	180,000	181,762	*
L. Scott Biar	—	27,500	27,500	*
Stephen A. Hines	2,620	64,300	66,920	*
Don K. Kyle (6)	—	100,000	100,000	*
Mark Whitman (6)	100	40,000	40,100	*
Howard Wolf	21,776	54,000	75,776	*
Monroe M. Luther	9,755	26,000	35,755	*
Charles R. Ofner	4,755	26,000	30,755	*
Charles S. Ream	1,285	10,000	11,285	*
Robert S. Sullivan	4,787	29,000	33,787	*
James M. Tidwell	2,565	10,000	12,565	*
All current executive officers and directors as a group (11 persons)	80,571	1,221,300	1,301,871	4.2	%

*Less than 1.0% of the outstanding shares.

(1)Includes shares issuable upon the exercise of one or more outstanding stock options exercisable within sixty days following April 5, 2006.

(2)Beneficial ownership is determined in accordance with the rules of the SEC.  Shares of our common stock issuable by us pursuant to options that may be exercised within 60 days after April 5, 2006, are deemed to be beneficially owned and outstanding for purposes of calculating the number of shares and the percentage beneficially owned by the applicable person.  However, these shares are not deemed to be beneficially owned and outstanding for purposes of computing the percentage beneficially owned by any other person or entity.

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(3)A Schedule 13G/A filed with the SEC on February 13, 2006 shows J. & W. Seligman Co. Incorporated and William C. Morris, each with a principal business office at 100 Park Avenue, New York, NY 10017, as each having shared voting power over 1,147,505 shares, shared dispositive power over 1,524,873 shares and beneficial ownership of 1,524,873 shares of our common stock.  The Schedule 13G/A states that William C. Morris is the owner of a majority of the outstanding voting securities of, and may be deemed to beneficially own the shares reported by J. & W. Seligman &Co. Incorporated.

(4)Based solely on a Schedule 13D filed jointly by Starboard Value and Opportunity Master Fund Ltd. (“Starboard”), Parche, LLC (“Parche”), RCG Ambrose Master Fund, Ltd. (“RCG Ambrose”), RCG Halifax Fund, Ltd. (“RCG Halifax”), Ramius Master Fund, Ltd. (“Ramius Master”), Admiral Advisors, LLC (“Admiral Advisors”), Ramius Advisors, LLC (“Ramius Advisors”), Ramius Capital Group, L.L.C. (“Ramius Capital”), C4S & Co., L.L.C. (“C4S”), Peter A. Cohen, Morgan B. Stark, Jeffrey M. Solomon, Thomas W. Strauss, Barington Companies Equity Partners, L.P. (“Barington Companies Equity”), Barington Companies Investors, LLC (“Barington Companies Investors”), Barington Companies Offshore Fund, Ltd. (“Barington Companies Offshore”), Barington Investments, L.P. (“Barington Investments”), Barington Companies Advisors, LLC (“Barington Companies Advisors”), Barington Capital Group, L.P. (“Barington Capital”), LNA Capital Corp. (“LNA”) and James Mitarotonda with the Securities Exchange Commission on April 4, 2006.  According to the report, Starboard has sole voting and dispositive power with respect to 317,977 shares.  Parche has sole voting and dispositive power with respect to 175,186 shares.  RCG Ambrose has sole voting and dispositive power with respect to 65,371 shares.  RCG Halifax has sole voting and dispositive power with respect to 70,399 shares.  Ramius Master has sole voting and dispositive power with respect to 256,456 shares.  As the investment manager of Starboard and the managing member of Parche, Admiral Advisors has sole voting and dispositive power with respect to 493,163 shares.  As the investment advisor of Ramius Master, Ramius Advisors has sole voting and dispositive power of 256,456 shares.  As the sole member of Admiral Advisors and Ramius Advisors and as the investment manager of RCG Halifax and RCG Ambrose, Ramius Capital has sole voting and dispositive power of 885,389 shares.  As the managing member of Ramius Capital, C4S has sole voting and dispositive power of 885,389 shares.  As the managing members of C4S, each of Messrs. Cohen, Stark, Solomon and Strauss share voting and dispositive power with respect to an aggregate of 885,389 shares owned by Starboard, Parche, RCG Ambrose, RCG Halifax and Ramius Master.  Messrs. Cohen, Stark, Solomon and Strauss disclaim beneficial ownership of such shares.  Barington Companies Equity has sole voting and dispositive power with respect to 348,448 shares.  As the general partner of Barington Companies Equity, Barington Companies Investors has sole voting and dispositive power with respect to 348,448 shares.  Barington Companies Offshore has sole voting and dispositive power with respect to 207,936 shares.  Barington Investments has sole voting and dispositive power with respect to 212,238 shares.  As the investment advisor of Barington Companies Offshore and the general partner of Barington Investments, Barington Companies Advisors has sole voting and dispositive power with respect to 420,174 shares.  As the majority member of Barington Companies Investors and the managing member of Barington Companies Advisors, Barington Capital has sole voting and dispositive power with respect to 768,622 shares.  As the general partner of Barington Capital, LNA has sole voting and dispositive power with respect to 768,622 shares.  Mr. Mitarotonda is the sole stockholder and director of LNA and therefore may be deemed the beneficial owner of shares owned by Barington Companies Equity, Barington Companies Offshore and Barington Investments.  Mr. Mitarotonda disclaims beneficial ownership of such shares.  Mr. Mitarotonda has sole voting and dispositive power with respect to 768,622 shares.  The address of the principal office of each of Parche, Admiral Advisors, Ramius Advisors, Ramius Capital, C4S, Mr. Cohen, Mr. Stark, Mr. Strauss and Mr. Solomon is 666 Third Avenue, 26th Floor, New York, New York 10017. The address of the principal office of each of Starboard, RCG Ambrose, RCG Halifax and Ramius Master is c/o Citco Fund Services (Cayman Islands) Limited, Corporate Center, West Bay Road, Grand Cayman, Cayman Islands, British West  Indies. The address of the principal business and principal office of each of Barington Companies Equity, Barington Companies Investors, Barington Investments, Barington Companies Advisors, Barington Capital and LNA is 888 Seventh Avenue, 17th Floor, New York, New York 10019.  The business address of Mr. Mitarotonda is c/o Barington Capital Group, L.P., 888 Seventh Avenue, 17th Floor, New York, New York 10019.  The address of the principal business and principal office of Barington Companies Offshore is c/o Bison Financial Services LTD, Bison Court, Road Town, Tortola, British Virgin  Islands.

(5)           Based solely on a Schedule 13G filed jointly by Citadel Limited Partnership (“Limited”), Citadel Investment Group, L.L.C. (“Investment”), Kenneth Griffin (“Griffin”), Citadel Wellington LLC (“Wellington”), Citadel Kensington Global Strategies Fund Ltd. (“Kensington”), Citadel Equity Fund Ltd. (“Equity”) and Citadel Derivatives Group LLC (“Derivatives,” and together with Limited, Investment, Griffin, Wellington, Kensington and Equity, the “Citadel Entities”)) with the Securities Exchange Commission on April 10, 2006. According to the report, the Citadel Entities share voting and dispositive power with respect to 2,286,253 shares and none of the Citadel Entities has sole voting or dispositive power with respect to any shares.

(6)Messrs. Kyle and Whitman ceased to be executive officers in January 2006.

Item 13.  Certain Relationships and Related Transactions.

Mr. Howard Wolf, who was elected Chairman of the Board of Directors of the Company effective March 1, 2004, retired as a partner in the international law firm of Fulbright & Jaworski L.L.P. in December 2003, which firm provides legal services to the Company.

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Item 14.  Principal Accountant Fees and Services.

The following table presents fees for professional audit services rendered by Ernst & Young for the audit of the Company’s annual financial statements for the fiscal years ended January 31, 2006 and 2005, and fees billed for other services rendered by Ernst & Young during those periods.

	Fiscal Year 2005		Fiscal Year 2004
Audit fees(1)	$	1,000,000	$	1,857,500
Audit-related fees(2)	125,553		117,924
Tax Fees(3)	16,219		32,604
All other fees(4)	500		269,767
Total fees	$	1,142,272	$	2,277,795

(1)Audit Fees consist of professional services rendered for the audit of the Company’s consolidated financial statements, the audit of the effectiveness of the Company’s internal control over financial reporting and the reviews of the Company’s quarterly financial statements.  Audit Fees also include fees for statutory audits of certain subsidiaries of the Company, consents , assistance with and review of documents filed with the SEC, work done by tax professionals in connection with the audit and quarterly reviews and accounting consultations and research work necessary to comply with generally accepted auditing standards. 

(2)Audit-related fees include benefit plan audits and consultation concerning accounting and financial reporting matters not required by statute or regulation.

(3)Tax fees consist of services rendered primarily related to tax return reviews and tax consulting.

(4)All other fees in Fiscal 2004 primarily include certain advisory services and assistance with the Company’s implementation of Section 404 of the Sarbanes-Oxley Act of 2002.

The Audit Committee or the Chairman of the Audit Committee, approved all of the services described above for Fiscal 2005 and Fiscal 2004.  The Audit Committee has determined that the provision of services rendered for all other fees, as described in the paragraphs above, is compatible with maintaining the independence of Ernst & Young.

Pre-Approval Policies and Procedures

The Audit Committee has adopted a policy requiring pre-approval by the Audit Committee of all audit and permissible non-audit services to be provided by Ernst & Young.  These services may include audit services, audit-related services, tax services and other services. Current rules of the Public Company Accounting Oversight Board are consulted prior to pre-approval of any non-audit services to be provided by Ernst & Young.  The Company’s Chief Financial Officer is notified prior to any engagement of Ernst & Young.  The Chief Financial Officer evaluates the desirability of employing Ernst & Young for any non-audit engagement, and if such engagement is desirable, the Chief Financial Officer presents the proposed engagement to the Chairman of the Audit Committee for pre-approval.  The Audit Committee or the Chairman of the Audit Committee then approves or rejects the proposed engagement.  If the Chairman of the Audit Committee approves any such engagement, he discusses such approval with the Audit Committee no later than the next regularly scheduled meeting.

Part iv

Item 15.  Exhibits and Financial Statement Schedules.

(a)	1.	The following financial statements for Stewart & Stevenson Services, Inc. are filed as a part of this report:
		Consolidated Balance Sheets—January 31, 2006 and 2005
		Consolidated Statements of Operations—Years ended January 31, 2006, 2005 and 2004
		Consolidated Statements of Shareholders’ Equity—Years ended January 31, 2006, 2005 and 2004
		Consolidated Statements of Comprehensive Income – Years ended January 31, 2006, 2005 and 2004
		Consolidated Statements of Cash Flows—Years ended January 31, 2006, 2005 and 2004

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		Notes to Consolidated Financial Statements
	2.	Schedules are omitted because of the absence of conditions under which they are required or because the information is included in the financial statements or notes thereto.
	3.	The Company has several instruments which define the rights of holders of long-term debt. Except for the instrument listed as exhibit 4.1 below, the total amount of securities authorized under any individual instrument with respect to long-term debt does not exceed 10% of the total assets of the Company and its subsidiaries on a consolidated basis. The Company agrees to furnish upon request by the Securities and Exchange Commission any instruments not filed herewith relating to its long-term debt.
		The Company will furnish to any shareholder of record as of April 5, 2006, a copy of any exhibit to this annual report on Form 10-K upon receipt of a written request addressed to Carl B. King, P. O. Box 1637, Houston, Texas 77008-1637 and the payment of $.20 per page with a minimum charge of $5.00 for reasonable expenses prior to furnishing such exhibits. The Company agrees to furnish supplementally to the Securities and Exchange Commission a copy of any omitted schedule to any document listed below upon request.
		The following instruments and documents are included as exhibits to this report.
*2.1		Asset Purchase Agreement dated December 6, 2004, by and among Stewart & Stevenson Services, Inc., S&S Tug Service Centers, Inc. and Tug Manufacturing Corp., f/k/a TUG Acquisition Corp. (filed January 27, 2005 as Exhibit 99.1 to the Company’s Current Report on Form 8-K and incorporated herein by reference).
*2.2		Amendment No. 1 to Asset Purchase Agreement dated as of December 31, 2004, by and among Stewart & Stevenson Services, Inc., S&S Tug Service Centers, Inc. and Tug Manufacturing Corp. (filed January 27, 2005 as Exhibit 99.2 to the Company’s Current Report on Form 8-K and incorporated herein by reference).
*2.3		Amendment No. 2 to Asset Purchase Agreement dated as of January 21, 2005, by and among Stewart & Stevenson Services, Inc., S&S Tug Service Centers, Inc. and Tug Manufacturing Corp. (filed January 27, 2005 as Exhibit 99.3 to the Company’s Current Report on Form 8-K and incorporated herein by reference).
*2.4		Agreement Relating to the Sale and Purchase of the Whole of the Issued Share Capital of Automotive Technik (Holdings) Limited dated April 8, 2005 between Stewart & Stevenson TVS UK Limited, a subsidiary of the Company, and the shareholders of ATHL (filed April 14, 2005 as Exhibit 2.1 to the Company’s Current Report on Form 8-K and incorporated herein by reference).
*2.5		Asset Purchase Agreement dated September 27, 2005, by and among Stewart & Stevenson Services, Inc., Stewart & Stevenson Petroleum Services, Inc., Stewart & Stevenson International, Inc., Sierra Detroit Diesel Allison, Inc., and S & S Trust, as sellers, and Hushang Ansary, as buyer (filed December 6, 2005 as Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q for the quarterly period ended October 29, 2005 and incorporated herein by reference).
*2.6		Asset Purchase Agreement dated October 24, 2005, by and among Stewart & Stevenson Services, Inc., IPSC Co. Inc., Stewart & Stevenson Holdings, Inc., Stewart & Stevenson De Las Americas, Inc., Stewart & Stevenson International, Inc., Stewart & Stevenson Power, Inc., and S & S Trust, as sellers, and Hushang Ansary, as buyer (filed December 6, 2005 as Exhibit 10.2 to the Company’s Quarterly Report on Form 10-Q for the quarterly period ended October 29, 2005 and incorporated herein by reference).
2.7		Amendment dated January 25, 2006 by and among Hushang Ansary, Stewart & Stevenson Services, Inc., Stewart & Stevenson International, Inc., Sierra Detroit Diesel Allison, Inc., S & S Trust, IPSC Co. Inc., Stewart & Stevenson Holdings, Inc., Stewart & Stevenson De Las Americas, Inc., Stewart & Stevenson Power, Inc., and C. Jim Stewart & Stevenson, Inc.
*2.8		Agreement and Plan of Merger dated as of February 27, 2006 by and among Armor Holdings, Inc., Santana Acquisition Corp. and Stewart & Stevenson Services, Inc. (filed March 3, 2006 as Exhibit 2.1 to the Company’s Quarterly Report on Form 8-K and incorporated herein by reference).
*3.1		Third Restated Articles of Incorporation of Stewart & Stevenson Services, Inc., effective as of September 13, 1995 (filed December 14, 1995 as Exhibit 3(a) to the Company’s Quarterly Report on Form 10-Q for the quarterly period ended October 31, 1995 and incorporated herein by reference).

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*3.2	Seventh Restated Bylaws of Stewart & Stevenson Services, Inc., effective as of July 9, 2004, as amended (filed April 6, 2005 as Exhibit 3.1 to the Company’s Current Report on Form 8-K and incorporated herein by reference).
*4.1	Note Purchase Agreement effective May 30, 1996, between Stewart & Stevenson Services, Inc. and the Purchasers named therein (filed September 12, 1996 as Exhibit 4 to the Company’s Quarterly Report on Form 10-Q for the quarterly period ended July 31, 1996 and incorporated herein by reference).
*4.2	Credit Agreement dated as of January 12, 2005 among Stewart & Stevenson Services, Inc., the Lenders party thereto JPMorgan Chase, N.A., as Administrative Agent, Wachovia Bank, National Association, as Syndication Agent, Bank of America, N.A., as Documentation Agent, and J.P. Morgan Securities Inc., as Sole Lead Arranger and Bookrunner (filed January 19, 2005 as Exhibit 99.1 to the Company’s Current Report on Form 8-K and incorporated herein by reference).
†*10.1	Stewart & Stevenson Elective Deferral Plan dated as of June 1, 2001 (filed June 6, 2001 as Exhibit 4.1 to the Company’s Registration Statement on Form S-8 (File No. 333-62438) and incorporated herein by reference).
†*10.2	Stewart & Stevenson Supplemental Retirement Plan, signed April 5, 2005 and effective as of July 1, 2003 (filed April 6, 2005 as Exhibit 10.4 to the Company’s Current Report on Form 8-K and incorporated herein by reference).
†*10.3	Stewart & Stevenson Services, Inc. 1988 Nonstatutory Stock Option Plan (as amended and restated effective as of June 10, 1997) (filed September 15, 1997 as Exhibit 4.1 to the Company’s Registration Statement on Form S-8 (File No. 333-35617) and incorporated herein by reference).
†*10.4	Amendment to Stewart & Stevenson Services, Inc. 1988 Nonstatutory Stock Option Plan (filed December 23, 2005 as Exhibit 10.1 to the Company’s Current Report on Form 8-K and incorporated herein by reference).
†*10.5	Stewart & Stevenson Services, Inc. Amended and Restated 1993 Nonofficer Employee Stock Option Plan effective as of January 31, 2004 (filed April 6, 2005 as Exhibit 10.7 to the Company’s Quarterly Report on Form 10-Q for the quarterly period ended January 31, 2005 and incorporated herein by reference).
†*10.6	Stewart & Stevenson Services, Inc. Amended and Restated 1996 Director Stock Plan dated April 8, 2002, as amended by Amendment No. 1 effective as of July 9, 2004 (filed September 1, 2004 as Exhibit 4.1 to the Company’s Registration Statement on Form S-8 (File No. 333-118742) and incorporated herein by reference).
†*10.7	Form of Severance Agreement by and between Stewart & Stevenson Services, Inc. and each of Carl B. King, Stephen A. Hines and Dennis M. Dellinger dated July 19, 2004, and L. Scott Biar dated June 7, 2005 (filed August 26, 2004 as Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q for the quarterly period ended July 31, 2004 and incorporated herein by reference).
†*10.8	Nonqualified Stock Option Agreement, entered into as of March 31, 2004, between Stewart & Stevenson Services, Inc. and Max L. Lukens (filed May 25, 2004 as Exhibit 10.3 to the Company’s Quarterly Report on Form 10-Q for the quarterly period ended May 1, 2004 and incorporated herein by reference).
†*10.9	Summary Description of Stewart & Stevenson Services, Inc. Fiscal 2004 Management Incentive Compensation Plan (filed April 6, 2005 as Exhibit 10.1 to the Company’s Current Report on Form 8-K and incorporated herein by reference).
†*10.10	Summary Description of Stewart & Stevenson Services, Inc. Fiscal 2005 Management Incentive Compensation Plan (filed April 6, 2005 as Exhibit 10.2 to the Company’s Current Report on Form 8-K and incorporated herein by reference).
†*10.11	Summary Description of Director Compensation (filed April 6, 2005 as Exhibit 10.3 to the Company’s Current Report on Form 8-K and incorporated herein by reference).
†*10.12	Description of January 2005 Option Agreement with Max Lukens (filed May 26, 2005 as Exhibit 10.5 to the Company’s Quarterly Report on Form 10-Q for the quarterly period ended April 30, 2005 and incorporated herein by reference).

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†*10.13	Termination and Release Agreement by and between Mark L. Whitman and Stewart & Stevenson Services, Inc., signed by the Company on December 23, 2005 (filed December 23, 2005 as Exhibit 10.2 to the Company’s Current Report on Form 8-K and incorporated herein by reference).
†*10.14	Termination and Release Agreement by and between Don K. Kyle and Stewart & Stevenson Services, Inc., signed by the Company on December 23, 2005 (filed December 23, 2005 as Exhibit 10.3 to the Company’s Current Report on Form 8-K and incorporated herein by reference).
†*10.15	Employment Agreement by and between Max L. Lukens and Stewart & Stevenson Services, Inc., effective as of December 23, 2005 (filed December 29, 2005 as Exhibit 10.1 to the Company’s Current Report on Form 8-K and incorporated herein by reference).
†*10.16	Severance Agreement by and between Max L. Lukens and Stewart & Stevenson Services, Inc., effective as of December 23, 2005 (filed December 29, 2005 as Exhibit 10.2 to the Company’s Current Report on Form 8-K and incorporated herein by reference).
†10.17	Termination and Release Agreement dated January 25, 2006 by and between John B. Simmons and Stewart & Stevenson Services, Inc.
*10.18	Contract number DAAE07-03C-S023 dated April 17, 2003 between Stewart & Stevenson Tactical Vehicle Systems, LP and the United States Department of Defense, U.S. Army Tank-Automotive and Armaments Command (filed September 4, 2003 as Exhibit 10.7 to the Company’s Quarterly Report on Form 10-Q for the quarterly period ended August 2, 2003 and incorporated herein by reference).
*10.19	Contract modification number P00048 dated March 23, 2005 to contract number DAAE07-03C-S023 between Stewart & Stevenson Tactical Vehicle Systems, LP and the United States Department of Defense, U.S. Army Tank-Automotive and Armaments Command (filed May 26, 2005 as Exhibit 10.6 to the Company’s Quarterly Report on Form 10-Q for the quarterly period ended April 30, 2005 and incorporated herein by reference).
*10.20	Contract modification number P00057 dated March 29, 2005 to contract number DAAE07-03C-S023 between Stewart & Stevenson Tactical Vehicle Systems, LP and the United States Department of Defense, U.S. Army Tank-Automotive and Armaments Command (filed May 26, 2005 as Exhibit 10.7 to the Company’s Quarterly Report on Form 10-Q for the quarterly period ended April 30, 2005 and incorporated herein by reference).
10.21	Transition Services Agreement dated January 25, 2006 by and between Stewart & Stevenson LLC and Stewart & Stevenson Services, Inc.
21.1	List of Subsidiaries.
23.1	Consent of Ernst & Young LLP, Independent Registered Public Accounting Firm.
31.1	Certification of Max L. Lukens, Chief Executive Officer, dated April 11, 2006, pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended.
31.2	Certification of L. Scott Biar, Chief Financial Officer, dated April 11, 2006, pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended.
32.1	Statement of Max L. Lukens, Chief Executive Officer, and L. Scott Biar, Chief Financial Officer, dated April 11, 2006, pursuant to Rule 13(a)-14(b) of the Securities Exchange Act of 1934, as amended.

* Incorporated by reference.
† Identifies management contracts or compensation plans or arrangements required to be filed as an exhibit hereto.

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SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized on the 13th day of April 2006.

STEWART & STEVENSON SERVICES, INC.
By	/s/ Max L. Lukens
Max L. Lukens
President and Chief Executive Officer

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities indicated on the 13th day of April 2006.

/s/ Max L. Lukens	/s/ Charles R. Ofner
Max L. Lukens	Charles R. Ofner
President and Chief Executive Officer	Director
(Principal Executive Officer)
/s/ L. Scott Biar	/s/ Charles S. Ream
L. Scott Biar	Charles S. Ream
Chief Financial Officer, Treasurer and Controller	Director
(Principal Financial and Principal Accounting Officer)
/s/ Howard Wolf	/s/ Robert S. Sullivan
Howard Wolf	Robert S. Sullivan
Chairman of the Board and Director	Director
/s/ Monroe M. Luther	/s/ James M. Tidwell
Monroe M. Luther	James M. Tidwell
Director	Director

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EX-2.7

Exhibit 2.7

Execution Copy

AMENDMENT

This AMENDMENT (together with the Schedules hereto, this “Amendment”), dated January 25, 2006, by and among Hushang Ansary (“Buyer”), and Stewart & Stevenson Services, Inc., a Texas corporation (“Parent”), and certain subsidiaries of Parent signatory hereto (collectively, with Parent, “Sellers” and each, including Parent, a “Seller”). Buyer and each Seller may be referred to herein collectively as the “Parties” and individually as a “Party”. Capitalized terms used herein but not defined herein shall have the meanings ascribed to such terms in the PPD Purchase Agreement (as defined below).

RECITALS

A.Pursuant to that certain Asset Purchase Agreement, dated September 27, 2005, among Parent and certain of its subsidiaries party thereto and Buyer (as amended, supplemented or otherwise modified from time to time upon the mutual agreement of the parties, the “EPD Purchase Agreement”), Buyer has agreed to acquire certain assets, and assume certain liabilities, of the EPD Business;

B.Pursuant to that certain Asset Purchase Agreement, dated as of October 24, 2005, among Parent and certain of its subsidiaries party thereto and Buyer (as amended, supplemented or otherwise modified from time to time upon the mutual agreement of the parties, the “PPD Purchase Agreement” and, together with the EPD Purchase Agreement, the “Purchase Agreements”), Buyer has agreed to acquire certain assets, and assume certain liabilities, of the Business (the “PPD Business” and, together with the EPD Business, the “Businesses”); and

C.Buyer desires to purchase, and Sellers desire to sell, certain other assets related to the Businesses, and Buyer and Sellers desire to enter into certain additional agreements related to the transactions contemplated by the Purchase Agreements.

The Parties, intending to be legally bound, agree as follows:

1.Additional Assets and Liabilities.

(a)For all purposes of the EPD Purchase Agreement, provided the PPD Purchase Agreement shall not have been terminated, the term “Business” shall include the Hybrid Bus Business (as defined below), the term “Assets” shall include the assets of the Hybrid Bus Business set forth in Schedule 1(a) hereto, and the term “Assumed Liabilities” shall include the liabilities of the Hybrid Bus Business described on Schedule 1(a) hereto. The term “Hybrid Bus Business” means the Sellers’ business of designing, converting and manufacturing diesel-electric hybrid powered busses. All references to the property, assets or rights of the Hybrid Bus Business as Excluded Assets (as defined in the EPD Purchase Agreement), including any references thereto in any of the sections of the Seller Disclosure Letter to the EPD Purchase Agreement, are correspondingly deleted.

(b)For all purposes of the EPD Purchase Agreement, provided the PPD Purchase Agreement shall not have been terminated, the term “Business” shall include the Snow Blower Business (as defined in the EPD Purchase Agreement), the term “Assets” shall include the assets of the Snow Blower Business set forth on Schedule 1(b) hereto, and the term “Assumed Liabilities” shall include the liabilities of the Snow Blower Business described on Schedule 1(b) hereto; provided, however, that notwithstanding anything herein or in the Purchase Agreements to the contrary, at the Closing and effective as of the Effective Time, the design library and all other Intellectual Property of the Snow Blower Business described in Schedule 1(b) hereto will be sold, conveyed, assigned, transferred, and delivered to Buyer “As Is/Where Is,” without any representation or warranty whatsoever.

(c)Attached hereto as Schedule 1(c) is a balance sheet of the Hybrid Bus Business and Snow Blower Business as of December 3, 2005, prepared in accordance with Agreed Accounting Principles.

2.Consents.

The following provisions shall be applicable to all Consents described in Section 10.6(a) of the EPD Purchase Agreement or Section 10.7(a) of the PPD Purchase Agreement other than those of such Consents required to be obtained from the original equipment manufacturers listed in Section 7.3(d) of the Seller Disclosure Letter to the PPD Purchase Agreement (the “OEM Consents”).

(a)Notwithstanding the provisions of Section 5.1 of either of the Purchase Agreements, Sellers shall not be obligated to seek any Consent described in Section 10.6(a) or (b) of the EPD Purchase Agreement or Section 10.7(a) or (b) of the PPD Purchase Agreement other than the OEM Consents and those Consents set forth on Schedule 2(a) hereto (collectively, the “Required Consents”). Receipt of the Required Consents, but no other Consents, shall be a condition to the obligations of Buyer to take and perform all actions required to be taken by Buyer at the Closing. Prior to the Closing, Sellers shall be permitted, however, to seek any Consents as Sellers may, in their discretion, elect.

(b)Except as provided in subparagraph (a) above, the provisions of this Section 2 shall have no effect on the rights, duties or obligations of the Parties under Section 10.6 of the EPD Purchase Agreement or Section 10.7 of the PPD Purchase Agreement.

3.Additional Amendments.

(a)Provided the PPD Purchase Agreement shall not have been terminated, the obligations of Buyer or Sellers, respectively, to take the actions required to be taken by any of them at the Closing (as such term is defined in the EPD Purchase Agreement) shall be subject, in addition to the conditions precedent set forth in Article 7 and Article 8, respectively, of the EPD Purchase Agreement, to the satisfaction, at or prior to the Closing (as defined in the EPD Purchase Agreement), of the conditions precedent set forth in Article 7 and Article 8, respectively, of the PPD Purchase Agreement.

2

(b)Provided the EPD Purchase Agreement shall not have been terminated, the obligations of Buyer or Sellers, respectively, to take the actions required to be taken by any of them at the Closing shall be subject, in addition to the conditions precedent set forth in Article 7 and Article 8, respectively, of the PPD Purchase Agreement, to the satisfaction, at or prior to the Closing, of the conditions precedent set forth in Article 7 and Article 8, respectively, of the EPD Purchase Agreement.

(c)For all purposes of the PPD Purchase Agreement, the following entities shall be “Purchased Subsidiaries” and shall not be “Sellers”:

(i)Stewart & Stevenson Distributor Holdings, Inc., or if such corporation has converted to a limited liability company, Stewart & Stevenson Distributor Holdings LLC; and

(ii)Stewart & Stevenson Power Products LLC.

(d)If SSTH has converted from a corporation to a limited liability company, the words “a Delaware corporation” in the definition of “SSTH” in Section 1.1 shall be amended to read “a Delaware limited liability company”.

(e)For all purposes of the PPD Purchase Agreement, C. Jim Stewart & Stevenson, Inc., a Delaware corporation, shall be a “Seller”.

(f)Provided the PPD Purchase Agreement shall not have been terminated, for all purposes of the EPD Purchase Agreement, the EPD Purchase Agreement is hereby amended (i) to provide that the Buyer is purchasing 100% of the outstanding equity interests of Stewart & Stevenson Petroleum Services, Inc., or if such corporation has converted to a limited liability company, Stewart & Stevenson Petroleum Services LLC (“SSPS”), (ii) to address the concept that the equity interests of SSPS are being sold to Buyer in the same manner that the PPD Purchase Agreement addresses the concept that the Outstanding Equity Interests of the Purchased Subsidiaries are being sold to the Buyer, with the effect that all provisions relating to Purchased Subsidiaries in the PPD Purchase Agreement would be deemed to be read into the EPD Purchase Agreement, (iii) to provide that SSPS would be the only Purchased Subsidiary for purposes of the EPD Purchase Agreement and (iv) to provide that SSPS shall be a “Purchased Subsidiary” and not a “Seller”. Schedule 3(f-1) hereto contains the information that would have been provided in respect of SSPS if it were a “Purchased Subsidiary” under the PPD Purchase Agreement. A balance sheet of SSPS, prepared in accordance with Agreed Accounting Principles, as of January 20, 2006, is attached hereto as Schedule 3(f-2). As of the date hereof and as of the Closing Date, other than Liabilities under the Seller Contracts to which SSPS is a party disclosed on Section 3.6 of the Seller Disclosure Letter under the EPD Purchase Agreement, SSPS will have no Liabilities other than the Liabilities reflected on such balance sheet.

(g)(i)Provided the PPD Purchase Agreement shall not have been terminated, notwithstanding the provisions of Section 10.2(b) of the PPD Purchase Agreement, Buyer shall not be prevented from hiring or attempting to hire the employees of Sellers listed on Schedule 3(g) hereto; provided, however, that no offer of employment shall contemplate or require that any such employee’s employment by Buyer would

3

commence, and Buyer shall not employ any such employee, prior to a date to be mutually agreed upon in writing by Buyer and Parent but that shall not be later than the date set forth next to such employee’s name on Schedule 3(g); and further provided, however, that prior to the earlier of (i) the time such employee finally declines Buyer’s offer of employment, (ii) the time such employee is no longer employed by Sellers and (iii) the date set forth next to such employee’s name on Schedule 3(g), Sellers will make such employee available to Buyer to perform after the Closing, the same services to or functions for the Business as such employee performed prior to the Closing. Any such employee accepting Buyer’s offer of employment and hired by Buyer shall be treated as an “Affected Employee.”

(ii)Provided the PPD Purchase Agreement shall not have been terminated, notwithstanding the provisions of Section 10.2(a) of the PPD Purchase Agreement, prior to the earlier of (i) the time any such employee hired by Buyer in accordance with Section 3(g)(i) is no longer employed by Buyer or its Affiliates and (ii) December 31, 2006, Buyer will make such employee available to Sellers to perform, the same services to or functions for the Parent and its subsidiaries (other than providing legal advice in the case of any lawyer) as such employee performed prior to being hired by Buyer, except to the extent such services are Support Services under the Transition Services Agreement, in which case the provision of such services shall be governed by the Transition Services Agreement.

(iii)Notwithstanding the foregoing, the services to be performed pursuant to Sections 3(g)(i) and (ii) shall be (A) required to be performed only after such employee has satisfied his or her duties to his or her then-current employer, (B) performed on a salary- and rent-free basis; provided, that any reasonable out-of-pocket costs and expenses incurred by the party making such employee available to the other party will be paid by the party receiving the services in a manner consistent with Section 3 of the Transition Services Agreement, and (C) subject to the terms in Sections 5 and 6 of the Transition Services Agreement.

(h)Provided the PPD Purchase Agreement shall not have been terminated, all references in the EPD Purchase Agreement to the “Supply Agreement,” as defined in the EPD Purchase Agreement, including the form thereof attached thereto as Exhibit 2.9(a)(ii), are deleted.

(i)For all purposes of the EPD Purchase Agreement, provided the PPD Purchase Agreement shall not have been terminated, the terms “Assets” and “Business Records” shall include the data and Records of the EPD Business located at the 38th Street Records Warehouse, and all references, if any, to such data and Records as Excluded Assets in the EPD Purchase Agreement, including any references thereto in any of the sections of the Seller Disclosure Letter to the EPD Purchase Agreement, are correspondingly deleted.

(j)Section 6.1 of the PPD Purchase Agreement is hereby amended to add the following subparagraph (d) to the end of Section 6.1

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“(d)Upon reasonable prior notice, but no less than three (3) business days notice, Buyer or an Affiliate of Buyer shall permit Parent or its representatives, contractors, or consultants, to enter the Facilities during reasonable business hours (including 7:00 a.m. to 6:00 p.m., Monday through Friday), as may be necessary to Remediate any Business Property pursuant to the provisions in Section 11 of this Agreement. Parent agrees to protect, defend, indemnify and hold the Buyer and its Affiliates harmless from and against any and all Liabilitiesarising from or relating in any way, directly or indirectly, to the acts or omissions of Parent or any Person acting on Parent’s behalf in connection with any such Remedial Actions. Parent agrees to use, and to require its representatives, contractors and consultants to use, best efforts to comply with all rules and instructions issued by Buyer or an Affiliate of Buyer (to the extent reasonable notice thereof has been given to Parent) regarding their actions while upon, entering or leaving any Facility, including any insurance requirements that the Buyer may reasonably impose on contractors authorized to perform the work described herein.”

(k)Section 6.4 of the EPD Purchase Agreement is hereby deleted in its entirety.

(l)The words “sixty (60) days”, appearing in line 1 of Section 2.11(b) of the PPD Purchase Agreement, are hereby amended to read “ninety (90) days”.

(m)The words “Except as set forth in the next sentence, this” appearing in Section 13.12 of the PPD Purchase Agreement and the EPD Purchase Agreement are hereby amended to read “This”.

(o)Buyer acknowledges and agrees that Parent shall not be required to sell, transfer or otherwise convey the eight shares of Stewart & Stevenson Venezuela, S.A. that are not owned by Parent.

(p)Section 2.9(a)(xvi) of the PPD Purchase Agreement is hereby deleted in its entirety.

(q)The EPD Purchase Agreement is hereby amended to add Exhibit 10.9, which is attached hereto as Schedule 3(q), and the following new Section 10.9:

“10.9SETTLEMENT AGREEMENT

Sellers shall, within 5 Business Days of Buyer’s written request, file or cause to be filed an executed copy of the Settlement Agreement relating to the Varco Lawsuit, attached hereto as Exhibit 10.9, with the United States District Court for the Northern District of Texas in the docket related to the Varco Lawsuit and shall provide Buyer the evidence of such filing.”

(r)The first sentence of Section 2.7 of the EPD Purchase Agreement and the PPD Purchase Agreement shall be amended to read as follows:

5

“Not later than forty-five (45) days after the Closing Date, Buyer and Sellers shall agree upon the allocation of the Purchase Price among the Assets in accordance with Section 1060 of the Code and the Treasury Regulations promulgated thereunder (as well as any similar provision of state, local or foreign law, as appropriate), and prepare drafts of IRS Forms 8594 consistent with such agreement (the “Allocation Schedule”).”

(s)The term “Effective Time” in Section 1.1 of each of the Purchase Agreements shall be amended in its entirety to read “Effective Time - 12:01 a.m. on January 23, 2006.”

(t)The terms “Closing Date” and “Closing” in all Transaction Agreements (as those terms are defined in the PPD Purchase Agreement and the EPD Purchase Agreement) shall mean “Effective Time” except for (a) the timing of the deliveries under Section 2.9 of each Purchase Agreement (which deliveries shall be required to be made on or before January 25, 2006) or (b) when otherwise clearly required by the context (in which case January 25, 2006 shall apply). After giving effect to Section 3(s) of this Amendment, all Transaction Agreements entered into on January 25, 2006 will be deemed effective as of the Effective Time, unless the otherwise clearly required by the context.

(u)All references in the Purchase Agreements to the “Confirmation of Closing” are hereby deleted.

4.Miscellaneous.

(a)The provisions of Article 13 of the PPD Purchase Agreement are incorporated herein by this reference, mutatis mutandis.

(b)Except to the extent amended hereby, the Purchase Agreements, and each of them, remain in full force and effect.

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IN WITNESS WHEREOF, the parties have duly executed this Agreement as of the date first above written.

BUYER:
/s/ Hushang Ansary
Hushang Ansary
PARENT:
STEWART & STEVENSON SERVICES, INC.
By:	/s/ Carl B. King
Name:			Carl B. King
Title:		Senior Vice President, Secretary and General Counsel
SUBSIDIARIES:
IPSC CO. INC.
By:	/s/ Carl B. King
Name:			Carl B. King
Title:		Vice President and Secretary
STEWART & STEVENSON HOLDINGS, INC.
By:	/s/ Don Mueller
Name:			Don Mueller
Title:		President
STEWART & STEVENSON DE LAS AMERICAS, INC.
By:	/s/ Carl B. King
Name:			Carl B. King
Title:		Vice President and Secretary

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STEWART & STEVENSON INTERNATIONAL, INC.
By:	/s/ Carl B. King
Name:			Carl B. King
Title:		Vice President and Secretary
STEWART & STEVENSON POWER, INC.
By:	/s/ Carl B. King
Name:			Carl B. King
Title:		Vice President and Secretary
S&S TRUST
By:	/s/ Don Mueller
Name:			Don Mueller
Title:		President
SIERRA DETROIT DIESEL ALLISON, INC.
By:	/s/ Carl B. King
Name:			Carl B. King
Title:		Vice President and Secretary
STEWART & STEVENSON PETROLEUM SERVICES LLC
By:	/s/ Carl B. King
Name:			Carl B. King
Title:		Vice President and Secretary
C. JIM STEWART & STEVENSON, INC.
By:	/s/ Carl B. King
Name:			Carl B. King
Title:		Vice President and Secretary

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Schedules are omitted in accordance with Item 601(b)(2) of Regulation S-K. Schedules will be provided by the Company to the Securities Exchange Commission upon request.

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EX-10.17

Exhibit 10.17

TERMINATION AND RELEASE AGREEMENT

THIS TERMINATION AND RELEASE AGREEMENT (this “Agreement”) is entered into by and between John B. Simmons (“Employee”), a resident of Houston, Texas and Stewart & Stevenson Services, Inc., a Texas corporation, having its principal place of business in Houston, Texas (the “Company,” and together with its subsidiary and affiliated companies, “S&S”).

WITNESSETH:

WHEREAS, Employee has been an employee and an officer of S&S, serving most recently as Senior Vice President, Chief Financial Officer and Treasurer of the Company and as an officer of various of the Company’s affiliates; and

WHEREAS, the Company has entered into certain Asset Purchase Agreements dated October 24, 2005 and September 27, 2005 (the “APAs”), with Hushang Ansary (“Ansary”) to sell the assets and business of the Company’s Power Products and Engineered Products Divisions (the “Divisions”) to Ansary upon the terms set forth therein, and the Company has agreed with Ansary that the sale of the Divisions shall close prior to January 31, 2006 (the “Closing Date”); and

WHEREAS, Employee is expected to become the chief executive officer of the entity formed by Ansary to succeed to the business of the Divisions; and

WHEREAS, Employee has agreed to remain an employee of the Company through March 31, 2006, to continue to perform certain financial related activities for the Company, including helping the Company to carryout its financial reporting obligations in respect of its fiscal year ending January 31, 2006 (the period of time from the date hereof through March 31, 2006, being herein referred to as the “Transition Period”); and

WHEREAS, Employee has, on behalf of S&S, contributed significantly to the transactions contemplated by the APAs as well as having contributed significantly to the overall performance of the Company in recent periods; and

WHEREAS, Employee’s position and employment as an employee of S&S shall, under the foregoing circumstances, be terminated at the close of business on March 31, 2006 (the “Separation Date”); and

WHEREAS, Employee’s position and employment as an officer of S&S shall be terminated as of the closing of the sale of the Divisions; and

WHEREAS, Employee is a participant in the Company’s Management Incentive Compensation Plan (the “MICP”) and shall be paid compensation under the MICP for his performance during the Company’s fiscal year that will end on January 31, 2006 in accordance with the terms of the MICP; and

WHEREAS, Employee shall not participate in the MICP during the Company’s fiscal year that will end on January 31, 2007; and

WHEREAS, the Company and Employee have agreed with respect to certain future obligations of Employee to the Company, including his activities during the Transition Period, confidentiality, non-competition and cooperation; and

WHEREAS, Employee and S&S desire to avoid the expense, delay, and uncertainty attendant to any claims that may arise from Employee’s service with and termination from his positions and employment with S&S; and

WHEREAS, Employee desires to release S&S, its predecessors and successors in interest, and its employees, officers, directors, shareholders, agents and representatives, past and present, and, except to the extent specifically provided herein, all employee benefit plans sponsored by S&S (collectively, the “S&S Parties” and each individually, an “S&S Party”), individually and collectively, from all claims and causes of action and damages, if any, he has or may have against S&S and/or any of the S&S Parties; and

WHEREAS, S&S desires to release Employee from all claims or causes of action, if any, it may have against Employee; and

WHEREAS, Employee and S&S therefore desire to establish their respective rights and obligations for the future.

NOW, THEREFORE, in consideration of the following mutual covenants and promises, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, Employee and S&S hereby agree as follows:

1.RESIGNATION:  Employee hereby resigns from his positions as Senior Vice President, Chief Financial Officer and Treasurer of the Company. Employee and S&S agree, however, that he shall continue to be an employee of the Company at his current salary rate to and through the Separation Date at which time his employment shall automatically terminate. Employee acknowledges and agrees that he has no authority to and will not act for any of the S&S Parties in any capacity on or after the Separation Date and will no longer be in charge of the Company’s financial affairs after the date hereof. Employee further acknowledges and agrees that S&S has to date fully paid his regular salary as it has become payable to date, less customary withholding for taxes and applicable deductions, and that such payment is in full satisfaction of all wages (other than vacation pay) owed him by S&S as of the date hereof.

2.CONSIDERATION:  In consideration for Employee’s termination pursuant to this Agreement and his other promises made herein and in full satisfaction of all (i) all amounts applicable to payment for the non-competition agreements of Employee contained in Section 6 of this Agreement, and (ii) all amounts owed and earned by reason of Employee’s contribution to the Company in the management of the affairs of the Company and in the Company’s successful efforts leading to the pending sale of the Divisions to Ansary, the Company agrees to pay Employee the aggregate amount of $974,000 (the “Additional Compensation”).

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The payment of the Additional Compensation is subject to the following conditions having been met and the Additional Compensation will not be made unless such conditions are satisfied:

a.the closing of the sale of the Divisions (the “Closing”) shall have occurred prior to January 31, 2006; and

b.Employee shall have carried out his duties and responsibilities during the Transition Period in good faith and with appropriate care and attention as reasonably directed by the Company’s President and Chief Executive Officer;

c.Employee shall have satisfied his cooperation obligations specified in Section 13; and

d.a Change in Control shall have occurred by December 31, 2006.

The Additional Compensation shall be paid to Employee on the later of (1) the day following the date that is six months from the date of his separation from service from the Company (within the meaning of Section 409A of the Internal Revenue Code of 1986, as amended (the “Code”)) or (2) the date of the Change in Control.

The payment of the Additional Compensation shall be net of customary withholding for taxes and applicable deductions imposed by law or permissible elections made by Employee.

For purposes of this Section 2, the term “Change in Control” means:

(I)The acquisition by any Person of beneficial ownership within the meaning of Rule 13d-3 promulgated under the Securities Exchange Act of 1934, as amended (the “Exchange Act”) of 35% or more of either (A) the then-outstanding shares of common stock of the Company (the “Outstanding Company Common Stock”) or (B) the combined voting power of the then-outstanding voting securities of the Company entitled to vote generally in the election of director (the “Outstanding Company Voting Securities”); provided, however, that, for purposes of this Section 2, the following acquisitions shall not constitute a Change in Control:  (i) any acquisition directly from the Company, (ii) any acquisition by the Company, (iii) any acquisition by any employee benefit plan (or related trust) sponsored or maintained by the Company or any of its Affiliates or (iv) any acquisition by any corporation pursuant to a transaction that complies with clauses (III)(A), (III)(B) and (III)(C);

(II)The individuals who, as of the date hereof, constitute the Board of Directors of the Company (the “Incumbent Board”) cease for any reason to constitute at least a majority of the Board of Directors of the Company; provided, however, that any individual becoming a director subsequent to the date hereof whose election, or nomination for election by the Company’s stockholders, was approved by a vote of at lease two thirds (2/3) of the directors then comprising the Incumbent Board shall be considered as though such individual were a member of the Incumbent Board, but excluding, for this purpose, any such individual whose initial assumption of office occurs as a result of an actual or threatened election contest with respect to the election or removal of directors or other actual or threatened solicitation of proxies or consents by or on behalf of Person other than the Board of Directors of the Company; or

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(III)The consummation of a reorganization, merger, statutory share exchange or consolidation or similar corporate transaction involving the Company or any of its subsidiaries, a sale or other disposition of all or substantially all of the assets of the Company, or the acquisition of assets or stock of another entity by the Company or any of its subsidiaries (each, a “Business Combination”), in each case unless, following such Business Combination, (A) all or substantially all of the individuals and entities that were the beneficial owners of the Outstanding Company Stock and the Outstanding Company Voting Securities immediately prior to such Business Combination beneficially own, directly or indirectly, more than 50% of the then-outstanding shares of common stock and the combined voting power of the then-outstanding voting securities entitled to vote generally in the election of directors, as the case may be, of the corporation resulting from such Business Combination (including, without limitation, a corporation that, as a result of such transaction, owns the Company or all or substantially all of the Company’s assets either directly or through one or more subsidiaries) in substantially the same proportions as their ownership immediately prior to such Business Combination of the Outstanding Company Common Stock and the Outstanding Company Voting Securities, as the case may be, (B) no Person (excluding any corporation resulting from such Business Combination or any employee benefit plan (or related trust of the Company or such corporation resulting from such Business Combination) beneficially owns, directly or indirectly, 35% or more of, respectively, the then-outstanding shares of common stock of the corporation resulting from such Business Combination or the combined voting power of the then-outstanding voting securities of such corporation, except to the extent that such ownership existed prior to the Business Combination, and (C) at least a majority of the members of the board of directors of the corporation resulting from such Business Combination were members of the Incumbent Board at the time of the execution of the initial agreement or of the action of the Board of Directors of the Company providing for such Business Combination; or

(IV)The approval by the stockholders of a complete liquidation or dissolution of the Company.

For purposes of this Section 2, the term “Person” shall have the meaning given in Section 3(a)(9) of the Exchange Act, as modified and used in Sections 13(d) and 14(d) thereof, except that such term shall not include (1) the Company or any of its subsidiaries, (ii) a trustee or other fiduciary holding securities under an employee benefit plan of the Company or any of its Affiliates, (iii) an underwriter temporarily holding securities pursuant to an offering of such securities, or (iv) a corporation owned, directly or indirectly, by the stockholders of the Company in substantially the same proportions as their ownership of stock of the Company; and “Affiliate” shall have the meaning set forth in Rule 12-b-2 promulgated under Section 12 of the Exchange Act;

3.ACCRUED SALARY AND VACATION PAY:  In addition, S&S agrees to pay to Employee, within 30 days of the Separation Date, any accrued but unpaid salary (at the rate currently in effect) through the Separation Date and the accrued unpaid vacation due him under the S&S vacation policy through the Separation Date.

4.STOCK OPTIONS:  Any stock options in the name of Employee held on the Separation Date (the “Stock Options”) shall be governed by the terms of the applicable stock

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option agreement and stock option plan; provided, however, that it is specifically acknowledged that the Stewart & Stevenson Services, Inc. 1988 Nonstatutory Stock Option Plan permits, at the Compensation Committee’s discretion, (i) the acceleration of the vesting of the Stock Options, to the extent not previously vested, immediately upon the occurrence of the Separation Date and (ii) the exercise by Employee thereof at any time after the Separation Date and prior to 3:00 p.m. December 31, 2006. All agreements with respect to the Stock Options shall be amended as of the date hereof to provide to Employee the full benefits of such provisions of such Stock Option Plan and such discretionary action by the Compensation Committee upon, and subject to, the occurrence of the Closing. Said stock options and all rights or entitlement thereto are not released or waived by this Agreement.

5.NON-DISCLOSURE: S&S and Employee agree as follows:

a.Employee acknowledges that he has held a position of trust and confidence with S&S and that S&S has provided him with Confidential Information, as defined in this section, through the Closing Date.

b.Employee agrees that he shall not directly or indirectly disclose any Confidential Information unless such disclosure is (i) to an employee of S&S; or (ii) authorized in writing by S&S; or (iii) required by any court or administrative entity or (iv) to Ansary or his representatives or permitees after the Closing Date and which relates solely to the Divisions.

c.Employee acknowledges and agrees that these non-disclosure agreements shall survive any termination of this Agreement or the completion of payments under this Agreement and shall be fully enforceable by S&S or its successor or assignee subsequent to the termination of Employee’s employment.

d.For purposes of this Agreement, the term “Confidential Information” shall be defined as information in the possession of, prepared by, obtained by, or compiled by S&S that is not generally available to the public. “Confidential Information” as so defined shall include information pertaining to, but not limited to:  (i) financial information of S&S, including but not limited to information pertaining to product and asset cost data and projections, actual and expected revenues and expenses, asset valuations and liabilities, budgetary data, profit and expense margin data, existing and projected manufacturing and inventory capacities, company and personnel strengths and weaknesses, and other confidential and proprietary information related to the products or services of S&S, and the rights and obligations of S&S, and said information includes, but is not limited to, S&S’s proposals, plans, budgets and strategies with respect to its contracts with the U.S. Army as to the family of medium tactical vehicles and related matters; (ii) the identity of S&S’s suppliers, vendors, customers, clients, and prospects; (iii) the business, finances and special needs of S&S, their customers, clients, and prospects; (iv) S&S’s policies and procedures; (v) S&S’s personnel and compensation plans and employee benefits; (vi) confidential market studies; (vii) pricing studies, information and analyses; (viii) current and prospective business projections; (ix) business plans and strategies; (x) financial statements and information; (xi) special processes, procedures and services of S&S; and (xii) the trade secrets of S&S.

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e.Employee acknowledges and agrees that this Confidential Information, if disclosed, would place S&S at a competitive disadvantage. Employee further agrees that S&S takes reasonable steps to maintain the confidentiality of this Confidential Information, and that the Confidential Information is in fact secret or substantially secret.

6.NON-COMPETITION:

a.Business Relationships, Goodwill and Confidential Information. Employee acknowledges and agrees that as an officer and representative of S&S, Employee is and has been responsible for building and maintaining business relationships and goodwill with current and future customers, clients and prospects on a personal level. Employee acknowledges and agrees that this responsibility has created a special relationship of trust and confidence between Employee and S&S and between Employee and the customers, clients and prospects of S&S. In addition, Employee acknowledges and agrees that S&S has disclosed to him on a regular basis the Confidential Information of S&S. As a result, there is a high risk and opportunity for Employee to misappropriate these relationships, the goodwill existing between S&S and such persons and entities and the Confidential Information of S&S. Employee acknowledges and agrees that it is fair and reasonable for S&S to take steps to protect itself from the risk of such misappropriation.

b.Consideration. Employee acknowledges and agrees that S&S is hereby providing him with substantial, valuable consideration for the agreements set forth in this section, including compensation and benefits as described in this Agreement. Employee acknowledges and agrees that this constitutes fair, adequate and sufficient consideration for the agreements set forth in this section.

c.Exclusion of Activities as to Divisions Business from Non-Competition Obligations. Notwithstanding any other provision hereof, Employee’s activities in respect of (i) Ansary after the Closing Date and (ii) his continued employment by Ansary or any successor thereof after the Separation Date, solely in both cases in respect of the business of the Divisions as they existed on the Closing Date, and solely in the case of clause (ii) to the extent he remains in the employ of Ansary or any successor thereof as to the Divisions, shall be excluded from the operation of the obligations otherwise applicable to Employee under this Section 6 of this Agreement.

d.Scope of Non-Competition Obligation. In consideration for the valuable consideration described above and subject to the exclusion described above:

(i)Employee acknowledges and agrees that during the Transition Period and for two years following the Separation Date, Employee will not solicit, contact, or communicate with any person, company, or business that was a client, customer, or prospect of S&S, and that S&S personally solicited, contacted, communicated with or accepted business from while he was an officer or employee of S&S, for the purpose of engaging in the Same or a Similar Business as S&S in the Market Area, as defined herein;

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(ii)Employee further acknowledges and agrees that during the Transition Period and for two years following the Separation Date, Employee will not engage in the Same or a Similar Business as S&S in the Market Area, including working for any company or business as an agent, consultant, partner, employee, officer, shareholder or independent contractor; and

(iii)nothing herein shall prohibit Employee from owning up to (but not more than) one percent (1%) of any class of securities of any enterprise (but without otherwise participating in the activities of such enterprise) if such securities are listed on any national or regional securities exchange or have been registered under Section 12(g) of the Exchange Act.

e.Definitions. For purposes of this section, the following definitions shall apply:

(i)The term “Same or a Similar Business as the Company” shall be defined to include (A) the assembly, manufacture, design, engineering, service or maintenance of military vehicles or the training of military personnel with respect to military vehicles; (B) the distribution, manufacture, service or rental of diesel and gas engines and engine driven equipment, including without limitation pump packages, generator sets, power units or related parts and equipment; (C) the distribution or manufacture of parts for over-the-road trucking and inter-city commercial trucking applications and the service of such trucks, including transport refrigeration equipment; (D) the distribution or manufacture or service of industrial generator sets for prime and back-up power, air compressors, snow blowers, railcar movers, forklifts and cable extractors; and (E) the design or supply of custom marine propulsion systems or standard or custom marine auxiliary engines.

(ii)The term “Market Area” shall be defined as the United States of America and any other countries in which S&S does business as of the date of this Agreement or during the term hereof.

f.Enforcement. Employee acknowledges and agrees that the non-competition agreements set forth above are ancillary to an otherwise enforceable agreement, including the provisions of this Agreement other than this Section 6, and supported by independent, valuable and sufficient consideration as required by TEX. BUS. & COM. CODE ANN. §15.50. Employee agrees and acknowledges that it is reasonable and appropriate for Employee and S&S to agree to restrict Employee from working in a Same or a Similar Business as the Company within the Market Area because the Confidential information of S&S provided by S&S to Employee previously would place S&S at a competitive disadvantage and would harm S&S economically if used by any entity in the Same or a Similar Business as the Company within the Market Area. Employee agrees that the business activities of S&S are national and the markets for the products and services of S&S are very competitive national and international markets. Accordingly, Employee acknowledges and agrees that the limitations as to time, geographical area, and scope of activity to be restrained are reasonable, appropriate and acceptable to Employee

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and do not impose any greater restraint than is reasonably necessary to protect the goodwill and other business interests of S&S. Employee further agrees that if, at some later date, a court of competent jurisdiction determines that these agreements do not meet the criteria set forth in Tex. Bus. & Com. Code Ann. §15.50, these agreements shall be reformed by the court, pursuant to TEX. BUS. & COM. CODE ANN. §15.51(c), and enforced to the maximum extent permitted under Texas law.

g.Damages. In addition to any other remedies that may be available to S&S under the terms of this Agreement or applicable law, Employee agrees that, if he violates any of the obligations owed by him to S&S as stated in paragraphs 5 or 6 of this Agreement, S&S shall be entitled to all damages to which it may be entitled for breach of contract.

7.NON-INTERFERENCE:  Employee agrees that during the Transition Period and for two years following the Separation Date, Employee shall not solicit or recruit, directly or indirectly or by assisting others, any other employees of S&S, nor shall Employee contact or communicate with any other employees of S&S for the purpose of inducing other employees to terminate their employment with S&S or to begin employment by any other entity. For purposes of this covenant, “other employees” shall refer to employees who are actively employed by, or doing business with, S&S at the time of the attempted recruiting or hiring except for employees who were employed solely and directly in connection with activities of the Divisions as of the Closing Date. Employee acknowledges and agrees that these non-interference agreements shall survive the termination of this Agreement and shall be fully enforceable by S&S.

8.EMPLOYEE BENEFIT PLANS:  After the Separation Date, except as specifically contemplated hereby in respect of the Stock Options, except as provided under S&S’s 401(k) Plan and except as required under the Consolidated Omnibus Budget Reconciliation Act of 1985, as amended, Employee shall not be entitled to any coverage or benefit under the Stewart & Stevenson Medical Plan and Dental Plan or under any other benefit or welfare plan of the Company or under any severance agreement or policy of any kind with the Company or applicable to Employee.

9.PRIOR RIGHT AND OBLIGATIONS:  This Agreement extinguishes, and constitutes a complete accord and satisfaction of, all rights, if any, which Employee may have, and obligations, if any, which S&S may have, contractual or otherwise, relating to the employment, or resignation from employment, of Employee with S&S, including any right to severance benefits different from those set forth above.

10.EXPENSES: Employee shall, after the Closing Date, submit to the Company all actual past expenses incurred by him in the course of his employment and activities as to the Divisions incurred before the Closing Date. The Company shall reimburse Employee for such expenses in accordance with the Company’s expense reimbursement policy. Employee acknowledges and agrees that S&S shall not have any obligation to reimburse expenses incurred by him with respect to the business of the Divisions incurred after the Closing Date.

11.S&S ASSETS:  Employee hereby represents and warrants that he has no claim or right, title or interest in any property designated on any of S&S’s books as property or assets of

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S&S. Employee shall deliver to S&S any and all S&S property in his possession or control and execute and deliver any and all assignments or other documents necessary to convey such property to S&S on the Separation Date other than property or assets being sold to Ansary under the APAs.

12.DOCUMENTS: Employee agrees, except to the extent they relate solely to the business of the Divisions, to deliver to S&S on the Separation Date all correspondence, memoranda, notes, records, data or information, analyses, customer lists or other documents and all copies thereof (including any computer diskettes), made, composed or received by Employee, solely or jointly with others, which are in Employee’s possession, custody, or control and which are related in any manner to the past, present, or anticipated business of S&S.

13.COOPERATION: Employee shall cooperate with S&S to the extent reasonably required in all matters relating to the winding up of his pending work (including his assignments during the Transition Period) on behalf of S&S and the orderly transfer of any such pending work as reasonably designated by S&S. Employee shall cooperate with S&S to the extent reasonably required to respond to questions concerning matters with respect to which he has unique knowledge or information relating to his prior responsibilities with S&S. Employee further agrees, upon request by any S&S Party, to cooperate fully in preparation for, or, giving depositions or testifying in the defense of, any litigation arising from events, acts or omissions alleged, or that may be alleged in the future, to have occurred during the term of his employment with S&S. Employee shall be reimbursed for any reasonable out of pocket expenses incurred in connection with such cooperation. Employee and S&S shall take such further action and execute any such further documents as may be reasonably necessary or appropriate in order to carry out the provisions and purposes of this Agreement.

14.PARTIES’ REPRESENTATIONS:  Employee and S&S represent, warrant, and agree that:

a.They have not filed any claims, appeals, complaints, charges or lawsuits against the other with any governmental agency or court and that they will not file or permit to be filed or accept benefits from any claim, complaint or petition filed with any court by either of them or on their behalf against the other at any time hereafter; provided, however, this provision shall not limit either Employee or S&S from filing an action for the sole purpose of enforcing their rights under this Agreement; and

b.no other person or entity has any interest or assignment of any claims or causes of action, if any, that either Employee or S&S may have against the other, and that they have not sold, assigned, transferred, conveyed or otherwise disposed of any of the claims, demands, obligations or causes of action referred to in this Agreement, and that Employee and S&S have the sole right and exclusive authority to execute this Agreement and receive the consideration provided for herein; and

c.neither Employee nor S&S is aware of any facts or circumstances that would constitute a violation of any law by Employee, S&S, or any S&S Party, including specifically without limitation, any false statements or omissions that would be a

9

violation of the False Claims Act or any other similar law or law of similar tenor, the Securities Act of 1933 as amended, the Exchange Act or the Sarbanes-Oxley Act of 2002.

15.RELEASE:

a.Employee agrees to release, acquit and discharge, and does hereby release, acquit, and discharge, S&S and all S&S Parties from any and all claims, costs, damages, or attorney’s fees, and from any and all causes of action (arising as of or prior to the Closing Date) against S&S and each S&S Party existing of any kind or character, whether now known or not known, that he has or may have against S&S and any S&S Party, including, but not limited to, (i) any claim based on tort, contract, common law, regulation, statute or any other legal or equitable basis or for salary, benefits, expenses, costs, damages, compensation, remuneration or wages; (ii) all claims or causes of action arising from his employment, or resignation from employment, or any alleged discriminatory employment practices, (iii) any and all claims or causes of action arising under the Age Discrimination in Employment Act, as amended, (“ADEA”), the Equal Pay Act of 1963, the Vocational Rehabilitation Act of 1973, the Older Workers’ Benefit Protection Act, the Americans with Disabilities Act of 1990, the Civil Rights Acts of 1866, 1964 and 1991, the Employee Retirement Income Security Act, the Texas Commission on Human Rights Act, the Texas Pay Day Law, the Texas Workers’ Compensation Act, and the Family and Medical Leave Act, (iv) any and all claims or causes of action arising under any other federal, state, or local laws pertaining to discrimination in employment or equal employment opportunity, and (v) any claims for breach of contract, infliction of emotional distress or any other claims arising under the common law. This Release also applies to any claims brought by any person or agency or class action under which Employee may have a right or benefit, provided, however, by entering into this Agreement Employee is not releasing any claims under this Agreement, with respect to the Stock Options as provided for herein or by the terms thereof or in respect of his rights, if any, under S&S’s 401(k) Plan.

b.S&S agrees to release, acquit, and discharge and does hereby release, acquit, and discharge Employee, his heirs, executors, and spouse from any and all claims, costs, damages or attorney’s fees, and from any and all causes of action (arising as of or prior to the Closing Date) against Employee of any kind or character, whether now known or not known, S&S may have against Employee including, but not limited to, any claim based on tort, contract, common law, regulation, statute or any other legal or equitable basis; provided, however, by entering into this Agreement, S&S is not releasing any claims under this Agreement.

16.NO ADMISSIONS:  The parties to the Agreement expressly understand and agree that the terms of this Agreement are contractual and not merely recitals and that the agreements contained herein and consideration paid is to compromise doubtful and disputed claims, avoid litigation and buy peace and that no statement or consideration given shall be construed as an admission of liability or wrongdoing by either party, any such liability and wrongdoing being expressly denied. This Agreement does not constitute evidence of unlawful conduct or wrongdoing by either party hereto.

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17.REMEDIES: Each of the parties to this Agreement agrees that, because damages at law for any breach or nonperformance of this Agreement by the other party, while recoverable, will be inadequate, this Agreement may be enforced in equity by specific performance, injunction, accounting, or otherwise.

18.WAIVERS: No waiver or non-action with respect to any breach by the other party of any provision of this Agreement, nor the waiver or non-action with respect to any breach of the provisions of similar agreements with other employees shall be construed to be a waiver of any succeeding breach of such provision or as a waiver of the provision itself.

19.SEVERABILITY: If any section, sentence, term or provision of this Agreement is determined to be illegal, invalid or wholly or partially unenforceable, by a court of competent jurisdiction or by any state or federal regulatory authority having jurisdiction thereof, such section, sentence, term or provision shall be revised and reduced in scope to be valid and enforceable. In the event such section, sentence, term or provision cannot be so revised or reduced in scope, the determination of illegality, invalidity or unenforceability of such section, sentence, term or provision shall have no effect upon the validity of any other section, sentence, term or provision of this Agreement, all of which shall remain in full force in effect.

20.CHOICE OF LAW:  This Agreement shall be governed by and construed and enforced, in all respects, in accordance with the laws of the State of Texas except as preempted by federal law and provided that no effect shall be given to any provision or policy that would direct the application of the laws of another jurisdiction. The parties agree that Harris County, Texas, along with the courts thereof, is the proper and convenient and sole venue to resolve any disputes arising under or relating to this Agreement.

21.AMENDMENT: This Agreement may not be changed or terminated orally, and no change, termination or waiver of this Agreement or any of the provisions herein contained shall be binding unless made in writing and signed by all parties, and in the case of S&S, by an authorized officer.

22.NO DEROGATORY COMMENTS:  Except as required by judicial, legislative, or administrative process or governmental rule or regulation, each of the parties to this Agreement agrees to refrain from making public or private comments relating to the other party that are derogatory or that may tend to injure any such party in its business, public or private affairs.

23.CONFIDENTIALITY: Employee agrees that he will not disclose the terms of this Agreement or the consideration received from S&S to any other person, except his attorneys or their tax or financial advisors, and his immediate family and only on the condition that they keep such information strictly confidential; provided, however, that the foregoing obligation of confidentiality shall not apply to information that is required to be disclosed by any applicable law, rule or regulation of any governmental authority.

24.ADEA RIGHTS:  Employee and S&S acknowledge and agree that:

a.The Company has given Employee at least twenty-one (21) days to review this Agreement, although he may choose to accept it in less than that time; and

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b.Employee has been advised to consult with an attorney, of his own choosing, regarding the terms of the Agreement prior to executing this Agreement; and

c.if Employee executes this Agreement, he has seven (7) days following the execution of this Agreement to revoke this Agreement (the “Revocation Period”), which Revocation Period shall begin on the date Employee signs and dates this Agreement in the space provided below; and

d.this Agreement shall become effective and enforceable (the “Effective Date”) immediately following the expiration of the Revocation Period; and

e.Employee does not, by the terms of this Agreement, waive claims or rights that may accrue subsequent to the Effective Date; and

f.the parties are each receiving, pursuant to this Agreement, consideration in addition to anything of value to which each is already entitled.

25.GROSS-UP POSSIBILITY:

a.Anything in this Agreement to the contrary notwithstanding and except as set forth below, in the event it shall be determined that a Payment or any part thereof would be subject to the Excise Tax, then Employee shall be entitled to receive an additional payment (the “Gross-Up Payment”) in an amount such that, after payment by Employee of all taxes (and any interest or penalties imposed with respect to such taxes), including, without limitation, any income taxes (and any interest and penalties imposed with respect thereto) and Excise Tax imposed upon the Gross-Up Payment, Employee retains an amount of the Gross-Up Payment equal to the Excise Tax imposed upon the Payment.

b.Subject to the provisions of Section 25.c, all determinations required to be made under this Section 25, including whether and when a Gross-Up Payment is required, the amount of such Gross-Up Payment and the assumptions to be utilized in arriving at such determination, shall be made by the Auditor, or such other nationally recognized certified public accounting firm as may be designated by Employee (the “Accounting Firm”). The Accounting Firm shall provide detailed supporting calculations both to the Company and Employee within 15 business days of the receipt of notice from Employee that there has been a Payment or such earlier time as is requested by the Company. In the event that the Accounting Firm is serving as accountant or auditor for the individual, entity or group effecting the change of control, Employee may appoint another nationally recognized accounting firm to make the determinations required hereunder (which accounting firm shall then be referred to as the Accounting Firm hereunder). All fees and expenses of the Accounting Firm shall be borne solely by the Company. Any Gross-Up Payment, as determined pursuant to this Section 25, shall be paid by the Company to Employee within 5 days of the receipt of the Accounting Firm’s determination; provided, however, that no Gross-Up Payment shall be paid to Employee prior to six months following the date of Employee’s separation from service from the Company (within the meaning of Section 409A of the Code). Any determination by the

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Accounting Firm shall be binding upon the Company and Employee. As a result of the uncertainty in the application of section 4999 of the Code at the time of the initial determination by the Accounting Firm hereunder, it is possible that Gross-Up Payments that will not have been made by the Company should have been made (the “Underpayment”), consistent with the calculations required to be made hereunder. In the event the Company exhausts its remedies pursuant to Section 25.c and Employee thereafter is required to make a payment of any Excise Tax, the Accounting Firm shall determine the amount of the Underpayment that has occurred and any such Underpayment shall be promptly paid by the Company to or for the benefit of Employee.

c.Employee shall notify the Company in writing of any claim by the Internal Revenue Service that, if successful, would required the payment by the Company of the Gross-Up Payment. Such notification shall be given as soon as practicable, but no later than 10 business days after Employee is informed in writing of such claim. Employee shall apprise the Company of the nature of such claim and the date on which such claim is requested to be paid. Employee shall not pay such claim prior to the expiration of the 30-day period following the date on which Employee gives such notice to the Company (or such shorter period ending on the date that any payment of taxes with respect to such claim is due). If the Company notifies Employee in writing prior to the expiration of such period that the Company desires to contest such claim, Employee shall:

(i)give the Company any information reasonably requested by the Company relating to such claim,

(ii)take such action in connection with contesting such claim as the Company shall reasonably request in writing from time to time, including, without limitation, accepting legal representation with respect to such claim by an attorney reasonably selected by the Company,

(iii)cooperate with the Company in good faith in order effectively to contest such claim, and

(iv)permit the Company to participate in any proceedings relating to such claim;

provided, however, that the Company shall bear and pay directly all costs and expenses (including additional interest and penalties) incurred in connection with such contest, and shall indemnify and hold Employee harmless, on an after-tax basis, for any Excise Tax or income tax (including interest and penalties) imposed as a result of such representation and payment of costs and expenses. Without limitation on the foregoing provisions of this Section 25.c, the Company shall control all proceedings taken in connection with such contest, and, at its sole discretion, may pursue or forgo any and all administrative appeals, proceedings, hearings and conferences with the applicable taxing authority in respect of such claim and may, at its sole discretion, either pay the tax claimed to the appropriate taxing authority on behalf of Employee and direct Employee to sue for a refund or contest the claim in any permissible manner, and Employee agrees to prosecute such contest to a determination before any administrative tribunal, in a court of initial

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jurisdiction and in one or more appellate courts, as the Company shall determine; provided, however, that, if the Company pays such claim and directs Employee to sue for a refund, the Company shall indemnify and hold Employee harmless, on an after-tax basis, from any Excise Tax or income tax (including interest or penalties) imposed with respect to such payment or with respect to any imputed income in connection with such payment; and provided, further, that any extension of the statute of limitations relating to payment of taxes for the taxable year of Employee with respect to which such contested amount is claimed to be due is limited solely to such contested amount. Furthermore, the Company’s control of the contest shall be limited to issues with respect to which the Gross-Up Payment would be payable hereunder, and Employee shall be entitled to settle or contest, as the case may be, any other issue raised by the Internal Revenue Service or any other taxing authority.

d.If, after the receipt by Employee of a Gross-Up Payment or payment by the Company of an amount on Employee’s behalf pursuant to Section 25.c, Employee becomes entitled to receive any refund with respect to the Excise Tax to which such Gross-Up Payment relates or with respect to such claim, Employee shall (subject to the Company’s complying with the requirements of Section 25.c, if applicable) promptly pay to the Company the amount of such refund (together with any interest paid or credited thereon after taxes applicable thereto). If, after payment by the Company of an amount on Employee’s behalf pursuant to Section 25.c, a determination is made that Employee shall not be entitled to any refund with respect to such claim and the Company does not notify Employee in writing of its intent to contest such denial of refund prior to the expiration of 30 days after such determination, then the amount of such payment shall offset, to the extent thereof, the amount of Gross-Up Payment required to be paid.

e.Notwithstanding any other provision of this Section 25, the Company may, in its sole discretion, withhold and pay over to the Internal Revenue Service or any other applicable taxing authority, for the benefit of Employee, all or any portion of any Gross-Up Payment, and Employee hereby consents to such withholding.

f.For purposes of this Section 25 of this Agreement, “Excise Tax” shall mean the excise tax imposed by section 4999 of the Code, together with interest or penalties imposed with respect to such excise tax;  “Auditor” shall mean the accounting firm which was, immediately prior to the change of control, the Company’s independent auditor; and “Payment” shall mean any payment or distribution in the nature of compensation (within the meaning of Section 280G(b)(2) of the Code) to or for the benefit of Employee, whether paid or payable pursuant to this Agreement or otherwise.

26.AGREEMENT VOLUNTARY:  Employee and S&S each acknowledge and agree that they have carefully read this Agreement and understand that, except as expressly reserved herein, it is a release of all claims, known and unknown, past or present, including all claims under the ADEA. The parties further agree that they have entered into this Agreement for the above stated consideration. The parties each warrant to the other that they are fully competent and authorized to execute this Agreement, which they understand to be contractual. They further each acknowledge that they execute this Agreement of their own free will, after having a reasonable period of time to review, study, and deliberate regarding its meaning and

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effect, and after being advised to consult an attorney, and without reliance on any representation of any kind or character not expressly set forth herein. Finally, they execute this Agreement fully knowing its effect and voluntarily for the consideration stated above.

27.NOTICES:  Any notices required or permitted to be given under this Agreement shall be properly made if delivered in the case of S&S to:

Stewart & Stevenson Services, Inc.
P.O. Box 1637
Houston, Texas 77251
Attention:  Stephen A. Hines
Vice President of Human Resources

and in the case of Employee to:

John B. Simmons; at the last address on the books and records of the Company.

28.ENTIRE AGREEMENT. This Agreement sets forth the entire agreement of the parties hereto in respect of the subject matter contained herein and supersedes all prior agreements, promises, covenants, arrangements, communications, representations or warranties, whether oral or written, by any officer, employee or representative of any party hereto, including but not limited to the Severance Agreement dated July 19, 2004 between Employee and the Company.

29.BINDING EFFECT. This Agreement shall be binding upon, and inure to the benefit of, any successor of the Company.

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IN WITNESS WHEREOF, the parties have caused this Agreement to be executed in multiple counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument, in Houston, Harris County, Texas as of the last date entered below.

/s/ John B. Simmons		1/20/06
John B. Simmons		Date
STEWART & STEVENSON SERVICES, INC.
By:	/s/ Carl B. King	1/25/06
	Carl B. King	Date
	Senior Vice President

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EX-10.21

Exhibit 10.21

TRANSITION SERVICES AGREEMENT

This TRANSITION SERVICES AGREEMENT (together with the Schedules hereto, the “Agreement”), dated January 25, 2006, by and between Stewart & Stevenson LLC, a Delaware limited liability company (“Buyer”), and Stewart & Stevenson Services, Inc., a Texas corporation (“Parent”). Buyer and Parent may be referred to herein collectively as the “Parties” and individually as a “Party”. Capitalized terms used herein but not defined herein shall have the meanings ascribed to such terms in the PPD Purchase Agreement (as defined below).

WHEREAS, pursuant to the Asset Purchase Agreement, dated September 27, 2005, among Parent and certain of its subsidiaries party thereto, on the one hand, and Mr. Hushang Ansary (“Mr. Ansary”), on the other (as amended, supplemented or otherwise modified from time to time by mutual agreement of the parties thereto, the “EPD Purchase Agreement”), Parent and certain of its subsidiaries have agreed to sell and assign, and Mr. Ansary has agreed to acquire and assume, certain assets and liabilities of the Business (as defined in the EPD Purchase Agreement);

WHEREAS, pursuant to the Asset Purchase Agreement, dated as of October 24, 2005, among Parent and certain of its subsidiaries party thereto, on the one hand, and Mr. Ansary, on the other, (as amended, supplemented or otherwise modified from time to time by the mutual agreements of the parties thereto, the “PPD Purchase Agreement” and, together with the EPD Purchase Agreement, the “Purchase Agreements”), Parent and certain of its subsidiaries have agreed to sell and assign, and Mr. Ansary has agreed to acquire and assume, certain assets and liabilities of the Business (as defined in the PPD Purchase Agreement and, collectively with Business (as defined in the EPD Purchase Agreement), the “Businesses”);

WHEREAS, the EPD Purchase Agreement contemplated that at the closing thereunder Mr. Ansary and Parent would enter into the Transition Services Agreement in the form attached as Exhibit 2.9(a)(vii) to the EPD Purchase Agreement (the “EPD Transition Services Agreement”);

WHEREAS, the PPD Purchase Agreement contemplated that at the closing thereunder the Parties would enter into a Transition Services Agreement in form and substance to be agreed by the Parties (the “PPD Transition Services Agreement”);

WHEREAS, consistent with and subject to the terms and conditions of the Purchase Agreements, Mr. Ansary has assigned his rights and his obligations under the Purchase Agreements to Buyer and Stewart & Stevenson Power Products LLC, a Delaware limited liability company;

WHEREAS, following the consummation of the transactions contemplated by the Purchase Agreements, Buyer will directly or indirectly own and operate the Businesses;

WHEREAS, in lieu of entering into the EPD Transition Services Agreement and the PPD Transition Services Agreement and as a result of Buyer acquiring the Businesses, Buyer and Parent desire to enter this Agreement in respect of transition services to be provided between the Parties;

WHEREAS, Buyer has requested that Parent or its Affiliates provide the Parent Support Services (as defined below), subject to the terms and conditions set forth herein; and

WHEREAS, Parent has requested that Buyer or its Affiliates provide the Buyer Support Services (as defined below), subject to the terms and conditions set forth herein.

NOW, THEREFORE, in consideration of the premises and the mutual agreements set forth herein, the Parties hereto agree as follows:

1.Provision of Support Services.

(a)Following the date hereof, Parent agrees to provide or cause to be provided to Buyer and its subsidiaries, the services listed on Schedule 1 (the “Parent Support Services”), upon receipt of an e-mail notice from one of the individuals designated on Schedule 1 (or any other individual designated by Buyer in a notice to Parent) to one of the individuals designated on Schedule 2 (or any other individual designated by Parent in a notice to Buyer) requesting any such Parent Support Service. Each such notice shall provide reasonable detail as to the specific Parent Support Service being requested.

(b)Following the date hereof, Buyer agrees to provide or cause to be provided to Parent and its subsidiaries, the services listed on Schedule 2 (the “Buyer Support Services” and, together with the Parent Support Services, the “Support Services” and each a “Support Service”) upon receipt of an e-mail notice from one of the individuals designated on Schedule 2 (or any other individual designated by Parent in a notice to Buyer) to one of the individuals designated on Schedule 1 (or any other individual designated by Buyer in a notice to Parent) requesting any such Buyer Support Service. Each such notice shall provide reasonable detail as to the specific Buyer Support Service being requested.

(c)Subject to the terms and conditions hereof, any requested modification in the provision of any Support Service, including the provision of additional services, will only be made if each Party in its sole discretion agrees in writing to the provision of the Support Services as so modified.

(d)The Parties acknowledge that Parent has prepaid certain maintenance, license and other fees in respect of the contracts listed on Schedule 3 (the “Prepaid Fees”) and the Parties agree that such amounts will be reimbursed to Parent in the manner described in Schedule 3. The Parties recognize that in connection with the transfer to Buyer of the assets listed in section 2.1(l) of the Seller Disclosure Letter to the PPD Purchase Agreement (the

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“IT Assets”) and the transfer to and assumption by Buyer of the Contracts listed on Schedule 3 and Buyer’s obligation to provide the Buyer Support Services certain fees have been or will need to be paid to third parties to obtain consents and additional licenses, which fees are set forth on Schedule 4 (the “Transition Fees”). The Parties agree that the Transition Fees shall be borne equally by the Parties.

(e)During the Transition Period (as defined in Section 7(a)), each Party agrees to provide such advice and assistance relating to the use of the JD Edwards system and associated software on an informal, cost-free basis (but not on a recurring or unreasonable basis) and in a manner consistent with such advice and assistance provided on an unallocated basis among the Parent and its divisions prior to the date hereof.

(f)Upon the earlier of the termination of this Agreement and the end of the Transition Period, Buyer shall deliver to Parent electronic, usable and archivable copies of all electronic records in its possession (including its electronic data systems) relating to Parent and its Subsidiaries.

(g)Each agreement, covenant and obligation of each Party in Schedules 1 and 2 shall be binding upon such Party notwithstanding the fact that such agreement, covenant or obligation may be present in the schedule of services to be provided by the other Party.

2.Force Majeure; Emergency Situations.

In the event that war, fire, explosion, flood, accident, strike, riot, act of governmental authority, act of terrorism, act of God or other contingency beyond the reasonable control of a party obligated to provide a Support Service (the “Providing Party”) causes cessation or interruption of the Providing Party’s or its subcontractor’s performance hereunder (a “Force Majeure Event”), performance by the Providing Party shall be temporarily excused for the period of the disability, without liability, provided that the Providing Party shall promptly after it has actual knowledge of the beginning of any excusable delay, notify the party for whom the Support Service is being provided (the “Receiving Party”) of such delay, the reason therefor, and the probable duration and consequence thereof. The Providing Party shall use its commercially reasonable efforts to resume performance of its obligations hereunder as soon as reasonably practicable.

3.Charges for Support Services.

(a)Each Party shall pay the other Party for the Support Services provided hereunder on the basis of the charges set forth on Schedule 1 or Schedule 2, as the case may be, plus,

(i)the reasonable out-of-pocket costs and expenses incurred by the Providing Party and its Affiliates in connection with the travel of any Person to facilitate the delivery of the Support Services and transition of such services to the Businesses or to Parent, as the case may be; and

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(ii)the reasonable out-of-pocket costs and expenses incurred by the Providing Party and its Affiliates to purchase and install new hardware and/or software reasonably necessary to provide a Support Service or reasonably required by the Providing Party for security and or confidentiality purposes.

(b)In the event the Providing Party receives timely notice pursuant to Section 7(a) of the Receiving Party’s request to terminate any Support Service or additional service prior to the termination of this Agreement, the Receiving Party shall not be charged for such Support Service or additional service for the remaining term of this Agreement following the effective date of the termination of such Support Service.

(c)The Providing Party shall obtain the Receiving Party’s written consent prior to incurring any cost or expense hereunder in excess of $5,000 if such incurrence would obligate a party to share such cost or expense with the other Party pursuant to Section 1(c) or reimburse the other Party pursuant to Section 3(a)(i), 3(a)(ii) or 4(g).

(d)In no event shall either Party be responsible for (i) paying any salaries, wages, withholding, severance payments or any other compensation or payments with respect to employees of the other Party, (ii) overhead costs or (iii) matters of any nature associated with the provision of Support Services, other than as expressly provided in this Agreement.

(e)On or before the last day of each month, the Providing Party shall invoice the Receiving Party for the amount due for the period covered by that invoice (each, an “Invoice”). Invoices shall be sent in a format and containing a level of detail reasonably sufficient for the Receiving Party to determine the accuracy of the computation of the amount invoiced. If the Receiving Party does not dispute the amount payable pursuant to the Invoice, then the full amount of the Invoice shall be paid on or before the 30^th day after which it was delivered. If the Receiving Party disputes any amount payable pursuant to an Invoice, the Receiving Party shall pay to the Providing Party the undisputed portion within the 30-day period specified above. All amounts due under this Agreement that are not paid on or before the due date and which are ultimately due and payable shall bear interest at the rate of twelve percent (12%) per annum. The obligation to pay for Support Services rendered shall survive the termination of this Agreement. No Party shall have any right to setoff any amounts due and payable to the other Party pursuant to this Agreement against any payments to be made pursuant to this Agreement, the Purchase Agreements or otherwise. Notwithstanding anything to the contrary in this Section 3(e), after a material Force Majeure Event has continued for a thirty (30) consecutive day period with respect to any Support Service, the monthly fee (or any portion thereof) for such Support Service shall not accrue until the ability to provide such Support Service has been restored, in which case the resumption of the monthly fee shall be calculated by multiplying the monthly fee by the quotient of (x) the number of days in the month in which the Support Service was capable of being provided,

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divided by (y) the number of days in the month. By way of example, if a material Force Majeure Event occurs on April 15 and continues until June 15, Buyer will be invoiced one-half of the monthly fee for April, no fee for May, one-half of the monthly fee for June and the monthly fee for July.

(f)All payments made hereunder are exclusive of any and all sales and use taxes, similar duties or levies assessed by applicable Governmental Bodies on the payments hereunder. The Receiving Party agrees to pay or reimburse the Providing Party for any such taxes or similar fees or duties for such Support Service provided hereunder.

(g)Costs for long distance, the MAN (Metropolitan Area Network) data circuit from the Businesses to Parent, P-card, blackberry service, telephone services, travel related services and other business expenses that have been paid by Parent and charged directly to the Businesses, rather than charged to the Corporate segment of Parent and allocated to the Businesses via an allocation mechanism, shall continue to be paid by Parent and reimbursed by Buyer until the earlier of (i) 120 days after the date hereof and (ii) such time as Buyer has contracted for such services in Buyer’s name.

4.Conduct of the Business.

(a)Buyer recognizes that the transfer of the IT Assets and the performance of the Buyer Support Services will result in Buyer having access to confidential and proprietary information of Parent and its Affiliates. Buyer hereby agrees and covenants to comply with, and cause its employees, independent contractors and other agents and representatives to comply with, usage rules and policies at least as stringent as Parent’s usage rules and policies in effect immediately prior to the date hereof, a copy of which is attached hereto as Schedule 5.

(b)Parent shall comply with, and cause its employees, independent contractors and other agents and representatives that will be accessing or otherwise using the Buyer Support Services to comply in all material respects with Buyer’s usage rules and policies, except to the extent Buyer’s usage rules and policies differ from Parent’s rules and policies in Schedule 5 and such difference would adversely affect the benefits to be received by Parent under this Agreement.

(c)Buyer and Parent hereby agree to enforce compliance with the usage rules and policies using the same principles that Parent enforced and used immediately prior to the Closing Date.

(d)Parent’s obligation to provide the Parent Support Services is subject to Buyer’s compliance with Buyer’s agreements in Sections 4(a) and (c). Parent shall not be obligated to provide any Parent Support Services during any period in which Buyer is in material breach of Section 4(a) or 4(c).

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(e)Buyer’s obligation to provide the Buyer Support Services is subject to Parent’s compliance with Parent’s agreements in Sections 4(b) and (c). Buyer shall not be obligated to provide any Buyer Support Services during any period in which Parent is in material breach of Section 4(b) or 4(c).

(f)Each Party will have the sole authority to administer its information technology network in accordance with its relevant practices and procedures so long as such administration does not materially adversely affect such Party’s performance of its obligations hereunder. All technical, security and policy decisions relating to a Party’s information technology network and the Support Services to be provided by such Party shall be made by such Party.

(g)Notwithstanding anything to the contrary in Section 4(f) or elsewhere in this Agreement, Buyer agrees with respect to Parent’s assets affected by this Agreement to, and shall take all steps reasonably requested by Parent to, (i) safeguard Parent’s assets against unauthorized acquisition, use or disposition and provide reasonable assurance to Parent that Buyer has an internal control process designed to prevent and timely detect unauthorized acquisition, use or disposition of Parent’s assets, (ii) assist Parent in achieving its objectives of maintaining (A) effectiveness and efficiency of its operations, (B) reliability of financial reporting and (C) compliance with applicable laws and regulations, (iii) provide Parent and its representatives, including without limitation its independent registered public accounting firm, reasonable access to monitor, evaluate and test Buyer’s control systems for the limited purpose of assessing the status of the items in clauses (A)-(C) above, and (iv) generally support Parent’s management’s and Parent’s independent registered public accounting firm’s periodic assessments that Parent and its subsidiaries maintain effective internal control over financial reporting; provided, however, that, to the extent Buyer incurs, in connection with the performance of its obligations under this Section 4(g), any incremental, information technology or other costs, Seller will promptly reimburse Buyer for such costs upon Buyer’s demand therefor.

5.Standard of Performance; Disclaimers; Limitation of the Parties’ Liability.

(a)Each Party shall use its commercially reasonable efforts to provide or cause to be provided the Support Services that it is required to provide with the same degree of care, skill and prudence customarily exercised by it for its own operations, and shall comply with all applicable Legal Requirements. Each Party acknowledges, however, that neither Party nor any of its Affiliates is in the business of providing the Support Services and that such Support Services are provided solely as an accommodation as a result of the transactions contemplated by the Purchase Agreements. Except in matters involving wilfull misconduct or gross negligence, each Party’s sole and exclusive remedy and sole and exclusive liability for any defect or error in Support Services provided to it shall be either (i) the reperformance of such Support Services at no charge, or (ii) the reimbursement of amounts paid by the recipient of such Support Services.

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(b)NO PARTY MAKES ANY REPRESENTATION OR WARRANTY AS TO THE RESULTS OF ANY SUPPORT SERVICES PROVIDED BY IT OR ITS AFFILIATES HEREUNDER AND HEREBY DISCLAIMS ALL REPRESENTATIONS AND WARRANTIES, WHETHER EXPRESS, IMPLIED, STATUTORY OR OTHERWISE WITH RESPECT TO ITS OR ITS AFFILIATES PERFORMANCE HEREUNDER, EXCEPT AS EXPRESSLY SET FORTH HEREIN. EACH PARTY SPECIFICALLY DISCLAIMS ANY IMPLIED WARRANTY OF MERCHANTABILITY, QUALITY, ACCURACY AND FITNESS FOR A PARTICULAR PURPOSE.

(c)EXCEPT FOR THE OBLIGATIONS SET FORTH IN SECTION 5(a) AND EXCEPT FOR DAMAGES ARISING FROM WILFULL MISCONDUCT OR GROSS NEGLIGENCE, NEITHER THE PARTIES NOR THEIR AFFILIATES SHALL BE LIABLE TO EACH OTHER OR ANYONE ACTING BY, THROUGH OR UNDER THE OTHER PARTY, UNDER ANY LEGAL THEORY (INCLUDING WITHOUT LIMITATION BREACH OF CONTRACT, STRICT LIABILITY, NEGLIGENCE OR ANY OTHER LEGAL OR EQUITABLE THEORY), FOR EXEMPLARY, SPECIAL, PUNITIVE, INDIRECT, REMOTE, SPECULATIVE OR CONSEQUENTIAL DAMAGES ARISING OUT OF OR RELATING TO PERFORMANCE OR NONPERFORMANCE OF SUPPORT SERVICES (EXCEPT TO THE EXTENT ANY SUCH PERSON SUFFERS SUCH DAMAGES TO AN UNAFFILIATED THIRD PARTY IN CONNECTION WITH A THIRD PARTY CLAIM, IN WHICH EVENT SUCH DAMAGES SHALL BE RECOVERABLE).

6.Independent Contractor; Subcontractors.

(a)In the performance of all activities hereunder, each Party shall be an independent contractor with the exclusive authority to control and direct the means, method and manner of performance of the details of any Support Services. The obligations of the Providing Party to the Receiving Party shall be those of an independent contractor and not an employee, agent or servant of the Receiving Party, and this Agreement does not create any partnership or joint venture between Parent and Buyer.

(b)Each Party expressly consents to the other Party’s use of subcontractors in connection with the performance of Support Services hereunder.

7.Term.

(a)With respect to all of the Support Services, the term of this Agreement shall begin on the date hereof and shall remain in full force for a period of twelve (12) months (the “Transition Period”); provided, however, that either Party may terminate this Agreement at any time, in whole or with respect to any Support Service being provided to it at such time, by providing written

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notice to the other Party at least thirty (30) days prior to such termination, in which case this Agreement or any such Support Service being terminated shall be terminated effective as of the end of the month in which the thirty (30) day notice period expires. Charges for any Support Services so terminated shall be reduced accordingly; provided, that the Receiving Party shall be obligated to pay the Providing Party for any Support Service provided prior to the effective date of termination of any such Support Service.

(b)So long as Buyer is in full compliance with its obligations under this Agreement and all amounts to be paid to Parent hereunder have been paid when due, Buyer shall have the option to extend the Transition Period with respect to any Parent Support Service up to an additional period of six (6) months with respect to all or part of the Parent Support Services that have not been terminated prior to the end of the Transition Period (the “Buyer Extension Period”). Buyer may exercise its option to initiate a Buyer Extension Period by delivery of a written notice to Parent no later than sixty (60) days prior to the end of the Transition Period. Buyer’s notice shall specify in reasonable detail the types and levels of Parent Support Services to be provided by Parent during the Buyer Extension Period. If Buyer initiates a Buyer Extension Period with respect to any Parent Support Service, the fee, rate or amount to be charged to Buyer for the provision of any Parent Support Service shall be increased by twenty-five percent (25%) from the fee, rate or amount to be charged in accordance with Schedule 1.

(c)So long as Parent is in full compliance with its obligations under this Agreement and all amounts to be paid to Buyer hereunder have been paid when due, Parent shall have the option to extend the Transition Period with respect to any Buyer Support Service up to an additional period of six (6) months with respect to all or part of the Buyer Support Services that have not been terminated prior to the end of the Transition Period (the “Parent Extension Period”). Parent may exercise its option to initiate a Parent Extension Period by delivery of a written notice to Buyer no later than sixty (60) days prior to the end of the Transition Period. Parent’s notice shall specify in reasonable detail the types and levels of Buyer Support Services to be provided by Buyer during the Parent Extension Period. If Parent initiates a Parent Extension Period with respect to any Buyer Support Service, the fee, rate or amount to be charged to Buyer for the provision of any Buyer Support Service shall be increased by twenty-five percent (25%) from the fee, rate or amount to be charged in accordance with Schedule 2.

(d)Notwithstanding the provisions of Sections 7(a), (b) and (c), each Party reserves the right to immediately terminate this Agreement by written notice to the other Party in the event that:

(i)the other Party commits a material breach of the terms of this Agreement, which breach remains uncured for a period of five (5) days after the non-breaching Party has given written notice to the other Party of such breach (the “Cure

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Period”); provided, that each Party expressly acknowledges that the failure to pay any amount when due (following any Cure Period) and any breach of Section 4(a), (b) or (c) shall be a material breach of the terms of this Agreement; provided, however, that neither contesting in good faith the quality or effectiveness of Support Services nor the withholding of amounts owed hereunder in connection with a good faith dispute concerning such Support Services shall be considered a material breach for purposes of this subparagraph;

(ii)the other Party shall (A) apply for consent to the appointment of a receiver, trustee or liquidator, (B) admit in writing an inability to pay debts as they mature, (C) make a general assignment for the benefit of creditors, (D) file a voluntary petition or have filed against it a petition for an order of relief under the Federal Bankruptcy Code, as the same may be amended, so as to take advantage of any insolvency laws or to file an answer admitting the general obligations of an insolvency petition; or

(iii)the other Party shall have been prevented from exercising normal managerial control over all or any substantial part of its property by any person or agent or by reason of the entry of any order, judgment or decree by any court or governmental agency of competent jurisdiction approving a petition seeking the reorganization of such Party, or appointment of a receiver’s trustee, liquidator or the like of such Party or a substantial part of its assets.

(e)Upon termination of this Agreement for any reason, unless otherwise specified in Article 12 of the PPD Purchase Agreement, each Party shall return to the other Party all documents and other tangible objects containing or representing Confidential Information of the other Party obtained in connection with this Agreement, including all notes, records, extracts, summaries and permitted copies thereof, which are in the possession or control of such Party.

(f)EACH PARTY, AS RECEIVING PARTY, EXPRESSLY AGREES THAT A CONDITION TO THE PROVIDING PARTY PROVIDING SUPPORT SERVICES IS THE RECEIVING PARTY’S AGREEMENT TO MAKE ALL PAYMENTS TO THE PROVIDING PARTY WHEN DUE (FOLLOWING THE CURE PERIOD), AND THAT BUT FOR RECEIVING PARTY’S AGREEMENT TO MAKE ANY SUCH PAYMENTS WHEN DUE (FOLLOWING THE CURE PERIOD), THE PROVIDING PARTY WOULD NOT HAVE AGREED TO ENTER INTO THIS AGREEMENT. EACH PARTY, AS RECEIVING PARTY, EXPRESSLY UNDERSTANDS AND AGREES THAT IF IT FAILS TO MAKE ANY PAYMENT TO THE PROVIDING PARTY WHEN DUE (FOLLOWING THE CURE PERIOD), THE PROVIDING PARTY SHALL HAVE THE RIGHT IN ITS SOLE AND ABSOLUTE DISCRETION TO IMMEDIATELY TERMINATE THIS AGREEMENT AND CEASE PROVIDING ANY SUPPORT SERVICES. ANY TERMINATION OF THIS AGREEMENT AND SUPPORT SERVICES AS A RESULT OF THE RECEIVING PARTY’S FAILURE TO MAKE ANY

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PAYMENT TO THE PROVIDING PARTY WHEN DUE (FOLLOWING THE CURE PERIOD) SHALL BE WITHOUT LIABILITY OF ANY KIND WHATSOEVER TO THE PROVIDING PARTY AND ITS AFFILIATES. EACH PARTY, AS RECEIVING PARTY, EXPRESSLY UNDERSTANDS AND AGREES THAT ANY SUCH TERMINATION OF SUPPORT SERVICES COULD HAVE A MATERIAL ADVERSE EFFECT ON THE RECEIVING PARTY’S BUSINESS.

(g)Buyer’s exercise of the option in the Lease Agreement (as defined in the EPD Purchase Agreement) shall not affect the Parties’ obligations hereunder or be deemed to result in the termination of this Agreement.

8.Information and Records. Each Party shall keep the other Party reasonably and promptly informed as to all matters relevant to the performance of Support Services hereunder. Each Party will maintain true and correct records of all receipts, invoices, reports and such other documents relating to the Support Services rendered hereunder as are customarily maintained by it for its own operations or as reasonably requested by the other Party.

9.Notices. All notices, consents, waivers and other communications required or permitted by this Agreement shall be in writing and shall be deemed given to a Party when (a) delivered to the appropriate address by hand or by nationally recognized overnight courier service (costs prepaid); (b) sent by facsimile with confirmation of transmission by the transmitting equipment; (c) received or rejected by the addressee, if sent by certified mail, return receipt requested; or (d) if given pursuant to Section 1(a) pr 1(b), sent by e-mail with confirmation of transmission by return email, in each case to the following addresses, facsimile numbers and marked to the attention of the person (by name or title) designated below (or to such other address or facsimile number or person as a Party may designate by notice to the other Party):

Parent:	Stewart & Stevenson Services, Inc.
	2707 North Loop West, Suite 800
	Houston, Texas 77008
	Attention: General Counsel
	Facsimile:	(713) 868-2130
	Confirm:	(713) 868-7700
	E-mail:	s.biar@ssss.com
with a mandatory copy (which shall not constitute notice) to:
	Fulbright & Jaworski L.L.P.
	1301 McKinney, Suite 5100
	Houston, Texas 77010-3095
	Attention:	Charles H. Still
	Facsimile:	(713) 651-5246
	Confirm:	(713) 651-5151

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Buyer:	c/o Parman Capital Group, LLC
	1000 Louisiana, Suite 5900
	Houston, Texas 77002
	Attention:	Hushang Ansary
	Facsimile:	713-659-3137
	Confirm:	713-650-0071
	E-mail: email@hushangansary.com
with a mandatory copy (which shall not constitute notice) to:
	Jones Day
	222 East 41st Street
	New York, NY 10017
	Attention:	William F. Henze II
	Facsimile:	212-755-7306
	Confirm:	212-326-3939

10.Waiver. No course of dealing and no delay on the part of either Party in exercising any right, power or remedy shall operate as a waiver thereof or otherwise prejudice such Party’s rights, powers or remedies. No term or condition of this Agreement shall be deemed to have been waived nor shall there be any estoppel to enforce any provision of this Agreement except by written agreement of the Party charged with such waiver or estoppel. The waiver of any breach of any term, condition or provision of this Agreement shall not be construed as a waiver of any prior, concurrent or subsequent breach of the same or any other term, condition or provision hereof.

11.Entire Agreement. This Agreement and the Schedules attached to this Agreement and the Purchase Agreements constitute the final and entire agreement between the Parties concerning the subject matter hereof, and supersede all prior and contemporaneous agreements and undertakings of the Parties in connection therewith. This Agreement may not be contradicted by evidence of prior, contemporaneous or subsequent oral agreements of the Parties. There are no oral agreements between the Parties.

12.Successors and Assigns. This Agreement shall inure to the benefit of and be binding upon the Parties hereto and their respective successors and permitted assigns, but neither this Agreement nor any of the rights, interests or obligations hereunder shall be assigned by either Party without the prior written consent of the other Party.

13.Governing Law. This Agreement and the performance hereof shall be governed by and construed and enforced under, and any Dispute determined in accordance with, the laws of the State of Texas, without regard to conflicts-of-law principles that would require the application of the law of any other jurisdiction.

14.Confidentiality. The Parties agrees that this Agreement, including all information exchanged or accessed pursuant to this Agreement and the Support Services provided

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hereunder, is subject to, and the Parties are bound by, the terms and conditions in Section 12 of the PPD Purchase Agreement.

15.Arbitration. In the event there shall exist any dispute or controversy with respect to this Agreement or the providing of Support Services hereto or the transactions contemplated hereby, the Parties hereto agree to seek to resolve such dispute in accordance with Section 13.4 of the PPD Purchase Agreement.

16.Severability. The invalidity or unenforceability of any provision of this Agreement shall in no way affect the validity or enforceability of any other provision hereof.

17.Captions. The headings to Sections of this Agreement are inserted for convenience of reference only and will not affect the meaning or interpretation of this Agreement.

18.Schedules. All Schedules hereto which are referred to herein are hereby made a part hereof and incorporated herein by such reference.

19.No Third Party Beneficiaries. This Agreement inures to the sole and exclusive benefit of the Parties, their respective successors, legal representatives and permitted assigns, and confers no benefit on any third party.

20.Mutual Cooperation; Further Assurances. Upon request by either Party from time to time during the term of this Agreement, each Party agrees to execute and deliver all such other and additional instruments, notices and other documents and do all such other acts and things as may be necessary to carry out the purposes of this Agreement and to more fully assure the Parties’ rights and interests provided for hereunder.

21.Amendments; Changes; Modifications. This Agreement may not be effectively amended, changed, modified or altered without the written consent of the Parties and such consent shall be effective only in the specific instance and for the specific purpose for which it is given.

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IN WITNESS WHEREOF, the Parties have duly executed this Agreement as of the date first above written.

BUYER:
STEWART & STEVENSON LLC
By:	/s/ Hushang Ansary
Name:			Hushang Ansary
Title:		Chairman
PARENT:
STEWART & STEVENSON SERVICES, INC.
By:	/s/ Carl B. King
Name:			Carl B. King
Title:		Senior Vice President, Secretary
		and General Counsel

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Schedules are omitted in accordance with Item 601(b)(2) of Regulation S-K. Schedules will be provided by the Company to the Securities Exchange Commission upon request.

EX-21.1

EXHIBIT 21.1

SUBSIDIARIES OF STEWART & STEVENSON SERVICES, INC.

In accordance with Item 601(b)(21) of Regulation S-K, the following list sets forth the name of certain subsidiaries of the Company. Each such name is also the name under which such subsidiary does business:

DOMESTIC SUBSIDIARIES

C. Jim Stewart & Stevenson, Inc.

Extended Reach Logistics, Inc.

S&S Trust

Sierra Detroit Diesel Allison, Inc.

Stewart & Stevenson FMTV International, Inc.

Stewart & Stevenson TVS, Inc.

Stewart & Stevenson Vehicle Services, Inc.

TVS Holdings, Inc.

DOMESTIC LP and LLC

Stewart & Stevenson Tactical Vehicle Systems, LP

TVS Holdings, LLC

FOREIGN SUBSIDIARIES

Automotive Technik (Holdings) Limited

Automotive Technik Engineering Limited

Automotive Technik Fabrications Limited

Automotive Technik Limited

Automotive Technik New Zealand Limited

Stewart & Stevenson TVS UK Ltd.

EX-23.1

Exhibit 23.1

Consent of Independent Registered Public Accounting Firm

We consent to the incorporation by reference in the following Registration Statements:

1.No. 33-22463 on Form S-8 dated June 13, 1988, related to the 1988 NONSTATUTORY STOCK OPTION PLAN

2.No. 33-65404 on Form S-8 dated July 1, 1993, related to the 1993 NONOFFICER EMPLOYEE STOCK OPTION PLAN

3.No. 33-52881 on Form S-8 dated March 30, 1994, related to the 1993 NONOFFICER EMPLOYEE STOCK OPTION PLAN

4.No. 33-52903 on Form S-4 dated June 30, 1994, related to the 401K SAVINGS PLAN

5.No. 33-54389 on Form S-4 dated June 30, 1994, related to 500,000 SHARES OF COMMON STOCK

6.No. 33-58679 on Form S-8 dated April 18, 1995, related to the 1993 NONOFFICER EMPLOYEE STOCK OPTION PLAN

7.No. 33-58685 on Form S-8 dated April 18, 1995, related to the 1994 DIRECTOR STOCK OPTION PLAN

8.No. 333-02817 on Form S-8 dated April 25, 1996, related to the 1993 NONOFFICER EMPLOYEE STOCK OPTION PLAN

9.No. 333-15271 on Form S-8 dated November 1, 1996, related to the 1996 DIRECTOR STOCK PLAN

10.   No. 333-26089 on Form S-8 dated April 29, 1997, related to the 1993 NONOFFICER EMPLOYEE STOCK OPTION PLAN

11.No. 333-35617 on Form S-8 dated September 15, 1997, related to the 1988 NONSTATUTORY STOCK OPTION PLAN

12.No. 333-51567 on Form S-8 dated May 1, 1998, related to the 1993 NONOFFICER EMPLOYEE STOCK OPTION PLAN

13.No. 333-77799 on Form S-8 dated May 5, 1999, related to the 1993 NONOFFICER EMPLOYEE STOCK OPTION PLAN

14.No. 333-54172 on Form S-8 dated January 23, 2001, related to the 1993 NONOFFICER EMPLOYEE STOCK OPTION PLAN

15.No. 333-62402 on Form S-8 dated June 6, 2001, related to the 1993 NONOFFICER EMPLOYEE STOCK OPTION PLAN

16.No. 333-62438 on Form S-8 dated June 6, 2001, related to the STEWART & STEVENSON ELECTIVE DEFERRAL PLAN

17.No. 333-86144 on Form S-8 dated April 12, 2002, related to the 1996 DIRECTOR STOCK PLAN

18.No. 333-86122 on Form S-8 dated April 12, 2002, related to the 1993 NONOFFICER EMPLOYEE STOCK OPTION PLAN

19.No. 333-104579 on Form S-8 dated April 16, 2003, related to the 1993 NONOFFICER EMPLOYEE STOCK OPTION PLAN

20.No. 333-118742 on Form S-8 dated September 1, 2004 related to the AMENDED AND RESTATED
1996 DIRECTOR STOCK PLAN, AS AMENDED

of our reports dated April 11, 2006, with respect to the consolidated financial statements of Stewart & Stevenson Services, Inc., Stewart & Stevenson Services, Inc. management’s assessment of the effectiveness of internal control over financial reporting, and the effectiveness of internal control over financial reporting of Stewart & Stevenson Services, Inc., included in the Annual Report (Form 10-K) for the year ended January 31, 2006.

	/s/ Ernst & Young LLP
Houston, Texas
April 11, 2006

EX-31.1

EXHIBIT 31.1

CHIEF EXECUTIVE OFFICER CERTIFICATION

I, Max L. Lukens, President and Chief Executive Officer, certify that:

1. I have reviewed this annual report on Form 10-K of Stewart & Stevenson Services, Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)), and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing equivalent functions):

a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date:   April 13, 2006

/s/ Max L. Lukens

Max L. Lukens

President and Chief Executive Officer

(Principal Executive Officer)

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EX-31.2

EXHIBIT 31.2

CHIEF FINANCIAL OFFICER CERTIFICATION

I, L. Scott Biar, Chief Financial Officer, Treasurer and Controller, certify that:

1. I have reviewed this annual report on Form 10-K of Stewart & Stevenson Services, Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)), and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing equivalent functions):

a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date:   April 13, 2006

/s/ L. Scott Biar

L. Scott Biar

Chief Financial Officer, Treasurer and Controller

(Principal Financial and Principal Accounting Officer)

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EX-32.1

EXHIBIT 32.1

Certification Pursuant to 18 U.S.C. Section 1350 as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

Solely for the purpose of Section 906 of the Sarbanes-Oxley Act of 2002, and solely to the extent this certification is applicable to the Report on Form 10-K for the year ended January 31, 2006 of Stewart & Stevenson Services, Inc. (the “Report”), the undersigned hereby certify that the Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934 and that the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of Stewart & Stevenson Services, Inc.

/s/ Max L. Lukens
Name:	Max L. Lukens
Title:	President and Chief Executive Officer
Date:	April 13, 2006
/s/ L. Scott Biar
Name:	L. Scott Biar
Title:	Chief Financial Officer, Treasurer and Controller
Date:	April 13, 2006

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