FEW studies exist on the determination of profitability in UK Government- regulated industries.1 Aerospace is an ideal industry to study since it is dependent on Government contracts which have state-determined profit rates. Various hypotheses on the industry's profitability have been suggested. Critics allege that profits depend on wars and domestic military work. Firms claimed that until I968, the state's profit rules failed to recognize that tech- nical progress was resulting in shorter production runs and greater emphasis on less profitable development work. Questions also arise about the effects on profits of the mergers of 1959-60 and the Review Board for Government Contracts established in I968. These variables and the features of both the industry and Government procurement policy relevant to explaining profit- ability are outlined and incorporated into estimating equations. Considera- tion is also given to the effects of profit controls on wages and unregulated outputs.