The 3rd Generation Sets
1988 EU Technic catalog
5 new sets were released, including the 3rd major auto chassis. Lego also updated the packaging with a new box and manual design showing a CAD drawing on a dark blue background. This design would serve as the basis for Technic packaging for the next 10 years.
There were several new elements introduced in 1988, such as the propeller assembly and steering arm. Model designs were becoming more complex and realistic and 1988 marked the beginning of ultra-specialized elements. Rather than construct the functional equivalent out of more standard elements, Designers began to use these specialized elements to increase the functionality with compact assemblies.
US patent 5.071,384
The steering gear:
The new steering gear assembly is a good illustration of these new highly specialized elements. The assembly consisted of a rounded plate with a toothed bracket, a rack/steering rod and a pinion holder. The pinion holder would engage the teeth of the bracket, allowing it it remain fixed in various positions. Because the rack had a rounded profile the pinion could rotate around it and remain engaged. This same functionality would require a much bulkier assembly if constructed out of separate elements. This steering gear has served as the base of steering, especially in small models, to the present day.
The 8855 Prop Plane:
This was the first Technic airplane and still stands as their best. By this time Technic sets had mostly lost their block-like construction and were starting to become quite realistic in appearance. The design of the prop plane, especially of the wings and rudder, look like a cutaway of a real plane. This technique would become the staple of 3rd generation set design. The joystick in the cockpit realistically controlled the ailerons and rudder through a series of cross axles and universal joints. The final result is a model that captured the prototype in both form and function. It is perhaps the most underrated Technic set ever.

1988 sets:

8712 Technic Action Figures
8832 Roadster
8853 Excavator
8855 Prop Plane
8865 Test Car
By Isodomus