10-K405

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-K

(Mark One)

/x/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Fiscal Year Ended September 30, 2001

or

/ / 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 0-8408

WOODWARD GOVERNOR COMPANY
(Exact name of registrant specified in its charter)

Delaware (State or other jurisdiction of incorporation or organization)	36-1984010 (I.R.S. Employer Identification No.)
5001 North Second Street, Rockford, Illinois (Address of principal executive offices)	61125-7001 (Zip Code)

(815) 877-7441
(Registrant's telephone number, including area code)

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

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

Common stock, par value $.00875 per share
(Title of Class)

    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 /x/  No / /

    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. /x/

    There were 11,324,150 shares of common stock with a par value of $.00875 per share outstanding at November 30, 2001. The aggregate market value of the voting stock held by non-affiliates was approximately $450,783,523 at November 30, 2001 (such aggregate market value does not include voting stock beneficially owned by directors, officers, the Woodward Governor Company Profit Sharing Trust or the Woodward Governor Company Charitable Trust).

DOCUMENTS INCORPORATED BY REFERENCE

    Portions of our annual report to shareholders for the fiscal year ended September 30, 2001 (2001 Annual Report), are incorporated by reference into Parts I, II and IV of this filing, to the extent indicated.

    Portions of our proxy statement dated December 6, 2001, are incorporated by reference into Part III of this filing, to the extent indicated.

TABLE OF CONTENTS

			Page
Part I	Item 1.	Business	1
	Item 2.	Properties	3
	Item 3.	Legal Proceedings	3
	Item 4.	Submission of Matters to a Vote of Shareholders	3
Part II	Item 5.	Market for the Registrant's Common Stock and Related Shareholder Matters	4
	Item 6.	Selected Financial Data	4
	Item 7.	Management's Discussion and Analysis of Financial Condition and Results of Operations	4
	Item 7A.	Quantitative and Qualitative Disclosures About Market Risk	4
	Item 8.	Financial Statements and Supplementary Data	4
	Item 9.	Changes in and Disagreements with Accountants On Accounting and Financial Disclosure	4
Part III	Item 10.	Directors and Executive Officers of the Registrant	5
	Item 11.	Executive Compensation	5
	Item 12.	Security Ownership of Certain Beneficial Owners and Management	5
	Item 13.	Certain Relationships and Related Transactions	5
Part IV	Item 14.	Exhibits, Financial Statement Schedules, and Reports on Form 8-K	6
Signatures			9

PART I

Item 1.  Business

    Woodward Governor Company was established in 1870 and incorporated in 1902. Headquartered in Rockford, Illinois and serving global markets from locations worldwide, we design, manufacture, and service energy control systems and components for aircraft and industrial engines, turbines, and other power equipment. Leading OEMs (original equipment manufacturers) throughout the world use our products and services in the power generation, process industries, transportation, and aerospace markets.

    Our operations are organized based on the nature of products and related services provided and consist of two reportable segments—Industrial Controls and Aircraft Engine Systems. Industrial Controls provides energy control systems and components primarily to OEMs of industrial engines, turbines, and other power equipment. Aircraft Engine Systems provides energy control systems and components primarily to OEMs of aircraft engines.

    Information about our operations in 2001 and outlook for the future, including certain segment information, is included in "Management's Discussion and Analysis" on pages 14 through 21 of our 2001 Annual Report, incorporated here by reference. Additional segment information and certain geographical information is included in Note R to the Consolidated Financial Statements, on page 33 of our 2001 Annual Report, incorporated here by reference. Other information about our business follows.

Industrial Controls

    We provide energy control systems and components through Industrial Controls, primarily to OEMs of industrial engines, turbines, and other power equipment. We also sell components as spares or replacements, and provide other related services to these customers and other customers. In 2001, our largest customer was General Electric Company, accounting for about 38% of Industrial Controls' sales.

    We generally sell Industrial Controls' products and services directly to our customers, although we also generate sales through distributors, dealers, and independent service facilities. We carry certain finished goods and component parts inventory to meet rapid delivery requirements of customers, primarily for aftermarket needs. We do not believe Industrial Controls' sales are subject to significant seasonal variation.

    During 2001, we acquired the Bryce diesel fuel injection business of Delphi Automotive Systems to extend and complement our existing products for the important medium-speed diesel market. We also acquired Hoeflich Controls, Inc. to add to our ignition systems technology for gas engines.

    We believe Industrial Controls has a significant competitive position within the market for energy control systems and components for industrial engines. We compete with as many as 10 other independent manufacturers and with the in-house control operations of OEMs. While published information is not available in sufficient detail to enable an accurate assessment, we believe we hold a strong position among the independent manufacturers for power generation, transportation, and process industries markets. Companies compete principally on price, quality and customer service. We also see increasing demand for products that result in lower environmental emissions, particularly in gas turbine applications. In our opinion, our prices are generally competitive and our quality, customer service and technology used in products to reduce emissions are favorable competitive factors.

    Industrial Controls' backlog orders were $96 million at November 30, 2001, approximately 95% of which we expect to fill by September 30, 2002. Last year, Industrial Controls' backlog orders were $97 million at November 30, 2000, approximately 94% of which we expected to fill by September 30,

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2001. Backlog orders are not necessarily an indicator of future billing levels because of variations in lead times.

    Industrial Controls' products make use of several patents and trademarks of various durations that we believe are collectively important. However, we do not consider our business dependent upon any one patent or trademark. Our products consist of mechanical, electronic and electromagnetic components. Mechanical components are machined primarily from aluminum, iron, and steel. Generally there are numerous sources for the raw materials and components used in our products, and they are believed to be sufficiently available to meet all Industrial Controls' requirements.

Aircraft Engine Systems

    We provide energy control systems and components through Aircraft Engine Systems, primarily to OEMs of aircraft engines for use in those engines. We also sell components as spares or replacements, and provide repair and overhaul services to these customers and other customers. In 2001, our largest customer was General Electric Company, accounting for about 25% of Aircraft Engine Systems' sales.

    We generally sell Aircraft Engine Systems' products and services directly to our customers, although we also generate aftermarket sales through distributors, dealers, and independent service facilities. We carry certain finished goods and component parts inventory to meet. rapid delivery requirements of customers, primarily for aftermarket needs. We do not believe Aircraft Engine Systems' sales are subject to significant seasonal variation.

    We believe Aircraft Engine Systems has a significant competitive position within the market for energy control systems and components for aircraft engines. We compete with several other manufacturers, including divisions of OEMs of aircraft engines. While published information is not available in sufficient detail to enable an accurate assessment, we do not believe any company holds a dominant competitive position. Companies compete principally on price, quality and customer service. In our opinion, our prices are generally competitive, and our quality and customer service are favorable competitive factors.

    Aircraft Engine Systems' backlog orders were $177 million at November 30, 2001, approximately 77% of which we expect to fill by September 30, 2002. Last year, Aircraft Engine Systems' backlog orders were $163 million at November 30, 2000, approximately 77% of which we expected to fill by September 30, 2001. Backlog orders are not necessarily an indicator of future billing levels because of variations in lead times.

    Aircraft Engine Systems' products make use of several patents and trademarks of various durations that we believe are collectively important. However, we do not consider our business dependent upon any one patent or trademark. Our products consist of mechanical, electronic, and electromagnetic components. Mechanical components are machined primarily from aluminum, iron, and steel. Generally there are numerous sources for the raw materials and components used in our products, and they are believed to be sufficiently available to meet all Aircraft Engine Systems' requirements.

Other Matters

    We spent approximately $30.4 million for company-sponsored research and development activities in 2001, $29.1 million in 2000, and $24.6 million in 1999.

    We are currently involved in matters of litigation arising from the normal course of business, including certain environmental matters. These matters are discussed in Note P to the Consolidated Financial Statements on page 32 of our 2001 Annual Report, incorporated here by reference. We do not believe that compliance with provisions regulating the discharge of materials into the environment, or otherwise relating to the protection of the environment, will have any material effect on our financial condition and competitive position, although such matters could have a material effect on our

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quarterly or annual operating results and cash flows (including capital expenditures) in a future period. We are not aware of any material capital expenditures that we will make for environmental control facilities through September 30, 2002.

    We employed about 3,654 people at November 30, 2001.

    This report and the 2001 Annual Report, sections of which have been incorporated by reference, contain forward-looking statements and should be read with the "Cautionary Statement" on page 35 of the 2001 Annual Report, incorporated here by reference.

Item 2.  Properties

    Our principal plants are as follows:

    United States

Fort Collins, Colorado—Industrial Controls' manufacturing
Loveland, Colorado—Industrial Controls' manufacturing and partially leased to a third party
Rockford, Illinois—Aircraft Engine Systems' manufacturing and corporate offices
Rockton, Illinois—Aircraft Engine Systems' manufacturing and repair and overhaul
Memphis, Michigan (leased)—Industrial Controls' manufacturing
Zeeland, Michigan—Aircraft Engine Systems' manufacturing
Buffalo, New York—Aircraft Engine Systems' manufacturing
Greenville, South Carolina (leased)—Industrial Controls' manufacturing

    Other Countries

Aken, Germany (leased)—Industrial Controls' manufacturing
Tomisato, Chiba, Japan—Industrial Controls' manufacturing
Hoofddorp, The Netherlands—Industrial Controls' manufacturing
Cheltenham, England, United Kingdom—Industrial Controls' manufacturing
Prestwick, Scotland, United Kingdom (leased)—Aircraft Engine Systems' repair and overhaul

    Our principal plants are suitable and adequate for the manufacturing and other activities performed at those plants, and we believe our utilization levels are generally high. With continuing advancements in manufacturing technology and operational improvements, we believe we can continue to increase production without additional plants.

    In addition to the principal plants listed above, we lease several facilities in locations worldwide, used primarily for sales and service activities.

Item 3.  Legal Proceedings

    We are currently involved in environmental litigation. These matters are discussed in Note P to the Consolidated Financial Statements on page 32 of our 2001 Annual Report, incorporated here by reference.

Item 4.  Submission of Matters to a Vote of Shareholders

    There were no matters submitted to a vote of shareholders during the fourth quarter of the year ended September 30, 2001.

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PART II

Item 5.  Market for the Registrant's Common Stock and Related Shareholder Matters

    Our common stock is listed on the Nasdaq National Market and at November 30, 2001, there were 1,606 holders of record. Cash dividends were declared quarterly during 2001 and 2000. The amount of cash dividends per share and the high and low sales price per share for our common stock for each fiscal quarter in 2001 and 2000 are included in the "Selected Quarterly Financial Data" on page 35 of the 2001 Annual Report, incorporated here by reference.

Item 6.  Selected Financial Data

    Selected financial data is included in the "Summary of Operations/Eleven-Year Record" on page 36 of our 2001 Annual Report, incorporated here by reference.

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

    "Management's Discussion and Analysis" is included on pages 14 through 21 of our 2001 Annual Report, incorporated here by reference. This discussion should be read with the consolidated financial statements on pages 22 through 33 of our 2001 Annual Report and the "Cautionary Statement" on page 35 of our 2001 Annual Report, both incorporated here by reference.

Item 7A.  Quantitative and Qualitative Disclosures About Market Risk

    Disclosures about market risk are included under the captions "Other Matters—Market Risks" on page 21 of our 2001 Annual Report, incorporated here by reference.

Item 8.  Financial Statements and Supplementary Data

    Consolidated financial statements and schedules, as listed in Item 14(a) and excluding the two items listed under the caption "Other Financial Statement Schedules", are incorporated here by reference.

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

    There have been no changes in or disagreements on accounting principles and financial disclosure. PricewaterhouseCoopers LLP, or its predecessors, have been our independent accountants since 1940.

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PART III

Item 10.  Directors and Executive Officers of the Registrant

Executive Officers:

John A. Halblrook, age 56—chairman and chief executive officer since January 1995; chief executive officer and president November 1993 through January 1995; president November 1991 through November 1993.

Stephen P. Carter, age 50—vice president, chief financial officer, and treasurer since January 1997; vice president and treasurer September 1996 through January 1997; and assistant treasurer January 1994 through September 1996.

Thomas A. Gendron, age 40—vice president and general manager of Industrial Controls since June 2001; vice president of Industrial Controls April 2000 through May 2001; director of global marketing and Industrial Controls' business development February 1999 through March 2000; and marketing and product support manager of Aircraft Engine Systems November 1990 through January 1999.

Ronald E. Fulkrod, age 57—vice president of the company since June 2001, vice president of Industrial Controls April 2000 through May 2001; vice president of Industrial Controls' operations January 1997 through March 2000; and vice president of the company January 1993 through December 1996.

C. Phillip Turner, age 60—vice president and general manager of Aircraft Engine Systems since 1988.

Carol J. Manning, age 51—secretary since June 1991.

With the exception of Messrs. Gendron and Fulkrod, all executive officers were elected to their current positions at the January 24, 2001, Board of Directors meeting to serve until the January 23, 2002, Board of Directors meeting, or until their successors have been elected. Messrs. Gendron and Fulkrod were appointed to their current positions at the July 25, 2001, Board of Directors meeting to serve until the January 23, 2002, Board of Directors meeting.

Other information regarding our directors and executive officers is under the captions "Board of Directors" on pages 6 through 7 and "Section 16(a) Beneficial Ownership Reporting Compliance" on page 9 of our proxy statement dated December 6, 2001, incorporated here by reference.

Item 11.  Executive Compensation

    Executive compensation is under the captions "Board of Directors—Director Compensation" on page 8, "Executive Compensation" on pages 12 through 13, "Stock Options" on pages 13 through 14, and "Long-Term Management Incentive Compensation Plan Awards" on page 14 of our proxy statement dated December 6, 2001, incorporated here by reference.

Item 12.  Security Ownership of Certain Beneficial Owners and Management

    Security ownership of certain beneficial owners and management is under the tables captioned "Share Ownership of Management" and "Persons Owning More than Five Percent of Woodward Stock" on pages 8 through 9 of our proxy statement dated December 6, 2001, incorporated here by reference.

Item 13.  Certain Relationships and Related Transactions

    Information regarding certain relationships and related transactions is under the caption "Board of Directors—Director Compensation" on page 8 of our proxy statement dated December 6, 2001, incorporated here by reference.

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PART IV

Item 14.  Exhibits, Financial Statement Schedules, and Reports on Form 8-K

(a)  Index to Consolidated Financial Statements and Schedules

		Reference
		Form 10-K Annual Report Page	Annual Report to Shareholders Page
Annual report to shareholders for the fiscal year ended September 30, 2001, filed as Exhibit 13 to this Form 10-K and incorporated by reference:
	Statements of Consolidated Earnings for the years ended September 30, 2001, 2000, and 1999		22
	Consolidated Balance Sheets at September 30, 2001 and 2000		23
	Statements of Consolidated Share-holders' Equity for the years ended September 30, 2001, 2000, and 1999		24
	Statements of Consolidated Cash Flows for the years ended September 30, 2001, 2000, and 1999		25
	Notes to Consolidated Financial Statements		26-33
	Management's Responsibility for Financial Statements		34
	Report of Independent Accountants		34
	Selected Quarterly Financial Data		35
Other Financial Statement Schedules, included with this filing:
	Report of Independent Accountants	S-1
	Valuation and Qualifying Accounts	S-2
Financial statements and schedules other than those listed above are omitted for the reason that they are not applicable, are not required, or the information is included in the financial statements or the footnotes. With the exception of the consolidated financial statements and the reports of independent accountants listed in the above index, and the information referred to in Items 1, 3, 5, 6, 7, 7a, and 8, all of which is included in the 2001 Annual Report to Shareholders of Woodward Governor Company and incorporated by reference into this Form 10-K Annual Report, the 2001 Annual Report to Shareholders is not to be deemed "filed" as part of this report.

(b)  Reports Filed on Form 8-K During the Fourth Quarter of the Fiscal Year Ended September 30, 2001. None

(c)  Exhibits Filed as Part of This Report

(3) (ii)By-laws Filed as Exhibit 3 (ii) to Form 10-Q for the quarter ended June 30, 2001, incorporated here by reference.

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(4)	Instruments defining the rights of security holders, including indentures	Instruments with respect to long-term debt and the ESOP debt guarantee are not being filed as they do not individually exceed 10 percent of our assets. We agree to furnish a copy of each instrument to the Commission upon request.
(10)	Material contracts	(a) A $250,000,000 credit agreement dated June 15, 1998, filed as Exhibit 4 to Form 10-Q for the quarter ended June 30, 1998, incorporated here by reference.
		(b) 1996 Long-Term Incentive Compensation Plan filed on August 21, 1996 as Exhibit 4.1 to our Registration Statement on Form S-8 (File No. 333-10409) and incorporated here by reference.
		(c) Long-Term Management Incentive Compensation Plan, filed as Exhibit 10(c) to Form 10-K for the year ended September 30, 2000, incorporated here by reference.
		(d) Annual Management Incentive Compensation Plan, filed as Exhibit 10(d) to Form 10-K for the year ended September 30, 2000, incorporated here by reference.
		(e) Executive Benefit Plan (non-qualified deferred compensation plan), filed as Exhibit 10(e) to Form 10-K for the year ended September 30, 2000, incorporated here by reference.
		(f) Form of Transitional Compensation Agreement with John A. Halbrook, C. Phillip Turner, and Stephen P. Carter, filed as Exhibit 10(f) to Form 10-K for the year ended September 30, 2000, incorporated here by reference.
		(g) Form of Outside Director Stock Purchase Agreement with Michael H. Joyce, Rodney O'Neal, and Lou L. Pai, filed as Exhibit 10(g) to Form 10-K for the year ended September 30, 2000, incorporated here by reference.
		(h) Form of Outside Director Stock Purchase Agreement with Paul Donovan, filed as an exhibit.

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(11)	Statement on computation of earnings per share	Included in Note E of Notes to Consolidated Financial Statements, filed as an exhibit.
(13)	Annual report to shareholders for the fiscal year ended September 30, 2001	Except as specifically incorporated by reference, report is furnished solely for the information of the Commission and is not deemed "filed" as part of this report.
(21)	Subsidiaries	Filed as an exhibit.
(23)	Consents of Independent Accountants	Filed as an exhibit.
(99)	Additional exhibit—description of annual report graphs	Filed as an exhibit.

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SIGNATURES

    This report has been prepared in accordance with the rules and regulations of the Securities and Exchange Commission and the financial statements referenced have been prepared in accordance with such rules and regulations and with generally accepted accounting principles, by officers and members of Woodward Governor Company. This has been done under the general supervision of Stephen P. Carter, vice president, chief financial officer and treasurer. The consolidated financial statements have been audited by PricewaterhouseCoopers LLP, independent accountants, as indicated in their report in the annual report to shareholders for the fiscal year ended September 30, 2001.

    This report contains much detailed information of which the various signatories cannot and do not have independent personal knowledge. The signatories believe, however, that the preparation and review processes summarized above are such as to afford reasonable assurance of compliance with applicable requirements.

    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.

WOODWARD GOVERNOR COMPANY

/s/ JOHN A. HALBROOK John A. Halbrook
Director, Chairman of the Board and
Chief Executive Officer

/s/ STEPHEN P CARTER Stephen P. Carter
Vice President, Chief Financial Officer and Treasurer

Date December 7, 2001

    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 and on the dates indicated.

Signature	Title	Date
/s/ J. GRANT BEADLE J. Grant Beadle	Director	December 7, 2001
/s/ VERN H. CASSENS Vern H. Cassens	Director	December 7, 2001
/s/ PAUL DONOVAN Paul Donovan	Director	December 7, 2001
/s/ LAWRENCE E. GLOYD Lawrence E. Gloyd	Director	December 7, 2001

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/s/ THOMAS W. HEENAN Thomas W. Heenan	Director	December 7, 2001
/s/ J. PETER JEFFREY J. Peter Jeffrey	Director	December 7, 2001
/s/ MICHAEL H. JOYCE Michael H. Joyce	Director	December 7, 2001
/s/ RODNEY O'NEAL Rodney O'Neal	Director	December 7, 2001
Lou L. Pai	Director
/s/ MICHAEL T. YONKER Michael T. Yonker	Director	December 7, 2001

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REPORT OF INDEPENDENT ACCOUNTANTS

To the Board of Directors and Shareholders
Woodward Governor Company

    Our audits of the consolidated financial statements referred to in our report dated October 31, 2001, appearing on page 34 in the 2001 Annual Report to Shareholders of Woodward Governor Company (which report and consolidated financial statements are incorporated by reference in this Annual Report on Form 10-K) also included an audit of the financial statement schedule listed in Item 14(a) of this Form 10-K. In our opinion, the financial statement schedule presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements.

PricewaterhouseCoopers LLP
Chicago, Illinois
October 31, 2001

S–1

WOODWARD GOVERNOR COMPANY AND SUBSIDIARIES
SCHEDULE II—VALUATION AND QUALIFYING ACCOUNTS
for the years ended September 30, 2001, 2000 and 1999
(In thousands of dollars)

Col. A		Col. B		Col. C					Col. D		Col. E
				Additions
Description		Balance at Beginning of Year		Charged to Costs and Expenses		Charged to Other Accounts (B)			Deductions (A)		Balance at End of Year
2001:
	Allowance for doubtful accounts	$	4,452	$	2,780	($	28	)	$	2,540	$	4,720
2000:
	Allowance for doubtful accounts	$	4,417	$	2,348	$	73		$	2,386	$	4,452
1999:
	Allowance for doubtful accounts	$	4,451	$	1,593	$	49		$	1,576	$	4,417

NOTE:

(A)

Represents accounts written off during the year and also overseas currency translation adjustments that decreased the deduction from reserves by $28 in 2001 and increased the reserve by $366 in 2000 and $37 in 1999.

(B)

Recovery of accounts previously written-off.

S–2

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TABLE OF CONTENTS
PART I

Item 1. Business
Item 2. Properties
Item 3. Legal Proceedings
Item 4. Submission of Matters to a Vote of Shareholders

PART II

Item 5. Market for the Registrant's Common Stock and Related Shareholder Matters
Item 6. Selected Financial Data
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Item 8. Financial Statements and Supplementary Data
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

PART III

Item 10. Directors and Executive Officers of the Registrant
Item 11. Executive Compensation
Item 12. Security Ownership of Certain Beneficial Owners and Management
Item 13. Certain Relationships and Related Transactions

PART IV

Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K

SIGNATURES
REPORT OF INDEPENDENT ACCOUNTANTS
WOODWARD GOVERNOR COMPANY AND SUBSIDIARIES SCHEDULE II—VALUATION AND QUALIFYING ACCOUNTS for the years ended September 30, 2001, 2000 and 1999 (In thousands of dollars)

EX-10.4

Exhibit 10 (h)
Outside Director Stock Purchase Agreement

                            WOODWARD GOVERNOR COMPANY

                    OUTSIDE DIRECTOR STOCK PURCHASE AGREEMENT


                                                                     Dated as of
                                                                    May 16, 2001


WOODWARD GOVERNOR COMPANY
Attention:  Mr. John Halbrook, President
5001 North Second Street
Rockford, IL  61111

Dear Mr. Halbrook:

The undersigned, Paul Donovan, understands that you, Woodward Governor Company,
a Delaware corporation (the "Company") is authorized to issue 60,000,000 shares,
designated Common Stock of the par value of $0.00875 per share (the "Company
Stock"), of which as of May 16, 2001, (i) 11,319,356 shares were issued and
outstanding, and (ii) 840,644 shares were issued but are not outstanding and are
owned and held by the Company as treasury shares.

In accordance with the Company's Director Stock Ownership Guideline, the Company
is authorized to sell treasury shares of the Company Stock to each of its
directors who are not officers, members or employees of the Company (the
"Outside Directors"). The aggregate purchase price to me for the shares of
Company Stock I purchase will be One Hundred Ten Thousand, Nine Hundred
Eighty-two and 78/100 Dollars ($110,982.78) (the "Purchase Price"). The price
per shall be equal to the Fair Market Value of such stock as quoted on the
Nasdaq National Market at the close of business on the date of this agreement.
The shares of the company Stock to be purchased by me hereunder shall be the
number of whole shares of Company Stock which may be acquired for the Purchase
Price based upon the Fair Market Value per share as of the Purchase Date (the
"Shares").

I confirm my agreement with the Company as follows in connection with my
purchase of the Shares. Accordingly, the Company confirms its agreement with me.

     (1) PURCHASE OF SHARES. Subject to the terms and conditions herein set
     forth, I agree to purchase from the Company, and the Company agrees to sell
     to me, the number of Shares which may be purchased for the Purchase Price
     at a price per share equal to the Fair Market Value per share as of the
     Purchase Date.

     (2) PAYMENT OF PURCHASE PRICE. In payment of the Purchase Price, I agree to
     deliver to the Company within 10 days following the Purchase Date a
     Non-Interest Bearing Installment Note from me in the amount of the Purchase
     Price dated the Purchase Date and payable to your order, expressed to
     mature as follows: Immediate application of prior




     fees held by my request in the amount of $11,700.00, plus $2,000.00 on the
     20th day of May, 2001, and $2,000.00 on the same day of each and every
     succeeding month thereafter to and including a final installment on the
     20th day of June, 2005, such note to be in the form of the Non-Interest
     Installment Note from me which is attached hereto as Exhibit A and hereby
     made a part hereof (the "Installment Note"). The remaining balance on the
     Installment Note will be accelerated in the event I cease to be an Outside
     Director of the Company for any reason and shall be payable 90 days
     thereafter.

     (3) PURCHASE DATE. The purchase and sale provided for herein shall be
     consummated and closed at the office of the Company, 5001 North Second
     Street, Rockford, Illinois 61111, commencing at 11:00 a.m., Rockford local
     time, on May 17, 2001.

     (4) ASSIGNMENT OF RETAINER FEES. I agree that commencing as of the Purchase
     Date, and on each of the next 60 payment dates thereafter, the Company may
     withhold and retain the monthly retainer fees due me from the company for
     my service as a member of the Board of Directors of the Company (the
     "Retainer Fees") in satisfaction of the payment of the Purchase Price for
     the Shares under the Installment Note. I hereby sell, assign, convey and
     transfer to the Company all my right, title and interest to any and all
     payments due me as Retainer Fees, including any and all increases thereof.
     The assignment of Retainer Fees shall be effective as of the Purchase Date
     until the Installment Note is paid and satisfied in full.

     (5) PREPAYMENT. The unpaid monthly installments of the Purchase Price for
     Shares to be purchased by me hereunder may be prepaid by me in whole or in
     part at any time. In case of any prepayment of the Purchase Price in part,
     such prepayment shall be applied to the installments hereof in the inverse
     order of their respective maturities. Any monthly Retainer Fees in excess
     of $2,000.00 shall be applied by the Company as a prepayment hereunder.

     (6) ISSUANCE OF STOCK CERTIFICATE. On the Purchase Date, the Company shall
     issue to me a stock certificate evidencing the number of Shares purchased
     by me hereunder.

     (7) TRANSFERABILITY AND CONTINUING OBLIGATION. The rights granted me
     hereunder may not be sold, pledged, assigned, transferred or otherwise
     disposed of in any manner whatsoever. Only I shall have the right to
     purchase Shares hereunder. Furthermore, except as mutually agreed otherwise
     by the parties hereto, I understand and agree that my obligation under the
     Installment Note and this Agreement are with recourse and binding on me
     individually until satisfied in full, including without limitation, in the
     event (i) of my death, or (ii) that I am no longer an Outside Director for
     any reason.

     (8) FINANCIAL RISKS. I acknowledge that I have received all information
     which I deem necessary and appropriate to evaluate the financial risks
     inherent in my purchase of Shares hereunder, and I acknowledge that I have
     satisfactory and complete information concerning the business, operations,
     and finances of the Company in response to all my inquiries in respect
     thereof.

     (9) INVESTMENT REPRESENTATION. I represent and warrant that the Shares
     acquired by me pursuant to this agreement (i) will be acquired by me for my
     own account, (ii) will be




     acquired by me for investment and not with a view to, or for sale in
     connection with, any distribution thereof, (iii) will be acquired by me
     with no present intention of selling or distributing such shares. I agree
     that I will not dispose of the Shares purchased by me hereunder in such a
     manner as will violate the Securities Act of 1933, as amended, or any
     applicable rules and regulations thereunder and until and unless the
     Company shall have been furnished with an opinion of counsel satisfactory
     to it to the effect that any proposed disposition of such shares may be
     effected without such violation. I agree that all certificates evidencing
     the Shares acquired by me hereunder will be marked with a legend as
     follows:

               "The shares evidenced by this Certificate have not been
          registered under the Securities Act of 1933, as amended. The shares
          evidenced hereby may not be sold, transferred, pledged or hypothecated
          in the absence of an effective registration statement for the shares
          under the Securities Act of 1933, as amended, or an opinion of counsel
          satisfactory to the Corporation prior to the proposed transaction that
          registration is not required under said Act."

     I represent that I have been informed by the Company and understand that
     the Shares acquired by me hereunder will not be registered under the
     Securities Act of 1933, as amended, and that the Company does not
     contemplate and is not legally required to file any such registration.
     Accordingly, in connection with any future resale of the Shares acquired by
     me hereunder I acknowledge that my attention has been directed to Rule 144
     under the Securities Act of 1933, as amended, and that I have been advised
     that the Shares acquired by me hereunder must be held indefinitely unless
     they are subsequently registered under the Securities Act of 1933, as
     amended, or an exemption from such registration is available.

     (10) NOTICES. All notices, requests, demands and other communication
     hereunder shall be in writing and shall be deemed to have been duly given
     when delivered personally or when deposited in the United States mail,
     registered or certified, return receipt requested, postage prepaid,
     addressed as follows:

          (a)  if to me, to:

               Mr. Paul Donovan
               2515 Cherokee Trail
               Rockford, IL  61107


          (b)  if to you, to:

               Woodward Governor Company
               5001 North Second Street
               Rockford, Illinois 61111
               Attention:  Stephen P. Carter, Treasurer

     or to such other address or addresses as you or I may communicate in
     writing to the other by notice given pursuant to the provisions of this
     paragraph (10). Written notice given by




     any other method shall be deemed effective only when actually received by
     the party to whom given.

     (11) MISCELLANEOUS. This Agreement (i) constitutes the entire agreement
     between you and me with respect to the subject matter hereof, (ii) shall
     not be assigned or transferred by your or me, (iii) shall be governed in
     all respects by the laws of the State of Illinois, and (iv) may be executed
     in two or more counterparts which together shall constitute a single
     instrument.

If the foregoing is in accordance with your understanding of our agreement,
please sign and return to me the enclosed copy of this Outside Director Stock
Purchase Agreement whereupon it shall become a binding agreement between us.

                                       Very truly yours,




                                       By ________________________________
                                             Paul Donovan

The foregoing is hereby confirmed
and agreed to as of the 16th day of
May, 2001.

WOODWARD GOVERNOR COMPANY




By _______________________________
   John A. Halbrook, President





                              NON-INTEREST BEARING
                            SECURED INSTALLMENT NOTE



$110,982.78                                                         May 16, 2001

     For value received, Paul Donovan (hereinafter referred to as the "Payor"),
hereby promises to pay to the order of WOODWARD GOVERNOR COMPANY, a Delaware
corporation (hereinafter referred to as the "Payee"), the principal sum of One
Hundred Ten Thousand, Nine Hundred Eighty-two and 78/100 Dollars ($110,982.78)
in lawful money of the United States of America in installments as follows:

          Immediate application of prior fees held by my request in the amount
          of $11,700.00, plus Two Thousand Dollars ($2,000.00) on the 20th day
          of May, 2001, and the same amount on the same day of each and every
          succeeding month thereafter to and including a final installment on
          the 20th day of June, 2005.

     In the event the Payor ceases to be a member of the Board of Directors of
the Payee for any reason, then, at the option of the Payee, the entire unpaid
principal of this Note shall become due and payable ninety (90) days after the
date the Payor ceases to be a director.

     If the Payor shall default in the making of any payment of principal due
hereunder and such default shall continue for more than ten (10) days after
notice thereof to the Payor from the Payee, then, at the option of the Payee,
all unpaid principal of this Note shall become immediately due and payable.

     Notwithstanding anything to the contrary contained in this Note, in the
event of an uncorrected payment default after a ten (10) day notice thereof to
the Payor from the Payee, the Payor promises to pay interest to the Payee on all
unpaid principal for the period after the date of such default until payment in
full thereof, at the rate of seven percent (7.0%) per annum.

     Except as specifically provided herein, this Note shall be non-interest
bearing for the period hereof.

     All payments of principal of this Note shall be made to the Payee at 5001
North Second Street, Rockford, Illinois 61111, or at such other place or places
as the holder hereof may direct from time to time.

     This Note is issued under and pursuant to that certain Outside Director
Stock Purchase Agreement, dated as of May 16, 2001, between the Payor and the
Payee (the "Purchase


                                    EXHIBIT A





Agreement"). In accordance therewith, it is contemplated that this Note may be
satisfied by the assignment from the Payor to the Payee of retainer fees due the
Payor for service as a member of the Woodward Governor Company Board of
Directors pursuant to Section 4 of the Purchase Agreement; PROVIDED, HOWEVER,
all obligations hereunder are with full recourse to the Payor hereof.

     The Payor hereby promises to pay on demand all costs of collection,
including, without limitation, court costs and attorneys' fees paid or incurred
by the Payee in enforcing this Note.

     The Payor may prepay, without notice, all or any part of the unpaid
principal of this Note at any time, and from time to time, without payment of
any penalty or premium on account of such prepayment. Any monthly Retainer Fees
in excess of $2,000.00 assigned pursuant to the Purchase Agreement shall be
applied by the Payee as a prepayment hereunder. In case of any prepayment of
this Note in part, such prepayment shall be applied to the installments hereof
in inverse order of their respective maturities.

     The parties hereto, including the maker and all endorsers and guarantors of
this Note, hereby waive presentment, demand, notice, protest and all other
demands and notices in connection with the delivery, acceptance, performance or
enforcement of this Note.

     All notices and other communications to be given or made pursuant to this
Note shall be in writing and shall be deemed to have been duly given if
personally delivered or mailed by registered or certified mail, postage prepaid,
return receipt requested, and addressed to the Payor at the address set forth in
the Purchase Agreement.

     This Note shall be governed by and construed in accordance with the laws of
the State of Illinois.

     IN WITNESS WHEREOF, the undersigned has caused this instrument to be duly
executed as of the day and year first above written.




                                       ----------------------------------
                                       Paul Donovan





               ELECTION TO INCLUDE VALUE OF RESTRICTED PROPERTY IN
             GROSS INCOME IN YEAR OF TRANSFER UNDER CODE SECTION 83 (b)


The undersigned hereby elects pursuant to Section 83(b) of the Internal
Revenue Code with respect to the property described below and supplies the
following information in accordance with the regulations promulgated
thereunder:

1.   The name, address and taxpayer identification number of the undersigned
     are:

          Paul Donovan
          2515 Cherokee Trail
          Rockford, IL  61107
          SS# ###-##-####

2.   Description of property with respect to which the election is being made:

          1,502 shares of Common Stock,
          par value $0.00875 per share, of Woodward Governor Company.

3.   The date on which property was transferred is May 18, 2001.

          The taxable year to which this election relates is calendar year 2001.

4.   The nature of the restriction(s) to which the property is subject to:

          The property is nontransferable in the taxpayer's hands, by virtue of
          language to that effect stamped on the stock certificate.
          Section 16(b) of The Securities and Exchange Act of 1934 and SEC Rule
          144.

5.   Fair market value:

          The fair market value at the time of transfer (determined without
          regard to any restrictions) of the property with respect to which this
          election is being made is $73.89 per share.

6.   Amount paid for property:

          The amount paid by taxpayer for said property is $73.89 per share.

7.   Furnishing statement to employer:

          A copy of this statement has been furnished to Woodward Governor
          Company.


     -----------------------               -----------------------------------
     Date                                  Name: Paul Donovan

EX-13

EXHIBIT 13

SUSTAINABLE GROWTH



We will expand our customer base

and gain market share through our

product development efforts,

strategic acquisitions and alliances,

and operational improvements.



The investments Woodward

makes today will create

a stronger Woodward tomorrow.









Business Description

Woodward designs, manufactures,

and services energy control systems

and components for aircraft and

Industrial engines, turbines, and other power equipment.

Leading OEMs (original equipment manufacturers)

throughout the world use our products

and services in the power generation,

process industries, transportation,

and aerospace markets.





Contents

Financial Highlights                        1

To All Shareholders                         2

Market Drivers Shape Our Strategy           5

Financial Section                          13

Board of Directors                         37

Officers and Investor Information          38









FINANCIAL HIGHLIGHTS


FISCAL YEAR ENDED SEPTEMBER 30,                                                   2001             2000               1999
- ----------------------------------------------------------------------------------------------------------------------------
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS AND OTHER YEAR-END DATA)
                                                                                                         
Operating Results
   Net sales                                                                    $678,791          $597,385         $596,904
   Net earnings                                                                   53,068            46,976*          30,829
   Basic earnings per share                                                         4.69              4.17*            2.74
   Diluted earnings per share                                                       4.59              4.15*            2.73
   Cash dividends per share                                                          .93               .93              .93
Year-end Financial Position
   Working capital                                                               123,744           100,836          124,392
   Total assets                                                                  584,628           533,723          550,664
   Long-term debt                                                                 77,000            74,500          139,000
   Shareholders' equity                                                          318,862           275,624          241,992
Other Year-end Data
   Shareholders' equity per diluted share                                       $  27.58          $  24.35         $  21.43
   Worker members                                                                  3,709             3,302            3,791
   Registered shareholder members                                                  1,652             1,742            1,866
- ----------------------------------------------------------------------------------------------------------------------------


- ---------------------------
*Net earnings include a gain from the sale of business, net of tax, of $17,082
or $1.52 per basic share and $1.51 per diluted share for 2000. Without this
item, net earnings would have been $29,894 or $2.65 per basic share and $2.64
per diluted share for 2000.


                                                                            1







To All Shareholders

It was an outstanding year. We attribute the excellent results in fiscal year
2001 to the successful execution of our energy control technologies strategy.

Over the past few years, we have added significant technology capability and
product offerings through our internal product development efforts and
acquisitions and alliances. We have leveraged this extensive capability over all
types of power equipment and market applications--providing our customers with
innovative, practical, and cost-effective system solutions. As a result, we have
been steadily displacing our competitors and gaining market share.

This fiscal year, in our industrial business we introduced more than 30 new
products. One example is a new line of gas and liquid fuel system valves for
large industrial turbines (greater than 50 MW). Since fiscal year 2000, we went
from no sales for large gas turbine valves to almost $3 million. We expect our
sales from this one product family to reach $14 million next fiscal year and
continue to grow. Other new products launched will demonstrate similar
successes.

Next fiscal year, we anticipate even more market share gains from our product
development efforts. We plan to double our product introductions compared to
this fiscal year. We are leveraging our fundamental technologies to rapidly
introduce systems to help our customers produce more reliable, efficient, and
cost-effective power equipment.

General Electric Aircraft Engines awarded our Aircraft Engine Systems business
two new long-term contracts--one for fuel metering units on the GE90-115B that
supports the extended-range Boeing 777; the other for fuel metering units and
actuators on the CF34-10 engines that will power the Embraer ERJ-190 and
Fairchild Dornier 928JET regional jets.

In fiscal year 2001, we continued to strengthen customer relationships by
achieving even higher levels of product quality, improving development and
manufacturing cycle times, meeting aggressive delivery schedules, and providing
competitive pricing by executing aggressive cost-reduction initiatives.

We achieved these improvements by continuing and building on our commitment to
lean manufacturing principles and Six Sigma methodologies. In addition, we
intensified our customer support and service through the Internet. We plan to
continue with our e-Business efforts in fiscal year 2002 by further enhancing
our customer support capabilities.



2







Growth through targeted acquisitions, alliances, and partnerships

We will continue to achieve market share growth by expanding our technologies
and products through acquisitions, alliances, and partnerships. We carefully
seek technologies and product lines that align with our energy control strategy
and adapt to a wide range of power equipment applications.

Our first major acquisition, Fuel Systems Textron, acquired in 1998, created new
business opportunities by broadening our capabilities. Through this acquisition,
we gained technologies and products that we leveraged with other Woodward
offerings to increase our market share in the aerospace and industrial turbine
markets. By combining the strengths of both companies, we have grown our
customer base and increased our content on power equipment. Since the
acquisition, we have doubled our fuel nozzle sales for gas turbines.

This fiscal year we completed a number of significant activities that broadened
and enhanced our technology and product offerings:

- -   Teamed with Snecma Control Systems to provide fuel control systems for the
    Pratt & Whitney Canada PW600 family of engines

- -   Acquired Hoeflich Controls and finalized a licensing agreement with
    Adrenaline Research to add ignition systems for industrial gas engines

- -   Formed an alliance with Edward King AG to supply integrated gas turbine fuel
    systems

- -   Collaborated with Leonhard-Reglerbau to sell and service monitoring,
    control, and protection devices for power generation equipment

- -   Acquired the Bryce diesel fuel injection equipment operation from Delphi
    Automotive Systems to expand our capabilities and product lines

These acquisitions and partnerships added more than $11 million in sales for
fiscal year 2001. We plan to leverage the new technologies and products to
achieve even stronger results in the future. Our solid financial position
enables us to continue seeking acquisitions that add to our technology base
and product lines.

Our market outlook
Our world has changed dramatically since the September 11, 2001, terrorist
attacks. Of our four broad target markets--aerospace, power generation, process
industries, and transportation--aerospace has been the most directly affected.
At this writing, our key industrial markets have not been materially affected
beyond the general economic trends.

We have not yet fully quantified the negative impact on the commercial aircraft
industry. However, we will see a near-term reduction in demand for new systems,
spare parts, and overhauls and have taken steps to prepare for this impact.

We remain optimistic about the long-term future of commercial aircraft and the
opportunities for Woodward. In addition, we serve other aerospace markets that
we expect to remain relatively healthy: business jets, military aircraft
engines, and aeroderivative gas turbines. For fiscal year 2002, we believe
military sales will increase about 15 to 20 percent. And, despite near-term
shortfalls, our large installed base of products will continue to provide a
source of profitable aftermarket sales and service.

In the power generation market, there is a critical, long-term need for clean,
reliable, and dependable power. Our customers' projections for product demand
remain high, particularly for large gas turbine systems used in base load
plants, where Woodward has significantly increased market share in the past few
years. Also, orders for distributed power generation equipment, according to
industry surveys, indicate a continued growing demand. This equipment is driven
by small engines, turbines, and fuel cells powered by natural gas and diesel
fuels. Woodward has very strong product offerings in all these areas.



                                                                              3




In the process industries, particularly natural gas, business is strong. We will
likely see growth rates above general economic trends. The amount of pipeline
growth, gas drilling sites, and upgrades to existing pipelines is strong,
especially in the U.S. This translates into a need for new compressors, engines,
and turbines, where Woodward's systems play key roles.

We are working to help our customers in the transportation sector meet the
demand for fuel and control system upgrades on locomotives and ships to improve
reliability and meet emissions regulations worldwide. We expect to increase our
market share with products that answer our customers' needs and reduce their
total installed costs.

Financial performance
Our net earnings rose 45 percent in fiscal year 2001 to $53.1 million or $4.59
per diluted share over last year's earnings before certain items. Net earnings
in fiscal year 2000 were $47.0 million or $4.15 per diluted share, but included
an after-tax gain of $17.1 million or $1.51 per diluted share and certain
expenses netting to $6.7 million or $0.59 per diluted share. The gain resulted
from the sale of our turbine control retrofit business, and the expenses were
related to streamlining operations after the sale, realigning our workforce, and
certain other items.

Staying the course
While we will be negatively impacted over the next two years by the current
market disruptions, we believe we have the right formula in place. Our
performance over the last several years reflects our ability to build upon and
execute our energy control technologies strategy. We remain committed to
expanding our customer base and realizing market share growth by developing and
introducing new products, making acquisitions, and finding partnership
opportunities.

During fiscal year 2001, we set 15 percent average annual net earnings growth,
before one-time items, as our goal for the next three to four years. Although we
significantly beat that pace for fiscal 2001, weakness in the commercial
aerospace industry, accelerated by the events of September 2001, will likely
result in lower than normal results for Aircraft Engine Systems in fiscal years
2002 and 2003. However, we believe that strength in Industrial Controls will
cushion the effects of lower Aircraft Engine Systems' results and that net
earnings for fiscal year 2002 will approximate those of fiscal year 2001--within
a range of plus or minus 5 percent--before the effect of new accounting
standards for goodwill and other intangible assets.

For planning purposes--for which there are many uncertain variables--we are
currently assuming that any additional decrease in Aircraft Engine Systems'
results in 2003 will be much smaller than in 2002. Total company results could
show some growth in 2003, possibly even approaching our 15 percent growth goal,
depending on the strength of our industrial markets.

Over the long term, we still expect to achieve the 15 percent goal based on two
fundamental beliefs. First, we believe Aircraft Engine Systems is well
positioned to manage the industry cycle and will stabilize and recover quickly
when conditions normalize and improve. Second, we believe that our strategies at
Industrial Controls will provide opportunities to grow above and beyond industry
growth rates in its key markets.

In closing, I want to thank our Woodward members for their dedication and
enthusiasm. I am very proud of our talented and creative workforce. Also, I want
to acknowledge our management team for helping make fiscal year 2001 a success.
Finally, I want to express my gratitude to our directors who help to ensure we
make the best decisions for our shareholders. We welcomed a new board member
this fiscal year--Paul Donovan, senior vice president and chief financial
officer of Wisconsin Energy Corporation.

When we combine the strengths of these three groups--our members, our management
team, and our Board of Directors--the result is a team ready to meet the
challenges that lie ahead.

John A. Halbrook

Chairman of the Board

and Chief Executive Officer

December 6, 2001

4





Market Drivers Shape Our Energy Control Technologies Strategy

                                                                         
Power Generation           Transportation              Process Industries         Aerospace
Power Plants               Marine Propulsion           Oil and Gas                Commercial
Distributed Power          Locomotive                  Petro Chemical             Military
Back-Up Power              Off-Highway Equipment       Paper                      Business/General Aviation
                           Alternative Fuel Trucks     Sugar                      Aftermarket Services
                           and Buses                                              and Support


Our customers include      Our customers include       Our customers include      Our customers include
Alstom                     Caterpillar                 Dreser-Rand                GE Aircraft Engines
Caterpillar                Caterpillar Kiel            Ebara                      Honeywell
Emerson Electric           Cummins                     GE Power Systems           Pratt & Whitney
GE Power Systems           General Motors EMD          Mitsubishi                 Pratt & Whitney Canada
Kawasaki                   GE Transportation Systems   Rolls-Royce                Rolls-Royce
Mitusbishi                 MAN Group                                              Rolls-Royce Deutschland
Pratt & Whitney            Wartsila                                               U.S. Government
Siemens-Westinghouse                                                              Williams International
Wartsila                                                                          Major airlines worldwide






THE MARKETS WE SERVE

The demand for clean, reliable, and dependable power generation will continue
strongly over the next several years, providing attractive market
opportunities for Woodward. Additionally, the installed base of equipment in
ships, trains, and stationary applications will require upgrades to fuel and
control systems. In the process industry natural gas exploration and
distribution is growing globally. The aerospace market is expected to provide
long-term growth with near-term opportunities, particularly for both military
and aeroderivative engine applications.

                                                                              5








                                                 (GRAPHIC OMITTED)







6











                                                 (GRAPHIC OMITTED)







                                                                              7







Woodward's System Solutions Help Our Customers Achieve Success



The demands on our customers have been increasing steadily. More than ever,
engines, turbines, and other power equipment must be reliable, clean burning,
and efficient. Our proven energy control technologies strategy--built on a
foundation of internal product development complemented with strategic
acquisitions, alliances, and partnerships--helps customers meet the most
stringent market-driven requirements. Woodward's aerospace and industrial
businesses focus on providing system solutions to industry leaders.

Meeting aerospace customer needs
Based on market needs, Woodward leverages core technologies to develop versatile
product lines for a full range of aircraft gas turbine engines. Currently, our
Aircraft Engine Systems business is designing a new fuel metering unit and
actuators for the General Electric CF34-10 engine that will power the Embraer
ERJ-190 and Fairchild Dornier 928JET regional jets. By providing technically
advanced products to meet our customers' critical performance, weight, and cost
requirements, Woodward continues to support the developing regional jet market.

Aircraft engine manufacturer Pratt & Whitney Canada (P&WC) selected Woodward to
design and develop an integrated, low-cost fuel control and electronic engine
control system for its new PW600 turbofan engine family. Aircraft Engine Systems
teamed with Snecma Control Systems of France to win the PW600 contract, while
maintaining full system level responsibility.

By providing P&WC with a single source for the development and integration of
the complete engine control system, Woodward demonstrated its ability to apply
its engine fuel delivery system strategy. The PW600 concept, slated to be
produced in turboshaft, turboprop, and turbofan variations, is forecasted as a
high-volume production program for the light helicopter, general aviation, and
small business jet markets.

After years of market leadership and robust sales in the commercial and military
aircraft gas turbine engine market, we support our large installed base of
systems, sub-systems, and components with responsive product sales and service
in support of our customers' increasing aftermarket needs.



8





Aircraft Engine Systems anticipates that the large installed base of our
military engine fuel controls and fuel injection components will lead to an
increase in aftermarket business. We believe in the next fiscal year we will
achieve a 15 to 20 percent increase in military sales, primarily for products
used on the Blackhawk and Apache helicopters, the F-15 Eagle air superiority
jet, and the F-16 Fighting Falcon jet combat aircraft. We will also continue
remanufacturing engine fuel controls for cruise missiles.

Beyond our current military product offerings, we are qualifying our fuel
system components for the new Pratt & Whitney F119 and F135 engines. These
engines will power the latest generation of fighter aircraft--the F-22 Raptor
and Joint Strike Fighter (both being built by Lockheed Martin). Also, we are
competing for similar components on the GE/Rolls-Royce F120 engine, an
alternate engine being developed for the fighter aircraft.

To support the growing demand for clean and efficient power generation and
marine products, Aircraft Engine Systems produces advanced, low-emission fuel
nozzle products for aeroderivative gas turbines. Aeroderivatives are aircraft
gas turbines modified for use in the industrial market. Currently, we produce
fuel delivery systems, combustion products, and controls for aeroderivative
gas turbines manufactured by General Electric, Pratt & Whitney, and
Rolls-Royce. We expect this to remain a dynamic market now and in the near
future.

                                                                              9






New products for industrial markets
In fiscal 2001, our Industrial Controls business introduced several new gas and
liquid fuel valves for large industrial gas turbines. With these products,
Woodward captured about 30 percent of the heavy-frame gas turbine fuel control
market, and we expect to make further market share gains in fiscal 2002.

For natural gas applications, the new SonicFlo(TM) valve integrates the gas
valve and actuator into a single compact assembly. More importantly, the
SonicFlo valve features increased fuel delivery accuracy at reduced system
pressure drops, ensuring each stage of a dry low emissions combustion system
gets the precise amount of flow required. The SonicFlo helps our gas turbine
original equipment manufacturers achieve higher fuel efficiencies and reduce
emissions.

A companion product to the SonicFlo valve, the new Woodward Gas Stop/Ratio valve
actuator combines two functions into a single, modular product that accommodates
a variety of stroke, force output, and mechanical interface arrangements.

For fuel oil applications, Woodward has successfully introduced two types of
valves: a three-way bypass and a three-way stop valve. The valves feature a
fully integrated valve and actuator design that dramatically reduces the
installed cost and package size. Our compact design is more than 50 percent
smaller than the competition.

A key platform product, also introduced by Industrial Controls this fiscal
year, was a range of electric actuators designed for mid-size gas engines and
turbines. By incorporating our advanced digital control technologies within
the actuator, the new ProAct Digital Plus(TM) actuators are easily networked
into today's high-technology engines, while reducing our customers' total
installation costs.

Complementing our business through acquisitions and alliances To improve time
to market and broaden our product offerings, acquisitions and alliances are
key to our growth strategy. In early fiscal 2001, we added ignition systems
to our current product offerings for industrial gas engines by acquiring
Hoeflich Controls, Inc. (HCI) and completing a licensing agreement with
Adrenaline Research for advanced ignition technology. We now have a full
complement of technologies to provide complete, integrated systems for
natural gas engines used in electric power, oil and gas processing, and
industrial off-road vehicles.

Our advanced ignition controls, which optimize combustion processes, help
natural gas engines improve their fuel efficiency and reduce emissions. With
the acquisition of HCI, we won business at several of the world's largest gas
engine manufacturers. We delivered and shipped a number of new ignition
control products this fiscal year. We will continue releasing new ignition
control systems and components that provide solutions for natural gas engine
manufacturers.

10







We formed an alliance with Edward King AG to design, develop, supply, and
service integrated fuel skids for gas turbine original equipment manufacturers.
Through this alliance, we became the only supplier that can provide an
integrated fuel system from concept through field installation. Consequently,
our customers can improve their time to market, manage capacity issues, and
reduce total costs.

Among the first products from this partnership are six integrated fuel delivery
systems produced for an industrial gas turbine installation in Canada. Based on
a system of Woodward gas fuel control valves, these fuel skids are essential
elements in the performance of this combined-cycle power project.

Collaborating with Leonhard-Reglerbau, Stuttgart, Germany, marked another
strategic addition to our energy control technologies portfolio. Woodward is
now the only company able to provide networked system solutions in the
distributed power and power generation markets. By expanding our product line
this way, Woodward offers complete networked solutions that reduce costs and
are easy to install.

This agreement better positions Woodward to support the power generation
industry and to meet the growing global demands for new electric power
sources, ranging from 300 MW down to a few kW. Included in the product sales
agreement were generator set controls, digital synchronizers, multi-function
protective relays, and a low-cost digital speed governor--all designed to
network easily with Woodward's on-engine controls.

Finally, in the industrial arena, Woodward significantly expanded its
portfolio of fuel injection technologies for heavy industrial diesel engines
by acquiring the Bryce fuel injection business in England from Delphi
Automotive Systems. Now named Woodward Diesel Systems, this facility and our
plant in Germany comprise the Woodward Diesel Systems Center of Excellence.
This acquisition created an opportunity for Woodward to be the core fuel
control supplier for one of the world's largest marine engine manufacturers.
Woodward will provide an advanced fuel injection system for the next
generation of ultra-clean, low-emission diesel engines.

                                                                             11





Fuel injection systems are vital to diesel engines used in the power
generation, marine, and locomotive industries and are key to reducing
emissions and improving engine fuel efficiency. By bringing these engine
components together into a networked engine system, Woodward can provide
customers with comprehensive solutions that meet their needs for cost,
performance, and reliability.

Operational excellence is our focus
Woodward enhances our sound business strategy by focusing on operational
excellence. By emphasizing lean manufacturing principles and rigorously
practicing Six Sigma methodology throughout the company, we continually improve
our product quality, reduce cycle times, and eliminate waste and variation from
our processes.

Hundreds of Woodward members participate as Six Sigma Champions, Black Belts,
and Green Belts. In addition, we have been training our key suppliers in the Six
Sigma methodology. As we relentlessly pursue complete customer satisfaction, we
remain committed to embedding a Six Sigma continuous improvement culture
throughout the entire supply chain.

A system solutions provider
By leveraging our strong technical expertise across the entire organization, our
complementary technology roadmaps continue to merge. New products and expanded
market offerings result from this Woodward-wide approach. These efforts further
enhance our ability to provide our customers with system solutions.

Our high value, integrated system solutions help position our customers to
gain a competitive advantage in the marketplace. Increasingly, Woodward is
becoming the preferred supplier for leading global original equipment
manufacturers.

Woodward earns total customer satisfaction by working closely with customers
to gain their confidence and contribute to their success. Our commitment to
meeting our customers' needs has its rewards--as the success of our customers
continues, so will Woodward's. We have the right people and processes in
place. By consistently providing our customers with reliable energy control
systems that enhance performance, improve efficiency, and reduce emissions,
we will remain a leader in the industry.

12





Contents
Management's Discussion and Analysis  14
Consolidated Financial Statements  22
Management's Responsibility for Financial Statements  34
Report of Independent Accountants  34
Selected Quarterly Financial Data  35
Cautionary Statement  35
Summary of Operations/Eleven-Year Record  36




                                                                            13



Management's Discussion and Analysis

We prepared the following discussion and analysis to help you better understand
our results of operations and financial condition. This discussion should be
read with the consolidated financial statements and cautionary statement.

Results of Operations

Our results of operations are discussed and analyzed by segment. We have two
operating segments--Industrial Controls and Aircraft Engine Systems.
Industrial Controls provides energy control systems and components primarily
to OEMs (original equipment manufacturers) of industrial engines, turbines,
and other power equipment. Aircraft Engine Systems provides energy control
systems and components primarily to OEMs of aircraft engines.

We use segment earnings internally to assess the performance of each segment and
for making decisions on the allocation of resources. Total segment earnings do
not reflect all expenses and gains of the company. Nonsegment expenses and
gains, including income taxes, are separately discussed and analyzed.




Industrial Controls
- --------------------------------------------------------------------------------
IN THOUSANDS FOR THE YEAR
ENDED SEPTEMBER 30,            2001       2000      1999
                                        
External net sales          $384,145   $330,962  $310,038
Segment earnings              57,710     41,258    35,959
================================================================================



2001 Compared to 2000 and Outlook

External net sales of Industrial Controls increased 16% in 2001 over 2000.
Increases in sales volumes more than offset the impact of the sale of our
turbine control retrofit business and negative foreign currency translation
effects.

o  Strong demand for turbine and engine control products throughout the world,
   as well as new product introductions and market share gains, accounted for
   most of our volume increase. We benefited from continued strength in key
   end-markets, particularly power generation. Prices averaged about 1% higher.

o  Businesses acquired in November 2000 and June 2001 accounted for
   approximately $9 million of our volume increase.

o  The sale of our turbine control retrofit business four months prior to our
   fiscal year-end in 2000 reduced our sales by an undetermined amount. We
   believe this business had annual sales approaching $50 million.

o  The strengthening of the dollar against most foreign currencies reduced our
   sales by 3%.

Several key actions in 2001 broadened the functionality and scope of our
integrated energy control systems.

o  We acquired the Bryce diesel fuel injection business of Delphi Automotive
   Systems, which extended and complemented our existing products for the
   important medium-speed diesel market.

o  We acquired Hoeflich Controls, Inc. and entered into a licensing agreement
   with Adrenaline Research to add to our ignition systems technology for gas
   engines.

o  We formed an alliance with Leonhard-Reglerbau for networked system solutions
   targeting distributed power and centrally generated power applications,
   ranging from a few kilowatts to 300 megawatts.

o  We formed an alliance with Edward King AG of Switzerland, to design, develop,
   supply, and service integrated fuel skids for gas turbines.


14





Segment earnings of Industrial Controls increased 40% in 2001 over 2000. In
2000, expenses of approximately $4.2 million that we associate with the decision
to sell our turbine control retrofit business reduced segment earnings. These
expenses primarily involved the relocation of certain ongoing business
activities. Without these expenses, our segment earnings would have been $45.5
million in 2000, and our increase in 2001 over 2000 would have been 27%. This
earnings increase was the result of higher sales and improved segment earnings
margins.

o  Exclusive of the impact of the sale of our turbine control retrofit business,
   our selling, general, and administrative expenses are relatively independent
   of changes in sales volumes.

o  The sale of our turbine control retrofit business four months prior to our
   fiscal year-end in 2000 impacted our segment earnings margin by an
   undetermined amount. While the retrofit business generated higher gross
   margins (which we measure as net sales less cost of goods sold as a percent
   of sales) than our remaining business, it also incurred more selling,
   general, and administrative expenses as a percent of sales.

OUTLOOK: We currently expect Industrial Controls' sales and earnings to increase
between 10% and 15% in 2002 over 2001. Our market share for systems and
components used in power generation, processing, and transportation markets has
been increasing and we expect market share gains to continue. With increased
sales, we also expect to improve our segment earnings margin.

In addition, we also expect to adopt new accounting standards in 2002 that
impact accounting for goodwill and other intangible assets, as more fully
described near the end of this management's discussion and analysis. Segment
earnings are expected to increase by $2.8 million in 2002 as a result of
adopting these new accounting standards. On a comparable basis, had these new
accounting standards been adopted at the beginning of 2000, segment earnings
would have been $2.4 million higher in 2001 and $2.3 million higher in 2000.


2000 Compared to 1999

External net sales of Industrial Controls increased 7% in 2000 over 1999.
Increases in sales volumes more than offset the impact of the sale of our
turbine control retrofit business, lower average selling prices, and negative
foreign currency translation effects.

o  Strong demand in the power generation markets, primarily benefiting our
   domestic locations, accounted for our volume increase. In total, our domestic
   locations accounted for approximately 62% of our 2000 sales.

o  The sale of our turbine control retrofit business four months prior to our
   fiscal year-end in 2000 reduced our sales by an undetermined amount. We
   believe this business had annual sales approaching $50 million.

o  Prices averaged about 2% lower, and the strengthening of the dollar against
   most foreign currencies reduced our sales by an additional 2%.

In the third quarter, 2000, we signed a five-year $500 million contract to
supply fuel and combustion control systems and components for a customer's
family of industrial gas turbines for the power generation, oil and gas
processing, and marine markets. Also, we finalized other long-term agreements
with major industrial companies that total over $100 million in incremental
business over the next four years.

Segment earnings increased 15% in 2000 over 1999. Expenses we associate with the
decision to sell our turbine control retrofit business of approximately $4.2
million impacted segment earnings in 2000. These expenses primarily involved the
relocation of certain ongoing business activities. Without these expenses, our
segment earnings would have been $45.5 million in 2000, an increase of 27% over
1999. This earnings increase was the result of higher sales and improved segment
earnings margins.

o  Selling, general, and administrative expenses decreased. Our selling,
   general, and administrative activities are relatively independent of changes
   in sales volumes, and expenses associated with our turbine control retrofit
   business were not incurred in the last four months of 2000 following our sale
   of that business. In addition, we benefited from the full-year impact of
   improvements made during our restructuring in the second quarter of 1999.
   These expense reductions were offset somewhat by a provision for a company's
   uncollectible receivables of $0.9 million in 2000.

o  Certain land located in The Netherlands was sold in 1999, which resulted in a
   gain of $1.9 million.




                                                                              15








Aircraft Engine Systems
- --------------------------------------------------------------------------------
IN THOUSANDS FOR THE YEAR
ENDED SEPTEMBER 30,            2001       2000      1999
                                        
External net sales          $294,646   $266,423  $286,866
Segment earnings              53,585     38,150    54,260
================================================================================



2001 Compared to 2000 and Outlook  External net sales of Aircraft Engine
Systems increased 11% in 2001 over 2000. In addition to solid orders for
products used in regional and narrow-body commercial jets, sales growth was
driven by increased demand for some OEM products, aeroderivative engine
nozzles and controls for power generation applications, military spare parts,
and commercial aftermarket sales. While most of our sales are to OEMs, we
estimate that about 39% of our sales resulted from the aftermarket in 2001
compared to 42% in 2000. The impact of changes in selling prices and changes
in foreign currency exchange rates was insignificant.

Segment earnings increased 40% in 2001 over 2000. In 2000, segment earnings
were impacted by expenses totaling $5.1 million associated with a workforce
management program to align staffing levels with expected demand. Without
these expenses, segment earnings would have been $43.2 million in 2000, and
our increase in 2001 over 2000 would have been 24%. This earnings increase
was the result of higher sales and improved segment earnings margins.

o  Cost of goods sold was relatively high in the first half of 2000. Near the
   end of the second quarter, we implemented our workforce management program to
   align staffing levels with expected demand. Our cost of goods sold in 2001,
   as a percent of sales, is relatively close to the comparable percent in the
   last half of 2000.

o  Selling, general, and administrative activities are relatively independent of
   changes in sales volumes and did not increase proportionally with sales.

o  Partially offsetting the items above, in 2001, we recognized additional
   expense due to increased uncertainty about receivable collections following
   the September 11, 2001, terrorist attacks and we had higher losses on
   disposals of equipment. In 2000, we reduced certain acquisition-related
   accruals and recognized insurance proceeds that settled certain matters from
   previous years as a reduction in expense.

OUTLOOK: While we have not been able to determine the full effects on Aircraft
Engine Systems of the tragic events of September 11, 2001, we currently expect
sales to decrease at least 15% and earnings to decrease at least 20% in 2002 as
compared to 2001. For planning purposes, we are assuming that any additional
decrease in Aircraft Engine Systems' sales and earnings in 2003 will be much
smaller than in 2002. Commercial aircraft engines and parts are widely believed
to be vulnerable to a downturn as a result of the terrorist attacks, but we are
well positioned in the markets we serve and should not be disproportionately
affected as a result of overall market conditions. With decreases in sales, we
expect our segment earnings margin to decrease. However, we have taken immediate
steps to reduce costs to dampen any negative impact to earnings.

In addition, we also expect to adopt new accounting standards in 2002 that
impact accounting for goodwill and other intangible assets, as more fully
described near the end of this management's discussion and analysis. Segment
earnings are expected to increase by $3.5 million in 2002 as a result of
adopting these new accounting standards. On a comparable basis, had these new
accounting standards been adopted at the beginning of 2000, segment earnings
would have been $3.5 million higher in both 2001 and 2000.


2000 Compared to 1999

External net sales of Aircraft Engine Systems decreased 7% in 2000 from 1999.
This decrease was due about equally to both lower volume and lower average
selling prices. Most of our reduced volumes were in sales related to aftermarket
revenues. We believe the decrease in aftermarket revenues might have been caused
by broader industry trends, including the lengthening of time between our
customers' discretionary repair and overhaul activities, increasing competition
from OEMs that have expanded their own aftermarket service offerings, and
increasing reliability of our components. While most of our sales are to OEMs,
we estimate that about 42% of our sales resulted from the aftermarket in 2000
compared to 40% in 1999.



16





Segment earnings decreased 30% in 2000 from 1999. In 2000, segment earnings
were impacted by expenses totaling $5.1 million associated with a workforce
management program to align staffing levels with expected demand. Without
these expenses, segment earnings would have been $43.2 million in 2000, a
decrease of 20% from 1999. This earnings decrease was the result of lower
sales and reduced segment earnings margins.

o  Cost of goods sold increased as a percent of sales.
   Our cost of goods sold was relatively high in the
   first half of 2000. Near the end of the second quarter, we implemented our
   workforce management program to align staffing levels with expected demand.
   Our cost of goods sold in the last half of 2000, as a percent of sales, is
   relatively close to the comparable percent in 1999.

o  Selling, general, and administrative expenses did not decrease proportionally
   with sales. Our selling, general, and administrative activities are
   relatively independent of changes in sales volumes.

o  Partially offsetting the items above, in 2000, we had increased earnings
   resulting from our AESYS joint venture with BAE SYSTEMS Controls, a $0.9
   million reduction in acquisition-related accruals, and $0.9 million in
   insurance proceeds in settlement of certain matters from previous years.




Nonsegment Expenses and Gain
- --------------------------------------------------------------------------------
IN THOUSANDS FOR THE YEAR
ENDED SEPTEMBER 30,                2001       2000      1999
                                            
Interest expense                $ 7,554    $10,897   $12,746
Interest income                    (967)      (770)     (827)
Unallocated corporate expenses   18,753     20,689    19,192
Gain on sale of business             --    (25,500)       --
Restructuring expense                --         --     7,889
================================================================================



2001 Compared to 2000

Interest expense decreased in 2001 primarily because we had lower levels of
average outstanding debt in 2001 as compared to 2000. Average interest rates
were also lower.

Unallocated corporate expenses were 3% of consolidated net sales in both 2001
and 2000.

The gain on the sale of business in 2000 relates to a sale on May 31, 2000,
of certain assets associated with our turbine controls retrofit business for
cash, with the buyer assuming certain liabilities. The resulting gain was
reported separately in the statements of consolidated earnings.

The net sales and earnings of the turbine control retrofit business were
included as part of Industrial Controls and could not be separately
identified. However, we believe annual sales of this business were
approaching $50 million at the time of the sale.

2000 Compared to 1999

Interest expense decreased in 2000 because we had lower levels of average
outstanding debt in 2000 as compared to 1999.

Unallocated corporate expenses were impacted by a gain of $1.0 million on the
sale of non-operating real estate in 1999. Excluding this gain, unallocated
corporate expenses were 3% of consolidated net sales in both 2000 and 1999.

The gain on the sale of business in 2000 relates to a sale on May 31, 2000,
of certain assets associated with our turbine controls retrofit business for
cash, with the buyer assuming certain liabilities. The resulting gain was
reported separately in the statements of consolidated earnings.

We incurred restructuring expense in 1999 primarily in connection with a
change in the structure of our internal Industrial Controls organization. We
terminated 197 members, impacting all job functions to varying degrees. Most
of the terminations were in Fort Collins and Loveland, Colorado.

                                                                          17









Net Earnings
- --------------------------------------------------------------------------------
IN THOUSANDS, EXCEPT PER SHARE
AMOUNTS, FOR THE YEAR
ENDED SEPTEMBER 30,              2001       2000      1999
                                           
Earnings before income taxes   $85,955    $74,092   $51,219
Income taxes                    32,887     27,116    20,390
================================================================================
Net earnings                   $53,068    $46,976   $30,829
Basic earnings per share       $  4.69    $  4.17   $  2.74
Diluted earnings per share        4.59       4.15      2.73
================================================================================



2001 Compared to 2000 and Outlook

Net earnings and earnings per share, both basic and diluted, increased in
2001 over 2000. Income taxes were provided at an effective rate on earnings
before income taxes of 38.3% in 2001 compared to 36.6% in 2000. The most
significant reason for the lower rate in 2000 was related to the sale of our
turbine control retrofit business, which allowed us to use capital loss
carryforwards for which we previously provided valuation allowances. The
spread between basic and diluted earnings per share increased in 2001 as
compared to 2000, primarily because of increases in the price for our common
stock during 2001.

Results for 2000 included a gain on sale of the turbine control retrofit
business, net of tax, of $17.1 million or $1.52 per basic share and $1.51 per
diluted share. Without this gain, net earnings would have been $29.9 million
or $2.65 per basic share and $2.64 per diluted share for 2000. Our results in
2000 also included costs to streamline operations after the sale, costs
associated with reductions in our workforce, and certain other costs not
indicative of normal operations which totaled, net of tax, $6.7 million or
$0.60 per basic share and $0.59 per diluted share.

OUTLOOK: During 2001, we have stated our goal of 15% growth in net earnings,
on average and before one-time items, over the next three to four years. Our
growth in 2001 exceeded this average expectation. However, recent
developments following the terrorist attacks on September 11, 2001, suggest
that we are unlikely to achieve that level of annual growth for 2002. While
we have not been able to determine the full effects of those tragic events,
we currently expect net earnings in 2002 to approximate those of 2001, within
a range of plus or minus 5%.

In addition, we also expect to adopt new accounting standards in 2002 that
impact accounting for goodwill and other intangible assets, as more fully
described near the end of this management's discussion and analysis. Net
earnings are expected to increase by approximately $3.9 million in 2002 as a
result of adopting these new accounting standards. On a comparable basis, had
these new accounting standards been adopted at the beginning of 2000, net
earnings would have been $3.7 million higher in 2001 and $3.6 million higher
in 2000.

As we look forward, we have assumed for planning purposes that any additional
decrease in Aircraft Engine Systems' earnings in 2003 will be much smaller
than in 2002. Consolidated net earnings could show some growth in 2003,
possibly even approaching our 15% goal, depending on continued strength in
our industrial markets.

2000 Compared to 1999

Net earnings and earnings per share, both basic and diluted, increased in
2000 over 1999. Income taxes were provided at an effective rate on earnings
before income taxes of 36.6% in 2000 compared to 39.8% in 1999. The most
significant reason for this decrease was related to the sale of our turbine
control retrofit business in 2000, which allowed us to use capital loss
carryforwards for which we previously provided valuation allowances.

Results for 2000 included a gain on sale of the turbine control retrofit
business, net of tax, of $17.1 million or $1.52 per basic share and $1.51 per
diluted share. Without this gain, net earnings would have been $29.9 million
or $2.65 per basic share and $2.64 per diluted share for 2000.

Our results in 2000 also included costs to streamline operations after the
sale, costs associated with reductions in our workforce, and certain other
costs not indicative of normal operations which totaled, net of tax, $6.7
million or $0.60 per basic share and $0.59 per diluted share. Our results in
1999 included restructuring expense and gains on the sale of real estate that
netted to a reduction of $3.0 million or $0.26 per basic share and $0.27 per
diluted share.

18





Financial Condition

Our financial condition is discussed and analyzed by segment for assets. We
also separately discuss and analyze other balance sheet measures and cash
flows. Together, this discussion and analysis will help you assess our
liquidity and capital resources, as well as understand changes in our
financial condition.




Assets
- --------------------------------------------------------------------------------
IN THOUSANDS AT SEPTEMBER 30,  2001       2000      1999
                                        
Segment assets:
   Industrial Controls      $283,072   $214,935  $223,874
   Aircraft Engine Systems   241,002    260,712   272,898
Nonsegment assets             60,554     58,076    53,892
================================================================================
Total assets                $584,628   $533,723  $550,664



2001 Compared to 2000

Industrial Controls' segment assets at September 30, 2001, were 32% higher
than a year earlier. Business acquisitions accounted for about half of the
increase. The remaining increase resulted from changes in accounts
receivable, inventories, and property, plant, and equipment associated with
the level of business activity. Industrial Controls' sales were 23% higher in
the fourth quarter 2001 than in the fourth quarter 2000 and we anticipate
higher sales volumes in upcoming quarters. Intangibles decreased by the
amount of amortization for the year.

Aircraft Engine Systems' segment assets at September 30, 2001, were 8% lower
than a year earlier. This decrease primarily resulted from negotiating
accelerated pay agreements with several of our customers and better
collection experience generally, reducing accounts receivable. Also affecting
receivables, Aircraft Engine Systems' sales were 3% lower in the fourth
quarter 2001 than in the fourth quarter 2000 and we increased our allowance
for losses by $1.5 million following the terrorist attacks of September 11,
2001. Other contributing factors to the decrease in segment assets are that
intangibles decreased by the amount of amortization for the year and capital
expenditures were below depreciation levels. Increases in inventories made in
anticipation of first quarter 2002 sales partially offset these decreases.

2000 Compared to 1999

Industrial Controls' segment assets at September 30, 2000, were 4% lower than
a year earlier. This decrease resulted from the sale of assets related to our
turbine control retrofit business and other changes in accounts receivable,
inventories, and property, plant, and equipment associated with the level of
business activity. Most significantly, receivables, inventories, and
equipment related to industrial nozzles increased. This increase was a result
of higher sales volumes in 2000 as compared to 1999, as well as anticipated
sales volumes in 2001. Intangibles decreased by the amount of amortization
for the year.

Aircraft Engine Systems' segment assets at September 30, 2000, were 4% lower
than a year earlier. Decreases in accounts receivable, inventories, and
property, plant, and equipment primarily resulted from lower business
activity this year as compared to the prior year. Intangibles decreased by
the amount of amortization for the year.




Other Balance Sheet Measures
- --------------------------------------------------------------------------------
IN THOUSANDS AT SEPTEMBER 30,            2001       2000      1999
                                                  
Working capital (current
   assets less current liabilities)   $123,744   $100,836  $124,392
Long-term debt, less
   current portion                      77,000     74,500   139,000
Other liabilities                       51,042     50,142    46,620
Commitments and contingencies               --         --        --
Shareholders' equity                   318,862    275,624   241,992
================================================================================



2001 Compared to 2000

Increases in working capital were most significantly attributed to increases
in Industrial Controls' inventories in anticipation of higher sales volumes
in upcoming quarters and to reductions in short-term borrowings made possible
by the excess of operating cash flows over our investing cash flows. In the
first quarter of 2002, we received proceeds from senior notes totaling $75
million and used a portion of these proceeds to pay $60 million of long-term
debt, including $20 million that was classified as a current liability. The
senior notes have a ten-year term, and the principal is required to be paid
back in seven equal annual payments beginning in 2006. Shareholders' equity
increased 16%, resulting primarily from 2001 net earnings in excess of cash
dividend payments.

We are currently involved in matters of litigation arising from the normal
course of business, including certain environmental and product liability
matters. Further discussion of these matters is in Note P in the notes to
consolidated financial statements.



                                                                            19






2000 Compared to 1999

Decreases in working capital were most significantly attributable to the sale
of assets related to our turbine control retrofit business, and the
assumption of certain liabilities by the buyer, as we used the cash proceeds
from the sale to reduce debt. Strong operating and investing cash flows in
2000 enabled us to reduce our long-term debt by $64.5 million from the
September 30, 1999, balance. Increases in other liabilities relate primarily
to changes in postemployment and retirement obligations. Shareholders' equity
increased 14%, resulting primarily from 2000 net earnings in excess of cash
dividend payments.




Cash Flows
- --------------------------------------------------------------------------------
IN THOUSANDS FOR THE YEAR
ENDED SEPTEMBER 30,                  2001       2000      1999

                                              
Net cash provided by
   operating activities           $ 86,990   $ 55,210  $ 59,932
Net cash provided by (used in)
   investing activities            (61,699)    15,736   (17,963)
Net cash used in
   financing activities            (23,218)   (70,792)  (42,982)
================================================================================



2001 Compared to 2000 and Outlook

Net cash flows provided by operations increased by 58% in 2001 over 2000.
This improvement is predominantly due to increased net earnings, exclusive of
the pretax gain from the sale of our turbine control retrofit business in
2000. For purposes of preparing the statement of consolidated cash flows, the
proceeds from the sale of the retrofit business were not considered an
operating activity, but the associated income tax payments were.

Net cash flows for investing activities changed by $77.4 million in 2001 as
compared to 2000. This change resulted from Industrial Controls' business
acquisition and divestiture activities. This year, we made payments
associated with two acquisitions totaling $31.2 million and made payments
associated with last year's sale of our turbine control retrofit business of
$4.0 million. In 2000, we received proceeds from the sale of our retrofit
business of $41.7 million.

Net cash flows used in financing activities decreased by $47.6 million in
2001 from 2000. This decrease is primarily associated with lower levels of
debt reductions due to two business acquisitions, despite higher levels of
operating cash flows. Last year, we also used proceeds received from the sale
of the turbine control retrofit business to reduce debt.

OUTLOOK: Future cash flows from operations and available revolving lines of
credit are expected to be adequate to meet our cash requirements over the
next twelve months. However, it is possible business acquisitions could be
made in the future that would require amendments to existing debt agreements
and the need to obtain additional financing.

We received new debt proceeds totaling $75 million from 6.39% senior notes in
the first quarter of 2002 that increases our liquidity over the next several
years. These new senior notes have a ten-year term, and the principal is
payable in seven equal annual installments beginning in 2006. A portion of
the proceeds from the new borrowings was used to pay $60 million of term
notes due in 2002 and 2003.

2000 Compared to 1999

Net cash flows provided by operations decreased by 8% in 2000 from 1999. For
purposes of preparing the statement of consolidated cash flows, the proceeds
from the sale of the turbine control retrofit business were not considered an
operating activity, but the associated income tax payments were reflected as
an operating activity. Exclusive of income taxes related to the gain, net
cash flows provided by operating activities would have increased by about 6%
in 2000 over 1999. Most of this improvement was related to a small reduction
in total operating assets and liabilities on relatively flat sales in 2000,
compared to an increase in total operating assets and liabilities on a sales
increase in 1999.

Net cash flows for investing activities changed by $33.7 million in 2000 as
compared to 1999. Most of this change was the result of cash flows from the
sale of our turbine control retrofit business of $41.7 million. Without this
item, cash flows used in investing activities in 2000 would have been $26.0
million, an increase of $8.0 million over 1999. This increase was primarily
related to higher capital expenditures for Industrial Controls because of
increases in current and anticipated sales, offset by the 1999 proceeds from
the sale of non-operating real estate in Stevens Point, Wisconsin and land in
The Netherlands.

Net cash flows used in financing activities increased by $27.8 million in
2000 over 1999. This increase is primarily associated with debt reductions
made possible from greater cash flows provided by operations and from the
sale of the turbine control retrofit business.




20





OTHER MATTERS

MARKET RISKS

Our long-term debt is sensitive to changes in interest rates. We monitor
trends in interest rates as a basis for determining whether to enter into
fixed rate or variable rate debt agreements, the duration of such agreements,
and whether to use hedging strategies. Our primary objective is to minimize
our long-term costs of borrowing. At September 30, 2001, all long-term debt
was denominated in United States dollars and consisted primarily of variable
rate agreements associated with LIBOR market rates, and there were no
derivative instruments associated with our debt. However, we used interest
rate swap agreements during 2001 to hedge our exposure to variable cash flows
of future interest payments associated with a portion of senior notes
executed in October 2001. The interest rate swap agreements were terminated
and settled at the time the senior notes were assigned a fixed rate in
September 2001. Currently, all long-term debt is denominated in United States
dollars and consists of both fixed rate agreements and variable rate
agreements associated with LIBOR market rates. In addition, we are currently
using interest rate swap agreements to hedge our exposure to changes in the
fair value of certain fixed rate long-term debt. As measured at September 30,
2001, a hypothetical 1% immediate increase in interest rates would adversely
affect our 2002 net earnings and cash flows by approximately $0.4 million and
reduce the fair value of our long-term debt by approximately $0.6 million.
Last year, a hypothetical 1% immediate increase in interest rates would have
adversely affected our 2001 net earnings and cash flows by approximately $0.5
million and reduced the fair value of our long-term debt by approximately
$0.1 million.

Assets, liabilities, and commitments that are to be settled in cash and are
denominated in foreign currencies for transaction purposes are sensitive to
changes in currency exchange rates. We monitor trends in foreign currency
exchange rates and our exposure to changes in those rates as a basis for
determining whether to use hedging strategies. Our primary exposures are to
the European Monetary Union euro and the Japanese yen. We do not have any
derivative instruments associated with foreign currency exchange rates. A
hypothetical 10% immediate increase in the value of the United States dollar
relative to all other currencies, when applied to September 30, 2001,
balances, would adversely affect our expected 2002 net earnings and cash
flows by approximately $1.9 million. Last year, a hypothetical 10% immediate
increase in the value of the United States dollar relative to all other
currencies would have adversely affected our expected 2001 net earnings and
cash flows by $1.1 million.

RECENT ACCOUNTING PRONOUNCEMENTS

In June 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 141, "Business Combinations" and No. 142,
"Goodwill and Other Intangible Assets." Statement No. 141 primarily impacts
accounting for acquisitions initiated or completed after June 30, 2001. However,
Statement No. 141 also contains transition provisions that may result in the
reclassification of carrying values among existing goodwill and other intangible
assets. These transition provisions require that we recognize an intangible
asset apart from goodwill whenever the asset arose from contractual or other
legal rights, or whenever it is capable of being separated or divided from the
acquired entity and sold, transferred, licensed, rented, or exchanged, either
individually or in combination with a related contract, asset, or liability. In
addition, these provisions prohibit the recognition of an assembled workforce as
an intangible asset apart from goodwill. Once adopted, Statement No. 142
prohibits amortization of goodwill, but requires transitional and annual
impairment reviews that may result in the recognition of losses, among other
requirements. We are required to adopt Statement No. 142 and the transition
provisions of Statement No. 141, on October 1, 2002, or on October 1, 2001, and
have elected the earlier date. Based on a preliminary assessment of the effects
of adoption, we expect to recognize an increase in goodwill and decrease in
other intangibles of approximately $43.8 million on October 1, 2001, and a
decrease in amortization expense of approximately $6.3 million in 2002.
Impairment losses resulting from transitional impairment reviews, if any, will
be recognized as a cumulative effect of a change in accounting principle in the
first quarter of 2002. We do not expect such impairment losses, if any, to be
material to our financial condition.


                                                                              21






- -----------------------------------------------------------------------------------------------------------------------------
Statements of Consolidated Earnings
Woodward Governor Company and Subsidiaries

                                                                                   Year Ended September 30,
- -----------------------------------------------------------------------------------------------------------------------------
(In thousands except per share amounts)                              2001                    2000                     1999
                                                                                                            
Net sales                                                            $678,791               $597,385                 $596,904

Costs and expenses:
      Cost of goods sold                                              511,027                453,538                  437,121
      Selling, general, and administrative expenses                    67,437                 77,463                   79,043
      Amortization of intangible assets                                 7,055                  6,418                    6,769
      Restructuring expense                                                --                     --                    7,889
      Interest expense                                                  7,554                 10,897                   12,746
      Interest income                                                    (967)                  (770)                    (827)
      Other expense--net                                                  730                  1,247                    2,944
Gain on sale of business                                                   --                (25,500)                      --
- -----------------------------------------------------------------------------------------------------------------------------
       Total costs and expenses, net of gain                          592,836                523,293                  545,685

Earnings before income taxes                                           85,955                 74,092                   51,219

Income taxes                                                           32,887                 27,116                   20,390

- -----------------------------------------------------------------------------------------------------------------------------
Net earnings                                                         $ 53,068               $ 46,976                 $ 30,829

Basic earnings per share                                             $   4.69               $   4.17                 $   2.74

- -----------------------------------------------------------------------------------------------------------------------------
Diluted earnings per share                                           $   4.59               $   4.15                 $   2.73

- -----------------------------------------------------------------------------------------------------------------------------
Weighted-average number of basic shares outstanding                    11,318                 11,263                   11,272

- -----------------------------------------------------------------------------------------------------------------------------
Weighted-average number of diluted shares outstanding                  11,561                 11,318                   11,292



See accompanying Notes to Consolidated Financial Statements.



22









Consolidated Balance Sheets
Woodward Governor Company and Subsidiaries
- -----------------------------------------------------------------------------------------------------------------------------
                                                                                                    At September 30,
- -----------------------------------------------------------------------------------------------------------------------------
(In thousands except per share amounts)                                                       2001                    2000

                                                                                                               
Assets
     Current assets:
         Cash and cash equivalents                                                          $010,542                 $009,315
         Accounts receivable, less allowance for losses
              of $4,720 for 2001 and $4,452 for 2000                                         102,008                  105,153
         Inventories                                                                         131,160                  102,990
         Deferred income taxes                                                                17,758                   16,835
- -----------------------------------------------------------------------------------------------------------------------------
              Total current assets                                                           261,468                  234,293

     Property, plant, and equipment, at cost:
         Land                                                                                  7,966                    6,032
         Buildings and improvements                                                          131,761                  127,825
         Machinery and equipment                                                             242,266                  233,188
         Construction in progress                                                              4,762                    3,364
- -----------------------------------------------------------------------------------------------------------------------------
                                                                                             386,755                  370,409
         Accumulated depreciation                                                            256,179                  247,951
- -----------------------------------------------------------------------------------------------------------------------------
     Property, plant, and equipment--net                                                     130,576                  122,458
     Intangibles--net                                                                        164,835                  150,118
     Other assets                                                                             11,571                    8,450
     Deferred income taxes                                                                    16,178                   18,404
- -----------------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS                                                                                $584,628                 $533,723

Liabilities and shareholders' equity
=============================================================================================================================
     Current liabilities:
         Short-term borrowings                                                              $005,561                 $021,284
         Current portion of long-term debt                                                    22,500                   22,500
         Accounts payable and accrued expenses                                                91,180                   81,342
         Income taxes payable                                                                 18,483                    8,331
- -----------------------------------------------------------------------------------------------------------------------------

              Total current liabilities                                                      137,724                  133,457
- -----------------------------------------------------------------------------------------------------------------------------
     Long-term debt, less current portion                                                     77,000                   74,500
     Other liabilities                                                                        51,042                   50,142
     Commitments and contingencies                                                               --                       --

- -----------------------------------------------------------------------------------------------------------------------------
     Shareholders' equity represented by:
         Preferred stock, par value $.003 per share, authorized
              10,000 shares, no shares issued                                                    --                       --
         Common stock, par value $.00875 per share, authorized
              50,000 shares, issued 12,160 shares                                                106                      106
         Additional paid-in capital                                                           13,440                   13,295
         Unearned ESOP compensation                                                           (3,297)                  (5,308)
         Accumulated other comprehensive earnings                                              1,046                    3,045
         Retained earnings                                                                   327,276                  284,431
- -----------------------------------------------------------------------------------------------------------------------------
                                                                                             338,571                  295,569




         Less treasury stock, at cost                                                         19,709                   19,945

- -----------------------------------------------------------------------------------------------------------------------------
              Total shareholders' equity                                                     318,862                  275,624

TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY                                                  $584,628                 $533,723



See accompanying Notes to Consolidated Financial Statements.




                                                                             23



Statements of Consolidated Shareholders' Equity

Woodward Governor Company and Subsidiaries


- ---------------------------------------------------------------------------------------------------------------------------------
                                                     Additional   Unearned     Accumulated    Other
                                             Common   Paid-in       ESOP      Comprehensive  Retained                      Total
(In thousands except per share amounts)      Stock    Capital    Compensation    Earnings    Earnings  Shares   Amount    Amount
- ---------------------------------------------------------------------------------------------------------------------------------
                                                                                                 
BALANCE AT SEPTEMBER 30, 1998                 $106    $13,304     $ (9,723)      $ 9,849    $226,736    863  $(20,170)   $220,102
   Net earnings                                 --         --           --            --      30,829     --        --      30,829
   Other comprehensive earnings--
     Foreign currency translation adjustments   --         --           --          (498)         --     --        --        (498)
- ---------------------------------------------------------------------------------------------------------------------------------
   Total comprehensive earnings                                                                                            30,331
   Purchases of treasury stock                  --         --           --            --          --     46    (1,029)     (1,029)
   Sales of treasury stock                      --         (3)          --            --          --    (13)      313         310
   Issuance of stock to ESOP                    --         (1)          --            --          --     (6)      151         150
   ESOP compensation expense                    --         --        2,273            --          --     --        --       2,273
   Cash dividends--$.93
     per common share                           --         --           --            --     (10,484)    --        --     (10,484)
   Tax benefit applicable to
     ESOP dividend and stock options            --         --           --            --         339     --        --         339
- ---------------------------------------------------------------------------------------------------------------------------------
BALANCE AT SEPTEMBER 30, 1999                  106     13,300       (7,450)        9,351     247,420    890   (20,735)    241,992
   Net earnings                                 --         --           --            --      46,976     --        --      46,976
   Other comprehensive earnings--
     Foreign currency translation adjustments   --         --           --        (6,306)         --     --        --      (6,306)
- ---------------------------------------------------------------------------------------------------------------------------------
   Total comprehensive earnings                                                                                            40,670
   Purchases of treasury stock                  --         --           --            --          --     64    (1,762)     (1,762)
   Sales of treasury stock                      --        (12)          --            --          --   (101)    2,423       2,411
   Issuance of stock to ESOP                    --          7           --            --          --     (5)      129         136
   ESOP compensation expense                    --         --        2,142            --          --     --        --       2,142
   Cash dividends--$.93
     per common share                           --         --           --            --     (10,472)    --        --     (10,472)
   Tax benefit applicable to ESOP
     dividend and stock options                 --         --           --            --         507     --        --         507
- ---------------------------------------------------------------------------------------------------------------------------------
BALANCE AT SEPTEMBER 30, 2000                  106     13,295       (5,308)        3,045     284,431    848   (19,945)    275,624
   Net earnings                                 --         --           --            --      53,068     --        --      53,068
   Other comprehensive earnings--
     Foreign currency translation adjustments,
      net of reclassification to earnings       --         --           --          (625)         --     --        --        (625)
     Unrealized losses on derivatives           --         --           --        (1,374)         --     --        --      (1,374)
- ---------------------------------------------------------------------------------------------------------------------------------
   Total comprehensive earnings                                                                                            51,069
   Sales of treasury stock                      --        145           --            --          --     (10)      236        381
   ESOP compensation expense                    --         --        2,011            --          --      --        --      2,011
   Cash dividends--$.93
     per common share                           --         --           --            --     (10,526)     --        --    (10,526)
   Tax benefit applicable to ESOP
     dividend and stock options                 --         --           --            --         303      --        --        303
- ---------------------------------------------------------------------------------------------------------------------------------
BALANCE AT SEPTEMBER 30, 2001                 $106    $13,440     $ (3,297)      $ 1,046    $327,276     838  $(19,709)  $318,862



See accompanying Notes to Consolidated Financial Statements.


24





Statements of Cash Flows
Woodward Governor Company and Subsidiaries




- ---------------------------------------------------------------------------------------------------------------------------------
                                                                                       Year Ended September 30,
- ---------------------------------------------------------------------------------------------------------------------------------
(In thousands)                                                              2001                 2000                 1999

                                                                                                            
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings                                                               $53,068              $46,976              $30,829
- ---------------------------------------------------------------------------------------------------------------------------------
Adjustments to reconcile net earnings to net cash provided by operating
   activities:
Depreciation and amortization                                               32,732               30,419               32,036
Net (gain) loss on sale of property, plant, and equipment                    1,445                  411               (2,848)
Gain on sale of business                                                        --              (25,500)                  --
Unrealized losses on derivatives                                            (1,374)                  --                   --
Deferred income taxes                                                        1,303                   (9)               4,342
ESOP compensation expense                                                    2,011                2,142                2,273
Equity in loss of unconsolidated affiliate                                      --                  271                2,079
Changes in operating assets and liabilities,
    net of business acquisitions and sale:
   Accounts receivable                                                       3,096               (3,997)              (8,015)
   Inventories                                                             (25,126)              (3,746)               2,145
   Current liabilities, other than short-term borrowings
      and current portion of long-term debt                                 22,187                7,792               (7,228)
   Other--net                                                               (2,352)                 451                4,319

- ---------------------------------------------------------------------------------------------------------------------------------
      Total adjustments                                                     33,922                8,234               29,103

Net cash provided by operating activities                                   86,990               55,210               59,932

CASH FLOWS FROM INVESTING ACTIVITIES:
Payments for purchase of property, plant, and equipment                    (26,903)             (27,416)             (22,789)
Proceeds from sale of property, plant, and equipment                           404                1,700                6,293
Proceeds from sale of business - net of direct costs                            --               41,742                   --
Payments associated with sale of business                                   (3,985)                  --                   --
Investment in unconsolidated affiliate                                          --                 (290)              (1,405)
Business acquisitions, net of cash acquired                                (31,215)                  --                  (62)

- ---------------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) investing activities                        (61,699)              15,736              (17,963)

CASH FLOWS FROM FINANCING ACTIVITIES:
Cash dividends paid                                                        (10,526)             (10,472)             (10,484)
Proceeds from sales of treasury stock                                          381                2,411                  310
Purchases of treasury stock                                                     --               (1,762)              (1,029)
Net proceeds (payments) from borrowings under revolving lines                9,124              (39,826)             (23,050)
Proceeds from long-term debt                                                    --                   --               75,000
Payments of long-term debt                                                 (22,500)             (21,650)             (84,068)
Tax benefit applicable to ESOP dividend and stock options                      303                  507                  339

- ---------------------------------------------------------------------------------------------------------------------------------
Net cash used in financing activities                                      (23,218)             (70,792)             (42,982)
Effect of exchange rate changes on cash                                       (846)              (1,288)                (964)

NET CHANGE IN CASH AND CASH EQUIVALENTS                                      1,227               (1,134)              (1,977)
Cash and cash equivalents, beginning of year                                 9,315               10,449               12,426
- ---------------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of year                                     $10,542              $09,315              $10,449

SUPPLEMENTAL CASH FLOW INFORMATION:
- ---------------------------------------------------------------------------------------------------------------------------------
Interest expense paid                                                      $ 8,058              $11,854              $12,675
Income taxes paid                                                          $19,769              $22,656              $19,024

NONCASH INVESTING:
Liabilities assumed in business acquisitions (sale)                        $   501             $ (1,430)             $ 1,994



See accompanying Notes to Consolidated Financial Statements.


                                                                             25




NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(In thousands of dollars except per share amounts)

A. Significant accounting policies:

PRINCIPLES OF CONSOLIDATION: The consolidated financial statements include the
accounts of the company and its majority-owned subsidiaries. Transactions within
and between these companies are eliminated. Results of joint ventures in which
the company does not have a controlling financial interest are included in the
financial statements using the equity method of accounting.

USE OF ESTIMATES: Financial statements prepared in conformity with generally
accepted accounting principles require the use of estimates and assumptions that
affect amounts reported. Actual results could differ materially from our
estimates.

FOREIGN CURRENCY TRANSLATION: The assets and liabilities of substantially all
subsidiaries outside the United States are translated at year-end rates of
exchange and earnings and cash flow statements are translated at
weighted-average rates of exchange. Translation adjustments are accumulated with
other comprehensive earnings as a separate component of shareholders' equity and
are presented net of tax in the statements of consolidated shareholders' equity.

REVENUE RECOGNITION: We recognize sales when delivery of product has occurred or
services have been rendered and there is persuasive evidence of a sales
arrangement, selling prices are fixed or determinable, and collectibility from
the customer is reasonably assured.

RESEARCH AND DEVELOPMENT COSTS: Expenditures related to new product development
are charged to expense when incurred and totaled approximately $30,400 in 2001,
$29,100 in 2000, and $24,600 in 1999.

INCOME TAXES: Deferred income taxes are provided for the temporary differences
between the financial reporting basis and the tax basis of the company's assets
and liabilities. We provide for taxes that may be payable if undistributed
earnings of overseas subsidiaries were to be remitted to the United States,
except for those earnings that we consider to be permanently reinvested.

CASH EQUIVALENTS: Highly liquid investments purchased with an original maturity
of three months or less are considered to be cash equivalents.

INVENTORIES: Inventories are valued at the lower of cost or market, with cost
being determined on a first-in, first-out basis.

PROPERTY, PLANT, AND EQUIPMENT: Property, plant, and equipment are recorded
at cost and are depreciated over the estimated useful lives of the assets,
ranging from 5 to 45 years for buildings and improvements and 3 to 15 years
for machinery and equipment. Assets placed in service after September 30,
1998, are depreciated using the straight-line method and assets placed in
service as of and prior to September 30, 1998, are depreciated principally
using accelerated methods. Certain costs associated with developing software
to be used by us that were incurred after September 30, 1999, are included
with machinery and equipment. Prior to September 30, 1999, software
development costs were expensed.

The September 30, 1999, change in accounting for software development costs
was made to adopt the provisions of Statement of Position 98-1, "Accounting
for the Costs of Computer Software Developed or Obtained for Internal Use,"
issued by the American Institute of Certified Public Accountants in March
1998. Net earnings in 2000, the first year following this change, were
increased by approximately $690 as a result of the change.

INTANGIBLES: Intangibles are amortized over the periods estimated to be
benefited using the straight-line method. No amortization period exceeds 30
years. We apply impairment losses on long-lived assets first to related
goodwill. Impairment losses are recognized whenever expected operating cash
flows are less than the carrying values of specific groups of property,
plant, and equipment, identifiable intangibles, and related goodwill.

DERIVATIVES: We recognize derivatives, which are used to hedge risks
associated with interest rates, as assets or liabilities at fair value. These
derivatives are designated as hedges of our exposure to changes in the fair
value of long-term debt or as hedges of our exposure to variable cash flows
of future interest payments. The gain or loss in the value of a derivative
designated as a fair value hedge is recognized in earnings in the period of
change together with an offsetting loss or gain on long-term debt. The
effective portion of a gain or loss in the value of a derivative designated
as cash flow hedge is initially reported as a component of other
comprehensive earnings and subsequently reclassified into earnings when the
future interest payments affect earnings. The ineffective portion of the gain
or loss in the value of a derivative designated as a cash flow hedge is
reported in earnings immediately.

RECLASSIFICATIONS: Certain reclassifications were made to the 2000 and 1999
financial statements to conform to the 2001 presentation.

NEW ACCOUNTING STANDARD: In June 2001, the Financial Accounting Standards
Board issued Statement of Financial Accounting Standards No. 141, "Business
Combinations" and No. 142, "Goodwill and Other Intangible Assets." Statement
No. 141 primarily impacts accounting for acquisitions initiated or completed


26







after June 30, 2001. However, Statement No. 141 also contains transition
provisions that may result in the reclassification of carrying values among
existing goodwill and other intangible assets. These transition provisions
require that we recognize an intangible asset apart from goodwill whenever
the asset arose from contractual or other legal rights, or whenever it is
capable of being separated or divided from the acquired entity and sold,
transferred, licensed, rented, or exchanged, either individually or in
combination with a related contract, asset, or liability. In addition, these
provisions prohibit the recognition of an assembled workforce as an
intangible asset apart from goodwill. Once adopted, Statement No. 142
prohibits amortization of goodwill, but requires transitional and annual
impairment reviews that may result in the recognition of losses, among other
requirements. We are required to adopt Statement No. 142 and the transition
provisions of Statement No. 141 on October 1, 2002, or October 1, 2001, and
have elected the earlier date. Based on a preliminary assessment of the
effects of adoption, we expect to recognize an increase in goodwill and
decrease in other intangibles of approximately $43,800 on October 1, 2001,
and a decrease in amortization expense of approximately $6,300 in 2002.
Impairment losses resulting from transitional impairment reviews, if any,
will be recognized as a cumulative effect of a change in accounting principle
in the first quarter of 2002. We do not expect such impairment losses, if
any, to be material to our financial condition.

B. Business acquisitions and sale:
In November 2000, we acquired the stock of Hoeflich Controls, Inc., a
manufacturer of ignition systems, and certain related assets, and in June 2001,
we acquired certain assets and assumed certain liabilities of the Bryce diesel
fuel injection business of Delphi Automotive Systems. These acquisitions, which
cost a total of $31,844, were accounted for using the purchase method of
accounting. The excess of the purchase prices over the estimated fair values of
tangible and identified intangible net assets acquired are being amortized over
15 years. Under terms of the Hoeflich purchase agreement, we could be required
to make an additional payment of up to $1,200 in fiscal year 2004, contingent
upon attaining certain investment and sales volumes, as defined by the
agreement. Under terms of the Delphi purchase agreement, we expect to assume
benefit obligations and receive plan assets in connection with a defined benefit
pension plan in 2002, the net amount of which has not been determined. We intend
to account for any additional payment and the net accrued or prepaid benefit
cost as an adjustment to the purchase prices for the acquisitions in the
earliest periods amounts are determined. If we had completed the acquisitions on
October 1, 1999, net sales and net earnings for 2001 and 2000 would not have
been materially different from amounts reported in the statements of
consolidated earnings.

At the time of our acquisition from Delphi, one of our directors was an
executive vice president with Delphi Automotive Systems and served as president
in a sector other than the one containing diesel fuel injection businesses.

On May 31, 2000, we sold certain assets associated with our turbine control
retrofit business for cash, and the buyer assumed certain liabilities. The
resulting gain on the sale is reported separately in the statements of
consolidated earnings. Net sales of the turbine control retrofit business are
believed to have represented less than 10% of consolidated net sales in 2000
and 1999.

C. Restructuring expense:
We incurred expenses in connection with a change in the structure of our
internal Industrial Controls organization and the consolidation of two of our
facilities in 1999. These expenses are reflected as restructuring expense in
the statements of consolidated earnings. The amount of restructuring expense
accrued at September 30, 1999, totaled $475 and was related to member
termination benefits. These benefits were paid in 2000.

D. Income taxes:




Income taxes consisted of the following:
- --------------------------------------------------------------------------------
YEAR ENDED SEPTEMBER 30,       2001       2000      1999
                                         
Current:
   Federal                   $23,884    $17,947   $10,550
   State                       3,064      2,202     1,384
   Foreign                     6,603      5,456     3,929
Deferred                        (664)     1,511     4,527
================================================================================
                             $32,887    $27,116   $20,390



Deferred income taxes presented in the consolidated balance sheets are related
to the following:



- --------------------------------------------------------------------------------
AT SEPTEMBER 30,                          2001      2000
                                            
Deferred tax assets:
   Postretirement and
    early retirement benefits           $17,853   $18,793
   Foreign net operating loss
    and state tax credits                 9,796     9,998
   Inventory                              6,105     8,357
   Other                                 24,961    20,047
   Valuation allowance                  (10,936)  (11,168)
- --------------------------------------------------------------------------------
   Total deferred tax assets,
   net of valuation allowance            47,779    46,027
Deferred tax liabilities:
   Intangibles--net                      (8,084)   (6,535)
   Other                                 (5,759)   (4,253)
- --------------------------------------------------------------------------------
   Total deferred tax liabilities       (13,843)  (10,788)
================================================================================
 Net deferred tax assets                $33,936   $35,239




                                                                              27



We have not provided for taxes on $13,300 of undistributed foreign earnings
that we consider permanently reinvested. These earnings could become subject
to income taxes if they were remitted as dividends, were loaned to the
company, or if we should sell our stock in the subsidiaries. However, we
believe that foreign tax credits would largely offset any income tax that
might otherwise be due.

We recorded a valuation allowance to reflect the estimated amount of deferred
tax assets that may not be realized primarily due to capital loss
carryforwards and foreign net operating loss carryforward limitations.
Remaining deferred tax assets are expected to be realized through future
earnings. The changes in the valuation allowance were as follows:



- --------------------------------------------------------------------------------
YEAR ENDED SEPTEMBER 30,                   2001      2000
                                            
Beginning balance                       $(11,168) $(11,716)
Foreign net operating loss carryforward       25      (624)
State net operating loss carryforward        177      (119)
Capital loss carryforward utilization         30     1,291
================================================================================
Ending balance                          $(10,936) $(11,168)



The reasons for the differences between our effective income tax rate and the
United States statutory federal income tax rate were as follows:



- --------------------------------------------------------------------------------
PERCENT OF PRETAX EARNINGS,
YEAR ENDED SEPTEMBER 30,       2001       2000      1999
                                           
Statutory rate                  35.0      35.0      35.0
State income taxes, net
   of federal tax benefit        2.2       2.1       2.5
Foreign loss effect              1.5       2.4       2.3
Foreign tax rate differences     0.1       0.1       2.1
Foreign sales benefits          (1.1)     (1.6)     (1.6)
Other items, net                 0.6       0.2      (0.5)
Capital loss carryforward
    utilization                  --       (1.6)       --
================================================================================
Effective rate                  38.3      36.6      39.8



E. Earnings per share:


- --------------------------------------------------------------------------------
YEAR ENDED SEPTEMBER 30,            2001       2000      1999
                                             
Net earnings (A)                  $53,068   $46,976   $30,829
- --------------------------------------------------------------------------------
Determination of shares,
 in thousands:
   Weighted-average shares
    of common stock
    outstanding (B)                11,318    11,263    11,272
   Assumed exercise of
    stock options                     243        55        20
- --------------------------------------------------------------------------------
   Weighted-average shares
    of common stock outstanding
    assuming dilution,
    in thousands (C)               11,561    11,318    11,292
================================================================================
Basic earnings per share (A/B)    $  4.69   $  4.17   $  2.74
Diluted earnings per share (A/C)  $  4.59   $  4.15   $  2.73
================================================================================



The following stock options were outstanding during 2001, 2000, and 1999 but
were not included in the computation of diluted earnings per share because the
options' exercise prices were greater than the average market price of the
common shares during the respective periods:



- --------------------------------------------------------------------------------
YEAR ENDED SEPTEMBER 30,           2001       2000      1999
                                            
Options                           4,884    203,429   220,375
Weighted-average exercise price  $69.73     $32.22    $32.34
================================================================================


F. Inventories:



- --------------------------------------------------------------------------------
AT SEPTEMBER 30,                          2001      2000
                                           
Raw materials                          $  4,638  $  3,056
Component parts                          74,595    58,559
Work in process                          33,472    26,922
Finished goods                           18,455    14,453
================================================================================
                                       $131,160  $102,990


G. Intangibles--net:



- --------------------------------------------------------------------------------
AT SEPTEMBER 30,                          2001      2000
                                           
Goodwill                               $ 95,704  $ 91,253
Customer relationships                   39,402    40,879
Other                                    29,729    17,986
================================================================================
                                       $164,835  $150,118


Intangibles are shown net of accumulated amortization of $23,967 in 2001 and
$16,848 in 2000.

H. Short-term borrowings:
Short-term borrowings reflect borrowings under certain bank lines of credit. The
total amount available under these lines of credit, including outstanding
borrowings, totaled $43,483 at September 30, 2001, and $46,667 at September 30,
2000. Interest on borrowings under the lines of credit is based on various
short-term rates. Several of the lines require compensating balances or
commitment fees. The lines, generally reviewed annually for renewal, are subject
to the usual terms and conditions applied by the banks. The weighted-average
interest rate for outstanding borrowings was 4.8% at September 30, 2001, 6.5% at
September 30, 2000, and 4.4% at September 30, 1999.

I. Long-term debt:



- --------------------------------------------------------------------------------
AT SEPTEMBER 30,                          2001      2000
                                            
Term note                               $60,000   $80,000
Borrowings under revolving line
   of credit facility                    35,000    10,000
ESOP debt guarantee--8.01%                4,500     7,000
- --------------------------------------------------------------------------------
                                         99,500    97,000
Less current portion                     22,500    22,500
================================================================================
                                        $77,000   $74,500



28





In 1998, we entered into uncollateralized financing arrangements with a
syndicate of U.S. banks, including a $100,000 term note and a revolving line
of credit facility up to a maximum amount of $150,000. The interest rate on
borrowings under the term note varies with LIBOR and was 3.16% at September
30, 2001. The revolving line of credit facility carries a facility fee of
0.25%, with outstanding borrowings due five years from the inception of the
agreement. The interest rate on borrowings under the revolving line of credit
facility varies with LIBOR, the money market rate, or the prime rate, and the
weighted-average rate was 3.92% at September 30, 2001.

In June 1992, the company's Member Investment and Stock Ownership Plan (a
qualified employee stock ownership plan) borrowed $25,000 for a term of
eleven years and used the proceeds to buy 1,027,224 shares of common stock
from the company. We guaranteed the payment of the loan and agreed to make
future contributions to the plan sufficient to repay the loan. Accordingly,
the original amount of the loan was recorded as long-term debt and unearned
ESOP compensation. The consolidated balance sheets reflect the outstanding
balance of the loan in long-term debt and the remaining unearned ESOP
compensation as a component of shareholders' equity. Unearned ESOP
compensation has been reduced using the shares allocated method for shares
allocated to plan participants. The unallocated shares were 135,472 at
September 30, 2001; 218,076 at September 30, 2000; and 306,088 at September
30, 1999.

At September 30, 2001, borrowings under the revolving line of credit facility
were classified as long-term as we have both the intent and ability, through
the company's revolving line of credit facility, to refinance this amount on
a long-term basis.

Exclusive of the revolving line of credit facility, required future principal
payments of long-term debt at September 30, 2001, are $22,500 in 2002, and
$42,000 in 2003. However, we received proceeds from 6.39% senior notes
totaling $75,000 in October 2001 and used a portion of these proceeds to pay
$20,000 of long-term debt that was due in 2002 and $40,000 that was due in
2003. The 6.39% senior notes have a ten-year term, and the principal is
required to be paid back in seven equal annual payments beginning in 2006.

In 2001, we entered into interest rate swap agreements to hedge our exposure
to variable cash flows of future interest payments associated with a portion
of the 6.39% senior notes. Settlement payments made upon termination of these
swap agreements at the time the senior notes were assigned a fixed rate were
recorded as a component of accumulated other comprehensive earnings. Amounts
will be reclassified to net earnings as interest expense is incurred on the
related debt. We expect to reclassify approximately $150 from accumulated
other comprehensive earnings to net earnings in 2002.

Provisions of the debt agreements include covenants customary to such
agreements that require us to maintain specified minimum or maximum financial
measures and place limitations on various investing and financing activities.
The agreements also permit the lenders to accelerate repayment requirements
in the event of a material adverse event. Our most restrictive covenants
require us to maintain a minimum consolidated net worth and a maximum
consolidated debt to consolidated operating cash flow ratio, as defined in
the agreements. At September 30, 2001, we had the ability to pay dividends
and purchase the company's common stock up to $87,837.

J. Accounts payable and accrued expenses:



- --------------------------------------------------------------------------------
AT SEPTEMBER 30,                          2001      2000
                                            
Accounts payable                        $27,613   $25,065
Salaries and other member benefits       31,872    23,580
Deferred compensation                     7,481     4,573
Taxes, other than on income               4,586     5,501
Other items--net                         19,629    22,623
================================================================================
                                        $91,181   $81,342


Certain key management members may elect to defer the payment of a portion of
their compensation to future periods. These deferrals are recorded as
deferred compensation, and individual member balances are increased or
decreased as if they were held in specified investments, including common
stock of the company. Deferred compensation balances are payable upon the
retirement or other termination of a participating member, or as otherwise
specified by plan documents.

K. Retirement benefits:
We provide various benefits to eligible members of our company, including
retirement healthcare benefits, pension benefits, and contributions to
various defined contribution plans.

Currently, approximately 57% of our members may become eligible for
retirement healthcare benefits, generally after reaching age 55 with 10 years
of service or after reaching age 65. We pay 80% to 100% of eligible
healthcare expenses of retired members, their dependents and survivors, which
are not paid by Medicare, up to maximum amounts established under the various
plans. Plan participants share in the cost of these benefits in varying
amounts based on years of service, and we have the right to modify or
terminate the plans. The plans are not funded, and there are no plan assets.
Changes in the benefit obligations, the unfunded status of the plans, and the
amount of accrued benefit costs for our retirement healthcare plans were as
follows:

                                       29





- --------------------------------------------------------------------------------
AT OR FOR THE YEAR ENDED SEPTEMBER 30,         2001      2000
                                                 
Change in benefit obligation:
   Benefit obligation at beginning of year   $39,631   $36,819
   Service cost                                  894     1,051
   Interest cost                               3,019     2,758
   Contributions by plan participants          3,082     2,394
   Net actuarial losses                        9,931       411
   Benefits paid                              (6,561)   (4,838)
   Curtailment gain related
    to sale of business                           --      (964)
   Other                                          --     2,000
- --------------------------------------------------------------------------------
Benefit obligation at end of year
   and unfunded status                        49,996    39,631
Unrecognized net actuarial gains (losses)     (2,769)    7,231
- --------------------------------------------------------------------------------
Total accrued benefit cost                    47,227    46,862
Portion of accrued benefit cost
   included in accrued expenses                2,000     2,000
- --------------------------------------------------------------------------------
Portion of accrued benefit cost
   included in other liabilities             $45,227   $44,862
================================================================================



The components of the net periodic benefit cost associated with the retirement
healthcare plans were as follows:



- --------------------------------------------------------------------------------
YEAR ENDED SEPTEMBER 30,       2001       2000      1999
                                          
Service cost                  $,0894     $1,051    $1,103
Interest cost                  3,019      2,758     2,587
Amortization of unrecognized
   net gain                      (69)      (142)       --
Curtailment gain related
   to sale of business            --       (964)       --
================================================================================
Net periodic benefit cost     $3,844     $2,703    $3,690



In accounting for the retirement healthcare plans, we assumed the
weighted-average discount rate was 7.25% in 2001, 7.75% in 2000, and 7.50% in
1999. We also assumed net healthcare cost trend rates primarily of 10.00% in
2002, decreasing gradually to 4.50% in 2007, and remaining at 4.50%
thereafter. A 1.00% change in assumed healthcare cost trend rates would have
had the following effects on amounts reported in 2001:



- --------------------------------------------------------------------------------
                                         1.00%          1.00%
                                       Increase       Decrease
                                               
Effect on total of service and
   interest cost components              $ 752         $ (580)
Effect on benefits obligation
   at end of year                        8,426         (6,659)
================================================================================



Approximately 13% of our members are currently covered under defined benefit
pension plans. Benefits paid under these plans vary primarily due to members'
length of service and compensation. However, effective September 30, 1999, the
years of service factor was frozen for participants in one of our pension plans.
Changes in benefit obligations and plan assets, the funded status, and the
amount of accrued benefit costs for our pension plans were as follows:



- --------------------------------------------------------------------------------
AT OR FOR THE YEAR ENDED SEPTEMBER 30,         2001      2000
                                                
Change in benefit obligations:
   Benefit obligation at beginning of year  $29,293   $28,461
   Service cost                                 698       781
   Interest cost                              1,365     1,352
   Net actuarial losses (gains)                 371      (843)
   Foreign currency exchange rate changes    (1,568)     (165)
   Benefits paid                               (366)     (293)
- --------------------------------------------------------------------------------
Benefit obligation at end of year            29,793    29,293
- --------------------------------------------------------------------------------
Change in plan assets:
   Fair value of assets at beginning of year 27,602    24,369
   Actual return on plan assets              (4,113)    3,018
   Foreign currency exchange rate changes    (1,525)     (174)
   Contributions by the company                 613       682
   Benefits paid                               (366)     (293)
- --------------------------------------------------------------------------------
Fair value of assets at end of year          22,211    27,602
- --------------------------------------------------------------------------------
Funded status                                (7,583)   (1,691)
Unamortized prior service cost                 (103)     (122)
Unrecognized net losses (gains)               3,727    (2,112)
Unamortized transition obligation               798       980
- --------------------------------------------------------------------------------
Net accrued benefit cost                     (3,161)   (2,945)
Portion of net accrued benefit
   cost included in other assets                 --       134
================================================================================
Portion of net accrued benefit
   cost included in other liabilities      $ (3,161) $ (3,079)



The components of the net periodic benefit cost associated with the pension
plans were as follows:




- --------------------------------------------------------------------------------
YEAR ENDED SEPTEMBER 30,              2001       2000      1999
                                                 
Service cost                         $  698     $  781    $1,490
Interest cost                         1,365      1,352     1,575
Expected return on plan assets       (1,306)    (1,230)   (1,529)
Amortization of prior service cost       (8)        (9)       (8)
Recognized net gains (losses)           (23)         9        --
Amortization of transition obligation    89        100        90
================================================================================
Net periodic pension cost            $  815     $1,003    $1,618





30



The following weighted-average assumptions, reflecting rates appropriate in the
United States and Japan, were used in accounting for pension plans:



- --------------------------------------------------------------------------------
YEAR ENDED SEPTEMBER 30,       2001       2000      1999
                                           
Discount rate                   4.6%      4.8%      5.3%
Rate of compensation increase   4.2%      4.2%      4.3%
Expected long-term rate of
  return on plan assets         5.0%      4.9%      5.2%
================================================================================


Approximately 78% of our members are currently eligible for one or more defined
contribution plans. Contributions to these plans are discretionary. However, we
do have a qualified employee stock ownership plan that has outstanding
borrowings that have been guaranteed by the company. We have agreed to make
future contributions to the plan sufficient to repay the loan. The proceeds of
the borrowing were used by the plan to purchase common stock from the company,
the shares of which are allocated to plan participants as contributions are made
to the plan. Amounts charged to expense for defined contribution plans totaled
$11,239 in 2001, $11,062 in 2000, and $10,551 in 1999.

L. Stock option plan:
We have a stock option plan covering key management members and directors of the
company. Options granted under the plan generally have a term of 10 years and
vest evenly at the end of each year over four years from the date of grant.
There were 1,308,663 shares of common stock authorized for issuance under the
plan at September 30, 2001. We account for options in accordance with Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees," and
therefore we do not recognize compensation expense in association with options
granted at or above the market price of our common stock at the date of grant.
As required by Statement of Financial Accounting Standards No. 123, "Accounting
for Stock-Based Compensation," the following table presents pro forma net
earnings and per share information that has been prepared as if compensation for
these options was ecognized:



- --------------------------------------------------------------------------------
YEAR ENDED SEPTEMBER 30,          2001       2000      1999
                                            
Net earnings                    $52,420    $46,850   $30,298
Basic earnings per share           4.63       4.16      2.69
Diluted earnings per share         4.53       4.14      2.68
================================================================================


The determination of compensation expense for this pro forma information was
based upon the estimated fair value of the options granted on the date of their
grant. The weighted-average estimated fair value of options granted was $16.05
in 2001, $6.82 in 2000, and $4.27 in 1999. These estimates were determined using
the Black-Scholes option pricing model and the following weighted-average
assumptions by grant year:



- --------------------------------------------------------------------------------
YEAR ENDED SEPTEMBER 30,          2001       2000      1999
                                           
Risk-free interest rate            5.8%       6.9%      4.9%
Expected life                  7 years    7 years   7 years
Expected volatility               30.0%      26.4%     23.0%
Expected dividend yield            1.7%       3.7%      4.2%
================================================================================


Changes in outstanding stock options were as follows:



- --------------------------------------------------------------------------------
                                                   Weighted-
                                                   Average
                                                   Exercise
                                        Number     Price
                                             
Balance at September 30, 1998           452,681    $26.88
   Options granted                      200,000     22.00
   Options exercised                     (4,000)    22.00
   Options canceled                      (7,266)    32.18
- --------------------------------------------------------------------------------
Balance at September 30, 1999           641,415     25.33
   Options granted                      145,100     24.75
   Options exercised                   (100,990)    23.38
   Options canceled                     (55,353)    30.46
- --------------------------------------------------------------------------------
Balance at September 30, 2000           630,172     25.06
   Options granted                      162,979     44.08
   Options exercised                     (5,533)    28.68
   Options canceled                      (6,800)    29.77
================================================================================
Balance at September 30, 2001           780,818    $28.96



Stock options outstanding at September 30, 2001, consisted of the following:
- --------------------------------------------------------------------------------


                            Options Outstanding        Options Exercisable

                           Weighted-  Weighted-                 Weighted-
   Exercise                Average    Average                   Average
     Price                 Exercise   Remaining                 Exercise
     Range        Number    Price     Life In Years    Number     Price
- --------------------------------------------------------------------------------
                                                 
$16.625-$24.750   454,150   $22.44       6.3          363,925    $21.87
$30.594-$41.813   313,689   $36.69       7.6          164,139    $32.14
$69.220-$73.700   012,979   $70.25       9.6          012,979    $70.25
================================================================================
                  780,818   $28.96       6.8          541,043    $26.15


There were 501,972 stock options exercisable at September 30, 2000, and 616,465
at September 30, 1999.



                                                                            31


M. Shareholder rights plan:
We have a shareholder rights plan to protect shareholders against unsolicited
attempts to acquire control of the company that do not offer what the Board of
Directors believes to be an adequate price to all shareholders. In connection
with this plan, a dividend of one preferred stock purchase right for each
outstanding share of common stock was paid to shareholders in February 1996.
Each right entitles its holder to purchase from the company one-four hundredth
of a share of Series A Preferred Stock, par value $.003 per share, at a price of
$75.00 (subject to adjustment, and restated for the January 1997 stock split).
The rights may not be exercised or transferred apart from the company's common
stock until 10 days after it is announced that a person or group has acquired
15% or more of the outstanding common stock or 15 business days after it is
announced that there is an offer (or an intent to make an offer) by a person or
group to acquire 15% or more of the outstanding common stock. The Board of
Directors may extend the 15 business day period referred to above and may redeem
the rights in whole (but not in part) at a redemption price of $.003 per right
at any time prior to an acquisition of 15% or more of the outstanding common
stock by a person or group. The rights expire on January 17, 2006.

N. Accumulated other comprehensive earnings:
- --------------------------------------------------------------------------------
AT OR FOR THE YEAR ENDED SEPTEMBER 30,        2001      2000

Accumulated foreign currency
 translation adjustments:
   Balance at beginning of year            $ 3,045   $ 9,351
   Translation adjustments                     358    (6,306)
   Reclassification adjustment for
     substantial liquidation of subsidiary     500        --
   Taxes associated with translation
     adjustments                            (1,483)       --
- --------------------------------------------------------------------------------
   Balance at end of year                    2,420     3,045
- --------------------------------------------------------------------------------
Accumulated unrealized derivative losses:
   Balance at beginning of year                 --        --
   Unrealized losses on derivatives         (2,217)       --
   Taxes associated with unrealized losses     843        --
- --------------------------------------------------------------------------------
   Balance at end of year                   (1,374)       --
================================================================================
Accumulated other comprehensive
  earnings                                 $ 1,046   $ 3,045


O. Leases:
We have entered into leases for certain facilities. Future minimum rental
commitments under these operating leases are: $1,497 in 2002, $1,597 in 2003,
$944 in 2004, $888 in 2005, and $770 in 2006. Rent expense for facilities was
approximately $3,051 in 2001, $2,878 in 2000, and $2,634 in 1999.

P. CONTINGENCIES:
We are currently involved in matters of litigation arising from the normal
course of business, including certain environmental and product liability
matters. We have accruals of approximately $1,000 at September 30, 2001, and
$460 at September 30, 2000, related to such matters. These accruals are based on
our current estimate of the most likely amount of losses that we believe will be
incurred. These amounts have been included in accounts payable and accrued
expenses.

We have been designated a "de minimis potentially responsible party" with
respect to the cost of investigation and environmental cleanup of certain
third-party sites. Our current accrual for these matters is based on costs
incurred to date that we have been allocated and our estimate of the most likely
future investigation and cleanup costs. There is, as in the case of most
environmental litigation, the possibility that under joint and several liability
we could be required to pay more than our allocated share of costs.

It is our opinion, after consultation with legal counsel, that additional
liabilities, if any, resulting from these matters are not expected to have a
material adverse effect on our financial condition, although such matters could
have a material effect on our quarterly or annual operating results and cash
flows when resolved in a future period.

Q. Financial instruments:
The estimated fair values of our financial instruments were as follows:
- --------------------------------------------------------------------------------
AT SEPTEMBER 30,                                2001        2000

Cash and cash equivalents                     $10,542     $09,315
Short-term borrowings                          (5,561)    (21,284)
Long-term debt, including current portion     (99,637)    (96,985)
================================================================================

The fair value of cash and cash equivalents, short-term borrowings, and
long-term debt at variable interest rates were assumed to be equal to their
carrying amounts. Cash and cash equivalents have short-term maturities,
short-term borrowings have short-term maturities and market interest rates, and
long-term debt at variable interest rates is repriced frequently at market rates
of interest. The fair value of long-term debt at fixed interest rates was
estimated based on a model that discounted future principal and interest
payments at interest rates available to the company at the end of the year for
similar debt of the same maturity.


32




R. Segment information:
Our operations are organized based on the nature of products and related
services provided and consist of two operating segments--Industrial Controls and
Aircraft Engine Systems. Industrial Controls provides energy control systems and
components primarily to OEMs of industrial engines, turbines, and other power
equipment. Aircraft Engine Systems provides energy control systems and
components primarily to OEMs of aircraft engines.

The accounting policies of the segments are the same as those described in Note
A. Intersegment sales and transfers are made at established intersegment selling
prices generally intended to approximate selling prices to unrelated parties.
Our determination of segment earnings does not reflect restructuring expense,
gain on sale of business, and allocations of corporate expenses, and is before
interest expense, interest income, and income taxes. Segment assets consist of
accounts receivable, inventories, property, plant, and equipment--net, and
intangible assets--net. Summarized financial information for our segments
follows:



- --------------------------------------------------------------------------------
AT OR FOR THE YEAR ENDED SEPTEMBER 30,    2001      2000      1999
                                                   
INDUSTRIAL CONTROLS:
   External net sales                  $384,145   $330,962  $310,038
   Intersegment sales                       808        700       679
   Segment earnings                      57,710     41,258    35,959
   Segment assets                       283,072    214,935   223,874
   Depreciation and amortization         14,850     13,322    14,670
   Capital expenditures                  15,582     14,631     9,576
- --------------------------------------------------------------------------------
AIRCRAFT ENGINE SYSTEMS:
   External net sales                  $294,646   $266,423  $286,866
   Intersegment sales                     2,919      2,010     1,853
   Segment earnings                      53,585     38,150    54,260
   Segment assets                       241,002    260,712   272,898
   Depreciation and amortization         15,704     15,318    15,708
   Capital expenditures                   9,711     10,071    11,183
================================================================================



The differences between the total of segment amounts and the consolidated
financial statements were as follows:



- --------------------------------------------------------------------------------
YEAR ENDED SEPTEMBER 30,                   2001       2000      1999
                                                   
Total segment net sales and
   intersegment sales                  $682,518   $600,095  $599,436
Elimination of intersegment
   sales                                 (3,727)    (2,710)   (2,532)
================================================================================
Consolidated net sales                 $678,791   $597,385  $596,904

Total segment earnings                 $111,295   $ 79,408  $ 90,219
Unallocated corporate expenses          (18,753)   (20,689)  (19,192)
Restructuring expense
   and gain on sale of business              --     25,500    (7,889)
Interest expense and income              (6,587)   (10,127)  (11,919)
================================================================================
Consolidated earnings before
   income taxes                        $ 85,955   $ 74,092  $ 51,219





- --------------------------------------------------------------------------------
AT SEPTEMBER 30,                           2001       2000      1999
                                                    
Total segment assets                    $524,074   $475,647  $496,772
Unallocated corporate property,
   plant, and equipment--net               4,505      5,072     3,926
Other unallocated assets                  56,049     53,004    49,966
================================================================================
Consolidated total assets               $584,628   $533,723  $550,664



Differences between total depreciation and amortization
and capital expenditures of our segments and the corresponding consolidated
amounts reported in the statements of consolidated cash flows are due to
unallocated corporate amounts.

One customer accounted for more than 10% of consolidated net sales, impacting
both the Aircraft Engine Systems and Industrial Controls segments, and
totaled approximately $219,000 in 2001, $147,000 in 2000, and $130,000 in
1999.

External net sales by geographical area, as determined by the location of the
customer invoiced, were as follows:



- --------------------------------------------------------------------------------
YEAR ENDED SEPTEMBER 30,       2001       2000      1999
                                        
United States               $429,020   $372,773  $350,999
Other countries              249,771    224,612   245,905
================================================================================
                            $678,791   $597,385  $596,904



Property, plant, and equipment--net by geographical area, as determined by the
physical location of the assets, were as follows:



- --------------------------------------------------------------------------------
AT SEPTEMBER 30,               2001       2000      1999
                                        
United States               $105,945   $105,725  $106,325
Other countries               24,631     16,733    17,797
                            $130,576   $122,458  $124,122


                                                                             33





MANAGEMENT'S RESPONSIBILITY FOR FINANCIAL STATEMENTS

Management is responsible for the accompanying financial statements and
believes that the financial statements accurately and consistently present
the financial position, results of operations, and cash flows of the company
in accordance with generally accepted accounting principles.

Management makes what it believes to be reasonable and prudent judgments and
estimates where necessary, and has a system of internal accounting controls
designed to provide reasonable assurance that its financial records are
accurate, assets are safeguarded, and transactions are executed in accordance
with management's authorizations. Self-monitoring of the internal accounting
control system, along with selective testing, is a part of our control
environment. Corrective actions are taken whenever deficiencies in our
internal accounting control system are identified.

PricewaterhouseCoopers LLP, the company's independent accountants, audit the
company's financial statements in accordance with generally accepted auditing
standards. Their report on these financial statements is presented below.

The audit committee of the company's Board of Directors, which consists of
directors who are not officers or employees of the company, meets with
management and PricewaterhouseCoopers LLP to review and discuss the audited
financial statements, along with other matters.


John A. Halbrook
Chairman and
Chief Executive Officer

Stephen P. Carter
Vice President,
Chief Financial Officer and Treasurer



REPORT OF INDEPENDENT ACCOUNTANTS



To Board of Directors and Shareholders
Woodward Governor Company

In our opinion, the accompanying consolidated balance sheets and the related
statements of consolidated earnings, shareholders' equity and cash flows
present fairly, in all material respects, the financial position of Woodward
Governor Company and its subsidiaries at September 30, 2001 and 2000, and the
results of their operations and their cash flows for each of the three years
in the period ended September 30, 2001, in conformity with accounting
principles generally accepted in the United States of America. 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 of these statements in accordance with
auditing standards generally accepted in the United States of America, which
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, assessing the accounting
principles used and significant estimates made by management, and evaluating
the overall financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.



PricewaterhouseCoopers LLP
Chicago, Illinois
October 31, 2001


34





SELECTED QUARTERLY FINANCIAL DATA

(Unaudited)




                                                2001 FISCAL QUARTERS                            2000 FISCAL QUARTERS

(In thousands except per share data)    FIRST     SECOND      THIRD    FOURTH           FIRST     SECOND     THIRD     FOURTH
- ------------------------------------------------------------------------------------------------------------------------------
                                                                                              
Net sales                             $150,730   $170,176   $182,508  $175,377        $133,592  $149,085   $155,496   $159,212
Gross profit*                           37,329     41,591     44,806    44,038          33,939    32,745     38,779     38,384
Net earnings                            10,908     12,672     13,728    15,760           6,007     5,372     26,165**    9,432
Net earnings per basic share              0.96       1.12       1.21      1.39            0.53      0.48       2.33**     0.84
Net earnings per diluted share            0.95       1.10       1.18      1.36            0.53      0.48       2.32**     0.83
Cash dividends per share                0.2325     0.2325     0.2325    0.2325          0.2325    0.2325     0.2325     0.2325

Common stock price per share
 High                                 $  49.00   $  57.73   $  91.00  $  86.85        $  28.50  $  27.38   $  28.50   $  45.00
 Low                                     35.75      40.00      49.00     42.06           24.50     21.88      21.75      26.88
 Close                                   44.75      51.38      84.35     48.45           27.50     23.00      28.31      44.56
- ------------------------------------------------------------------------------------------------------------------------------



*Gross profit represents net sales less cost of goods sold as reported in our
statements of consolidated earnings.

** We sold our turbine retrofit business for a gain, net of tax, of $17,203 in
the third quarter 2000. Without this gain, our net earnings in the third quarter
2000 would have been $8,962 or $0.80 per basic share and $0.79 per diluted
share.

CAUTIONARY STATEMENT

This annual report contains forward-looking statements, including financial
projections, our plans and objectives for future operations, expectations of
future economic performance, and various other assumptions relating to the
future. While such statements reflect our current expectations, all such
statements involve risks and uncertainties. Actual results could differ
materially from projections or any other forward-looking statement, and we
have no obligation to update our forward-looking statements. Important
factors that could cause results to differ materially from those projected or
otherwise stated include the following: unanticipated global or regional
economic developments and business cycle changes resulting from the September
11, 2001, terrorist attacks in the United States (and subsequent actions in
response to those attacks), particularly as those consequences impact the
sales and operations of Aircraft Engine Systems; other unanticipated global
or regional economic developments, particularly in, but not limited to, Asia,
Europe, and the United States; other changes in business cycles of particular
industries served by our company, primarily OEMs of aircraft engines, both
commercial and military, and industrial engines, turbines, and other power
equipment, particularly in power generation, transportation, and process
industries markets; fluctuations in currency exchange rates of U.S. and
foreign countries, primarily those located in Europe and Asia; fluctuations
in interest rates, primarily LIBOR, which affect the cost of borrowings;
timing and acceptance of new products and product enhancements, including,
but not limited to, products that integrate energy control technologies of
recently-acquired companies; competitor actions that adversely impact our
orders or pricing, including, but not limited to, aftermarket sales; adverse
changes in the business acquisition climate; effects of any business
acquisitions or divestitures; changes in U.S. and other country laws and
regulations involving acquisitions, the environment, and taxes; relative
success of

quality and productivity initiatives, such as the Six Sigma initiative and
supplier designation levels with key customers; unanticipated problems
associated with implementing our e-Business strategy; and unusual or
extraordinary events or developments involving litigation or other potential
liabilities.


                                                                             35







- ----------------------------------------------------------------------------------------------------------------------------
Summary of Operations/Eleven-Year Record
(In thousands of dollars except per share amounts)

Net Sales, Net Earnings, and Dividends FOR THE YEAR ENDED SEPTEMBER 30,
- ----------------------------------------------------------------------------------------------------------------------------
                                                            Net Earnings (Loss)
                                                     Per             Per                        % of Beginning       Cash
                                                    Basic          Diluted                      Shareholders'      Dividends
    Year        Net Sales        Amount             Share           Share        % of Sales         Equity         Per Share
- ----------------------------------------------------------------------------------------------------------------------------
                                                                                               
    2001       $678,791          $53,068           $4.69             $4.59            7.8             19.3          $ 0.93
    2000        597,385           46,976***         4.17***           4.15***         7.9             19.4            0.93
    1999        596,904           30,829            2.74              2.73            5.2             14.0            0.93
    1998        490,476           21,592            1.90              1.90            4.4             10.3            0.93
    1997        442,216           18,140            1.58              1.57            4.1              8.7            0.93
    1996        417,290           22,178            1.92              1.92            5.3             11.2            0.93
    1995        379,736           11,936            1.03              1.03            3.1              6.2            0.93
    1994        333,207           (3,273)          (0.28)            (0.28)          (1.0)            (1.6)           0.93
    1993        331,156           13,389**          1.13**            1.13**          4.0              6.1            0.93
    1992        374,173           20,212            1.81              1.81            5.4              9.7            0.92
    1991        361,924           24,293            2.22              2.22            6.7             12.5            0.92






Financial Position AT SEPTEMBER 30,
- ----------------------------------------------------------------------------------------------------------------------------
                                                                                      Shareholders' Equity          % of
               Working            Total          Long-term          Total                         Per Diluted      Debt to
    Year       Capital           Assets            Debt             Debt             Amount          Share       Debt-Equity
- ----------------------------------------------------------------------------------------------------------------------------
                                                                                                
    2001       $123,744         $584,628        $ 77,000           $105,061         $318,862         $27.58          24.8
    2000        100,836          533,723          74,500            118,284          275,624          24.35          30.0
    1999        124,392          550,664         139,000            180,953          241,992          21.43          42.8
    1998        119,506          563,435         175,685            213,645          220,102          19.34          49.3
    1997        124,827          348,110          17,717             30,604          210,614          18.27          12.7
    1996        121,103          348,798          22,696             42,868          207,995          18.01          17.1
    1995        116,364          349,599          27,796             62,960          197,903          17.05          24.1
    1994        113,751          323,318          32,665             61,591          193,846          16.57          24.1
    1993        107,809          332,461          36,246             58,258          206,222          17.36          22.0
    1992        103,818          331,653          40,135             64,375          219,690          18.48          22.7
    1991        105,213          306,534          17,300             50,132          208,564          19.02          19.4






Other Selected Data FOR THE YEAR ENDED SEPTEMBER 30,                                                     AT SEPTEMBER 30,
- ------------------------------------------------------------------------------------------------------------------------------
                                                         Effective                      Weighted-
                                                          Income                         Average                   Registered
            Depreciation   Amortization                  Tax Rate        Capital     Diluted Shares     Worker     Shareholder
    Year       Expense        Expense       EBITDA*         (%)       Expenditures    Outstanding       Members      Members
- ------------------------------------------------------------------------------------------------------------------------------
                                                                                              
    2001      $25,677          $7,055     $125,274          38.3         $26,903        11,561,000       3,709        1,652
    2000       24,001           6,418      114,638 ***      36.6          27,416        11,318,000       3,302        1,742
    1999       25,267           6,769       95,174          39.8          22,789        11,292,000       3,791        1,866
    1998       23,715           2,927       67,699          40.5          20,862        11,379,000       3,994        1,907
    1997       21,854             983       55,884          38.6          21,152        11,525,000       3,246        1,994
    1996       22,786             608       61,075          37.0          21,163        11,570,000       3,211        2,029
    1995       23,334             452       47,239          40.9          18,988        11,623,000       3,071        2,179
    1994       26,114             500       24,652          37.0          16,515        11,765,000       3,439        2,256
    1993       24,837             419       50,314 **       42.0          18,335        11,889,000       3,264        2,301
    1992       22,241             392       57,652          38.7          52,684        11,179,000       3,632        2,301
    1991       18,236             235       58,962          36.1          33,075        10,967,000       3,953        2,303



* EBITDA represents earnings before interest (expense and income), income taxes,
depreciation, and amortization.

** Net earnings and EBITDA for 1993 are before cumulative effect of accounting
changes.

*** Net earnings and EBITDA for 2000 include a gain from the sale of business of
$25,500 before income taxes and $17,082 after income taxes, or $1.52 per basic
share and $1.51 per diluted share.





36

EX-21

EXHIBIT 21
WOODWARD GOVERNOR COMPANY
SUBSIDIARIES OF THE REGISTRANT



                         Baker Electrical Products, Inc.
                                  Delaware, USA

                               Woodward FST, Inc.
                                  Delaware, USA

                       Woodward Foreign Sales Corporation
                         St. Thomas, U.S. Virgin Islands

                               Woodward HSC, Inc.
                                  New York, USA

                          Woodward International, Inc.
                                  Delaware, USA

                    Woodward Tianjin Controls Company Limited
                                 Tianjin, China

                    Woodward Governor de Mexico S.A. de C.V.
                               Mexico City, Mexico

                    Woodward Governor Asia/Pacific PTE. LTD.
                        Singapore, Republic of Singapore

                        Woodward Governor France S.A.R.L.
                               Venissieux, France

                         Woodward Governor Germany GmbH
                                  Aken, Germany

                             Woodward Governor GmbH
                              Lucerne, Switzerland

                        Woodward Governor India PTE. LTD.
                                New Delhi, India

                        Woodward Governor Nederland B.V.
                                 The Netherlands

                        Woodward Governor Poland, Limited
                                 Warsaw, Poland

                         Woodward Governor (Japan) Ltd.
                                      Japan

                         Woodward Governor (Quebec) Inc.
                                 Quebec, Canada

                    Woodward Governor (Reguladores) Limitada
                                     Brazil

                        Woodward Governor (U.K.) Limited
                                 United Kingdom

EX-23

Exhibit 23
Consent of Independent Accountants

                       CONSENT OF INDEPENDENT ACCOUNTANTS

We hereby consent to the incorporation by reference in the Registration
Statement on Form S-8 (File No. 333-66422) of Woodward Governor Company and
Subsidiaries of our report dated October 31, 2001, relating to the consolidated
financial statements, which appears in the Annual Report to Shareholders, which
is incorporated in this Annual Report on Form 10-K. We also consent to the
incorporation by reference of our report dated October 31, 2001 relating to the
financial statement schedule, which appears in this Form 10-K.




PricewaterhouseCoopers LLP
Chicago, Illinois
December 5, 2001

EX-99

EXHIBIT 99
WOODWARD GOVERNOR COMPANY
ADDITIONAL EXHIBIT - DESCRIPTION OF
ANNUAL REPORT GRAPHS


Below is a description of the graphs appearing under "Financial Highlights" on
page 1 of our 2001 Annual Report.

NET SALES:
     This bar graph shows consolidated net sales in millions of dollars for the
     fiscal years ended 1997 through 2001. Plot points are $442, $490, $597,
     $597, and $679 with the first plot point for 1997.

NET EARNINGS:
     The bar graph for consolidated net earnings is in millions of dollars for
     fiscal years 1997 through 2001. Plot points are $18, $22, $31, $47, and $53
     with the first plot point for 1997.

NET EARNINGS AND CASH DIVIDENDS PER SHARE:
     The bar graph for consolidated net earnings and cash dividends per diluted
     share is for fiscal years ended 1997 through 2001. Plot points for net
     earnings per diluted share are $1.57, $1.90 $2.73, $4.15, and $4.59 with
     the first plot point for 1997. Plot points for cash dividends per diluted
     share, beginning with 1997, are $.93 for all years.