10-Q

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

FORM 10-Q

ý
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended December 31, 2002

OR

o TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                              to                             

Commission file number 0-8408

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

Delaware	36-1984010
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)

5001 North Second Street, Rockford, Illinois 61125-7001
(Address of principal executive offices)

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

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

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

        As of January 24, 2003, 11,185,496 shares of common stock with a par value of $.00875 cents per share were outstanding.

TABLE OF CONTENTS

			Page
PART I—FINANCIAL INFORMATION
	Item 1.	Financial Statements	3
	Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	12
	Item 3.	Quantitative and Qualitative Disclosures About Market Risk	16
	Item 4.	Controls and Procedures	16
PART II—OTHER INFORMATION
	Item 6.	Exhibits and Reports on Form 8-K	17
SIGNATURES			18
CERTIFICATIONS			19

2

PART I—FINANCIAL INFORMATION

Item 1.    Financial Statements

Statements of Consolidated Earnings
Woodward Governor Company and Subsidiaries

			(Unaudited) Three Months Ended December 31,
(In thousands except per share amounts)			2002			2001
Net Sales			$	144,825		$	180,653
Costs and expenses:
	Cost of goods sold			118,266			141,368
	Selling, general, and administrative expenses			14,797			14,928
	Amortization of intangibles			1,017			768
	Interest expense			1,194			1,379
	Interest income			(109	)		(113	)
	Other expense (income)-net			(444	)		196
		Total costs and expenses		134,721			158,526
Earnings before income taxes and cumulative effect of accounting change				10,104			22,127
Income taxes				3,839			8,408
Earnings before cumulative effect of accounting change				6,265			13,719
Cumulative effect of accounting change, net of income taxes				—			(2,489	)
Net earnings			$	6,265		$	11,230
Basic per share amounts:
Earnings before cumulative effect of accounting change			$	0.55		$	1.21
Cumulative effect of accounting change, net of income taxes				—			(0.22	)
Net earnings			$	0.55		$	0.99
Diluted per share amounts:
Earnings before cumulative effect of accounting change			$	0.55		$	1.19
Cumulative effect of accounting change, net of income taxes				—			(0.22	)
Net earnings			$	0.55		$	0.97
Weighted-average number of shares outstanding:
Basic				11,306			11,323
Diluted				11,457			11,554
Cash dividends per share			$	0.2325		$	0.2325

See accompanying Notes to Consolidated Financial Statements.

3

Consolidated Balance Sheets
Woodward Governor Company and Subsidiaries

(In thousands except per share amounts)				(Unaudited) At December 31, 2002			At September 30, 2002
Assets
	Current assets:
		Cash and cash equivalents		$	28,096		$	29,828
		Accounts receivable, less allowance for losses of $2,554 for December and $2,717 for September			69,442			76,406
		Inventories			125,811			127,112
		Deferred income taxes			13,787			15,340
			Total current assets	$	237,136			248,686
	Property, plant, and equipment, at cost:
		Land			8,139			8,046
		Buildings and improvements			137,740			136,771
		Machinery and equipment			243,750			242,487
		Construction in progress			1,054			3,312
					390,683			390,616
		Less accumulated depreciation			270,371			266,994
	Property, plant, and equipment—net				120,312			123,622
	Goodwill				115,719			115,265
	Other intangibles—net				65,915			66,762
	Other assets				10,648			10,175
	Deferred income taxes				16,788			17,885
Total assets				$	566,518		$	582,395
Liabilities and shareholders' equity
	Current liabilities:
		Short-term borrowings		$	14,624		$	16,185
		Current portion of long-term debt			2,000			2,000
		Accounts payable and accrued expenses			61,115			74,995
		Income taxes payable			3,759			3,194
			Total current liabilities		81,498			96,374
	Long-term debt, less current portion				78,367			78,192
	Other liabilities				53,219			52,928
	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			13,473			13,542
		Unearned ESOP compensation			(1,564	)		(1,418	)
		Accumulated other comprehensive earnings			4,208			2,823
		Retained earnings			363,344			359,556
					379,567			374,609
		Less treasury stock, at cost			26,133			19,708
			Total shareholders' equity		353,434			354,901
Total liabilities and shareholders' equity				$	566,518		$	582,395

See accompanying Notes to Consolidated Financial Statements.

4

Statements of Consolidated Cash Flows
Woodward Governor Company and Subsidiaries

			(Unaudited) Three Months Ended December 31,
(In thousands)			2002			2001
Cash flows from operating activities:
Net earnings			$	6,265		$	11,230
Adjustments to reconcile net earnings to net cash provided by operating activities:
Cumulative effect of accounting change, net of income taxes				—			2,489
Depreciation and amortization				7,740			7,797
Net loss on sale of property, plant, and equipment				47			144
ESOP compensation expense				(146	)		(155	)
Deferred income taxes				1,827			1,321
Reclassification of unrealized losses on derivatives to earnings				43			—
Changes in operating assets and liabilities, net of business acquisitions:
	Accounts receivable			7,634			10,702
	Inventories			2,155			(3,077	)
	Accounts payable and accrued expenses			(14,310	)		(17,780	)
	Income taxes payable			773			(8,392	)
	Other—net			(23	)		(282	)
		Total adjustments		5,740			(7,233	)
Net cash provided by operating activities				12,005			3,997
Cash flows from investing activities:
Payments for purchase of property, plant, and equipment				(2,865	)		(5,580	)
Proceeds from sale of property, plant, and equipment				85			65
Net cash used in investing activities				(2,780	)		(5,515	)
Cash flows from financing activities:
Cash dividends paid				(2,635	)		(2,632	)
Proceeds from sales of treasury stock				185			68
Purchases of treasury stock				(6,679	)		—
Net payments from borrowings under revolving lines				(2,063	)		(9,355	)
Proceeds from long-term debt				—			75,000
Payments of long-term debt				—			(60,000	)
Net cash provided by (used in) financing activities				(11,192	)		3,081
Effect of exchange rate changes on cash				235			869
Net change in cash and cash equivalents				(1,732	)		2,432
Cash and cash equivalents, beginning of year				29,828			10,542
Cash and cash equivalents, end of period			$	28,096		$	12,974
Supplemental cash flow information:
Interest expense paid			$	570		$	396
Income taxes paid			$	1,294		$	14,539

See accompanying Notes to Consolidated Financial Statements.

5

Notes to Consolidated Financial Statements

(1)

Overview:

        The consolidated balance sheet as of December 31, 2002, the statements of consolidated earnings for the three-month periods ended December 31, 2002 and 2001, and the statements of consolidated cash flows for the three-month periods ended December 31, 2002 and 2001, were prepared by the company without audit. The September 30, 2002, consolidated balance sheet was derived from audited financial statements, but does not include all disclosures required by generally accepted accounting principles. Information in this 10-Q report is based in part on estimates and is subject to year-end adjustments and audit. In our opinion, the figures reflect all adjustments necessary to present fairly the company's financial position as of December 31, 2002, the results of its operations for the three-month periods ended December 31, 2002 and 2001, and its cash flows for the three-month periods ended December 31, 2002 and 2001. All such adjustments were of a normal and recurring nature. The statements were prepared following the accounting policies described in the company's 2002 annual report on Form 10-K and should be read with the Notes to Consolidated Financial Statements on pages 33-43 of the 2002 annual report to shareholders. The statement of consolidated earnings for the three-month period ended December 31, 2002, is not necessarily indicative of the results to be expected for other interim periods or for the full year.

(2)

Cumulative Effect of Accounting Change:

        We adopted Statement of Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets," and the transition provisions of Statement of Financial Accounting Standards No. 141, "Business Combinations," on October 1, 2001. As a result of adopting these new standards, we completed the transitional goodwill impairment reviews required by the new standards and recognized an aftertax loss of $2,489 as a cumulative effect of an accounting change. In performing our impairment reviews, we estimated the fair values of the various reporting units using a present value method that discounted future cash flows as we expect marketplace participants would, and we further assessed the reasonableness of the estimates by using valuation methods based on market multiples. The resulting loss, which was related to an Industrial Controls' reporting unit, was incurred to reduce goodwill to its implied fair value.

(3)

Earnings per share:

		Three months ended December 31,
(In thousands except per share amounts)		2002		2001
Earnings before cumulative effect of accounting change (A)		$	6,265	$	13,719
Determination of shares:
	Weighted-average shares of common stock outstanding (B)		11,306		11,323
	Assumed exercise of stock options		151		231
	Weighted-average shares of common stock outstanding assuming dilution (C)		11,457		11,554
Earnings before cumulative effect of accounting change:
	Basic per share amount (A/B)	$	0.55	$	1.21
	Diluted per share amount (A/C)	$	0.55	$	1.19

        The following stock options were outstanding during the three months ended December 31, 2002 and 2001, but were not included in the computation of diluted earnings per share because the options'

6

exercise prices were greater than the average market price of the common shares during the respective periods:

	Three months ended December 31,
	2002		2001
Options		292,979		15,099
Weighted-average exercise price	$	49.64	$	68.33

(4)

Inventories:

(In thousands)	At December 31, 2002		At September 30, 2002
Raw materials	$	2,401	$	5,499
Component parts		76,871		77,004
Work in process		26,153		27,095
Finished goods		20,386		17,514
	$	125,811	$	127,112

(5)

Goodwill:

(In thousands)
Industrial Controls:
	Balance at September 30, 2002	$	53,143
	Foreign currency exchange rate changes		454
	Balance at December 31, 2002	$	53,597
Aircraft Engine Systems:
	Balance at September 30, 2002 and December 31, 2002	$	62,122
Consolidated:
	Balance at September 30, 2002	$	115,265
	Foreign currency exchange rate changes		454
	Balance at December 31, 2002	$	115,719

(6)

Other intangibles—net:

In thousands			At December 31, 2002			At September 30, 2002
Industrial Controls:
	Customer relationships:
		Amount acquired	$	16,780		$	16,780
		Accumulated amortization		(2,561	)		(2,379	)
				14,219			14,401
	Other:
		Amount acquired		20,660			20,487
		Accumulated amortization		(2,200	)		(1,749	)
				18,460			18,738
	Total		$	32,679		$	33,139

7

Aircraft Engine Systems:
	Customer relationships:
		Amount acquired	$	28,547		$	28,547
		Accumulated amortization		(4,362	)		(4,124	)
				24,185			24,423
	Other:
		Amount acquired		11,785			11,785
		Accumulated amortization		(2,734	)		(2,585	)
				9,051			9,200
	Total		$	33,236		$	33,623
Consolidated:
	Customer relationships:
		Amount acquired	$	45,327		$	45,327
		Accumulated amortization		(6,923	)		(6,503	)
				38,404			38,824
	Other:
		Amount acquired		32,445			32,272
		Accumulated amortization		(4,934	)		(4,334	)
				27,511			27,938
	Total		$	65,915		$	66,762

        Amortization expense associated with current intangibles is expected to be approximately $4,100,000 for each year 2003-2006 and approximately $3,900,000 in 2007.

(7)

Accounts payable and accrued expenses:

(In thousands)	At December 31, 2002		At September 30, 2002
Accounts payable	$	21,196	$	22,739
Salaries and other member benefits		6,749		19,846
Deferred compensation		7,446		7,701
Product warranties		5,877		6,356
Taxes, other than on income		3,713		4,058
Other items—net		16,134		14,295
	$	61,115	$	74,995

        Included in salaries and other member benefits are accrued termination benefits totaling $2,683,000 for 150 members at December 31, 2002, and $1,389,000 for 36 members at September 30, 2002. During the three months ended December 31, 2002, Industrial Controls accrued termination benefits totaling $554,000 for 13 members and Aircraft Engine Systems accrued termination benefits totaling $2,300,000 for 138 members. Termination benefit payments totaling $1,560,000 were made during the three months ended December 31, 2002. The remaining accrual is expected to be paid over the next three fiscal quarters.

        The termination benefits accrued during the three months ended December 31, 2002, were provided primarily in connection with workforce management programs to better align Industrial Controls' workforce with expected demand and in connection with Aircraft Engine Systems' planned

8

closure and consolidation of a manufacturing facility with another existing facility. The accruals primarily affected cost of goods sold.

        Provisions of our sales agreements include product warranties customary to such agreements. We establish accruals for specifically identified warranty issues that are probable to result in future costs. We also accrue for warranty costs on a non-specific basis whenever past experience indicates a normal and predictable pattern exists. A reconciliation of accrued product warranties from September 30, 2002, to December 31, 2002, follows:

(In thousands)
Balance at September 30, 2002	$	6,356
Accruals related to warranties issued during the period		787
Accruals related to pre-existing warranties		(271	)
Settlements of amounts accrued		(995	)
Balance at December 31, 2002	$	5,877

(8)

Accumulated other comprehensive earnings:

        Accumulated other comprehensive earnings, which totaled $4,208,000 at December 31, 2002, consisted of the following items:

(In thousands)		At or for the three months ended December 31, 2002
Accumulated foreign currency translation adjustments:
	Balance at beginning of year	$	5,243
	Translation adjustments		2,165
	Taxes associated with translation adjustments		(823	)
	Balance at end of period	$	6,585
Accumulated unrealized derivative losses:
	Balance at beginning of year	$	(1,220	)
	Reclassification to interest expense		69
	Taxes associated with interest reclassification		(26	)
	Balance at end of period	$	(1,177	)
Accumulated minimum pension liability adjustments:
	Balance at beginning of year and end of period	$	(1,200	)

9

(9)

Total comprehensive earnings:

		Three months ended December 31,
(In thousands)		2002		2001
Net earnings		$	6,265	$	11,230
Other comprehensive earnings:
	Foreign currency translation adjustments		1,342		(1,582	)
	Reclassification of unrealized losses on derivatives to earnings		43		32
Total comprehensive earnings		$	7,650	$	9,680

(10)

Contingencies:

        We have entered into agreements with certain executive officers under which we would pay termination benefits under certain circumstances in the event of a change in control of the company.

        We are currently involved in matters of litigation arising from the normal course of business, including certain environmental and product liability matters. We have accrued approximately $1,000,000 at December 31, 2002, 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.

(11)

Segment information:

		Three months ended December 31,
(In thousands)		2002		2001
Industrial Controls:
	External net sales	$	78,529	$	105,733
	Intersegment sales		178		158
	Segment earnings		1,670		13,011
Aircraft Engine Systems:
	External net sales	$	66,296	$	74,920
	Intersegment sales		674		646
	Segment earnings		12,831		14,912

10

        The difference between the total of segment earnings and the statements of consolidated earnings follows:

	Three months ended December 31,
(In thousands)	2002			2001
Total segment earnings	$	14,501		$	27,923
Unallocated corporate expenses		(3,312	)		(4,530	)
Interest expense and income		(1,085	)		(1,266	)
Consolidated earnings before income taxes and cumulative effect of accounting change	$	10,104		$	22,127

        Segment assets were as follows:

(In thousands)	At December 31, 2002		At September 30, 2002
Industrial Controls	$	279,926	$	286,302
Aircraft Engine Systems		214,355		219,480

11

Item 2    Management's Discussion and Analysis of Financial Condition and Results of Operations

        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.

        This discussion and analysis should also be read with the cautionary statement of our 2002 annual report to shareholders, which was filed with our Form 10-K for the year ended September 30, 2002. This discussion and analysis contains forward-looking statements, including financial projections, our plans and objectives for the future, expectations for 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 are identified in the cautionary statement of our 2002 annual report to shareholders.

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 of the company and are before the cumulative effect of an accounting change. Nonsegment expenses, including income taxes, and the accounting change are separately discussed and analyzed.

Industrial Controls

	Three months ended December 31,
(In thousands)	2002		2001
External net sales	$	78,529	$	105,733
Segment earnings		1,670		13,011

        External net sales for Industrial Controls decreased in this year's first quarter as compared to the first quarter last year, resulting from a severe decline in domestic capital spending on power generation equipment and a downturn in industrial markets generally.

        Industrial Controls' segment earnings decreased in this year's first quarter as compared to the first quarter last year. Earnings were significantly impacted by the reverse leverage effect of reduced sales volume versus fixed costs and development costs considered necessary to satisfy core customers' current and future requirements.

        We incurred expenses totaling $0.6 million in this year's first quarter for the termination of 13 members involved in manufacturing operations to better align staffing levels with expected demand. In last year's first quarter, we incurred expenses totaling $0.8 million for the termination of 32 members in connection with the consolidation of certain manufacturing activities performed in two locations into a single location.

        Outlook:    Our original outlook for 2003 was based on the view that our industrial markets had begun to level out. Instead, those markets still seem to be adjusting to new industry realities. If current

12

conditions in industrial markets prevail over the next three quarters, we expect Industrial Controls' sales for 2003 will decrease 15% to 20% from 2002, and its segment earnings to decrease 25% to 35%. Earnings are expected to be impacted by the reverse leverage effect referred to above.

Aircraft Engine Systems

	Three months ended December 31,
(In thousands)	2002		2001
External net sales	$	66,296	$	74,920
Segment earnings		12,831		14,912

        External net sales for Aircraft Engine Systems decreased in this year's first quarter as compared to the first quarter last year, reflecting weakness in the commercial aviation industry.

        Aircraft Engine Systems' segment earnings decreased in this year's first quarter as compared to the first quarter last year. Cost management and productivity initiatives taken during 2002 enable margins to remain near last year's levels, despite continuing pricing pressures.

        In January 2003, we announced the consolidation of our servovalve manufacturing operations in Buffalo, New York, into our Rockford manufacturing facilities to achieve additional production cost efficiencies. Annual cost savings of approximately $2.5 million are expected once the consolidation has been completed. The total cost of the consolidation has been estimated at $4.0 million, of which $2.3 million was recognized in this year's first quarter. The remaining expenses are expected to be recognized over the last three quarters of the year.

        The $2.3 million referred to in the previous paragraph is specifically related to the planned termination of 138 members involved predominately in manufacturing operations, and reflects our estimate of certain termination benefits to be paid to these members. In last year's first quarter, we expensed $3.4 million for the planned termination of 141 members, also involved predominately in manufacturing activities. Last year's terminations were made to better align both capacity and cost structure with current business prospects.

        Outlook:    For 2003, we currently expect Aircraft Engine Systems' sales to decrease about 5% from 2002 and segment earnings to decrease about 15% to 20% from 2002. Our segment earnings outlook includes costs associated with the Buffalo consolidation referred to above.

Nonsegment Expenses

	Three months ended December 31,
(In thousands)	2002			2001
Interest expense	$	1,194		$	1,379
Interest income		(109	)		(113	)
Corporate expenses		3,312			4,530

        Corporate expenses decreased in this year's first quarter as compared to the first quarter last year primarily because of changes in deferred compensation expense. 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.

13

Consolidated Earnings

		Three months ended December 31,
(In thousands except per share amounts)		2002		2001
Earnings before income taxes and cumulative effect of accounting change		$	10,104	$	22,127
Income taxes			3,839		8,408
Earnings before cumulative effect of accounting change			6,265		13,719
Cumulative effect of accounting change, net of income taxes			—		(2,489	)
Net earnings		$	6,265	$	11,230
Basic per share amounts:
	Earnings before cumulative effect of accounting change	$	0.55	$	1.21
	Net earnings		0.55		0.99
Diluted per share amounts:
	Earnings before cumulative effect of accounting change	$	0.55	$	1.19
	Net earnings		0.55		0.97

        Earnings before the cumulative effect of accounting change decreased in this year's first quarter as compared to the first quarter last year. Income taxes were provided at an effective tax rate of 38.0% in the first quarter of both years.

        The cumulative effect of accounting change reflected in last year's first quarter is related to our October 1, 2002, adoption of Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets". We completed the transitional goodwill impairment reviews required by the new standards and determined that one of our Industrial Controls' reporting units had a goodwill carrying value that exceeded its estimated implied fair value. The cumulative effect of accounting change reflects the write-down of the goodwill, net of income taxes, to its implied fair value. In performing our impairment reviews, we estimated the fair value of the various reporting units using a present value method that discounted future cash flows as we expect marketplace participants would, and we further assessed the reasonableness of the estimates by using valuation methods based on market multiples.

        Outlook:    Our original outlook for 2003 was based on the view that our industrial markets had begun to level out. Instead, those markets still seem to be adjusting to new industry realities. If current conditions in industrial markets prevail over the next three quarters, we expect consolidated earnings for 2003 will decrease 25% to 35% from 2002 (as measured before the cumulative effect of the accounting change).

14

Financial Condition

        Our discussion and analysis of financial condition is presented 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 December 31, 2002		At September 30, 2002
Segment assets:
	Industrial Controls	$	279,926	$	286,302
	Aircraft Engine Systems		214,355		219,480
Nonsegment assets			72,237		76,613
Total assets		$	566,518	$	582,395

        Industrial Controls' segment assets decreased in the first quarter, primarily as a result of reductions in accounts receivable due to lower sales.

        Aircraft Engine Systems' segment assets decreased in the first quarter, primarily as a result of normal variations in inventories and the excess of first quarter depreciation over capital expenditures.

Other Balance Sheet Measures

(In thousands)	At December 31, 2002		At September 30, 2002
Working capital	$	155,638	$	152,312
Long-term debt, less current portion		78,367		78,192
Other liabilities		53,219		52,928
Commitments and contingencies		—		—
Shareholders' equity		353,434		354,901

        Shareholders' equity decreased slightly in the first quarter this year. On November 19, 2002, our Board of Directors authorized the repurchase of up to $20 million of Woodward common stock from time to time in open market and private transactions over the following two years. In our first quarter, we purchased $6.7 million of Woodward stock. These purchases reduced shareholders' equity and largely offset the other items impacting shareholders' equity, such as net earnings, dividends, and changes in accumulated foreign currency translation adjustments.

        We currently have a revolving line of credit facility with a syndicate of U.S. banks totaling $150 million that expires on June 15, 2003. In addition, we have other lines of credit facilities (which totaled $56.4 million at September 30, 2002) that are generally reviewed annually for renewal.

        Provisions of 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, as defined in the agreements. At September 30, 2002, we had the ability to pay dividends and purchase the company's common stock up to $109.2 million.

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        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 10 in the notes to the consolidated financial statements.

Cash Flows

	Three months ended December 31,
(In thousands)	2002			2001
Net cash provided by operating activities	$	12,005		$	3,997
Net cash used in investing activities		(2,780	)		(5,515	)
Net cash provided by (used in) financing activities		(11,192	)		3,081

        Net cash provided by operations increased in this year's first quarter compared to the first quarter last year. This improvement is predominantly due to relative changes in cash flows associated with income taxes and inventories, which more than offset the decrease in first quarter earnings (as measured before the cumulative effect of last year's accounting change, which was a non-cash item).

        Net cash used in investing activities decreased in this year's first quarter compared to the first quarter last year due to reduced levels of capital expenditures.

        Net cash from financing activities changed in this year's first quarter as compared to last year's first quarter because of two primarily reasons: First, we purchased $6.7 million of Woodward common stock in this year's first quarter. In November 2002, our Board of Directors authorized the repurchase of up to $20 million of Woodward stock from time to time in open market and private transactions over the following two years. Second, we reduced our debt by $2.1 million in the first quarter this year as compared to a net increase of $5.6 million in the first quarter last year. In the first quarter last year, we received proceeds from long-term debt totaling $75.0 million, which we principally used to repay debt that was due in 2002 and 2003. Under the senior notes, the $75 million of debt is payable in seven equal annual installments beginning in 2006.

        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. Our financing activities in 2002 have enhanced our liquidity for several years by delaying principal payment requirements for $60 million of debt from the fiscal 2002-2003 timeframe to the fiscal 2006-2012 timeframe, and by adding an additional $15 million of debt to the extended timeframe. We also expect to replace the current $150 million revolving line of credit facility, none of which was outstanding at December 31, 2002, with a new facility prior to its expiration on June 15, 2003. Despite these factors, it is possible business acquisitions could be made in the future that would require amendments to existing debt agreements and/or additional financing.

Item 3.    Quantitative and Qualitative Disclosures About Market Risk

        Our long-term debt is sensitive to changes in interest rates. Also, assets, liabilities, and commitments that are to be settled in cash and are denominated in foreign currencies are sensitive to changes in currency exchange rates. These market risks are discussed more fully in the Management Discussion and Analysis on pages 26-27 of our 2002 annual report to shareholders, which was filed with our Form 10-K for the year ended September 30, 2002.

Item 4.    Controls and Procedures

        We have established disclosure controls and procedures, which are designed to ensure that information required to be disclosed in reports filed or submitted under the Securities Exchange Act of

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1934 are recorded, processed, summarized, and reported, within the time periods specified in the Securities and Exchange Commission's rules and forms. John A. Halbrook, our chairman of the board and chief executive officer, and Stephen P. Carter, our executive vice president, chief financial officer and treasurer, evaluated the effectiveness of our disclosure controls and procedures as of January 15, 2003. Based on their evaluation, they concluded that our disclosure controls and procedures were effective in achieving the objectives for which they were designed. Since their evaluation, there have been no significant changes in our internal controls or in other factors that could significantly affect these controls.

PART II—OTHER INFORMATION

Item 6    Exhibits and Reports on Form 8-K

(a)

Exhibits Filed as Part of this Report:



(10)

Form of Transitional Compensation Agreement with John A. Halbrook, Thomas A. Gendron, and Stephen P. Carter, effective November 2002



(99)

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




(b)

Reports Filed on Form 8-K During the First Quarter of the Fiscal Year Ended December 31, 2002—None

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SIGNATURES

        Pursuant to the requirements 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
Date:	January 30, 2003	/s/  JOHN A. HALBROOK John A. Halbrook, Chairman and Chief Executive Officer
Date:	January 30, 2003	/s/  STEPHEN P. CARTER Stephen P. Carter, Executive Vice President, Chief Financial Officer and Treasurer

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CERTIFICATIONS

        I, John A. Halbrook, certify that:

        1.    I have reviewed this quarterly report on Form 10-Q of Woodward Governor Company;

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

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

        4.    The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:

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

        b)    evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and

        c)    presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

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

        a)    all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and

        b)    any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and

        6.    The registrant's other certifying officer and I have indicated in this quarterly report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

Date:	January 30, 2003
		/s/  JOHN A. HALBROOK John A. Halbrook Director, Chairman of the Board and Chief Executive Officer

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        I, Stephen P. Carter, certify that:

        1.    I have reviewed this quarterly report on Form 10-Q of Woodward Governor Company;

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

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

        4.    The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:

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

        b)    evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and

        c)    presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

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

        a)    all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and

        b)    any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and

        6.    The registrant's other certifying officer and I have indicated in this quarterly report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

Date:	January 30, 2003
		/s/  STEPHEN P. CARTER Stephen P. Carter Executive Vice President, Chief Financial Officer and Treasurer

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TABLE OF CONTENTS

PART I—FINANCIAL INFORMATION
Item 1. Financial Statements

Item 2 Management's Discussion and Analysis of Financial Condition and Results of Operations

Item 3. Quantitative and Qualitative Disclosures About Market Risk
Item 4. Controls and Procedures
PART II—OTHER INFORMATION
Item 6 Exhibits and Reports on Form 8-K

SIGNATURES
CERTIFICATIONS

EX-10

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Exhibit 10

Woodward Governor Company
Form of Transitional Compensation Agreement

TRANSITIONAL COMPENSATION AGREEMENT

        THIS AGREEMENT made and entered into as of November 20, 2002 by and between Woodward Governor Company, a Delaware corporation, (hereinafter called the "Corporation") and                        (hereinafter called the "Executive").

WITNESSETH THAT:

        WHEREAS, the Board of Directors of the Corporation (the "Board") has determined that it is in the best interests of the Corporation and its shareholders to assure that the Corporation will have the continued dedication of the Executive, despite the possibility, threat or occurrence of a Change in Control (as defined below) of the Corporation; and

        WHEREAS, the Board believes that it is imperative to diminish the inevitable distraction of the Executive which would result from the personal uncertainties and risks created by a threatened or pending Change in Control and to encourage the Executive's full attention and dedication to the business of the Corporation currently and in the event of any threatened or pending Change in Control and to provide the Executive with appropriate compensation and benefit protection upon a Change in Control;

        NOW, THEREFORE, the Corporation and the Executive, each intending to be legally bound, hereby mutually covenant and agree as follows:

        1.    Term.    This Agreement shall become effective upon the occurrence of a Change in Control (as defined in Paragraph 4(d), below) (hereinafter called the "Effective Date") and shall remain in effect for a term continuing until the end of the twenty-fourth (24th) calendar month following the month in which the Effective Date occurs; provided, however, that, anything in this Agreement to the contrary notwithstanding, if a Change in Control occurs and if the Executive's employment with the Corporation was terminated prior to the date on which the Change in Control occurs, and if it is reasonably demonstrated by the Executive that such termination of employment (a) was at the request of a third party who was taking steps reasonably calculated to effect a Change in Control or (b) otherwise arose in connection with or anticipation of a Change in Control, then for all purposes of this Agreement the "Effective Date" shall mean the date immediately prior to the date of such termination of employment.

        2.    Employment.    After the Effective Date, the Corporation shall employ the Executive to, and the Executive shall, exercise such authority and perform such executive duties as are commensurate with the authority being exercised and performed by the Executive during the ninety-day period immediately prior to the Effective Date, which services shall be performed at the location where the Executive was employed immediately prior to the Effective Date. The Executive shall also continue to serve as a member of the Board of Directors of the Corporation, if serving as such as of the Effective Date. The Executive shall devote substantially his entire time during reasonable business hours (reasonable sick leave and vacations excepted) and reasonable best efforts to fulfill faithfully and responsibly his duties hereunder. During the period of employment after the Effective Date, it shall not be a violation of this Agreement for the Executive to serve on corporate, civic or charitable boards or committees, or be involved in civic, charitable or educational endeavors, or manage personal investments, so long as such activities do not significantly interfere with the performance of Executive's responsibilities as an employee of the Corporation hereunder. It is expressly agreed and understood that to the extent any such activities were conducted by the Executive prior to the Effective Date, the continued conduct of such or similar activities subsequent to the Effective Date shall not thereafter be deemed to interfere with the performance of the Executive's responsibilities to the Corporation.

        3.    Compensation and Benefits.    For the Executive's employment with the Corporation after the Effective Date, the Executive shall be compensated as follows:

        (a)  The Executive shall receive an annual base salary at a rate not less than the highest aggregate annual base salary and seniority-based vacation plan amount paid or payable to the Executive by the Corporation during the 24 month period immediately prior to the Effective Date, to be paid in accordance the Corporation's regular payroll practices. Such amount, or such greater annual base salary rate which may be paid or payable to the Executive after the Effective Date, is hereinafter referred to as the "Annual Base Salary."

        (b)  The Executive shall be eligible to participate on a reasonable basis in the Corporation's bonus and incentive compensation plans and programs which provide opportunities to receive compensation which are not less than opportunities provided by the Corporation for executives with comparable annual base salary.

        (c)  The Executive shall be entitled to receive executive and employee benefits and perquisites which are not less than the executive and employee benefits and perquisites provided by the Corporation to executives with comparable annual base salary.

        For purposes of this Paragraph 3, "executives with comparable annual base salary" shall mean those executives of the Corporation whose annual base salary falls within a range the low end of which is 90% of the Executive's Annual Base Salary and the high end of which is 110% of the Executive's Annual Base Salary.

        4.    Termination.    Unless earlier terminated in accordance with the following provisions of this Paragraph 4, the Corporation shall continue to employ the Executive and the Executive shall remain employed by the Corporation from the Effective Date through the end of the term of this Agreement as set forth in Paragraph 1, above. Paragraph 6 hereof sets forth certain obligations of the Corporation in the event that the Executive's employment hereunder is terminated prior to the expiration of such term. Certain capitalized terms used in this Paragraph 4 and in Paragraphs 5 and 6 hereof are defined in Paragraph 4(d), below.

        (a)    Death or Disability.    The Executive's employment shall terminate immediately as of the Date of Termination in the event of the Executive's death or in the event that the Executive becomes disabled. The Executive will be deemed to be disabled upon the earlier of (i) the end of a six (6)-consecutive month period during which, by reason of physical or mental injury or disease, the Executive has been unable to perform substantially all of his usual and customary duties under this Agreement or (ii) the date that a reputable physician selected by the Board, and as to whom the Executive has no reasonable objection, determines in writing that the Executive will, by reason of physical or mental injury or disease, be unable to perform substantially all of the Executive's usual and customary duties under this Agreement for a period of at least six (6) consecutive months. If any question arises as to whether the Executive is disabled, upon reasonable request therefor by the Board, the Executive shall submit to reasonable medical examination for the purpose of determining the existence, nature and extent of any such disability. The Board shall promptly give the Executive written notice of any such determination of the Executive's disability and of any decision of the Board to terminate the Executive's employment by reason thereof. Until the Date of Termination for disability, the base salary payable to the Executive shall be reduced dollar-for-dollar by the amount of any disability benefits paid to the Executive in accordance with any disability policy or program of the Corporation.

        (b)    Discharge for Cause.    In accordance with the procedures hereinafter set forth, the Board may discharge the Executive from his employment hereunder for Cause. Any discharge of the Executive for Cause shall be communicated by a Notice of Termination to the Executive given in accordance with Paragraph 14 of this Agreement. For purposes of this Agreement, a "Notice of

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Termination" means a written notice which (i) indicates the specific termination provision in this Agreement relied upon, (ii) sets forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of the Executive's employment under the provision so indicated and (iii) specifies the termination date, which may be as early as the date of the giving of such notice. No purported termination of the Executive's employment for Cause shall be effective without a Notice of Termination.

        (c)    Termination for Other Reasons.    The Corporation may discharge the Executive without Cause by giving written notice to the Executive in accordance with Paragraph 14 at least fifteen (15) days prior to the Date of Termination. The Executive may resign from his employment, without liability to the Corporation, by giving written notice to the Corporation in accordance with Paragraph 14 at least fifteen (15) days prior to the Date of Termination.

        (d)    Definitions.    For purposes of this Agreement, the following capitalized terms shall have the meanings set forth below:

          (i)  "Accrued Obligations" shall mean, as of the Date of Termination, the sum of (A) the Executive's Annual Base Salary through the Date of Termination to the extent not theretofore paid, (B) the amount of any bonus, incentive compensation, deferred compensation and other cash compensation accrued by the Executive as of the Date of Termination to the extent not theretofore paid and (C) any vacation pay, expense reimbursements and other cash entitlements accrued by the Executive as of the Date of Termination to the extent not theretofore paid. For the purpose of this Paragraph 4(d)(i), amounts shall be deemed to accrue ratably over the period during which they are earned, but no discretionary compensation shall be deemed earned or accrued until it is specifically approved by the Board or the Compensation Committee in accordance with the applicable plan, program or policy.

        (ii)  "Cause" shall mean: (A) the Executive's commission of an act materially and demonstrably detrimental to the financial condition and/or goodwill of the Corporation or any of its subsidiaries, which act constitutes gross negligence or willful misconduct by the Executive in the performance of his material duties to the Corporation or any of its subsidiaries, or (B) the Executive's commission of any material act of dishonesty or breach of trust resulting or intended to result in material personal gain or enrichment of the Executive at the expense of the Corporation or any of its subsidiaries, or (C) the Executive's conviction of a felony involving moral turpitude, but specifically excluding any conviction based entirely on vicarious liability. No act or failure to act will be considered "willful" unless it is done, or omitted to be done, by the Executive in bad faith or without reasonable belief that his action or omission was in the best interests of the Corporation. In addition, no act or omission will constitute Cause unless (A) a resolution finding that Cause exists has been approved by a majority of all of the members of the Board at a meeting at which the Executive is allowed to appear with his legal counsel and (B) the Corporation has given detailed written notice thereof to the Executive and, where remedial action is feasible, he then fails to remedy the act or omission within a reasonable time after receiving such notice.

        (iii)  A "Change in Control" shall be deemed to have occurred if:

        (A)  Any "person" (as defined in Section 13(d) and 14(d) of the Securities Exchange Act of 1934, as amended (the "Exchange Act")), excluding for this purpose the Corporation or any subsidiary of the Corporation, or any employee benefit plan of the Corporation or any subsidiary of the Corporation, or any person or entity organized, appointed or established by the Corporation for or pursuant to the terms of such plan which acquires beneficial ownership of voting securities of the

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Corporation, is or becomes the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act) directly or indirectly of securities of the Corporation representing fifteen percent (15%) or more of the combined voting power of the Corporation's then outstanding securities; provided, however, that no Change in Control shall be deemed to have occurred (1) as the result of an acquisition of securities of the Corporation by the Corporation which, by reducing the number of voting securities outstanding, increases the direct or indirect beneficial ownership interest of any person to fifteen percent (15%) or more of the combined voting power of the Corporation's then outstanding securities, but any subsequent increase in the direct or indirect beneficial ownership interest of such a person in the Corporation shall be deemed a Change in Control, or (2) as a result of the acquisition directly from the Corporation of securities of the Corporation representing less than 50% of the voting power of the Corporation, or (3) if the Board of Directors of the Corporation determines in good faith that a person who has become the beneficial owner directly or indirectly of securities of the Corporation representing fifteen percent (15%) or more of the combined voting power of the Corporation's then outstanding securities has inadvertently reached that level of ownership interest, and if such person divests as promptly as practicable a sufficient amount of securities of the Corporation so that the person no longer has a direct or indirect beneficial ownership interest in fifteen percent (15%) or more of the combined voting power of the Corporation's then outstanding securities; or

        (B)  During any period of two (2) consecutive years (not including any period prior to the Effective Date of this Agreement), individuals who at the beginning of such two-year period constitute the Board of Directors of the Corporation and any new director or directors (except for any director designated by a person who has entered into an agreement with the Corporation to effect a transaction described in subparagraph (A), above, or subparagraph (C), below) whose election by the Board or nomination for election by the Corporation's shareholders was approved by a vote of at least two-thirds of the directors then still in office who either were directors at the beginning of the period or whose election or nomination for election was previously so approved, cease for any reason to constitute at least a majority of the Board (such individuals and any such new directors being referred to as the "Incumbent Board"); or

        (C)  Consummation of (1) an agreement for the sale or disposition of the Corporation or all or substantially all of the Corporation's assets, (2) a plan of merger or consolidation of the Corporation with any other corporation, or (3) a similar transaction or series of transactions involving the Corporation (any transaction described in parts (1) through (3) of this subparagraph (C) being referred to as a "Business Combination"), in each case unless after such a Business Combination (x) the shareholders of the Corporation immediately prior to the Business Combination continue to own, directly or indirectly, more than fifty-one percent (51%) of the combined voting power of the then outstanding voting securities entitled to vote generally in the election of directors of the new (or continued) entity (including, but not by way of limitation, an entity which as a result of such transaction owns the Corporation or all or substantially all of the Corporation's former assets either directly or through one or more subsidiaries) immediately after such Business Combination, in substantially the same proportion as their ownership of the Corporation immediately prior to such Business Combination, and (y) at least a majority of the members of the board of directors of the entity resulting from such Business Combination were members of the Incumbent Board at

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the time of the execution of the initial agreement, or of the action of the Board, providing for such Business Combination; or

        (D)  Approval by the shareholders of the Corporation of a complete liquidation or dissolution of the Corporation.

        (iv)  "Date of Termination" shall mean (A) in the event of a discharge of the Executive by the Board for Cause, the date specified in such Notice of Termination, (B) in the event of a discharge of the Executive without Cause or a resignation by the Executive, the date specified in the written notice to the Executive (in the case of discharge) or the Corporation (in the case of resignation), which date shall be no less than fifteen (15) days from the date of such written notice, (C) in the event of the Executive's death, the date of the Executive's death, and (D) in the event of termination of the Executive's employment by reason of disability pursuant to Paragraph 4(a), the date the Executive receives written notice of such termination.

        (v)  "Good Reason" shall mean any of the following without the written consent of the Executive: (A) (1) assignment of duties inconsistent with the Executive's position, authority, duties or responsibilities referred to in Paragraph 2, or any action by the Corporation which results in a substantial diminution of such position, authority, duties or responsibilities, other than an isolated, insubstantial and inadvertent action not taken in bad faith and which is remedied by the Corporation promptly after receipt of notice thereof given by the Executive, or (2) if applicable, removal or other failure to continue Executive as a member of the Board as required by Paragraph 2, (B) any reduction in Executive's Annual Base Salary, or bonus or incentive opportunities from those referred to in Paragraph 3(a) or 3(b), other than an isolated, insubstantial and inadvertent reduction not made in bad faith and which is remedied by the Corporation promptly after receipt of notice thereof given by the Executive, or (c) a relocation of Executive to an office location more than 30 miles from the location referred to in Paragraph 2, or (D) failure by the Corporation to provide Executive with the executive or employee benefits and perquisites referred to in Paragraph 3(c), other than an isolated, insubstantial and inadvertent reduction not made in bad faith and which is remedied by the Corporation promptly after receipt of notice thereof given by the Executive, or (E) failure by any successor to enter into the assumption of and agreement to perform this Agreement referred to in Paragraph 13. For purposes of this Paragraph 4(d)(v), any good faith determination by the Executive that one of the foregoing events has occurred shall be conclusive. In addition, resignation for any reason by the Executive, which resignation is to be effective at any time during the 30 day period beginning twelve (12) months after the Effective Date shall constitute a resignation for Good Reason; provided, further, that if the Executive dies or becomes disabled after the execution of a definitive agreement for a transaction which will constitute a Change in Control but before the expiration of such 30-day period, then the Executive shall be deemed to have terminated employment for Good Reason on the later of (1) the effective date of the Change in Control or (2) the date of the Executive's death or termination of employment due to disability.

        (vi)  "Qualifying Termination" shall mean termination of the Executive's employment after the Effective Date and during the term of this Agreement as described in Paragraph 1, above, (A) by reason of the discharge of the Executive by the Corporation other than for Cause or disability or (B) by reason of the resignation of the Executive for Good Reason within six (6) months after an event constituting Good Reason or (C) in accordance with the last sentence of the definition of Good Reason in subparagraph (v), above.

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        5.    Vesting of Equity Awards Upon a Change in Control.    Immediately upon a Change in Control, all stock options, restricted stock and other equity awards to the Executive which are not otherwise vested shall vest in full, and all options shall remain exercisable for the period provided for in the applicable plan or award agreement.

        6.    Obligations of the Corporation Upon Termination.    The following provisions describe certain obligations of the Corporation to the Executive under this Agreement upon termination of his employment. However, except as explicitly provided in this Agreement, nothing in this Agreement shall limit or otherwise adversely affect any rights which the Executive may have under applicable law, under any other agreement with the Corporation or any of its subsidiaries, or under any compensation or benefit plan, program, policy or practice of the Corporation or any of its subsidiaries.

        (a)    Death, Disability, Discharge for Cause, or Resignation Without Good Reason.    In the event the Executive's employment terminates by reason of the death or disability of the Executive (other than in circumstances which constitute a Qualifying Termination under Paragraph 4(d)(vi)(C)), or by reason of the discharge of the Executive by the Corporation for Cause, or by reason of the resignation of the Executive other than for Good Reason, the Corporation shall pay to the Executive, or his designated beneficiaries, heirs or estate, in the event of the Executive's death, all Accrued Obligations in a lump sum within thirty (30) days after the Date of Termination; provided, however, that any portion of the Accrued Obligations which consists of bonus, deferred compensation, or incentive compensation shall be determined and paid in accordance with the terms of the relevant plan as applicable to the Executive. In addition, if the Executive's employment is terminated by death, disability or retirement under a retirement plan of the Corporation or by resignation of the Executive other than for Good Reason, the Executive may, in the discretion of the Compensation Committee, be awarded a pro rata cash bonus for the year in which the Date of Termination occurs.

        (b)    Qualifying Termination.    In the event of a Qualifying Termination, the Executive shall receive the following benefits:

          (i)  Payment of all Accrued Obligations in a lump sum on the Date of Termination; provided, however, that any portion of the Accrued Obligations which consists of bonus, deferred compensation or incentive compensation shall be determined and paid in accordance with the terms of the relevant plan as applicable to the Executive.

        (ii)  A pro rata cash bonus for the year in which the Date of Termination occurs, determined and paid in accordance with the terms of the then current annual bonus plan applicable to the Executive; provided, however, that such pro rata amount shall not be less than the pro rata amount determined using the greater of (A) the full year's bonus to which Executive would have been entitled based on the Company's performance for the year, or (B) the greater of the Executive's target bonus (x) for such year under such plan or (y) for the year in which the Effective Date of this Agreement occurs based on the annual bonus plan as in effect and applicable to Executive immediately prior to the Effective Date.

        (iii)  Payment in a lump sum on the Date of Termination of a salary replacement amount equal to three hundred percent (300%) of the Annual Base Salary required to be paid to Executive pursuant to Paragraph 3(a) above, or if greater, the rate of Annual Base Salary as in effect immediately prior to the Date of Termination.

        (iv)  Payment in a lump sum on the Date of Termination of a bonus replacement amount equal to three hundred percent (300%) of the highest of the annual bonus paid or payable to the Executive for the three (3) years preceding the year in which the Date of Termination occurs or, if greater, the greater of (A) Executive's target bonus for year

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in which the Date of Termination occurs or (B) Executive's target bonus for the year in which the Effective Date occurs under the terms of the annual bonus plan in effect immediately prior to the Effective Date.

        (v)  Payment in a lump sum on the Date of Termination of a long-term incentive compensation bonus replacement amount equal to three hundred percent (300%) of the highest of the long-term incentive compensation bonus paid or payable to the Executive during the three (3) years preceding the year in which the Date of Termination occurs or, if greater, the highest of the Executive's target long-term incentive compensation award opportunity for any award cycle ending during or after the year in which the Effective Date occurs.

        (vi)  Payment in a lump sum on the Date of Termination of a retirement replacement amount equal to 300% of the sum of the Retirement Savings Plan and Executive Benefit Plan contributions made or credited by the Corporation for the benefit of the Executive for the plan year of each such plan during which the Date of Termination occurs or, if greater, for the plan year of each such plan (or any successor or replacement plan) immediately preceding the plan year in which the Effective Date occurs.

      (vii)  Continuation, for a period of three (3) years after the Date of Termination, of the following employee benefits on terms at least as favorable to the Executive as those which would have been provided if the Executive's employment had continued for that time pursuant to this Agreement, with the cost of such benefits to be paid by the Corporation: medical and dental benefits, life and disability insurance, and executive physical examinations. To the extent the Corporation is unable to provide comparable insurance for reasons other than cost; the Corporation may provide a lesser level or no coverage and compensate the Executive for the difference in coverage through a cash lump sum payment grossed up for taxes. This payment will be tied to the cost of an individual insurance policy if it were assumed to be available. Upon the expiration of the coverage provided under this paragraph (vi), the Executive and Executive's dependents will be entitled to elect COBRA continuation coverage on the same basis as would be extended with respect to an employee whose employment terminated at the time of such expiration.

      (viii)  Outplacement services, at the expense of the Corporation, from a provider reasonably selected by the Executive.

        (ix)  Tax preparation services for the Executive's taxable year in which the Date of Termination occurs, provided at the expense of the Corporation, on the same basis as provided to Executive immediately prior to the Effective Date.

        7.    Certain Additional Payments by the Corporation.    The Corporation agrees that:

        (a)  Anything in this Agreement to the contrary notwithstanding, in the event it shall be determined that any payment or distribution by the Corporation to or for the benefit of the Executive (whether paid or payable or distributed or distributable pursuant to the terms of this Agreement or otherwise, but determined without regard to any additional payments required under this Paragraph 7) (a "Payment") would be subject to the excise tax imposed by Section 4999 of the Internal Revenue Code of 1986, as amended, (the "Code") or if any interest or penalties are incurred by the Executive with respect to such excise tax (such excise tax, together with any such interest and penalties, being hereinafter collectively referred to as the "Excise Tax"), then the Executive shall be entitled to receive an additional payment (a "Gross-Up Payment") in an amount such that, after payment by the Executive of all taxes (including any interest or penalties imposed with respect to such taxes), including, without limitation, any income taxes (and any interest and

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penalties imposed with respect thereto) and Excise Tax imposed upon the Gross-Up Payment, the Executive retains an amount of the Gross-Up Payment equal to the Excise Tax imposed upon the Payment.

        (b)  Subject to the provisions of paragraph (c), below, all determinations required to be made under this Paragraph 7, including whether and when a Gross-Up Payment is required and the amount of such Gross-Up Payment and the assumptions to be utilized in arriving at such determination, shall be made by the accounting firm which is then serving as the auditors for the Corporation (the "Accounting Firm"), which shall provide detailed supporting calculations both to the Corporation and the Executive within fifteen (15) business days of the receipt of notice from the Executive that there has been a Payment, or such earlier time as is requested by the Corporation. In the event that the Accounting Firm is serving as accountant or auditor for the individual, entity or group effecting the Change in Control, the Executive may appoint another nationally recognized accounting firm to make the determinations required hereunder (which accounting firm shall then be referred to as the Accounting Firm hereunder). All fees and expenses of the Accounting Firm shall be borne solely by the Corporation. Any Gross-Up Payment, as determined pursuant to this Paragraph 7, shall be paid by the Corporation to the Executive within five (5) days of the receipt of the Accounting Firm's determination. If the Accounting Firm determines that no Excise Tax is payable by the Executive, it shall furnish the Executive with a written opinion that failure to report the Excise Tax on the Executive's applicable federal income tax return would not result in the imposition of a negligence or similar penalty. Any good faith determination by the Accounting Firm shall be binding upon the Corporation and the Executive. As a result of the uncertainty in the application of Section 4999 of the Code at the time of the initial determination by the Accounting Firm hereunder, it is possible that Gross-Up Payments which will not have been made by the Corporation should have been made ("Underpayment"), consistent with the calculations required to be made hereunder. In the event that the Corporation exhausts its remedies pursuant to paragraph (c), below, and the Executive thereafter is required to make a payment of any Excise Tax, the Accounting Firm shall determine the amount of the Underpayment that has occurred and any such Underpayment shall be promptly paid by the Corporation to or for the benefit of the Executive.

        (c)  The Executive shall notify the Corporation in writing of any claim by the Internal Revenue Service that, if successful, would require the payment by the Corporation of a Gross-Up Payment. Such notification shall be given as soon as practicable but no later than fifteen (15) business days after the Executive is informed in writing of such claim and shall apprise the Corporation of the nature of such claim and the date on which such claim is requested to be paid. The Executive shall not pay such claim prior to the expiration of the thirty (30)-day period following the date on which Executive gives such notice to the Corporation (or such shorter period ending on the date that any payment of taxes with respect to such claim is due). If the Corporation notifies the Executive in writing prior to the expiration of such period that it desires to contest such claim, the Executive shall:

          (i)  Give the Corporation any information reasonably requested by the Corporation relating to such claim,

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

        (iv)  Cooperate with the Corporation in good faith in order effectively to contest such claim, and

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        (v)  Permit the Corporation to participate in any proceedings relating to such claim; provided, however, that the Corporation shall bear and pay directly all costs and expenses (including additional interest and penalties) incurred in connection with such contest and shall indemnify and hold the Executive harmless, on an after-tax basis, for all taxes (including interest and penalties with respect thereto), including without limitation any Excise Tax and income tax (including interest and penalties with respect thereto), imposed as a result of such representation and payment of costs and expenses. Without limiting the foregoing provisions of this paragraph (c), the Corporation shall control all proceedings taken in connection with such contest and, at its sole option, may pursue or forego any and all administrative appeals, proceedings, hearings and conferences with the taxing authority in respect of such claim and may, at its sole option, either direct the Executive to pay the tax claimed and sue for a refund or contest the claim in any permissible manner; and the Executive agrees to prosecute such contest to a determination before any administrative tribunal, in a court of initial jurisdiction and in one or more appellate courts, as the Corporation shall determine; provided, however, that if the Corporation directs the Executive to pay such claim and sue for a refund, the Corporation shall advance the amount of such payment to the Executive on an interest-free basis and shall indemnify and hold the Executive harmless, on an after-tax basis, for all taxes (including interest and penalties with respect thereto), including without limitation any Excise Tax and income tax (including interest or penalties with respect thereto), imposed with respect to such advance or with respect to any imputed income with respect to such advance; and further provided that any extension of the statute of limitations relating to payment of taxes for the taxable year of the Executive with respect to which such contested amount is claimed to be due is limited solely to such contested amount. Furthermore, the Corporation's control of the contest shall be limited to issues with respect to which a Gross-Up Payment would be payable hereunder and the Executive shall be entitled to settle or contest, as the case may be, any other issue raised by the Internal Revenue Service or any other taxing authority.

        (d)  If, after the receipt by the Executive of an amount advanced by the Corporation pursuant to paragraph (c), above, the Executive becomes entitled to receive any refund with respect to such claim, the Executive shall (subject to the Corporation's complying with the requirements of said paragraph (c)) promptly pay to the Corporation the amount of such refund (together with any interest paid or credited thereon, after taxes applicable thereto). If, after the receipt by the Executive of an amount advanced by the Corporation pursuant to said paragraph (c), a determination is made that the Executive shall not be entitled to any refund with respect to such claim and the Corporation does not notify the Executive in writing of its intent to contest such denial of refund prior to the expiration of thirty (30) days after such determination, then such advance shall be forgiven and shall not be required to be repaid; and the amount of such advance shall offset, to the extent thereof, the amount of the Gross-Up Payment required to be paid.

        8.    Deferral; Grantor Trust.    The Corporation shall provide Executive the opportunity to defer the receipt of any amounts payable under Paragraph 6(b)(i), (ii), (iii), (iv) and (v) hereunder and under the Executive Benefit Plan to such dates or dates as are reasonably chosen by the Executive, such deferred amounts to appreciate at an annual rate equivalent to 120% of the Moody's Long Term Corporate Bond Yield Average for the twelve month period ending on September 30 of the calendar year preceding the calendar year in which such rate shall be used. The election to so defer shall be made by Executive no later than one year prior to the date such payments would otherwise due or such shorter period as the Corporation and the Executive shall reasonably agree upon. The amounts deferred shall be distributed as elected by the Executive from distribution options similar to those available under the Executive Benefit Plan as in effect immediately prior to the Effective Date of this Agreement. In the event the Executive shall make an election to defer receipt of amounts described in this Paragraph 8,

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the Corporation shall deposit into a grantor trust that meets the requirements of Rev. Proc. 92-64, 1992-2 C.B. 422, solely for the benefit of Executive, on terms reasonably acceptable to the Executive, an amount equal to 110% of the amount so deferred. Such deposit shall be made on the date such deferred amount would otherwise have been paid to Executive. On each anniversary of the Date of Termination, the Corporation shall deposit into the trust an amount sufficient so that, as of such anniversary, the value of the assets of the trust are not less than the 110% of the amount of the remaining obligations of the Corporation to the Executive under this Agreement (including the Executive Benefit Plan). The trustee of the grantor trust shall provide the Executive with statements on a not less frequently than quarterly basis showing the assets of the trust and the earnings, distributions and contributions made to the trust since the immediately preceding statement.

        9.    No Set-Off or Mitigation.    The Corporation's obligation to make the payments provided for in this Agreement and otherwise to perform its obligations hereunder shall not be affected by any set-off, counterclaim, recoupment, defense or other claim, right or action which the Corporation may have against the Executive or others. In no event shall the Executive be obligated to seek other employment or take any other action by way of mitigation of the amounts payable to the Executive under any of the provisions of this Agreement, and such amounts shall not be reduced whether or not the Executive obtains other employment.

        10.    Payment of Certain Expenses.    The Corporation shall pay the reasonable legal fees and expenses incurred by the Executive in connection with the negotiation and preparation of this Agreement. In addition, the Corporation shall pay promptly as incurred, to the fullest extent permitted by law, all legal fees and expenses which the Executive may reasonably incur as a result of any contest by the Corporation, the Executive or others of the validity or enforceability of, or liability under, any provision of this Agreement (including as a result of any contest initiated by the Executive about the amount of any payment due pursuant to this Agreement), plus in each case interest on any delayed payment at the applicable federal rate provided for in Section 7872(f)(2)(A) of the Code, plus an additional amount such that after payment by the Executive of all taxes imposed on such additional amount, the Executive shall retain an amount equal to the total taxes imposed on the Executive due to the payment by the Corporation, to or for the Executive, of legal fees and expenses with respect to any such contest; provided, however, that the Corporation shall not be obligated to make such payment with respect to any contest in which the Corporation prevails over the Executive.

        11.    Indemnification.    To the full extent permitted by law, the Corporation shall, both during and after the term of the Executive's employment, indemnify the Executive (including the advancement of expenses) for any judgments, fines, amounts paid in settlement and reasonable expenses, including attorneys' fees, incurred by the Executive in connection with the defense of any lawsuit or other claim to which he is made a party by reason of being (or having been) an officer, director or employee of the Corporation or any of its subsidiaries. In addition, the Executive shall be covered, both during and after the term of the Executive's employment, by director and officer liability insurance to the maximum extent that such insurance covers any officer or director (or former officer or director) of the Corporation.

        12.    Confidentiality.    During and after the period of employment with the Corporation, the Executive shall not, without prior written consent from the Chief Executive Officer or the General Counsel of the Corporation, directly or indirectly disclose to any individual, corporation or other entity, other than to the Corporation or any subsidiary or affiliate thereof or their officers, directors or employees entitled to such information or any other person or entity to whom such information is disclosed in the normal course of the business of the Corporation) or use for the Executive's own benefit or for the benefit of any such individual, corporation or other entity, any Confidential Information of the Corporation. For purposes of this Agreement, "Confidential Information" is information relating to the business of the Corporation or its subsidiaries or affiliates (a) which is not generally known to the public or in the industry, (b) which has been treated by the Corporation and its

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subsidiaries and affiliates as confidential or proprietary, (c) which provides the Corporation or its subsidiaries or affiliates with a competitive advantage, and (d) in the confidentiality of which the Corporation has a legally protectable interest. Confidential Information which becomes generally known to the public or in the industry, or in the confidentiality of which the Corporation and its subsidiaries and affiliates cease to have a legally protectable interest, shall cease to be subject to the restrictions of this Paragraph 12.

        13.    Binding Effect.    This Agreement shall be binding upon and inure to the benefit of the heirs and representatives of the Executive and the successors and assigns of the Corporation. Amounts payable under this Agreement upon the Executive's death shall be paid to his beneficiaries, if any, designated in writing and filed with the Corporate Secretary, and in the absence of such designation, shall be paid to his heirs by will or laws of descent and distribution. The Corporation shall require any successor (whether direct or indirect, by purchase, merger, reorganization, consolidation, acquisition of property or stock, liquidation, or otherwise) to all or a substantial portion of its assets, by agreement in form and substance reasonably satisfactory to the Executive, expressly to assume and agree to perform this Agreement in the same manner and to the same extent that the Corporation would be required to perform this Agreement if no such succession had taken place. Regardless of whether such an agreement is executed, this Agreement shall be binding upon any successor of the Corporation in accordance with the operation of law, and such successor shall be deemed the "Corporation" for purposes of this Agreement.

        14.    Notices.    All notices, requests, demands and other communications hereunder shall be in writing and shall be deemed to have been duly given when delivered by hand or by recognized commercial delivery service or on the third business day after being mailed within the continental United States by first class certified mail, return receipt requested, postage prepaid, addressed as follows:

(a)	If to the Board or the Corporation, to:
	Woodward Governor Company 5001 North Second Street P.O. Box 7001 Rockford, Illinois 61125 Attn: Corporate Secretary
(b)	If to the Executive, to:

        Such addresses may be changed by written notice sent to the other party at the last recorded address of that party.

        15.    Tax Withholding.    The Corporation shall provide for the withholding of any taxes required to be withheld by federal, state, or local law with respect to any payment in cash, shares of stock and/or other property made by or on behalf of the Corporation to or for the benefit of the Executive under this Agreement or otherwise. The Corporation may, at its option: (a) withhold such taxes from any cash payments owing from the Corporation to the Executive, (b) require the Executive to pay to the Corporation in cash such amount as may be required to satisfy such withholding obligations and/or (c) make other satisfactory arrangements with the Executive to satisfy such withholding obligations.

        16.    Arbitration.    Any dispute or controversy between the Corporation and the Executive arising out of or relating to this Agreement or the breach of this Agreement shall be settled by arbitration administered by the American Arbitration Association ("AAA") in accordance with its Commercial

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Arbitration Rules then in effect, and judgment on the award rendered by the arbitrator may be entered in any court having jurisdiction thereof. Any arbitration shall be held before a single arbitrator who shall be selected by the mutual agreement of the Corporation and the Executive, unless the parties are unable to agree to an arbitrator, in which case the arbitrator will be selected under the procedures of the AAA. The arbitrator shall have the authority to award any remedy or relief that a court of competent jurisdiction could order or grant, including, without limitation, the issuance of an injunction. However, either party may, without inconsistency with this arbitration provision, apply to any court otherwise having jurisdiction over such dispute or controversy and seek interim provisional, injunctive or other equitable relief until the arbitration award is rendered or the controversy is otherwise resolved. Except as necessary in court proceedings to enforce this arbitration provision or an award rendered hereunder, or to obtain interim relief, neither a party nor an arbitrator may disclose the existence, content or results of any arbitration hereunder without the prior written consent of the Corporation and the Executive. The Corporation and the Executive acknowledge that this Agreement evidences a transaction involving interstate commerce. Notwithstanding any choice of law provision included in this Agreement, the United States Federal Arbitration Act shall govern the interpretation and enforcement of this arbitration provision. The arbitration proceeding shall be conducted in Rockford, Illinois or such other location to which the parties may agree. The Corporation shall pay the costs of any arbitrator appointed hereunder.

        17.    No Assignment.    Except as otherwise expressly provided herein, this Agreement is not assignable by any party and no payment to be made hereunder shall be subject to anticipation, alienation, sale, transfer, assignment, pledge, encumbrance or other charge.

        18.    Execution in Counterparts.    This Agreement may be executed by the parties hereto in two (2) or more counterparts, each of which shall be deemed to be an original, but all such counterparts shall constitute one and the same instrument, and all signatures need not appear on any one counterpart.

        19.    Jurisdiction and Governing Law.    This Agreement shall be construed and interpreted in accordance with and governed by the laws of the State of Illinois, other than the conflict of laws provisions of such laws.

        20.    Severability.    If any provision of this Agreement shall be adjudged by any court of competent jurisdiction to be invalid or unenforceable for any reason, such judgment shall not affect, impair or invalidate the remainder of this Agreement. Furthermore, if the scope of any restriction or requirement contained in this Agreement is too broad to permit enforcement of such restriction or requirement to its full extent, then such restriction or requirement shall be enforced to the maximum extent permitted by law, and the Executive consents and agrees that any court of competent jurisdiction may so modify such scope in any proceeding brought to enforce such restriction or requirement.

        21.    Prior Understandings.    This Agreement embodies the entire understanding of the parties hereto and supersedes all other oral or written agreements or understandings between them regarding the subject matter hereof. No change, alteration or modification hereof may be made except in a writing, signed by each of the parties hereto. The headings in this Agreement are for convenience of reference only and shall not be construed as part of this Agreement or to limit or otherwise affect the meaning hereof.

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        IN WITNESS WHEREOF, the parties hereto have executed and delivered this Agreement as of the day and year first above written.

Attest:	WOODWARD GOVERNOR COMPANY
	By:
		Title:
		[EXECUTIVE]

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Exhibit 10

EX-99

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Exhibit 99

Woodward Governor Company
Certification pursuant to Section 906
of the Sarbanes-Oxley Act of 2002

        We hereby certify that the accompanying Report of Woodward Governor Company on Form 10-Q for the three months ended December 31, 2002 fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and that information contained in such Report fairly presents, in all material respects, the financial condition and results of operations of Woodward Governor Company.

/s/  JOHN A. HALBROOK John A. Halbrook
President and Chief
Executive Officer /s/  STEPHEN P. CARTER Stephen P. Carter
Executive Vice President, Chief
Financial Officer and Treasurer

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Exhibit 99