We believe all of our business segments have a significant competitive position within their markets for components and integrated systems. We compete with several other manufacturers, including the in-house operations of certain OEMs. While published information is not available in sufficient detail to enable an accurate assessment, we do notoriginal equipment manufacturers (“OEMs”). We believe any company holds a dominant competitive position. Companies compete principally on technology, price, quality, and customer service. In our opinion, our prices, are competitive, and our technology, quality, and customer service are favorable competitive factors.highly competitive.

BeginningWoodward operates in the fourth quarter of 2007, we realigned our operations into the following threefour business segments in order to better align our operations with the evolving nature of our customers and markets:segments:

Information about our operations in 20072008 and outlook for the future, including certain segment information, is included in “Item 7 — Management’s Discussion and Analysis of Financial Condition and Results of Operations.” Additional segment information and certain geographical information are included in the NotesNote 20 to the Consolidated

We primarily sell Engine Systems’ products and services directly to our OEM customers. We also sell through our global channel partners (distributors, dealers, and independent service facilities) to support our OEMs’ customers and end users.

We provide integrated control systems and electronic control and protection modules through the Electrical Power Systems groupsegment primarily to OEMs ofthat manufacture electrical power generation, distribution, conversion (predominantly wind power), and grid related quality equipment using digital controls and inverter technologies. Sales are made primarily to OEMs ofthat manufacture generator sets, wind turbine,turbines, and switchgear equipment. We also sell components as spares or replacements, and provide other related services to these customersOEM and other customers.

We generally sell Electrical Power Systems’ products and services directly to our OEM customers, although we also generate sales to end users through distributors. Our customers demand technological solutions to meet their needs for security, quality, reliability, and availability of electrical power networks.

Some of ourOur customers include Caterpillar, Ecotecnia,Ecotècnia, General Electric, RepowerREpower Systems AG, Rolls Royce, the U.S. government, and United Technologies/Pratt & Whitney.Technologies.

Two customers individually accounted for more than 10% of consolidated net sales in each of the years 2005 through 2007.ended September 30, 2008, 2007, and 2006. Sales to General Electric were made by all of our segments and totaled approximately 17% in fiscal 2008, approximately 20%, 22%, in fiscal 2007, and 23% of sales during the years ended September 30, 2007, 2006, and 2005, respectively.approximately 22% in fiscal 2006. Sales to Caterpillar were made by all of our segments and net sales totaled approximately 10%, in fiscal 2008, approximately 10% in fiscal 2007, and approximately 11%, and 13% of sales during the years ended September 30, 2007, 2006, and 2005, respectively. in fiscal 2006.

Our backlog as of September 30October 31, 2008 and 2007 by segment was as follows (in thousands):

Turbine System’s backlog at October 31, 2007 is estimated. In previous years, our disclosure of Turbine Systems’ reported backlog included forecasts of certain sales associated with customer agreements in addition to firm sales orders. Our current estimate of the backlog is based on typically assumed relationships between the timing of firm orders and subsequent sales. Backlog orders are not necessarily an indicator of future billingsales levels because of variations in lead times and customer production demand pull systems.

We do not believe sales are subject to significant seasonal variation.

We spent, across our segments, approximately $65 million for company-sponsoredconduct research and development activities under customer-funded contracts and with our own independent research and development funds. Our research and development costs include basic research, applied

For our segments, our products consist of mechanical, electronic, and electromagnetic components. Mechanical components are machined primarily from aluminum, iron, and steel. Generally there are numerous sources for the raw materials and components used in our products, and they are believed to be sufficiently available to meet expected requirements. We carry certain finished goods and component parts inventory to meet rapid delivery requirements of customers, primarily for aftermarket needs.

As of September 30, 2007,October 31, 2008, we employed 4,2485,823 full-time personsemployees of whom 1,464which 1,626 were located outside of the U.S. We consider the relationships with our employees to be positive.

In the U.S., as of October 31, 2008, all of our employees are at-will employees, except certain MPC employees who are not executive officers of Woodward and therefore,either had pre-existing employment agreements with MPC prior to the MPC acquisition or were members of the MPC Employees Representative Union. Our at-will employees are not subject to any type of employment contract or agreement. Our President and Chief Executive Officer and President and our Chief Financial Officer and Treasurer each hashave a Change in Control Transition Agreement.

Outside of the U.S., the Company enterswe enter into employment contracts and agreements in those countries in which such relationships are mandatory or customary. The provisions of these agreements correspond in each case with the required or customary terms in the subject jurisdiction.

Products for our segments make use of several patents and trademarks of various durations that we believe are collectively important. However, we do not consider any one patent or trademark material to our business.

Set forth below is certain information with respect to the current executive officers. There are no family relationships between any of the executive officers listed below.

Thomas A. Gendron, Age 46. President,47.  Chairman of the Board since January 2008; Chief Executive Officer, President, and Director since July 2005; President and Chief Operating Officer and President from September 2002 through June 2005; Vice President and General Manager of Industrial

Martin V. Glass, Age 50.51.  Group Vice President, Turbine Systems since September 2007; Vice President of the Aircraft Engine Systems Customer Business Segment December 2002 through August 2007; Director of Sales, Marketing, and Engineering February 2000 through December 2002.

Dennis Benning, Age 66.67.  Group Vice President, Airframe Systems since October 2008; Group Vice President, Engine Systems since September 2007;2007 through September 2008; Vice President, Center of Excellence Industrial Controls December 2002 through August 2007; General Manager, Center of Excellence Industrial Controls July 2002 through November 2002; Director of Operations, Aircraft Engine Systems January 2002 through June 2002.

Gerhard Lauffer, Age 46.47.  Group Vice President, Electrical Power Systems since September 2007.2007; Vice President and General Manager Electronic Controls March 2002 through August 2007.2007; Managing Director Leonhard-Reglerbau GmbH 1991 through March 2002.2002 when it was acquired by Woodward.

A. Christopher Fawzy, Age 38.39.  Vice President, General Counsel and Corporate Secretary since June 2007. Prior to joining Woodward, Mr. Fawzy was employed by Mentor Corporation, a global medical device company. He joined Mentor in 2001 and served as Corporate Counsel, then General Counsel in 2003, and was appointed Vice President, General Counsel and Secretary in 2004.

Through a link on the Investor Information section of our Website, we make available the following filings as soon as reasonably practicable after they are electronically filed or furnished to the Securities and Exchange Commission (“SEC”): our Annual Report onForm 10-K, Quarterly Reports onForm 10-Q, Current Reports onForm 8-K, Proxy Statements, and any amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934. ShareholdersStockholders may obtain, without charge, a single copy of Woodward’s 20072008 Annual Report onForm 10-K upon written request to the Corporate Secretary, Woodward Governor Company, 1000 East Drake Road, Fort Collins, Colorado 80525.

ManySome of our expenses are relatively fixed in relation to changes in sales volumes.volumes and are difficult to adjust in the short term. Some of these expenses are related to past capital expenditures or business acquisitions in the form of depreciation and amortization expense. Others are related to expenditures driven by levels of business activity other than the level of sales, including manufacturing overhead. As a result, we might be unable to reduce spending quickly enoughexpenses in a timely manner to compensate for a reduction in sales, which would adversely affectcould have a material adverse effect on our earnings.business, financial condition, results of operations, and cash flows.

We are dependent upon suppliers for parts and raw materials used in the manufacture of components that we sell to our customers. We may experience an increase in costs for parts or materials that we source from our suppliers, or we may experience a shortage of materials for various reasons, such as the loss of a significant supplier, high overall demand creating shortages in parts and supplies we use, or financial distress, work stoppages, natural disasters, or production difficulties that may affect one or more of our suppliers. Our customers rely on us to provide on-time delivery and have certain rights if our delivery standards are not maintained. A significant increase in our supply costs, or a protracted interruption of supplies for any reason, may adversely affectcould result in the delay of one or more of our customer contracts or could damage our reputation and relationships with customers. Any of these events could have a material adverse effect on our business, financial condition, and results of operations.operations, and cash flows.

Our business involves a significant level of product development activities, generally in connection with our customers’ own development activities. Industry standards, customer expectations, or other products may emerge that could render one or more of our products or services less desirable or obsolete. Maintaining our market position will require continued investment in research and development. During an economic downturn, including the current one, we may need to maintain our investment in research and development, which may limit our ability to reduce these expenses in proportion to a sales shortfall. If these activities are not as successful as currently anticipated, or if they are more costly than currently anticipated, future salesand/or earnings could be lower.lower than expected, which could have a material adverse effect on our business, financial condition, results of operations, and cash flows.

We completed atwo business acquisitionacquisitions in October 20062008, and we may acquire other businesses in the future. The success of these transactions will depend, among other things, on our ability to integrate assets and personnel acquired in these transactions and to apply our internal controls processes to these acquired businesses. The integration of these acquisitions may require significant attention from our management, and the diversion of management’s attention and resources could have a material adverse effect on our ability to manage our business. Furthermore, we may not realize the degree or timing of benefits we anticipate when we first enter into a transaction. If actual integration costs are higher than amounts assumed or we are unable to integrate the assets and personnel acquired in an acquisition as anticipated, or if we are unable to fully benefit from anticipated synergies, our business, financial condition, results of operations, and cash flows could be materially adversely affected.

Our existing term loan credit agreement, revolving credit agreement, and note purchase agreements governing our outstanding senior notes contain covenants that limit or restrict our ability to finance future earningsoperations or capital needs, to respond to changing business and economic conditions, or to engage in other transactions or business activities that may impact our growth or otherwise be important to us. These agreements limit or restrict, among other things, our ability and the ability of our subsidiaries to:

The agreements also impose financial covenants on us and our subsidiaries that require us to maintain certain leverage ratios and minimum levels of consolidated net worth. In addition, certain of these agreements require us to repay outstanding borrowings with portions of the proceeds we receive from certain sales of property or assets and specified future debt offerings. Our ability to comply with these provisions may be lower than anticipated.affected by events beyond our control.

Over time, the fair values of long-lived assets change. We test goodwill for impairment at least annually, and more often if circumstances require. Future goodwill impairment charges may occur if estimates of fair values decrease, which would reduce future earnings. We also test property, plant, and equipment and other intangibles for impairment whenever events or changes in circumstances indicate that the carrying value may not be recoverable. Future asset impairment charges may occur if estimatesasset utilization declines, if customer demand decreases, or for a number of fair values decrease,other reasons, which would reduce future earnings. Any such impairment charges could have a material adverse effect on our business, financial condition, results of operations, and cash flows.

We establish valuation allowances to reflect the estimated amount of deferred tax assets that might not be realized. The underlying analysis is performed for individual tax jurisdictions, generally at a subsidiary level. Future subsidiary results, actual or forecasted, as well as changes to the relevant tax statutes, could change the outcome of our analysis and change the amount of valuation allowances provided for deferred income tax assets.assets, which could have a material adverse effect on our financial condition, results of operations, and cash flows.

Competition for technical personnel in the industry in which we compete is intense. Our future success depends in part on our continued ability to hire, train, assimilate, and retain qualified personnel. There is no assurance that we will continue to be successful in recruiting qualified employees in the future. In addition, labor unrest at a customer facility can cause a reduction in demand or a deferral of orders. Any significant increases in labor costs, deterioration of employee relations, slowdowns or work stoppages at any of our locations, whether due to employee turnover, changes in availability of qualified technical personnel, or otherwise, could have a material adverse effect on our business, our relationships with customers, and our financial condition, results of operations, and cash flows.

Our success depends in part on our ability to obtain patents or rights to patents, protect trade secrets, operate without infringing upon the proprietary rights of others, and prevent others from infringing on our patents, trademarks, and other intellectual property rights. We will be able to protect our intellectual property from unauthorized use by third parties only to the extent that it is covered by valid and enforceable patents, trademarks, or licenses. Patent protection generally involves complex legal and factual questions and, therefore, enforceability of patent rights cannot be predicted with certainty; thus, any patents that we own or license from others may not provide us with adequate protection against competitors. Moreover, the laws of certain foreign countries do not recognize intellectual property rights or protect them to the same extent as do the laws of the United States.U.S. If we infringe on the proprietary rights of others or if we are unable to sufficiently protect our proprietary rights, our business, financial condition, results of operations, and cash flows could be materially adversely affected.

Our commercial success depends significantly on our ability to operate without infringing the patents and other proprietary rights of others. However, regardless of our intent, our current or future technologies may infringe upon the patents or violate other proprietary rights of third parties. In the event of such infringement or violation, we may face expensive litigation or indemnification obligations and may be prevented from selling existing products and pursuing product development or commercialization.commercialization, which could have an adverse affect on our business, financial condition, results of operations, and cash flows.

The manufacture and sale of our products and the services we provide expose us to risk of product liability and other tort claims. Both currently and in the past, we have had a number of product liability claims relating to our products, and we will likely be subject to additional product liability claims in the future for both past and current products, some of which may have a negative impactmaterial adverse effect on our business.business, financial condition, and results of operations. We also provide certain services to our customers. As a result, wecustomers and are subject to claims with respect to the services provided. In providing such services, we may rely on subcontractors to perform all or a portion of the contracted services. It is possible that we could be liable to our customers for work performed by a subcontractor. While we believe that we have appropriate insurance coverage available to us related to any such claims, our insurance may not cover all liabilities or be available in the future at a cost acceptable to us. If a product liability or other claim or series of claims, including class action claims, is brought against us for uninsured liabilities that are not covered by insurance or in excess of our insurance coverage or accruals, our business could suffer andfor which third-party indemnification is not available, such claim could have a material adverse effect on our business, financial condition, results of operations, or financial condition.and cash flows.

In addition to intellectual property and product liability matters, we are currently involved or may become involved in pending or threatened litigation or other legal proceedings regarding employment andor other contractual matters arising fromin the normalordinary course of business. We accrue for known individual matters that we believe are likely to result in a loss when ultimately resolved using estimates of the most likely amount of loss. There may be additional losses that have not been accrued, that would reduce future earnings.which could have a material adverse effect on our business, financial condition, results of operations, and cash flows.

We operate in a number of countries and are affected by a variety of laws and regulations, including foreign investment, employment, import, export, business acquisitions, environmental and taxation matters, among others. Unexpectedland use rights, property, and other matters. Our ability to operate in these countries may be materially adversely affected by unexpected changes in the legal environment may result in lower sales or increased expenses in the future.such laws and regulations.

Our operations include principal plants include facilities in China, Germany, Scotland, and Germany,Poland as well as the U.S. In addition, we operate sales and service facilities in Brazil, India, Japan, the Netherlands, and the United States.Kingdom. We also have suppliers for materials and parts inside and outside the United States. TheU.S. Our operations and sources of supply outside the United States could be disrupted by a natural disaster, war, political unrest, terrorist activity, public health concerns, or other unforeseen events, that would be less likely to occurwhich could cause significant delays in the United States. Disruptionshipment of an overseas operationproducts and the provision of services and could cause the loss of sales and customers. Accordingly, disruption of our operations or the operations of a significant supplier could adversely affecthave a material adverse effect on our business, financial condition, and results of operations.operations, and cash flows.

We have situations in which sales agreements andsignificant investments outside the related cost of sales are predominately denominated in different currencies. These may involve foreignU.S. Further, we have sales and domestic costs, or vice versa. Eachpurchases of these situations involve the risk that the margins associated with these sales could be lower than previous sales or forecasts because of changesraw materials and finished goods in foreign denominated currencies. Accordingly, we have exposure to fluctuations in foreign currency exchange rates.rates relative to the U.S. dollar. Foreign currency exchange rate risk is reduced through several means, including the maintenance of local production facilities in the markets served, invoicing of customers in the same currency as the source of the products, prompt settlement of inter-company balances utilizing a global netting system, and limited use of foreign currency denominated debt. Despite these measures, foreign currency rate fluctuations could have a material adverse effect on our international operations or on our business, financial condition, results of operations, and cash flows.

Accounting for retirement pension and healthcare benefit obligations and related expense requires the use of assumptions, including a weighted-average discount rate, an expected long-term rate of return on assets, and a net healthcare cost trend rate, among others. Benefit obligations and benefit costs are sensitive to changes in these assumptions. As a result, assumption changes could result in increases in our obligation amounts and expenses. Significant increases in the amount of retirement pension and healthcare benefit obligations and related expense could have a material adverse affect on our business, financial condition, results of operations, and cash flows.

Many of the components and systems we sell are used in harsh environments with stringent emissions standards. The technological expertise we have developed and maintained could become less valuable if a competitor were to develop a breakthrough technology that would allow them to match or exceed the performance of existing technologies at a lower cost. A breakthrough technologyIf we are unable to develop competitive technologies, future sales or earnings could also acceleratebe lower than expected, which could have a material adverse effect on our business, financial condition, results of operations, and cash flows.

There has been consolidation and there may be further consolidation in the rateaerospace, power, and process industries. The consolidation in these industries has resulted in customers with vertically integrated operations, including increased in-sourcing capabilities, which may result in economies of changescale for those companies. If our customers continue to seek to control more aspects of vertically integrated projects, cost pressures resulting in customer demands beyond what existing technologies are capablefurther integration or industry consolidation could reduce our sales opportunities, decrease sales prices, and drive down demand for our products, which could have a material adverse effect on our business, financial condition, results of achieving.operations, and cash flows.

Companies compete on the basis of providing products that meet the needs of customers, as well as on the basis of price, quality, and customer service. Changes in competitive conditions, including the availability of new products and services, the introduction of new channels of distribution, and changes in OEM and aftermarket pricing, could negativelyadversely affect future sales.sales, which could have a material adverse effect on our business, financial condition, results of operations, and cash flows.

Commercial producers of electricity use many of our components and systems, most predominately in their power plants that use natural gas as their fuel source. Commercial producers of electricity are often in a position to manage the use of different power plant facilities and make decisions based on operating costs. If natural gas prices were to increase significantly and disproportionatelyCompared to other sources of fuels it is likely thatused for power generation, natural gas prices have increased slower than fuel oil, but about the same as coal. This increase in natural gas prices and any future increases could decrease the use of our components and systems, would decrease.which could have a material adverse affect on our business, financial condition, results of operations, and cash flows.

The level of U.S. defense spending is subject to periodic congressional appropriation actions, which can change. The mix of programs to which such funding is allocated is also uncertain. A portion of our sales of components and systems is to the U.S. government, primarily in the aerospace market. The level of U.S. defense spending is subject to periodic congressional appropriation actions, which is subject to change at any time. The mix of programs to which such funding is allocated is also uncertain, and we can provide no assurance that an increase in defense spending will be allocated to programs that would benefit our business. If the amount of spending was to decrease, or there was a shift from certain aerospace programs to other programs, our sales could decrease.decrease, which could have a material adverse effect on our business, financial condition, results of operations, and cash flows.

ChangesA significant portion of our business is conducted in currencies other than the U.S. dollar which exposes us to movements in foreign currency exchange rates orrates. These exposures may change over time as our business and business practices evolve, and they could have a material adverse effect on our financial results and cash flows. An increase in interest rates affects demand for capital purchases. Eachthe value of the U.S. dollar could increase the real cost to our customers of our products in those markets in whichoutside the U.S. where we sell operates globallyin dollars, and is influenced bya weakened dollar could increase the cost of local operating expenses and procurement of raw materials to the extent that we must purchase components in foreign currencies. Continued instability in the worldwide financial markets could impact our ability to effectively manage our foreign currency exchange rates. Also, capital expenditures tend to decrease as interest ratesrate fluctuation risk, which could negatively impact our business, financial condition, results of operations, and economic uncertainty rise.cash flows.

The market price of our common stock changes over time. Stock markets in general have experienced significant price and volume volatility over the past year. The trading price of our common stock ranged from a low of $32.65$24.50 per share to a high of $66.28$48.62 per share in fiscal 2007.2008. The causesmarket price and volume of trading of our common stock price volatility are relatedmay continue to manybe subject to significant fluctuations due not only to general stock market conditions, but also to factors both within and outside management’s control.such as general conditions in the aerospace industry or a change in sentiment in the market regarding our operations or business prospects. As a result, we may not be able to maintain or increase the valuemarket price of our common stock.stock may fluctuate or decline significantly in the future.

We currently have approximately 3468 million shares of common stock outstanding. While the level of trading activity will vary by day, the typical trading level represents only a small percentage of total shares of stock outstanding. As a result, a seller ofwho a significant number of shares of stock in a short period of time could negatively affect our share price.

None.

Our principal plants are as follows:

In connection with the MPC acquisition, Woodward assumed leases on approximately 450,000 square feet of manufacturing and office space in Skokie and Niles, Illinois. In connection with the acquisition of MotoTron, Woodward assumed office leases in Ann Arbor, Michigan and Columbus, Indiana and established a lease for an office facility in Oshkosh, Wisconsin. Additional information about these acquisitions is included in Note 22 to the Consolidated Financial Statements in “Item 8 — Financial Statements and Supplementary Data.”

In addition to the principal plants listed above, we own or lease other facilities in Brazil, India, Japan, the Netherlands, and the United Kingdom and lease several facilities in locations worldwide, which are used primarily for sales and service activities.

Our principal plants are suitable and adequate for the manufacturing and other activities performed at those plants, and we believe our utilization levels are generally high. WithHowever, with continuing advancements in manufacturing technology and operational improvements, we believe we can continue to increase production without significant capital expenditures for expansion, retooling, or acquisition of additional plants.

We are currently involved in pending or threatened litigation or other legal proceedings regarding employment, product liability, and contractual matters arising from the normal course of business. TheseWe have accrued for individual matters that we believe are discussedlikely to result in a loss when ultimately resolved using estimates of the most likely amount of loss. There are also individual matters where management believes the likelihood of a loss when ultimately resolved is less than likely but more than remote, which were not accrued. While it is possible that there could be additional losses that have not been accrued, we currently believe the possible additional loss in the Notesevent of an unfavorable resolution of each matter is less than $10,000 in the aggregate.

Specifically, MPC, one of our newly acquired subsidiaries, is subject to an investigation by the DOJ regarding certain of its pricing practices related to government contracts prior to 2006. MPC and the U.S. Attorney for the Northern District of Illinois have reached a settlement in principle and are in the process of finalizing and obtaining approvals within the DOJ. Final disposition will be subject to acceptance and approval by the U.S. District Court. It is anticipated that any settlement of the matter would involve the payment of monetary fines and other amounts by MPC. MPC is also in the process of working with the U.S. Department of Defense to resolve any administrative matters that may arise out of the investigation. There can be no assurance as to the Consolidated Financial Statementsresolution of these matters. The purchase price for MPC reflects the amount agreed to in “Item 8 — Financial Statements and Supplementary Data.” principle by MPC with the U.S. Attorney. Any resulting fines or other sanctions beyond this amount could have a material negative impact on Woodward.

We currently do not have any administrative or judicial proceedings arising under any Federal, State, or local provisions regulating the discharge of materials into the environment or primarily for the purpose of protecting the environment.

There were no matters submitted to a vote of security holders during the fourth quarter of 2007.fiscal 2008.

Our common stock is listed on theThe NASDAQ Global Select Market and at November 20, 2007,17, 2008, there were approximately 1,2201,380 holders of record. Cash dividends were declared quarterly during 20072008 and 2006.2007. The amount of cash dividends per share and the high and low sales price per share for our common stock for each fiscal quarter in 20072008 and 20062007 are included in the NotesNote 21 to the Consolidated Financial Statements in “Item 8 — Financial Statements and Supplementary Data.”

Sales of common stock issued from treasury stock to one of the company’s directors during the fourth quarter of 20072008 consisted of the following:following (dollars in thousands):

The securities were sold in reliance upon the exemption contained in Section 4(2) of the Securities Act of 1933.

The following selected financial data should be read in conjunction with the Consolidated Financial Statements and related notes which appear in ‘‘Item“Item 8 -— Financial Statements and Supplementary Data”, of this Annual Report.

The preparation of financial statements and related disclosures in conformity with accounting principles generally accepted in the United StatesU.S. (“U.S.GAAP”) requires us to make judgments, assumptions, and estimates that affect the amounts reported in the Consolidated Financial Statements and accompanying notes. Note 1 to the Consolidated Financial Statements describes the significant accounting policies and methods used in the preparation of the Consolidated Financial Statements. The accounting policiespositions described below are significantly affected by critical accounting estimates. Such accounting policiespositions require significant judgments, assumptions, and estimates to be used in the preparation of the Consolidated Financial Statements, and actual results could differ materially from the amounts reported based on variability in factors affecting these policies.estimates.

Inventories are valued at the lower of cost or market, with cost being determined on afirst-in, first-out basis. Customer-specific information and contractual terms are considered when evaluating lower of cost or market considerations. The carrying value of inventory as of September 30, 2008 was $208.3 million. If economic conditions or other factors significantly reduce future customer demand for our products from forecast levels, then future adjustments to the carrying value of inventory may become necessary. We attempt to maintain inventory quantities to levels considered necessary to fill expected orders in a reasonable time frame, which we believe mitigates our exposure to future inventory carrying cost adjustments.

Estimates of the sales agreements include product warranties customaryvalue of post-retirement benefit obligations, and related net periodic benefits expense, are dependent on actuarial assumptions including future interest rates, compensation rates, healthcare cost trends, and returns on defined benefit plan investments. Variances from our year end estimates for these variables could materially affect our recognized post-retirement benefit obligation liabilities. On a near-term basis, such changes are unlikely to have a material impact on reported earnings, since such agreements. Accrualsadjustments are established for specifically identified warranty issuesrecorded to other comprehensive income and recognized into expense over a number of years. Significant changes in estimates could, however, materially affect the carrying amounts of projected benefit obligation liabilities, which could affect loan covenant compliance and future borrowing capacity. As of September 30, 2008, the projected benefit obligation of all of our post-retirement benefit plans was $101.1 million. In light of recent global economic instability, management considers the likelihood that are probable to resultsuch assumptions may change significantly in future costs. Warranty costs are accrued on a non-specific basis whenever past experience indicates a normal and predictable pattern exists.periods to be greater than in recent years.

Our methodologyAt September 30, 2008, we had $139.6 million of goodwill, or 15% of total assets. We test goodwill for allocatingimpairment at least annually, during the purchase price relating to purchase acquisitions is determined through established valuation techniques. Goodwill is measured assecond quarter, and whenever events occur or circumstances change that indicate there may be an impairment. These events or circumstances could include a significant adverse change in the excessbusiness climate, poor indicators of the costoperating performance, or a sale or disposition of acquisition over the sum of the amounts assigned to tangible and identifiable intangible assets acquired less liabilities assumed. We perform goodwill impairment tests on an annual basis and between annual tests in certain circumstances for eacha significant reporting unit. In response

We test goodwill for impairment at the reporting unit level. Our reporting units are our operating segments. Testing goodwill for impairment requires us to changes in industry and market conditions, we could be required to strategically realign our resources and consider restructuring, disposing of, or otherwise exiting businesses, which could result in an impairment of goodwill. There was no impairmentdetermine the amount of goodwill in fiscal 2007, 2006, or 2005.associated with reporting units, estimate fair values of those reporting units, and determine their carrying values. These processes are subjective and

Our other long-lived assets consist of property, plant, and equipment, and other intangibles, whichimpairment analysis is partially dependent upon future cash flow projections for our operating segments, discounted at appropriate interest rates. If future sales are included primarilysignificantly impacted by changes in the segment assets. We depreciate or amortize long-lived assets over their estimated useful lives. We test long-lived assets for recoverability whenever events or changes in circumstances indicate that the carrying values may not be recoverable.

We are subject to income taxes in both the United StatesU.S. and numerous foreign jurisdictions. Significant judgment is required in evaluating our tax positions and determining our provision for income taxes.

During the ordinary course of business, there are many transactions and calculations for which the ultimate tax determination is uncertain. We establish reserves for tax-related uncertainties based on estimates of whether, and the extent to which, additional taxes will be due. The reserves are established when we believe that certain positions are likely to be challenged and may not be fully sustained on review by tax authorities. We adjust these reserves in light of changing facts and circumstances, such as the closing of a tax audit or refinement of an estimate. Although we believe our reserves are reasonable, no assurance can be given that the final outcome of these matters will not be different from that which is reflected in our historical income tax provisions and accruals. To the extent that the final tax outcome of these matters is different than the amounts recorded, such differences will impact the provision for income taxes. The provision for income taxes includes the impact of reserve provisions and changes to reserves that are considered appropriate. As of September 30, 2008, unrecognized net tax benefits for which recognition has been deferred following the guidance of FIN 48 was $22.6 million.

Significant judgment is also required in determining any valuation allowance recorded against deferred tax assets. In assessing the need for a valuation allowance, we consider all available evidence including past operating results, estimates of future taxable income, and the feasibility of tax planning strategies. In the event that we change our determination as to the amount of deferred tax assets that can be realized, we will adjust our valuation allowance with a corresponding impact to the provision for income taxes in the period in which such determination is made. As of September 30, 2008, our valuation allowance was $0.1 million.

Our effective tax rates differ from the statutory rate primarily due to the tax impact of foreign operations, adjustments of valuation allowances, research tax credits, state taxes, and tax audit settlements.

Our provision for income taxes is subject to volatility and could be affected by the following: earnings that are different than anticipated in countries which have lower or higher tax rates; by changes in the valuation of our deferred tax assets and liabilities; by transfer pricing adjustments; by tax effects of share-basedstock-based compensation; by costs or benefits related to intercompany restructurings; or by changes in tax laws, regulations, and accounting principles, including accounting for uncertain tax positions, or interpretations thereof. In addition, we are subject to examination of our income tax returns by the Internal Revenue Service and other tax authorities. We regularly assess the likelihood of adverse outcomes resulting from these examinations to determine the adequacy of our provision for income taxes.

There can be no assurance that the outcomes from these examinations will not have an effect on our operating results and financial condition.

The following table presents the breakdown of consolidated net external sales by segment (in thousands):

Intersegment sales primarily reflect contract-manufacturing activity across business segments. Turbine Systems and Engine Systems sell electronic controls manufactured by Electrical Power Systems as part of their system offerings. These intersegment activities have been increasing as a result of our Turbine and Engine SystemsSystems’ segments growing their respective external sales.

Consolidated net external sales increased 22% from fiscal 2006 to fiscal 2007. The increase was attributable to the following (in thousands):

Turbine Systems’ sales volume changes:  Turbine Systems’ improvement reflects the favorable trends in all segments of our aerospace business. We continue to seesaw strong growth in the business and regional aviation markets with order backlogs and deliveries significantly higher than 2006 levels. Overall fleet growth and increased utilization has resulted in strong demand for repair and related aftermarket service. Our significant development efforts on the GEnx fuel system for the Boeing Dreamliner, the GP7200 fuel system components for the A380 and the PW600 control system for the Mustang and the Eclipse arewere making the transition from research to production. We continue to seesaw a trend toward higher revenue passenger miles incurred by commercial airlines and cargo growth, which drivesdrove aircraft usage and hashad a positive effect on our aftermarket sales. We estimate approximately 40% of Turbine Systems’ sales were aftermarket for fiscal 2007 and fiscal 2006.

Engine Systems’ sales volume changes:  Demand for power generation, such as industrial turbines and large gas and diesel engines, continues to growgrew with the significant increase in global demand for electricity, particularly in distributed power applications. DevelopmentGrowing infrastructure needs in India, China India, and the Middle East is playingrest of Asia played a key role in this growth. Within the transportation market, the marine off-highway, and alternative fuel segments continue to besegment was robust.