[LOGO](TM)
                                   DONALDSON






                           ANNUAL REPORT ON FORM 10-K

                             DONALDSON COMPANY, INC.


                                  JULY 31, 2001

================================================================================ SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K (MARK ONE) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE Act of 1934 for the fiscal year ended July 31, 2001 or [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES Exchange Act of 1934 (No Fee Required) for the transition period from __________ to __________. Commission File Number: 1-7891 DONALDSON COMPANY, INC. ----------------------- (Exact name of registrant as specified in its charter) DELAWARE 41-0222640 -------- ---------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 1400 WEST 94TH STREET, MINNEAPOLIS, MINNESOTA 55431 --------------------------------------------- ----- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code (952) 887-3131 SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NAME OF EACH EXCHANGE TITLE OF EACH ON WHICH REGISTERED ------------- ------------------- Common Stock, $5 Par Value New York Stock Exchange Preferred Stock Purchase Rights New York Stock Exchange SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: NONE Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes __X__ No _____ Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] The aggregate market value of the voting stock held by nonaffiliates of the registrant as of September 21, 2001 was $1,187,746,010. The shares of common stock outstanding as of September 21, 2001 were 44,097,328. Documents Incorporated by Reference ----------------------------------- Portions of the 2001 Annual Report to Shareholders of the registrant are incorporated by reference in Parts I and II, as specifically set forth in Parts I and II. Portions of the Proxy Statement for the 2001 annual shareholders meeting are incorporated by reference in Part III, as specifically set forth in Part III. ================================================================================

PART I ITEM 1. BUSINESS GENERAL Donaldson Company, Inc. ("Donaldson" or the "Company") was founded in 1915 and organized in its present corporate form under the laws of the State of Delaware in 1936. The Company is a leading worldwide manufacturer of filtration systems and replacement parts. The Company's product mix includes air and liquid filters and exhaust and emission control products for mobile equipment; in-plant air cleaning systems; air intake systems for industrial gas turbines; and specialized filters for such diverse applications as computer disk drives, aircraft passenger cabins and semiconductor processing. Products are manufactured at more than three dozen plants around the world and through three joint ventures. The Company has two reporting segments engaged in the design, manufacture and sale of systems to filter air and liquid and other complementary products. The two segments are Engine Products and Industrial Products. Products in the Engine Products segment consist of air intake systems, exhaust systems, liquid filtration systems and replacement parts. The Engine Products segment sells to original equipment manufacturers (OEMs) in the construction, industrial, mining, agriculture and transportation markets and to independent distributors, OEM dealer networks, private label accounts and large private fleets. Products in the Industrial Products segment consist of dust, fume and mist collectors, static and pulse-clean air filter systems for industrial gas turbines, computer disk drive filter products and other specialized air filtration systems. The Industrial Products segment sells to various industrial end-users, OEMs of gas-fired turbines, OEMs and end users requiring highly purified air. The table below shows the percentage of total net sales contributed by the principal classes of similar products for each of the last three fiscal years: YEAR ENDED JULY 31 2001 2000 1999 ---- ---- ---- Engine Products Segment Off-Road Equipment Products (including Defense Products) 16% 18% 19% Truck and Automotive Products 7% 14% 17% Aftermarket Products 31% 30% 29% Industrial Products Segment Dust Collection Products 19% 17% 16% Gas Turbine Systems Products 17% 11% 9% Special Applications Products 10% 10% 10% The segment detail information in Note H in the Notes to Consolidated Financial Statements on page 28 of the 2001 Annual Report to Shareholders is incorporated herein by reference. COMPETITION The Company's business is not considered to be seasonal. Principal methods of competition in both the Engine Products and Industrial Products segments are price, geographic coverage, service and product performance. The Company competes in a number of filtration markets in both the Engine Products and Industrial segments and both segments operate in a highly competitive environment. The Company estimates that it is a market leader in its primary product lines within the Industrial Products segment. Its principal competitors vary from country to country and include several large regional or global competitors and a significant number of small competitors who compete in a limited geographical region or in a limited number of product applications. The Company estimates that within the Engine 2

Products segment it is a market leader in its off-road equipment and truck product lines and is a significant participant in the aftermarket for replacement filters and hard parts in its engine-related businesses. The Engine Products segment principal competitors vary from country to country and include several large regional or global competitors, and small local and regional competitors, especially in the engine aftermarket businesses. RAW MATERIALS The Company experienced no significant or unusual problems in the purchase of raw materials or commodities. Donaldson has more than one source of raw materials essential to its business. The Company is not required to carry significant amounts of inventory to meet rapid delivery demands or secure supplier allotments. PATENTS AND TRADEMARKS The Company owns various patents and trademarks which it considers in the aggregate to constitute a valuable asset. However, it does not regard the validity of any one patent or trademark as being of material importance. MAJOR CUSTOMERS Sales to General Electric Company and subsidiaries ("GE") accounted for 12 percent of net sales in 2001. There were no sales over 10 percent of net sales to one customer in 2000. Sales to Caterpillar, Inc. and subsidiaries ("Caterpillar") accounted for 11 percent of net sales in 1999. Caterpillar has been a customer of the Company for many years and it purchases several models and types of products primarily from the Engine Products segment for a variety of applications. GE has also been a customer of the Company for many years and it purchases several models and types of products from the Industrial Products segment for a variety of applications, the majority of which are for use on their gas turbine systems. Sales to the U.S. Government do not constitute a material portion of the Company's business. BACKLOG At August 31, 2001, the backlog of orders expected to be delivered within 90 days was $191,858,000. The 90 day backlog at August 31, 2000 was $191,852,000. RESEARCH AND DEVELOPMENT During 2001 the Company spent $28,425,000 on research and development activities relating to the development of new products or improvements of existing products or manufacturing processes. The Company spent $27,304,000 in 2000 and $23,603,000 in 1999 on research and development activities. Essentially all commercial research and development is Company-sponsored. ENVIRONMENTAL MATTERS The Company does not anticipate any material effect on its capital expenditures, earnings or competitive position due to compliance with government regulations involving environmental matters. EMPLOYEES The Company employed 8,230 persons in worldwide operations as of July 31, 2001. GEOGRAPHIC AREAS Note H of the Notes to Consolidated Financial Statements on page 28 in the 2001 Annual Report to Shareholders contains information regarding the Company's geographic areas and is incorporated herein by reference. 3

ITEM 2. PROPERTIES The Company's principal office and research facilities are located in Bloomington, a suburb of Minneapolis, Minnesota. European administrative and engineering offices are located in Leuven, Belgium. Manufacturing activities are carried on in fourteen plants in the United States, three in the United Kingdom, two in Mexico, Germany, Japan, China and South Africa and one each in Australia, France, Hong Kong, Italy, Belgium and India. Page 31 of the 2001 Annual Report to Shareholders lists the principal plant locations and is incorporated herein by reference. Note H on page 28 of the 2001 Annual Report to Shareholders presents identifiable assets by geographic area and is incorporated herein by reference. The Company is a lessee under several long-term leases. These leases provide for options to purchase the facilities at the end of the lease term and have been capitalized. The Company's properties are considered to be suitable for their present purposes, well maintained and in good operating condition. ITEM 3. LEGAL PROCEEDINGS The Company has been party to various legal proceedings arising in the ordinary course of business. In the opinion of management, the outcome of litigation currently pending will not materially affect the Company's results of operations, financial condition or liquidity. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS - Not Applicable. EXECUTIVE OFFICERS OF THE REGISTRANT Current information regarding executive officers is presented below. All terms of office are for one year. There are no arrangements or understandings between individual officers and any other person pursuant to which he was selected as an officer. <TABLE> <CAPTION> FIRST YEAR ELECTED OR APPOINTED AS AN NAME AGE POSITIONS AND OFFICES HELD OFFICER ---- --- -------------------------- ------- <S> <C> <C> <C> William G. Van Dyke 56 Chairman, President and 1979 Chief Executive Officer William M. Cook 48 Senior Vice President, International 1994 and Chief Financial Officer James R. Giertz 44 Senior Vice President, 1994 Commercial and Industrial Norman C. Linnell 42 Vice President, General 1996 Counsel and Secretary Nickolas Priadka 55 Senior Vice President, 1989 Engine Systems and Parts Lowell F. Schwab 53 Senior Vice President, Operations 1994 Thomas A. Windfeldt 52 Vice President, Controller 1985 and Treasurer </TABLE> All of the above-named executive officers have held executive management positions with Registrant during the past five years. 4

PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The information in the sections "Quarterly Financial Information (Unaudited)" and "NYSE Listing," on pages 30 and 32, and restrictions on payment of dividends in Note D, page 24 of the 2001 Annual Report to Shareholders is incorporated herein by reference. As of September 21, 2001, there were approximately 1,799 shareholders of record of Common Stock. The high and low sales prices for registrant's common stock for each full quarterly period during 2001 and 2000, are as follows: FIRST QUARTER SECOND QUARTER THIRD QUARTER FOURTH QUARTER ------------- -------------- ------------- -------------- 2000 $19.50 - 23.50 $20.63 - 24.81 $20.25 - 24.06 $19.13 - 24.25 2001 $19.13 - 23.86 $21.62 - 29.48 $24.39 - 28.92 $27.30 - 33.05 ITEM 6. SELECTED FINANCIAL DATA The information for the years 1997 through 2001 on pages 8 and 9 of the 2001 Annual Report to Shareholders is incorporated herein by reference. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The information set forth in the section "Management's Discussion and Analysis" on pages 10 through 15 of the 2001 Annual Report to Shareholders is incorporated herein by reference. A. MARKET RISK Market Risk disclosure as discussed under "Market Risk" and "Foreign Currency" on page 14 of the 2001 Annual Report to Shareholders is incorporated herein by reference. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The Consolidated Financial Statements and Notes to Consolidated Financial Statements on pages 16 through 30, and the Quarterly Financial Information (Unaudited) on page 30 of the 2001 Annual Report to Shareholders is incorporated herein by reference. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE - Not applicable. 5

PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The information under the captions "Nominees For Election" and "Directors Continuing In Office" on page 5 and under the heading "Compliance With Section 16(a) of the Securities Exchange Act of 1934" on page 19 of the Company's definitive proxy statement dated October 12, 2001 is incorporated herein by reference. ITEM 11. EXECUTIVE COMPENSATION The information under "Director Compensation" on page 6 and in the section "Executive Compensation" on pages 13 through 15, the "Pension Benefits" on page 18 and under the caption "Change-in-Control Arrangements" on page 19 of the Company's definitive proxy statement dated October 12, 2001, is incorporated herein by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information in the section "Security Ownership" on page 3 of the Company's definitive proxy statement dated October 12, 2001, is incorporated herein by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS - Not Applicable. 6

PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a) Documents filed with this report: (1) Financial Statements Consolidated Balance Sheets -- July 31, 2001 and 2000 (incorporated by reference from page 17 of the 2001 Annual Report to Shareholders) Consolidated Statements of Earnings -- years ended July 31, 2001, 2000 and 1999 (incorporated by reference from page 16 of the 2001 Annual Report to Shareholders) Consolidated Statements of Cash Flows -- years ended July 31, 2001, 2000 and 1999 (incorporated by reference from page 18 of the 2001 Annual Report to Shareholders) Consolidated Statements of Changes in Shareholders' Equity -- years ended July 31, 2001, 2000 and 1999 (incorporated by reference from page 19 of the 2001 Annual Report to Shareholders) Notes to Consolidated Financial Statements (incorporated by reference from pages 20 through 30 of the 2001 Annual Report to Shareholders) Reports of Independent Public Accountants (filed as part of this report) (2) Financial Statement Schedules -- Schedule II Valuation and qualifying accounts All other schedules (Schedules I, III, IV and V) for which provision is made in the applicable accounting regulations of the Securities and Exchange Commission are not required under the related instruction, or are inapplicable, and therefore have been omitted. (3) Exhibits The exhibits listed in the accompanying index are filed as part of this report or incorporated by reference as indicated therein. (b) Reports on Form 8-K A report on Form 8-K was filed on May 22, 2001. On May 22, 2001 the Company issued a press release in the form attached as exhibit 99.1 to its Form 8-K reporting its results of operation for the three months ended April 30, 2001. 7

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. DONALDSON COMPANY, INC. (Registrant) Date: October 26, 2001 By: /s/ William G. Van Dyke ---------------- ------------------------------------ Chairman, President and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the date indicated. /s/ William G. Van Dyke Chairman, President and ---------------------------------- Chief Executive Officer William G. Van Dyke /s/ William M. Cook Senior Vice President, ---------------------------------- International and William M. Cook Chief Financial Officer /s/ Thomas A. Windfeldt Vice President, Controller ---------------------------------- and Treasurer Thomas A. Windfeldt *F. Guillaume Bastiaens Director ---------------------------------- F. Guillaume Bastiaens *Paul B. Burke Director ---------------------------------- Paul B. Burke *Janet M. Dolan Director ---------------------------------- Janet M. Dolan *Jack W. Eugster Director ---------------------------------- Jack W. Eugster *John F. Grundhofer Director ---------------------------------- John F. Grundhofer *Kendrick B. Melrose Director ---------------------------------- Kendrick B. Melrose *Jeffrey Noddle Director ---------------------------------- Jeffrey Noddle *S. Walter Richey Director ---------------------------------- S. Walter Richey *Stephen W. Sanger Director ---------------------------------- Stephen W. Sanger *By /s/ Norman C. Linnell Date: October 26, 2001 ---------------------------------- Norman C. Linnell *As attorney-in-fact 8

DONALDSON COMPANY, INC. AND SUBSIDIARIES FORM 10-K Item 14(a)(1) Index of Independent Public Accountants' Reports Report of Arthur Andersen LLP ...................................... 10 & 11 Report of Ernst & Young LLP ........................................ 12 9

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Shareholders and Board of Directors of Donaldson Company, Inc.: We have audited the accompanying consolidated balance sheets of Donaldson Company, Inc. (a Delaware corporation) and subsidiaries as of July 31, 2001 and 2000, and the related consolidated statements of earnings, changes in shareholders' equity and cash flows for the years then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Donaldson Company, Inc. and subsidiaries as of July 31, 2001 and 2000, and the results of their operations and their cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States. /s/ Arthur Andersen LLP Minneapolis, Minnesota, August 27, 2001 10

Report of Independent Public Accountants To the Shareholders and Board of Directors of Donaldson Company, Inc. We have audited, in accordance with auditing standards generally accepted in the United States, the consolidated financial statements included in Donaldson Company Inc.'s annual report to shareholders incorporated by reference in this Form 10-K, and have issued our report thereon dated August 27, 2001. Our audit was made for the purpose of forming an opinion on those statements taken as a whole. The schedule listed as part of item 14 in this Form 10-K is the responsibility of the Company's management and is presented for purposes of complying with the Securities and Exchange Commission's rules and is not part of the basic consolidated financial statements. This schedule has been subjected to the auditing procedures applied in the audit of the basic consolidated financial statements and, in our opinion, fairly states in all material respects the financial data required to be set forth therein in relation to the basic consolidated financial statements taken as a whole. /s/ Arthur Anderson LLP Minneapolis, Minnesota, August 27, 2001 11

REPORT OF INDEPENDENT AUDITORS Shareholders and Board of Directors Donaldson Company, Inc. We have audited the accompanying consolidated statements of earnings, changes in shareholders' equity and cash flows of Donaldson Company, Inc. and subsidiaries for the year ended July 31, 1999. Our audit also included the related financial statement schedule listed in the Index at Item 14(a). These financial statements and schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedule based on our audit. We conducted our audit in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated results of their operations and cash flows of Donaldson Company, Inc. and subsidiaries for the year ended July 31, 1999, in conformity with accounting principles generally accepted in the United States. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, present fairly in all material respects the information set forth therein. /s/ Ernst & Young LLP Minneapolis, Minnesota September 8, 1999 12

SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS DONALDSON COMPANY, INC. AND SUBSIDIARIES (Thousands of Dollars) <TABLE> <CAPTION> ---------------------------------------------------------------------------------------------------------------------- COL. A COL. B COL. C COL. D COL. E ---------------------------------------------------------------------------------------------------------------------- ADDITIONS ------------------------------- BALANCE AT CHARGED TO CHARGED TO BALANCE AT BEGINNING COSTS AND OTHER ACCOUNTS END OF DESCRIPTION OF PERIOD EXPENSES (A) & (B) DEDUCTIONS (C) PERIOD ------------------------------------ ------------ ------------ ---------------- ---------------- ----------- <S> <C> <C> <C> <C> <C> Year ended July 31, 2001: Allowance for doubtful accounts deducted from accounts receivable $ 4.380 $2,512 $ (154) $ (429) $6,309 ======= ====== ====== ======== ====== Restructuring Reserves -- AirMaze Acquisition $ 1,183 $ (1,017) $ 166 ======= ======== ====== Restructuring Reserves -- DCE Acquisition $ 2,775 $1,555 $ (2,205) $2,125 ======= ====== ======== ====== Year ended July 31, 2000: Allowance for doubtful accounts deducted from accounts receivable $ 4,341 $1,077 $ (156) $ (882) $4,380 ======= ====== ====== ======== ====== Restructuring Reserves -- AirMaze Acquisition $ 0 $1,488 $ (305) $1,183 ======= ====== ======== ====== Restructuring Reserves -- DCE Acquisition $ 0 $2,775 $2,775 ======= ====== ====== Year ended July 31, 1999: Allowance for doubtful accounts deducted from accounts receivable $ 3,696 $ 959 $ (43) $ (271) $4,341 ======= ====== ====== ======== ====== </TABLE> ------------------ Note A -- Allowance for doubtful accounts foreign currency translation losses (gains) recorded directly to equity. Note B -- Aquisition related restructuring reserves recorded to goodwill. Note C -- Bad debts charged to allowance, net of recoveries. 13

EXHIBIT INDEX ANNUAL REPORT ON FORM 10-K * 3-A -- Certificate of Incorporation of Registrant as currently in effect (Filed as Exhibit 3-A to Form 10-Q for the Second Quarter ended January 31, 1998) * 3-B -- By-laws of Registrant as currently in effect (Filed as Exhibit 3-B to Form 10-Q for the Second Quarter ended January 31, 1999) * 4 -- ** * 4-A -- Preferred Stock Amended and Restated Rights Agreement (Filed as Exhibit 4.1 to Form 8-K Report Dated January 12, 1996) *10-A -- Annual Cash Bonus Plan (Filed as Exhibit 10-A to 1995 Form 10-K Report)*** *10-B -- Supplementary Retirement Agreement with William A. Hodder (Filed as Exhibit 10-B to 1993 Form 10-K Report)*** *10-C -- 1980 Master Stock Compensation Plan as Amended (Filed as Exhibit 10-C to 1993 Form 10-K Report)*** *10-D -- Form of Performance Award Agreement under 1991 Master Stock Compensation Plan (Filed as Exhibit 10-D to 1995 Form 10-K Report)*** *10-E -- Copy of ESOP Restoration Plan as Amended and Restated (Filed as Exhibit 10-E to Form 10-Q for the Second Quarter ended January 31, 1998)*** *10-F -- Deferred Compensation Plan for Non-employee Directors as amended (Filed as Exhibit 10-F to 1990 Form 10-K Report)*** *10-G -- Form of "Change in Control" Agreement with key employees as amended (Filed as Exhibit 10-G to Form 10-Q for the Second Quarter ended January 31, 1999)*** *10-H -- Independent Director Retirement and Benefit Plan as amended (Filed as Exhibit 10-H to 1995 Form 10-K Report)*** *10-I -- Excess Pension Plan (1999 Restatement)*** *10-J -- Supplementary Executive Retirement Plan (1999 Restatement)*** *10-K -- 1991 Master Stock Compensation Plan as amended (Filed as Exhibit 10-K to 1998 Form 10-K Report)*** *10-L -- Form of Restricted Stock Award under 1991 Master Stock Compensation Plan (Filed as Exhibit 10-L to 1992 Form 10-K Report)*** *10-M -- Form of Agreement to Defer Compensation for certain Executive Officers (Filed as Exhibit 10-M to 1993 Form 10-K Report)*** *10-N -- Stock Option Program for Nonemployee Directors (Filed as Exhibit 10-N to 1998 Form 10-K Report)*** 14

*10-O -- Salaried Employees' Pension Plan -- 1997 Restatement (Filed as Exhibit l0-0 to 1997 10-K Report)*** *10-P -- Eighth Amendment of Employee Stock Ownership Plan Trust Agreement 1987 Restatement (Filed as Exhibit 10-P to 1997 10-K Report)*** *10-Q -- Deferred Compensation and 401(K) Excess Plan (1999 Restatement)*** *10-R -- Note Purchase Agreement among Donaldson Company, Inc. and certain listed Insurance Companies dated as of July 15, 1998 (Filed as Exhibit 10-R to 1998 Form 10-K Report) *10-S -- First Supplement to Note Purchase Agreement among Donaldson Company, Inc. and certain listed Insurance Companies dated as of August 1, 1998 (Filed as Exhibit 10-S to 1998 Form 10-K Report) *10-T -- Deferred Stock Option Gain Plan (1999 Restatement)*** 11 -- Computation of net earnings per share ("Earnings Per Share" in "Summary of Significant Accounting Policies" in Note A, page 20 of the 2001 Annual Report to Shareholders is incorporated herein by reference) 13 -- Portions of Registrant's Annual Report to Shareholders for the year ended July 31, 2001 21 -- Subsidiaries ("Wholly Owned Subsidiaries" and "Joint Ventures" on page 31 of the 2001 Annual Report to Shareholders is incorporated herein by reference) 23 -- Consent of Arthur Andersen LLP 23(A) -- Consent of Ernst & Young LLP 24 -- Powers of Attorney 99 -- Litigation Reform Act of 1995 -- Cautionary Statement * Exhibit has heretofore been filed with the Securities and Exchange Commission and is incorporated herein by reference as an exhibit. ** Pursuant to the provisions of Regulation S-K Item 601(b)(4)(iii)(A) copies of instruments defining the rights of holders of certain long-term debts of Registrant and its subsidiaries are not filed and in lieu thereof Registrant agrees to furnish a copy thereof to the Securities and Exchange Commission upon request. *** Denotes compensatory plan or management contract. Note: Exhibits have been furnished only to the Securities and Exchange Commission. Copies will be furnished to individuals upon request and payment of $20 representing Registrant's reasonable expense in furnishing such exhibits. 15

                                                                      Exhibit 13




ELEVEN-YEAR COMPARISON OF RESULTS

Donaldson Company, Inc. and Subsidiaries

<TABLE>
<CAPTION>
(Thousands of dollars, except per share amounts)           2001           2000           1999           1998
-----------------------------------------------------------------------------------------------------------------
<S>                                                  <C>            <C>            <C>            <C>
OPERATING RESULTS
Net sales                                            $1,137,015     $1,092,294     $  944,139     $  940,351
Gross margin                                         $  341,734        327,521        275,681        263,262
Gross margin percentage                                    30.1%          30.0%          29.2%          28.0%
Operating income                                     $  112,108        105,594         88,390         86,799
Operating income percentage                                 9.9%           9.7%           9.4%           9.2%
Interest expense                                     $   11,608          9,880          6,993          4,671
Earnings before income taxes                         $  104,928        100,333         89,210         86,441
Income taxes                                         $   29,380         30,100         26,763         29,390
Effective income tax rate                                  28.0%          30.0%          30.0%          34.0%
Net earnings                                         $   75,548         70,233         62,447         57,051
Return on sales                                             6.6%           6.4%           6.6%           6.1%
Return on average shareholders' equity                     25.2%          25.9%          24.1%          22.8%
Return on investment                                       19.1%          19.4%          19.0%          20.5%

FINANCIAL POSITION
Total assets                                         $  706,830        677,525        542,246        512,987
Current assets                                       $  407,227        383,347        326,388        300,817
Current liabilities                                  $  217,279        243,590        142,055        165,068
Working capital                                      $  189,948        139,757        184,333        135,749
Current ratio                                               1.9            1.6            2.3            1.8
Current debt                                         $   59,416         85,313         20,696         45,896
Long-term debt                                       $   99,259         92,645         86,691         51,553
Total debt                                           $  158,675        177,958        107,387         97,449
Shareholders' equity                                 $  319,093        280,165        262,763        255,671
Long-term capitalization ratio                             23.7%          24.9%          24.8%          16.8%
Property, plant and equipment, net                   $  207,658        204,545        182,180        178,867
Net expenditures on property, plant and equipment    $   38,924         36,417         29,539         54,705
Depreciation and amortization                        $   38,577         34,326         27,686         25,272

SHAREHOLDER INFORMATION
Net earnings per share - assuming dilution           $     1.66           1.51           1.31           1.14
Dividends paid per share                             $     .295            .27            .23            .19
Shareholders' equity per share                       $     7.19           6.27           5.69           5.28
Shares outstanding (000s)                                44,383         44,658         46,197         48,382
Common stock price range, per share
   High                                              $    33.05          24.81          25.88          27.19
   Low                                               $    19.13          19.13          14.44          18.56
-----------------------------------------------------------------------------------------------------------------
</TABLE>

Amounts are adjusted for all stock splits and reflect adoption of SFAS 128.

Operating income is gross margin less selling, general and administrative, and
research and development expense.

Return on investment is net earnings divided by average long-term debt plus
average shareholders' equity.

Long-term capitalization ratio is long-term debt divided by long-term debt plus
shareholders' equity.

(1)Excludes the cumulative effect of an accounting change of $2,206, or $.08 per
share, in 1994.


8

<TABLE> <CAPTION> 1997 1996 1995 1994 1993 1992 1991 --------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> <C> <C> $ 833,348 $ 758,646 $ 703,959 $ 593,503 $ 533,327 $ 482,104 $ 457,692 250,273 222,874 197,979 166,599 152,236 133,574 129,858 30.0% 29.4% 28.1% 28.1% 28.5% 27.7% 28.4% 82,715 75,642 65,531 52,079 45,246 41,249 41,304 9.9% 10.0% 9.3% 8.8% 8.5% 8.6% 9.0% 2,358 2,905 3,089 3,362 2,723 2,681 3,526 79,094 71,120 63,172 50,193 44,682 41,721 39,385 28,474 27,684 24,636 18,244 16,468 15,952 15,337 36.0% 38.9% 39.0% 36.3% 36.9% 38.2% 38.9% 50,620 43,436 38,536 31,949(1) 28,214 25,769 24,048 6.1% 5.7% 5.5% 5.4% 5.3% 5.3% 5.3% 21.4% 19.3% 18.8% 17.6% 16.9% 17.2% 18.0% 20.8% 18.5% 17.6% 16.0% 15.0% 14.8% 14.9% 467,501 402,850 381,042 337,360 300,217 286,348 253,194 283,367 250,751 247,904 220,308 196,014 187,360 169,398 177,346 138,578 123,747 115,757 93,666 89,956 77,537 106,021 112,173 124,157 104,551 102,348 97,404 91,861 1.6 1.8 2.0 1.9 2.1 2.1 2.2 42,674 13,145 20,800 16,956 7,595 11,425 6,380 4,201 10,041 10,167 16,028 18,920 23,482 25,673 46,875 23,186 30,967 32,984 26,515 34,907 32,053 243,865 228,880 221,173 189,697 174,008 160,303 138,947 1.7% 4.2% 4.4% 7.8% 9.8% 12.8% 15.6% 154,595 124,913 110,640 99,559 90,515 84,899 72,863 47,327 39,297 25,334 24,642 15,005 15,538 16,208 21,494 21,674 20,529 16,365 14,752 14,047 12,187 .99 .84 .73 .59(1) .51 .46 .42 .17 .15 .14 .12 .10 .09 .07 4.93 4.52 4.23 3.58 3.19 2.91 2.51 49,452 50,650 52,370 53,020 54,564 55,138 55,478 20.38 14.00 14.00 13.06 10.06 7.94 6.56 12.69 11.94 10.94 9.13 7.00 5.19 4.06 --------------------------------------------------------------------------------------------------------- </TABLE> 9

MANAGEMENT'S DISCUSSION AND ANALYSIS Results of Operations The following discussion of the company's financial condition and results of operations should be read in conjunction with the Consolidated Financial Statements and Notes thereto (including Note H, Segment Reporting) and other financial information included elsewhere in this Report. FISCAL 2001 COMPARED TO FISCAL 2000 The company reported record sales in 2001 of $1.137 billion. This was an increase of 4.1 percent over prior-year sales of $1.092 billion. Excluding the impact of businesses acquired in 2000, sales for the year ended July 31, 2001 were up 0.5 percent over the prior year. This modest growth in sales for the year reflected the diversification of our Industrial Products and Engine Products segments as shown by the strength in the gas turbine market offsetting the slump in the North American truck market. Sales for the Industrial Products segment were a record $530.2 million, up 26.7 percent over the prior year. Excluding the acquisition of DCE, sales for the year were up 18.9 percent from the prior year. Leading this increase were sales in gas turbine products with an increase over the prior year of 66.6 percent to record sales of $195.0 million, reflecting the continued high demand in this market. Sales in dust collection and special application products also increased from the prior year by 12.5 percent and 8.9 percent, respectively. Excluding the acquisition of DCE, dust collection product sales decreased 4.4 percent from the prior year. Sales for the Engine Products segment of $606.8 million were down 10.0 percent over the prior year reflecting the U.S. economic weakness and the strong U.S. dollar overseas. Worldwide markets for medium and heavy-duty trucks were severely depressed, reflected in a decrease in transportation product sales of 47.6 percent from the prior year. Excluding the company's second quarter exit from a block of truck related business due to unfavorable commercial terms, sales were down 37.1 percent from the prior year. Sales in off-road products decreased 5.9 percent from the prior year while aftermarket product sales increased 5.0 percent. Domestic Industrial Products sales increased 28.1 percent from the prior year. This increase was led by strong sales of gas turbine systems products domestically reflecting continued demand for large turbines in North America, with domestic sales almost doubling from the prior year. Domestic dust collection product sales grew slightly with an increase of 1.7 percent while sales in special application products domestically decreased 8.2 percent. Domestic Engine Products sales were down 10.5 percent from the prior year. The medium and heavy-duty truck market continued to show its effects on the company's transportation product sales domestically with a decrease of 51.8 percent from the prior year. This was somewhat offset by increases in domestic aftermarket and off-road product sales of 1.7 percent and 13.1 percent, respectively. In U.S. dollars, total international sales increased 5.6 percent from the prior year. Excluding the negative impact of foreign currency translation of $35.6 million, sales increased 14.4 percent over the prior year. Total international Industrial Products sales were up 24.9 percent from the prior year. Sales of all products within this segment were strong internationally, with increases across the board. Leading this growth were sales of dust collection products with an increase of 34.1 percent from the prior year. Sales of gas turbine products and special application products increased 20.2 percent and 18.9 percent from the prior year, respectively. Total international Engine Products sales were down 8.9 percent compared to the prior year despite an increase in aftermarket product sales of 11.3 percent. International sales of off-road and transportation products decreased from the prior year by 28.3 percent and 29.0 percent, respectively. The company reported record net earnings for 2001 of $75.5 million compared to $70.2 million in 2000, an increase of 7.6 percent. Net earnings per share - diluted were $1.66, up 10.0 percent from $1.51 in the prior year. With only a modest increase in sales, the increase in net earnings is also a result of cost management, particularly in plant rationalization efforts throughout the year and other cost reduction initiatives in the second half of the year. This along with the decrease in the company's effective tax rate due to increased profitability from foreign operations helped to offset the effect of negative foreign currency exchange rates. The Industrial Products segment continued to grow, contributing 46.6 percent of consolidated sales, approximately 70.0 percent of the operating income and all of the growth in operating income for the year. International operating income totaled approximately 68.9 percent and 62.1 percent of consolidated operating income in 2001 and 2000, respectively. International operations also contributed all of the growth in operating income. Europe's operating income increased 7.1 percent (16.2 percent in local currency) as a result of strong gas turbine results, the completion of the DCE integration and improved results in most markets. Asia-Pacific's operating 10

income increased by 38.0 percent (44.4 percent in local currency), led by increases from Japan's ROI improvement project and strong disk drive results in the Hong Kong and Wuxi, China, operations. Gross margin for 2001 remained virtually flat with only a slight increase to 30.1 percent compared to 30.0 percent in the prior year. This reflects an improved product mix and benefits of plant rationalization efforts, offsetting strong pricing pressure from major customers. Operating expenses as a percentage of sales for 2001 and 2000 were 20.2 percent and 20.3 percent, respectively. Operating expenses in 2001 totaled $229.6 million compared to $221.9 million in 2000, an increase of $7.7 million, or 3.5 percent. The increase in operating expenses relative to the prior year reflects higher sales levels and the continued impact of the businesses acquired in 2000. Selling expenses in 2001 were flat as compared to 2000. General and administrative expenses increased $7.2 million from the prior year. Interest expense increased $1.7 million, or 17.5 percent, primarily due to higher short-term debt levels throughout the year related to last year's acquisitions. Other income totaled $4.4 million in 2001 compared to other income of $4.6 million in the prior year. The major components of other income in 2001 were: interest income of $1.2 million, earnings from non-consolidated joint ventures of $3.0 million, and other miscellaneous income and expense items netting to $0.2 million of miscellaneous income. The effective income tax rate of 28.0 percent in 2001 decreased from the 30.0 percent tax rate in 2000. The tax rate was adjusted in the third quarter to provide for the increased contributions from the company's international operations in lower tax rate countries and reflects the foreign tax credit generated by the receipt of a dividend from the company's operations in Japan. The company anticipates that it will have a comparable proportion of income coming from its international operations located in lower tax rate countries in 2002. The company anticipates that its effective income tax rate will be approximately 28.0 percent in 2002. Total backlog was $355.3 million, up 7.2 percent from the same period last year. In the Industrial Products segment, total backlog increased 16.8 percent from the same period last year. In the Engine Products segment, total backlog was down 1.3 percent compared to the same period last year. Hard order backlog, goods scheduled for delivery in 90 days, was $179.9 million, down 2.1 percent from $183.7 million in the prior year. Within the Industrial Products segment, hard order backlog for gas turbine products increased 28.7 percent from the prior year. This increase was offset by decreases in dust collection and special application products of 26.2 percent and 24.1 percent, respectively, resulting in a slight overall increase in the Industrial Products segment from the prior year. In the Engine products segment, overall hard order backlog decreased 4.5 percent from the prior year. Within this segment, off-road and transportation products posted decreases of 6.4 percent and 16.3 percent, respectively, while aftermarket hard order backlog increased 4.5 percent from the prior year. FISCAL 2000 COMPARED TO FISCAL 1999 The company exceeded one billion dollars in sales in 2000, reporting record sales of $1.092 billion. This was an increase of 15.7 percent over prior-year sales of $944.1 million. Businesses acquired in this fiscal year contributed $56.7 million of revenues for the year. Excluding the impact of acquisitions, sales for the year ended July 31, 2000 were up 9.7 percent over the prior year. Sales for the Engine Products segment of $674.0 million were up 10.2 percent over the prior year. Sales for the Industrial Products segment of $418.3 million were up 25.7 percent over the prior year. Overall, growth was strong across essentially all the markets within both the Engine Products and Industrial Products segments with the exception of a 5.9 percent decline in sales of transportation products within the Engine Products segment, reflecting a slowdown in the North America heavy-duty truck market and a decrease in automotive sales due to the loss of the CK platform business. Continued increases in sales for the gas turbine systems and special application products reflected continued high demand in those markets. The increase in sales also reflected strengthening in other markets such as dust collection, engine aftermarket and off-road products. Domestic Engine Products sales were up 8.7 percent from the prior year. This increase was led by strong sales in engine aftermarket products, which increased domestically by 23.6 percent including businesses acquired during the year. Exclusive of acquisitions, domestic aftermarket product sales increased 10.4 percent. Domestic sales in off-road equipment products were also strong with an increase of 14.7 percent from the prior year reflecting growth in the agricultural, mining and large equipment markets compared to the prior year. Domestic sales in transportation products were down 1.8 percent with mixed results coming from an increase of 10.2 percent 11

in domestic truck sales offset by a sharp decline in domestic automotive sales. Domestic Industrial Products sales increased 17.8 percent from the prior year including businesses acquired during the year. Exclusive of acquisitions, domestic Industrial Products sales were still strong with an increase of 15.6 percent. This increase was led by continued strong sales of gas turbine systems products (55.4 percent increase from the prior year) reflecting continued demand for large turbines in North America. Domestic dust collection product sales grew at a more modest rate with an increase of 7.2 percent while increases in special applications products increased only slightly overall. In U.S. dollars, total international sales increased 23.0 percent from the prior year. Excluding the negative impact of foreign currency translation of $12.3 million, sales increased 26.8 percent over the prior year. Total international Engine Products sales were up 13.3 percent compared to the prior year despite lower overall sales of automotive products. International sales of off-road products and aftermarket products were strong, posting increases of 21.9 percent and 20.1 percent from the prior year, respectively. International Industrial Products sales were up 39.0 percent from the prior year including businesses acquired during the year. Businesses acquired during the year contributed $28.7 million of international sales in the Industrial Products segment. Excluding these sales, the Industrial Products segment showed an increase of 15.9 percent in international sales from the prior year. A sharp increase in international sales in dust collection products was due largely to acquisitions during the year but excluding acquisitions, sales still showed an increase of 6.7 percent. Also contributing to the increase in international sales for the Industrial Products segment were disk drive products and gas turbine products with increases of 18.8 percent and 14.9 percent, respectively, over the prior year. The company reported record net earnings for 2000 of $70.2 million compared to $62.4 million in 1999, an increase of 12.5 percent. Net earnings per share - diluted were $1.51, up 15.3 percent from the prior year. This reflects revenue growth as well as the impact of the company's stock repurchase program. An increase in sales levels from the prior year and the benefit from continued cost reduction efforts were the primary reasons for the higher earnings. The Industrial Products segment contributed almost half of the operating profit and all of the earnings growth for 2000. International operating income totaled approximately 62.1 percent and 57.6 percent of consolidated operating income in 2000 and 1999, respectively. Gross margin for 2000 increased to 30.0 percent compared to 29.2 percent in the prior year. The increase in gross margin for the year reflects the growth in net sales achieved in both operating segments of the company as well as the positive impact of the continuous focus on productivity improvements. Operating expenses as a percentage of sales for 2000 and 1999 were 20.3 percent and 19.8 percent, respectively. Operating expenses in 2000 totaled $221.9 million compared to $187.3 million in 1999, an increase of $34.6 million, or 18.5 percent. The increase in operating expenses relative to the prior year reflects higher sales levels and the impact of the acquired businesses. Selling expenses in 2000 increased $17.1 million, primarily due to the higher sales levels. General and administrative expenses increased $13.8 million from the prior year due to several factors including increased programming and information technology costs associated with Year 2000 efforts, increases in workers' compensation, increases in medical costs and employee compensation. In addition, there was $1.8 million of goodwill amortization related to the businesses acquired during the year. Interest expense increased $2.9 million, or 41.3 percent, primarily due to an increase in debt for the financing of acquisitions in the year as well as an increase in short-term borrowing. Other income totaled $4.6 million in 2000 compared to other income of $7.8 million in the prior year. The major components of other income in 2000 were: interest income of $2.7 million, earnings from non-consolidated joint ventures of $4.4 million, charitable contributions of $0.9 million, loss on sale of fixed assets of $1.0 million, and other miscellaneous income and expense items netting to $0.6 million of miscellaneous expense. The effective income tax rate of 30.0 percent in 2000 was unchanged from the 30.0 percent tax rate in 1999. Total backlog of $331.3 million was up 16.8 percent from the prior year-end. Hard order backlog, goods scheduled for delivery in 90 days, was $183.7 million and $157.1 million at July 31, 2000 and 1999, respectively. Hard order backlog for the Engine Products segment decreased slightly from 1999. This decrease resulted from a decrease in backlog for truck and automotive products of 32.1 percent, offset by double-digit increases in both aftermarket products and off-road equipment products of 22.2 percent and 15.5 percent, respectively. Hard order backlog for the Industrial Products segment increased $28.2 million from 1999. This increase was due to significant increases in backlog for both dust collection and 12

gas turbine products of 81.1 percent and 45.6 percent, respectively, followed by a more modest increase in special application products of 6.6 percent. Liquidity and Capital Resources FINANCIAL CONDITION At July 31, 2001, the company's capital structure was comprised of $59.4 million of current debt, $99.3 million of long-term debt and $319.1 million of shareholders' equity. The ratio of long-term debt to total long-term capital was 23.7 percent and 24.9 percent at July 31, 2001 and 2000, respectively. Total debt outstanding decreased $19.3 million to $158.7 million outstanding at July 31, 2001. The decrease resulted from a reduction in short-term borrowings outstanding at the end of the year of $25.6 million as compared to the prior year, offset by an increase in long-term debt of $6.6 million from the prior year. The increase in long-term debt is primarily due to the addition of a guaranteed note of $6.4 million in our Japan operations. The company has a multi-currency revolving credit facility totaling $100.0 million with a group of banks and an additional $35.0 million available for use under uncommitted facilities which provide unsecured borrowings for general corporate purposes. There was $57.7 million outstanding under these facilities at July 31, 2001. The company believes that the combination of present capital resources, internally generated funds, and unused financing sources are adequate to meet cash requirements for 2002. Shareholders' equity increased $38.9 million in 2001 to $319.1 million. The increase was primarily due to current year earnings of $75.5 million offset primarily by $10.3 million of treasury stock repurchases and $13.1 million of dividend payments as well as a foreign currency translation adjustment in other comprehensive income of $13.7 million. CASH FLOWS During fiscal 2001, $82.8 million of cash was generated from operating activities, compared with $88.5 million in 2000 and $100.9 million in 1999. The decrease in 2001 was primarily due to an increase in accounts receivable of $35.2 million during the year and contribution to employee pension plans offsetting increased earnings. In addition to cash generated from operating activities, the company decreased its outstanding short-term debt by $24.4 million while net long-term debt increased by $8.3 million. Cash flow generated by operations was used primarily to support $38.9 million for capital expenditures, $10.3 million for stock repurchases and $13.1 million for dividend payments. Cash and cash equivalents increased $4.1 million during 2001. Capital expenditures for property, plant and equipment totaled $38.9 million in 2001, compared to $36.4 million in 2000 and $29.5 million in 1999. Capital expenditures primarily related to productivity enhancing investments at various plants worldwide and continuing upgrades to the U.S. information systems. Capital spending in 2002 is planned to be $45.1 million. Significant planned expenditures include the further upgrade of U.S. information systems and investment in manufacturing equipment and tooling. It is anticipated that 2002 capital expenditures will be financed primarily by cash generated from operations. DIVIDENDS The company's dividend policy is to maintain a payout ratio which allows dividends to increase with the long-term growth of earnings per share, while sustaining dividends in down years. The company's dividend payout ratio target is 20.0 percent to 25.0 percent of the average earnings per share of the last three years. The current quarterly dividend of 7.5 cents per share equates to 20.1 percent of the 1999 through 2001 average net earnings per share. SHARE REPURCHASE PLAN In January 2001, the Board of Directors authorized the company to repurchase 4.5 million shares of common stock of which no shares had been repurchased as of July 31, 2001. Management and the Board of Directors believe the share repurchase program is an excellent means of returning value to the shareholders. In fiscal 2001, the company repurchased 0.5 million shares of common stock on the open market for $10.3 million under the share repurchase plan authorized in November 1998, at an average price of $21.16 per share. The company repurchased 1.7 million shares for $35.9 million in 2000 and 2.4 million shares for $44.5 million in 1999. ENVIRONMENTAL MATTERS The company has established reserves for potential environmental liabilities and plans to continue to accrue reserves in appropriate amounts. While uncertainties exist with respect to the amounts and timing 13

of the company's ultimate environmental liabilities, management believes that such liabilities, individually and in the aggregate, will not have a material adverse effect on the company's financial condition or results of operations. NEW ACCOUNTING STANDARDS In June 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards (SFAS) No. 141, "Business Com binations," and SFAS No. 142, "Goodwill and Other Intangible Assets." Major provisions of these statements are as follows: all business combinations must now use the purchase method of accounting, the pooling of interest method of accounting is now prohibited; intangible assets acquired in a business combination must be recorded separately from goodwill if they arise from contractual or other legal rights or are separable from the acquired entity and can be sold, transferred, licensed, rented or exchanged, either individually or as a part of a related contract, asset or liability; goodwill and intangible assets with indefinite lives are not amortized, but tested for impairment annually, except in certain circumstances, and whenever there is an impairment indicator; all acquired goodwill must be assigned to reporting units for purposes of impairment testing and segment reporting; effective August 1, 2002, goodwill is no longer subject to amortization. The company has adopted the provisions of these statements as of August 1, 2001. As required by SFAS 142, the company will perform an impairment test on goodwill and other intangible assets as of the adoption date. Thereafter, the company will perform impairment tests annually and whenever events or circumstances occur indicating that goodwill or other intangible assets might be impaired. Beginning August 1, 2001, amortization of goodwill will cease. Goodwill amortization expense was $3.8 million, $2.7 million and $0.7 million at July 31, 2001, 2000 and 1999, respectively. The company estimates that goodwill amortization expense would have been approximately $3.5 million in 2002. MARKET RISK The company's market risk includes the potential loss arising from adverse changes in foreign currency exchange rates and interest rates. The company manages foreign currency market risk, from time to time, through the use of a variety of financial and derivative instruments. The company does not enter into any of these instruments for trading purposes to generate revenue. Rather, the company's objective in managing these risks is to reduce fluctuations in earnings and cash flows associated with changes in foreign currency exchange rates. The company uses forward exchange contracts and other hedging activities to hedge the U.S. dollar value resulting from anticipated foreign currency transactions. The company's market risk on interest rates is the potential increase in fair value of long-term debt resulting from a potential decrease in interest rates. See further discussion of these market risks below. FOREIGN CURRENCY During 2001, the U.S. dollar strengthened throughout the year relative to the currencies of the foreign countries in which the company operates. The stronger dollar had a negative impact on the company's international results because the foreign denominated revenues and earnings directly translated into fewer U.S. dollars. It is not possible to determine the true impact of foreign currency translation changes; however, the direct effect on net sales and net earnings can be estimated. For the year ended July 31, 2001, the impact of foreign currency translation resulted in an overall decrease in net sales of $35.6 million and a decrease in net earnings of $3.2 million. The most significant impact on the company's results due to foreign currency translation was in Europe, where the stronger U.S. dollar relative to both the euro and pound sterling directly resulted in a decrease in net sales of $23.2 million and a decrease in net earnings of $2.9 million. The strength of the U.S. dollar relative to the Japanese yen during 2001 resulted in a decrease in net sales of $6.7 million and a decrease in net earnings of $0.2 million. In addition, fluctuation in the exchange rates for the Australian dollar and the South African rand also contributed to the company's translation losses, resulting in a decrease in net sales of $2.4 million and $3.0 million respectively. Going forward, the company expects local currency results to remain strong; excluding the effect of translation, revenues outside the U.S. increased 14.4 percent for the year ended July 31, 2001. The company maintains significant assets and operations in Europe, countries of the Asia-Pacific Rim, South Africa and Mexico. As a result, exposure to foreign currency gains and losses exists. A portion of the company's foreign currency exposure is hedged by incurring liabilities, including bank debt, denominated in the local currency in which the company's foreign subsidiaries are located. The foreign subsidiaries of the company purchase products and parts in various currencies. As a result, the company may be exposed to cost increases relative to local currencies in the markets to which it sells. To mitigate such adverse trends, the company, from time to time, enters into forward exchange contracts and other hedging 14

activities. Additionally, foreign currency positions are partially offsetting and are netted against one another to reduce exposure. Some products made in the United States are sold abroad, primarily in Canada. As a result, sales of such products are affected by the value of the U.S. dollar relative to other currencies. Any long-term strengthening of the U.S. dollar could depress these sales. Also, competitive conditions in the company's markets may limit its ability to increase product pricing in the face of adverse currency movements. INTEREST Our exposure to market risks for changes in interest rates relates primarily to our short-term investments, short-term borrowings and interest rate swap agreement. We have no earnings or cash flow exposure due to market risks on our long-term debt obligations as a result of the fixed-rate nature of the debt. However, interest rate changes would affect the fair market value of the debt. At July 31, 2001, the fair value of the company's long-term debt approximates market. Market risk is estimated as the potential decrease in fair value resulting from a hypothetical one-half percent increase in interest rates and amounts to approximately $3.2 million. On June 6, 2001, the company entered into an interest rate swap agreement effectively converting a portion of the company's interest rate exposure from a fixed rate to a variable rate basis to hedge against the risk of higher borrowing costs in a declining interest rate environment. The company does not enter into interest rate swap contracts for speculative or trading purposes; as the differential to be paid or received on the interest rate swap agreement is accrued and recognized as an adjustment to interest expense as interest rates change. The interest rate swap agreement has an aggregate notional amount of $27.0 million maturing on July 15, 2008. The variable rate is based on the current six-month London Interbank Offered Rates ("LIBOR"). This transaction resulted in a decrease to interest expense of $45,000 for the year ended July 31, 2001. Forward-Looking Statements The company desires to take advantage of the "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995 and is making this cautionary statement in connection with such safe harbor legislation. This Annual Report to Shareholders, any Form 10-K, Form 10-Q or Form 8-K of the company or any other written or oral statements made by or on behalf of the company may include forward-looking statements which reflect the company's current views with respect to future events and financial performance but involve uncertainties that could significantly impact results. The words "believe," "expect," "anticipate," "intends," "estimate," "forecast," "project," "should" and similar expressions are intended to identify "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. All forecasts and projections in this Annual Report are "forward-looking statements," and are based on management's current expectations of the company's near-term results, based on current information available pertaining to the company. The company wishes to caution investors that any forward-looking statements made by or on behalf of the company are subject to uncertainties and other factors that could cause actual results to differ materially from such statements. These uncertainties and other risk factors include, but are not limited to: risks associated with changing world economic and political factors, the company's international operations, interest and currency rate fluctuations, commodity prices, highly competitive markets, changes in capital spending levels by customers, changes in product demand and changes in the geographic and product mix of sales, integration of acquisitions and acquisition opportunities, ongoing plant and product line rationalization projects, ongoing information technology improvements, research and development expenditures, government laws and regulations, including diesel emissions controls. For a more detailed explanation of the foregoing and other risks, see exhibit 99 to our current Annual Report on Form 10-K, which is filed with the Securities and Exchange Commission. The company wishes to caution investors that other factors may in the future prove to be important in affecting the company's results of operations. New factors emerge from time to time and it is not possible for management to predict all such factors, nor can it assess the impact of each such factor on the business or the extent to which any factor, or a combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements. Investors are further cautioned not to place undue reliance on such forward-looking statements as they speak only to the company's views as of the date the statement is made. The company undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. 15

CONSOLIDATED STATEMENTS OF EARNINGS Donaldson Company, Inc. and Subsidiaries <TABLE> <CAPTION> (Thousands of dollars, except share and per share amounts) Year ended July 31, 2001 2000 1999 ------------------------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> Net sales $ 1,137,015 $ 1,092,294 $ 944,139 Cost of sales 795,281 764,773 668,458 ------------------------------------------------------------------------------------------------------------------------------- Gross Margin 341,734 327,521 275,681 Selling, general and administrative 201,201 194,623 163,688 Research and development 28,425 27,304 23,603 ------------------------------------------------------------------------------------------------------------------------------- Operating Income 112,108 105,594 88,390 Interest expense 11,608 9,880 6,993 Other (income) expense, net (4,428) (4,619) (7,813) ------------------------------------------------------------------------------------------------------------------------------- Earnings Before Income Taxes 104,928 100,333 89,210 Income taxes 29,380 30,100 26,763 ------------------------------------------------------------------------------------------------------------------------------- Net Earnings $ 75,548 $ 70,233 $ 62,447 =============================================================================================================================== Weighted Average Shares - Basic 44,381,082 45,716,482 46,899,127 =============================================================================================================================== Weighted Average Shares - Diluted 45,612,165 46,664,196 47,793,180 =============================================================================================================================== Net Earnings Per Share - Basic $ 1.70 $ 1.54 $ 1.33 =============================================================================================================================== Net Earnings Per Share - Diluted $ 1.66 $ 1.51 $ 1.31 =============================================================================================================================== </TABLE> The accompanying notes are an integral part of these consolidated financial statements. 16

CONSOLIDATED BALANCE SHEETS Donaldson Company, Inc. and Subsidiaries <TABLE> <CAPTION> (Thousands of dollars, except share amounts) At July 31, 2001 2000 ------------------------------------------------------------------------------------------------------------ <S> <C> <C> ASSETS Current Assets Cash and cash equivalents $ 36,136 $ 32,017 Accounts receivable, less allowance of $6,309 and $4,380 230,046 202,361 Inventories Raw materials 50,426 45,064 Work in process 21,209 20,171 Finished products 40,999 54,128 ------------------------------------------------------------------------------------------------------------ Total Inventories 112,634 119,363 Deferred income taxes 12,746 18,411 Prepaids and other current assets 15,665 11,195 ------------------------------------------------------------------------------------------------------------ Total Current Assets 407,227 383,347 Property, Plant and Equipment, at cost Land 6,890 7,432 Buildings 117,029 119,203 Machinery and equipment 345,073 333,310 Construction in progress 22,603 9,756 ------------------------------------------------------------------------------------------------------------ 491,595 469,701 Less accumulated depreciation (283,937) (265,156) ------------------------------------------------------------------------------------------------------------ 207,658 204,545 Deferred Income Taxes -- 408 Intangible Assets 61,658 63,885 Other Assets 30,287 25,340 ------------------------------------------------------------------------------------------------------------ $ 706,830 $ 677,525 ============================================================================================================ LIABILITIES & SHAREHOLDERS' EQUITY Current Liabilities Short-term borrowings $ 59,393 $ 85,034 Current maturities of long-term debt 23 279 Trade accounts payable 100,287 90,188 Accrued employee compensation and related taxes 29,945 29,759 Accrued liabilities 17,597 27,974 Other current liabilities 10,034 10,356 ------------------------------------------------------------------------------------------------------------ Total Current Liabilities 217,279 243,590 Long-term Debt 99,259 92,645 Deferred Income Taxes 9,189 -- Other Long-term Liabilities 62,010 61,125 Commitments and Contingencies (Note J) Shareholders' Equity Preferred stock, $1.00 par value, 1,000,000 shares authorized, none issued -- -- Common stock, $5.00 par value, 80,000,000 shares authorized, 49,655,954 shares issued in 2001 and 2000 248,280 248,280 Additional paid-in capital -- 2,967 Retained earnings 203,499 142,176 Accumulated other comprehensive loss (24,235) (10,523) Treasury stock - 5,273,121 and 4,998,342 shares in 2001 and 2000, at cost (108,451) (102,735) ------------------------------------------------------------------------------------------------------------ Total Shareholders' Equity 319,093 280,165 ------------------------------------------------------------------------------------------------------------ $ 706,830 $ 677,525 ============================================================================================================ </TABLE> The accompanying notes are an integral part of these consolidated financial statements. 17

CONSOLIDATED STATEMENTS OF CASH FLOWS Donaldson Company, Inc. and Subsidiaries <TABLE> <CAPTION> (Thousands of dollars) Year ended July 31, 2001 2000 1999 --------------------------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> OPERATING ACTIVITIES Net earnings $ 75,548 $ 70,233 $ 62,447 Adjustments to reconcile net earnings to net cash provided by operating activities Depreciation and amortization 38,577 34,326 27,686 Equity in (earnings) loss of affiliates (635) 74 (2,187) Deferred income taxes 7,093 (449) 489 Other (12,949) 3,121 10,344 Changes in operating assets and liabilities, net of acquired businesses Accounts receivable (35,220) (5,704) (13,244) Inventories 2,816 (26,227) 21,382 Prepaids and other current assets 2,838 (3,316) (3,095) Trade accounts payable and other accrued expenses 4,731 16,437 (2,960) --------------------------------------------------------------------------------------------------------------------------------- Net Cash Provided by Operating Activities 82,799 88,495 100,862 INVESTING ACTIVITIES Purchases of property and equipment, net (38,924) (36,417) (29,539) Acquisitions and investments in affiliates -- (88,220) (230) --------------------------------------------------------------------------------------------------------------------------------- Net Cash Used in Investing Activities (38,924) (124,637) (29,769) FINANCING ACTIVITIES Proceeds from long-term debt 9,462 5,752 35,546 Repayments of long-term debt (1,136) (4,522) (404) Change in short-term borrowings (24,417) 66,328 (24,422) Purchase of treasury stock (10,297) (35,923) (44,535) Dividends paid (13,092) (12,384) (10,830) Exercise of stock options 525 326 1,617 --------------------------------------------------------------------------------------------------------------------------------- Net Cash (Used in) Provided by Financing Activities (38,955) 19,577 (43,028) Effect of exchange rate changes on cash (801) (1,053) (1,084) --------------------------------------------------------------------------------------------------------------------------------- Increase (Decrease) in Cash and Cash Equivalents 4,119 (17,618) 26,981 Cash and Cash Equivalents, Beginning of Year 32,017 49,635 22,654 --------------------------------------------------------------------------------------------------------------------------------- Cash and Cash Equivalents, End of Year $ 36,136 $ 32,017 $ 49,635 ================================================================================================================================= </TABLE> The accompanying notes are an integral part of these consolidated financial statements. 18

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY Donaldson Company, Inc. and Subsidiaries <TABLE> <CAPTION> Accumulated Additional Other Common Paid-in Retained Comprehensive Treasury (Thousands of dollars, except per share amounts) Stock Capital Earnings Income (Loss) Stock Total -------------------------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> <C> <C> BALANCE JULY 31, 1998 $ 248,280 $ 1,570 $ 39,594 $ (5,135) $ (28,638) $ 255,671 -------------------------------------------------------------------------------------------------------------------------------- Comprehensive income Net earnings 62,447 62,447 Foreign currency translation (535) (535) ---------- Comprehensive income 61,912 Treasury stock acquired (44,535) (44,535) Stock options exercised (3,350) 3,004 (346) Performance awards (1,071) (174) 802 (443) Tax reduction - employee plans 1,334 1,334 Cash dividends ($.23 per share) (10,830) (10,830) -------------------------------------------------------------------------------------------------------------------------------- BALANCE JULY 31, 1999 248,280 1,833 87,687 (5,670) (69,367) 262,763 Comprehensive income Net earnings 70,233 70,233 Foreign currency translation (4,853) (4,853) ---------- Comprehensive income 65,380 Treasury stock acquired (35,923) (35,923) Stock options exercised (3,360) 2,555 (805) Tax reduction - employee plans 1,134 1,134 Cash dividends ($.27 per share) (12,384) (12,384) -------------------------------------------------------------------------------------------------------------------------------- BALANCE JULY 31, 2000 248,280 2,967 142,176 (10,523) (102,735) 280,165 Comprehensive income Net earnings 75,548 75,548 Foreign currency translation (13,717) (13,717) Additional minimum pension liability (341) (341) Net gain on cash flow hedging derivatives 346 346 ---------- Comprehensive income 61,836 Treasury stock acquired (10,297) (10,297) Stock options exercised (6,196) (1,124) 4,262 (3,058) Performance awards (9) 319 310 Tax reduction - employee plans 3,229 3,229 Cash dividends ($.295 per share) (13,092) (13,092) -------------------------------------------------------------------------------------------------------------------------------- BALANCE JULY 31, 2001 $ 248,280 $ -- $ 203,499 $ (24,235) $(108,451) $ 319,093 ================================================================================================================================ </TABLE> The accompanying notes are an integral part of these consolidated financial statements. 19

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Donaldson Company, Inc. and Subsidiaries A Summary of Significant Accounting Policies DESCRIPTION OF BUSINESS Donaldson Company, Inc., is a leading worldwide manufacturer of filtration systems and replacement parts. The company's product mix includes air and liquid filters and exhaust and emission control products for mobile equipment; in-plant air cleaning systems; air intake systems and exhaust products for industrial gas turbines; and specialized filters for such diverse applications as computer disk drives, aircraft passenger cabins and semi-conductor processing. Products are manufactured at more than three dozen Donaldson plants around the world and through three joint ventures. PRINCIPLES OF CONSOLIDATION The consolidated financial statements include the accounts of Donaldson Company, Inc. and all majority-owned subsidiaries (the company). All significant inter-company accounts and transactions have been eliminated. The company also has three joint ventures that are not majority-owned, all accounted for on the equity method. Certain amounts in prior periods have been reclassified to conform to the current presentation. The reclassifications had no impact on the company's net earnings or shareholders' equity as previously reported. USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles in the United States requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. FOREIGN CURRENCY TRANSLATION For most foreign operations, local currencies are considered the functional currency. Assets and liabilities are translated using the exchange rates in effect at the balance sheet date. Results of operations are translated using the average exchange rates prevailing throughout the period. Translation gains or losses, net of applicable deferred taxes, are accumulated in the foreign currency adjustment in accumulated other comprehensive income(loss) in shareholders' equity. There were no significant foreign currency transaction gains or losses in 2001. Foreign currency transaction losses of $0.2 million in 2000 and gains of $0.2 million in 1999 are included in earnings before income taxes. CASH EQUIVALENTS The company considers all highly liquid temporary investments with a maturity of three months or less when purchased to be cash equivalents. Cash equivalents are carried at cost which approximates market value. INVENTORIES Inventories are stated at the lower of cost or market. Domestic inventories are valued using the last-in, first-out (LIFO) method, while the international subsidiaries use the first-in, first-out (FIFO) method. Inventories valued at LIFO were approximately 53 percent and 52 percent of total inventories at July 31, 2001 and 2000, respectively. The FIFO cost of inventories valued under the LIFO method exceeded the LIFO carrying values by $22.5 million and $21.2 million at July 31, 2001 and 2000, respectively. PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment are stated at cost. Additions, improvements or major renewals are capitalized, while expenditures that do not enhance or extend the asset's useful life are charged to operating expense as incurred. Depreciation is computed principally by use of declining balance methods on facilities and equipment acquired on or prior to July 31, 1992. The company adopted the straight-line depreciation method for all property acquired after July 31, 1992. Accelerated depreciation methods are generally used for income tax purposes. The estimated useful lives of property, plant and equipment are as follows: -------------------------------------------------------------------------------- Buildings 10 to 40 years Machinery and equipment 3 to 10 years -------------------------------------------------------------------------------- INTANGIBLE ASSETS Intangible assets, primarily consisting of goodwill, are amortized on a straight-line basis over periods ranging up to 20 years. Amortization expense was $3.8 million, $2.7 million and $0.7 million at July 31, 2001, 2000 and 1999, respectively. Accumulated amortization was $9.6 million and $5.8 million as of July 31, 2001 and 2000, respectively. IMPAIRMENT OF LONG-LIVED ASSETS The company reviews the long-lived assets, including identifiable intangibles and associated goodwill, for impairment when events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. If impairment indicators are present and the estimated future undiscounted cash flows are less than the carrying value of the assets and any related goodwill, the carrying value is reduced to the estimated fair value as measured by the undiscounted cash flows. 20

INCOME TAXES Deferred tax assets and liabilities are recognized for the expected future tax consequences attributed to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis. Deferred tax assets and liabilities are measured using the enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to reverse. COMPREHENSIVE INCOME The company adopted Statement of Financial Accounting Standards (SFAS) 130, "Reporting Comprehensive Income," in the first quarter of fiscal 1999. Comprehensive income consists of net income, foreign currency translation adjustments, additional minimum pension liability and net gain or loss on cash flow hedging derivatives, and is presented in the Consolidated Statements of Changes in Shareholders' Equity. Accumulated other comprehensive income consists of accumulated foreign currency translation adjustment, accumulated additional minimum liability related to pension and accumulated net gain or loss on cash flow hedging derivatives. The adoption of SFAS 130 had no impact on the company's results of operations or shareholders' equity. EARNINGS PER SHARE The company follows SFAS 128, "Earnings per Share," to present earnings per share calculations. The company's basic net earnings per share is computed by dividing net earnings by the weighted average number of outstanding common shares. The company's diluted net earnings per share is computed by dividing net earnings by the weighted average number of outstanding common shares and dilutive shares relating to stock options. The following table presents information necessary to calculate basic and diluted earnings per share: (In thousands, except per share amounts) 2001 2000 1999 -------------------------------------------------------------------------------- Weighted average shares - basic 44,381 45,716 46,899 Dilutive shares 1,231 948 894 -------------------------------------------------------------------------------- Weighted average shares - diluted 45,612 46,664 47,793 ================================================================================ Net earnings for basic and diluted earnings per share computation $ 75,548 $ 70,233 $ 62,447 ================================================================================ Net earnings per share - basic $ 1.70 $ 1.54 $ 1.33 ================================================================================ Net earnings per share - diluted $ 1.66 $ 1.51 $ 1.31 ================================================================================ TREASURY STOCK Repurchased Common Stock is stated at cost and is presented as a separate reduction of shareholders' equity. RESEARCH AND DEVELOPMENT All expenditures for research and development are charged against earnings in the year incurred. STOCK-BASED COMPENSATION SFAS 123, "Accounting for Stock-Based Compensation," encourages, but does not require, companies to record compensation cost for stock-based employee compensation plans at fair value. The company has chosen to continue to account for stock-based compensation using the intrinsic value method prescribed in Accounting Principles Board (APB) Opinion No. 25, "Accounting for Stock Issued to Employees," and related Interpretations. Accordingly, compensation cost for stock options is measured as the excess, if any, of the quoted market price of the company's stock at the date of the grant over the amount an employee must pay to acquire the stock. Compensation cost for performance equity units is recorded based on the quoted market price of the company's stock at the end of the period. REVENUE RECOGNITION Revenue is recognized when product is shipped and invoiced or performance of services is complete. PRODUCT WARRANTIES The company provides for estimated warranty costs and accrues for specific items at the time their existence is known and the amounts are determinable. DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES The company adopted SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," as amended by SFAS No. 138, "Accounting for Certain Derivative Instruments and Certain Hedging Activities - an amendment of FASB Statement No. 133," effective beginning fiscal 2001. SFAS 133 and SFAS 138 require the company to recognize all derivatives on the balance sheet at fair value. Derivatives that are not hedges must be adjusted to fair value through income. If the derivative is a hedge, depending on the nature of the hedge, changes in the fair value of the hedged assets, liabilities or firm commitments are recognized through earnings or in other comprehensive income until the hedged item is recognized in earnings. The ineffective portion of a derivative's change in fair value will be immediately recognized in earnings. The company enters into foreign exchange contracts and other hedging activities to mitigate potential foreign currency gains and losses relative to local currencies in the markets to which it sells. 21

In order to comply with the implementation requirements of SFAS 133 and SFAS 138, the company undertook a comprehensive review of its contractual relationships to ensure that all potential free-standing and embedded derivatives were identified. As a result, all of the company's existing derivative positions qualified for hedge accounting per SFAS 133 and SFAS 138, and the impact of adoption was not considered material to the company's results of operations or financial position. The company's documentation policies for derivatives were revised as considered necessary to comply with SFAS 133 requirements. However, the company made no substantive changes to its risk management strategy as a result of adopting SFAS 133 and SFAS 138. As a result of the implementation of SFAS 133 and SFAS 138, the company has recorded a credit to other comprehensive income of $0.3 million for the year ended July 31, 2001. In June 2001 the company entered into an interest rate swap agreement which was determined to be a fair value hedge under SFAS 133 and SFAS 138 (see Note D). As of July 31, 2001, the interest rate swap had a fair value of $0.2 million which has been recorded as an increase to long-term debt. As a result of adopting these new accounting standards, there has been no material impact on the results of operations of the company for fiscal year ended July 31, 2001. NEW ACCOUNTING STANDARDS In June 2001, the Financial Accounting Standards Board issued SFAS No. 141, "Business Combinations," and SFAS No. 142, "Goodwill and Other Intangible Assets." Major provisions of these statements are as follows: all business combinations must now use the purchase method of accounting, the pooling of interest method of accounting is now prohibited; intangible assets acquired in a business combination must be recorded separately from goodwill if they arise from contractual or other legal rights or are separable from the acquired entity and can be sold, transferred, licensed, rented or exchanged, either individually or as a part of a related contract, asset or liability; goodwill and intangible assets with indefinite lives are not amortized, but tested for impairment annually, except in certain circumstances, and whenever there is an impairment indicator; all acquired goodwill must be assigned to reporting units for purposes of impairment testing and segment reporting; effective August 1, 2002, goodwill is no longer subject to amortization. The company has adopted the provisions of these statements as of August 1, 2001. As required by SFAS 142, the company will perform an impairment test on goodwill and other intangible assets as of the adoption date. Thereafter, the company will perform impairment tests annually and whenever events or circumstances occur indicating that goodwill or other intangible assets might be impaired. Beginning August 1, 2001, amortization of goodwill will cease. Goodwill amortization expense was $3.8 million, $2.7 million and $0.7 million at July 31, 2001, 2000 and 1999, respectively. The company estimates that goodwill amortization expense would have been approximately $3.5 million in 2002. B Acquisitions, Plant Closure and Plant Opening ACQUISITIONS All acquisitions were accounted for as purchases. The purchase prices assigned to the net assets acquired were based on the fair value of such assets and liabilities at the respective acquisition dates. The operating results of these acquired companies have been included in the consolidated statement of earnings from the dates of acquisition. Consolidated pro forma earnings and earnings per share would not be materially different from the reported amounts for all years presented. The company completed the purchase of all of the outstanding shares of AirMaze Corporation for $31.9 million in cash effective November 1, 1999. AirMaze Corporation was merged into Donaldson Company, Inc. effective April 1, 2000. AirMaze products include heavy-duty air and liquid filters, air/oil separators and high purity air filter products. AirMaze manufacturing facilities are located in Stow, Ohio and Greeneville, Tennessee. The excess of purchase price over the fair values of the net assets acquired was $26.8 million and has been recorded as goodwill which is being amortized on a straight-line basis over 20 years. AirMaze operations are a part of the company's Engine Products segment. As of July 31, 2001, the balance of restructuring liabilities recorded in conjunction with the acquisition was approximately $0.2 million for costs associated with the termination and relocation of employees. Costs incurred and charged to this reserve associated with the termination and relocation of employees amounted to $0.3 million for the fiscal year ended July 31, 2001. 22

The integration of AirMaze resulted in a reduction in the work force of approximately 15 employees during fiscal 2001. Adjustments to this reserve for the fiscal year ended July 31, 2001, amounted to a decrease of $0.7 million. The remaining employee terminations and relocations are expected to be completed by the end of fiscal 2002. The company acquired the DCE dust control business of Invensys, plc for $56.4 million effective February 1, 2000. DCE, headquartered in Leicester, England (UK) with smaller facilities in Germany and the United States and assembly operations in South Africa, Australia and Japan, is a major participant in the global dust collection industry. The excess of purchase price over the fair values of the net assets acquired was $33.2 million and has been recorded as goodwill which is being amortized on a straight-line basis over 20 years. DCE operations are part of the company's Industrial Products segment. As of July 31, 2001, the balance of restructuring liabilities recorded in conjunction with the acquisition was approximately $2.1 million of costs associated with the closure and sale of acquired facilities as well as termination and relocation of employees. Costs incurred and charged to these reserves associated with the closure and sale of acquired facilities amounted to $0.8 million for the fiscal year ended July 31, 2001. Costs incurred and charged to these reserves associated with the termination and relocation of employees amounted to $0.8 million during the year ended July 31, 2001. The integration of DCE resulted in a reduction in the work force of approximately 140 employees during fiscal 2001. Adjustments to these reserves for the fiscal year ended July 31, 2001, amounted to an increase of $0.9 million. The remaining closure or sale of facilities and employee terminations and relocations are expected to be completed by the end of fiscal 2002. PLANT CLOSURES During 2001, the company closed its manufacturing facilities located in Mooresville, North Carolina, and Louisville, Kentucky. The closures of these facilities were completed by the end of the fiscal year. For the closure of the Mooresville manufacturing facility, a pretax charge of $0.7 million was recorded in fiscal 2001 in general and administrative expense in the company's consolidated statement of earnings. For the closure of the Louisville manufacturing facility, costs were charged against the purchase liabilities recorded in conjunction with the acquisition of DCE. See discussion of these purchase liabilities in Note B. These charges were primarily related to severance and other employee related costs associated with the elimination of approximately 130 positions in Mooresville and 80 positions in Louisville. During 2000, the company closed its manufacturing facilities located in Oelwein, Iowa. The closure of the facility was completed by the end of the calendar year. A pretax charge of $2.8 million was recorded in fiscal 1999 in general and administrative expense in the company's consolidated statement of earnings. The charge was primarily related to severance and other employee related costs associated with the elimination of approximately 125 positions. PLANT OPENING During fiscal 2000, the company opened a new manufacturing facility in Auburn, Alabama. The facility was constructed to produce mufflers for the truck manufacturers located in the southwestern U.S. region and employs approximately 100 employees. C Credit Facilities In December 1997, the company amended and renewed a five-year multi-currency revolving facility with a group of participating banks under which it may borrow up to $100.0 million. The agreement provides that loans may be made under a selection of currencies and rate formulas including Base Rate Advance or Eurocurrency Rate Advance. The interest rate on each advance is based on certain adjusted leverage and debt-to-capitalization ratios. Facility fees and other fees on the entire loan commitment are payable for the duration of this facility. There was $50.0 million outstanding under this credit facility, leaving $50.0 million available for further borrowing under such facility at both July 31, 2001 and 2000. The weighted average interest rate on short-term borrowings outstanding at July 31, 2001 and 2000 was 3.99 percent and 6.83 percent, respectively. The company also has three agreements under uncommitted credit facilities which provide unsecured borrowings for general corporate purposes. At July 31, 2001, there was $35.0 million available for use under these facilities. There was $7.7 million and $12.6 million outstanding under these facilities at July 31, 2001 and 2000, respectively. The weighted average interest rate on short-term borrowings outstanding at July 31, 2001 and 2000 was 3.98 percent and 6.89 percent, respectively. 23

International subsidiaries may borrow under various credit facilities. As of July 31, 2001 and 2000, borrowings under these facilities were $1.7 million and $22.4 million, respectively. The weighted average interest rate on these international borrowings outstanding at July 31, 2001 and 2000 was 10.7 percent and 4.7 percent, respectively. D Long-Term Debt Long-term debt consists of the following: (Thousands of dollars) 2001 2000 ------------------------------------------------------------------------------- 6.20% Unsecured senior notes due July 15, 2005, interest payable semi-annually, principal payment of $23.0 million is due July 15, 2005 $ 23,000 $ 23,000 6.31% Unsecured senior notes due July 15, 2008, interest payable semi-annually, principal payment of $27.2 million is due July 15, 2008 27,157 27,000 6.39% Unsecured senior notes due August 15, 2010, interest payable semi-annually, principal payments of $5.0 million, to be paid annually commencing August 16, 2006 25,000 25,000 1.9475% Guaranteed senior note due January 29, 2005, interest payable semi-annually, principal amount of 1.2 billion Yen is due January 29, 2005 9,592 10,962 1.51% Guaranteed note due March 28, 2006, interest payable quarterly, principal amount of .8 billion Yen is due March 28, 2006 6,395 -- Variable Rate Industrial Development Revenue Bonds ("Lower Floaters") due September 1, 2024, principal amount of $8.0 million, interest payable monthly, and an interest rate of 2.8% as of July 31, 2001 8,000 5,667 Other 138 1,295 ------------------------------------------------------------------------------- Total 99,282 92,924 Less current maturities 23 279 ------------------------------------------------------------------------------- Total long-term debt $ 99,259 $ 92,645 =============================================================================== Annual maturities of long-term debt for the next five years are $32.6 million in 2005 and $6.4 million in 2006. Annual maturities in 2002, 2003 and 2004 are not significant. The company estimates that the carrying value of long-term debt approximates its fair market value. On June 6, 2001, the company entered into an interest rate swap agreement effectively converting a portion of the company's interest rate exposure from a fixed rate to a variable rate basis to hedge against the risk of higher borrowing costs in a declining interest rate environment. The company does not enter into interest rate swap contracts for speculative or trading purposes; as the differential to be paid or received on the interest rate swap agreement is accrued and recognized as an adjustment to interest expense as interest rates change. The interest rate swap agreement has an aggregate notional amount of $27.0 million maturing on July 15, 2008. The variable rate is based on the current six-month London Interbank Offered Rates ("LIBOR"). This transaction resulted in a decrease to interest expense of $45,000 for the year ended July 31, 2001. Total interest paid relating to all debt was $11.1 million, $9.1 million and $6.0 million in 2001, 2000 and 1999, respectively. In addition, total interest expense recorded in 2001, 2000 and 1999 was $11.6 million, $9.9 million and $7.0 million, respectively. Certain note agreements contain debt covenants related to working capital levels and limitations on indebtedness. Further, the company is restricted from paying dividends or repurchasing Common Stock if its tangible net worth (as defined) does not exceed certain minimum levels. As of July 31, 2001, the company was in compliance with all such covenants. E Employee Benefit Plans PENSION PLANS Donaldson Company, Inc. and certain of its subsidiaries have defined benefit pension plans for substantially all hourly and salaried employees. The domestic plan provides defined benefits pursuant to a cash balance feature whereby a participant accumulates a benefit comprised of a percentage of current salary which varies with years of service, interest credits and transition credits. The international plans generally provide pension benefits based on years of service and compensation level. The company's general funding policy is to make contributions as required by applicable regulations. The assets are primarily invested in diversified equity and debt portfolios. In 2000, the actuarial valuation date was changed from July 31 to April 30. This change did not have a material impact on the actuarial valuation. Costs for the company's pension plans include the following components: (Thousands of dollars) 2001 2000 1999 ------------------------------------------------------------------------------- Net periodic cost: Service cost $ 6,935 $ 6,084 $ 5,609 Interest cost 11,626 9,852 9,188 Expected return on assets (12,862) (11,475) (10,006) Transition amount amortization 173 (1,097) (1,097) Prior service cost amortization 119 64 30 Actuarial (gain) loss amortization (829) 71 1,094 Curtailment loss -- -- 684 ------------------------------------------------------------------------------- Net periodic benefit cost $ 5,162 $ 3,499 $ 5,502 =============================================================================== 24

The funded status of the company's pension plans as of April 30, 2001 and April 30, 2000, is as follows: (Thousands of dollars) 2001 2000 ------------------------------------------------------------------------------- Change in benefit obligation: Benefit obligation, August 1 N/A $ 131,996 Adjustment for change in measurement date N/A 1,841 ------------------------------------------------------------------------------- Benefit obligation, May 1 $ 137,056 133,837 Addition of non-U.S. plans 16,589 -- Service cost 6,936 6,085 Interest cost 11,626 9,852 Participant contributions 125 -- Plan amendments 174 568 Actuarial (gain)/loss (10,012) (11,472) Currency exchange rates (2,022) -- Acquisition -- 6,419 Benefits paid (10,371) (8,233) ------------------------------------------------------------------------------- Benefit obligations, April 30 $ 150,101 $ 137,056 =============================================================================== Change in plan assets: Fair value of plan assets, August 1 N/A $ 130,387 Adjustments for change in measurement date N/A 17,461 ------------------------------------------------------------------------------- Fair value of plan assets, May 1 $ 146,210 147,848 Addition of non-U.S. plans 7,857 -- Actual return on plan assets (10,978) (1,659) Company contributions 11,250 2,168 Participant contributions 125 -- Currency exchange rates (892) -- Acquisition -- 6,086 Benefits paid (10,371) (8,233) ------------------------------------------------------------------------------- Fair value of plan assets, April 30 $ 143,201 $ 146,210 =============================================================================== Reconciliation of funded status: Funded (unfunded) status $ (6,900) $ 9,154 Unrecognized actuarial (gain) loss 2,322 (12,196) Unrecognized prior service cost 2,527 2,472 Unrecognized net transition obligation 3,792 (3,769) Fourth quarter contributions 1,891 52 ------------------------------------------------------------------------------- Net amount recognized in consolidated balance sheet $ 3,632 (4,287) =============================================================================== Amounts recognized in consolidated balance sheet consist of: Prepaid benefit cost $ 9,853 $ 4,614 Accrued benefit liability (6,220) (8,901) Additional minimum liability (5,126) (280) Intangible asset 4,784 280 Accumulated other comprehensive income 341 -- ------------------------------------------------------------------------------- Net amount recognized in consolidated balance sheet $ 3,632 $ (4,287) =============================================================================== The 2000 actuarial valuation results have been revised to reflect the final valuation of a plan assumed in the acquisition of AirMaze (see Note B). The projected benefit obligation, accumulated benefit obligation, and fair value of plan assets for pension plans with accumulated benefit obligations in excess of plan assets were $20.9 million, $17.1 million, and $5.8 million, respectively, as of April 30, 2001 and $8.6 million, $5.4 million and $0.8 million, respectively, as of April 30, 2000. Weighted-average actuarial assumptions APRIL 30, 2001 July 31, 2000 July 31, 1999 ------------------------------------------------------------------------------- Discount rate 7.50% 8.00% 7.50% Expected return on plan assets 9.50% 9.00% 9.00% ------------------------------------------------------------------------------- Rate of compensation increase 5.50% 6.00% 6.00% =============================================================================== Pension expense related to international plans were $4.3 million, $2.5 million and $2.5 million for 2001, 2000 and 1999, respectively. 401(k) SAVINGS PLAN The company provides a contributory employee savings plan which permits participants to make contributions by salary reduction pursuant to section 401(k) of the Internal Revenue Code. The company's contributions under this plan are based on the level of employee contributions including a variable contribution based on performance of the company. Total contribution expense was $4.1 million, $4.2 million and $4.9 million for the years ended July 31, 2001, 2000 and 1999, respectively. F Shareholders' Equity STOCK RIGHTS On January 12, 1996, the Board of Directors of the company approved the extension of the benefits afforded by the company's existing rights plan by adopting a new shareholder rights plan. Pursuant to the new Rights Agreement, dated as of January 12, 1996, by and between the company and Wells Fargo Bank Minnesota, National Association, as Rights Agent, one Right was issued on March 4, 1996 for each outstanding share of Common Stock, par value $5.00 per share, of the company upon the expiration of the company's existing Rights. Each of the new Rights entitles the registered holder to purchase from the company one one-thousandth of a share of Series A Junior Participating Preferred Stock, without par value, at a price of $130.00 per one one-thousandth of a share. The Rights, however, will not become exercisable unless and until, among other things, any person acquires 15 percent or more of the outstanding Common Stock of the company. 25

If a person acquires 15 percent or more of the outstanding Common Stock of the company (subject to certain conditions and exceptions more fully described in the Rights Agreement), each Right will entitle the holder (other than the person who acquired 15 percent or more of the outstanding Common Stock) to purchase Common Stock of the company having a market value equal to twice the exercise price of a Right. The new Rights are redeemable under certain circumstances at $.01 per Right and will expire, unless earlier redeemed, on March 3, 2006. EMPLOYEE INCENTIVE PLANS In November 1991, shareholders approved the 1991 Master Stock Compensation Plan. The Plan extends through December 2001 and allows for the granting of nonqualified stock options, incentive stock options, restricted stock, stock appreciation rights (SARs), dividend equivalents, dollar-denominated awards and other stock-based awards. The Plan allows for the granting of performance awards to a limited number of key executives. The awards are payable in Common Stock and are based on a formula which measures performance of the company over a three-year period. Performance award expense totaled $2.4 million and $1.7 million in 2001 and 2000, respectively. There was no performance award expense in 1999. Options under the Plan are granted to key employees at or above 100 percent of the market price at the date of grant. Options are exercisable for up to 10 years from the date of grant. STOCK OPTIONS Stock options issued during fiscal 1999, 2000 and 2001 become exercisable for non-executives in each of the following three years, in an equal number of shares each year and become exercisable for executives immediately upon the date of grant. Stock options issued during fiscal 1997 and 1998 become exercisable in each of the following three years, in an equal number of shares each year, for both executives and non-executives. Stock options issued prior to fiscal l997 for non-executives and during fiscal 1996 for executives become exercisable in a four-year period in an equal number of shares each year. Prior to fiscal 1996, stock options vested immediately for executives. At July 31, 2001, options to purchase 3,464,159 shares are outstanding. In fiscal 1997, the company adopted the disclosure-only provisions of SFAS 123, "Accounting for Stock-Based Compensation." SFAS 123 encourages entities to adopt a fair value-based method of accounting for employee stock compensation plans, but allows companies to continue to account for those plans using the accounting prescribed by APB Opinion 25, "Accounting for Stock Issued to Employees." The company has elected to continue to account for stock-based compensation using APB 25, making pro forma disclosures of net earnings and earnings per share as if the fair value-based method had been applied. Accordingly, no compensation expense has been recorded for the stock option plan. Had compensation expense for the stock option plan been determined under SFAS 123 in fiscal 2001, 2000 and 1999, the company's net income and diluted earnings per share would have been approximately $71.0 million and $1.56, and $67.7 million and $1.45, and $61.1 million and $1.28, respectively. The pro forma effect on net income and earnings per share is not representative of the pro forma net earnings in future years because it does not take into consideration pro forma compensation expense related to grants made prior to 1996. For purposes of computing compensation cost of stock options granted, the fair value of each stock option grant was estimated on the date of grant using the Black-Scholes option pricing model with the following weighted-average assumptions: risk free interest rate of 4.72 percent, 6.50 percent and 5.50 percent in 2001, 2000 and 1999, respectively; two or seven year lives in 2001 and 2000 and two, three, or seven year lives in 1999; expected volatility of 30.5 percent, 29.7 percent and 26.3 percent in 2001, 2000 and 1999, respectively; and 1 percent expected dividend yield in 2001, 2000 and 1999. Black-Scholes is a widely accepted stock option pricing model; however, the ultimate value of stock options granted will be determined by the actual lives of options granted and the actual future price levels of the company's common stock. The weighted average fair value for options granted during fiscal 2001, 2000 and 1999 is $8.01, $7.49 and $5.62 per share, respectively. 26

The number and option price of options granted were as follows: Weighted Options Average Outstanding Exercise Price -------------------------------------------------------------------------------- Outstanding at July 31, 1998 3,348,176 $ 12.95 Granted 495,149 20.10 Exercised (432,505) 8.65 Canceled (28,498) 18.35 -------------------------------------------------------------------------------- Outstanding at July 31, 1999 3,382,322 14.50 Granted 489,086 23.01 Exercised (204,004) 10.09 Canceled (14,468) 20.41 -------------------------------------------------------------------------------- Outstanding at July 31, 2000 3,652,936 15.86 Granted 862,515 26.04 Exercised (1,025,995) 12.88 Canceled (25,297) 21.19 -------------------------------------------------------------------------------- Outstanding at July 31, 2001 3,464,159 $ 19.24 ================================================================================ At July 31, 2001 and 2000 there were 2,954,542 and 3,109,926 options exercisable, respectively. Shares reserved at July 31, 2001 for outstanding options and future grants were 8,140,639. The following table summarizes information concerning currently outstanding and exercisable options: Weighted Average Weighted Weighted Range of Remaining Average Average Exercise Number Contractual Exercise Number Exercise Prices Outstanding Life (Years) Price Exercisable Price -------------------------------------------------------------------------------- $5 to $10 201,888 1.21 $ 8.73 201,888 $ 8.73 $10 to $15 837,194 2.69 12.15 837,194 12.15 $15 to $20 738,728 6.11 18.08 670,441 17.89 $20 to $25 964,827 7.22 22.90 794,297 22.92 $25 and above 721,522 8.34 26.67 450,722 27.17 -------------------------------------------------------------------------------- 3,464,159 5.77 $19.24 2,954,542 $18.41 ================================================================================ G Income Taxes The components of earnings before income taxes are as follows: (Thousands of dollars) 2001 2000 1999 -------------------------------------------------------------------------------- Earnings before income taxes: United States $ 48,705 $ 54,913 $ 55,811 Foreign 56,223 45,420 33,399 -------------------------------------------------------------------------------- Total $104,928 $100,333 $ 89,210 ================================================================================ The components of the provision for income taxes are as follows: (Thousands of dollars) 2001 2000 1999 -------------------------------------------------------------------------------- Income Taxes: Current: Federal $ 8,502 $ 18,192 $ 16,717 State 622 2,361 2,471 Foreign 13,163 9,996 7,086 -------------------------------------------------------------------------------- 22,287 30,549 26,274 -------------------------------------------------------------------------------- Deferred: Federal 7,304 52 426 State 417 3 24 Foreign (628) (504) 39 -------------------------------------------------------------------------------- 7,093 (449) 489 -------------------------------------------------------------------------------- Total $ 29,380 $ 30,100 $ 26,763 ================================================================================ The tax effects of temporary differences that give rise to deferred tax assets and liabilities are as follows: (Thousands of dollars) 2001 2000 1999 ------------------------------------------------------------------------------- Deferred tax assets: Compensation and retirement plans $ 3,619 $ 12,839 $ 8,950 Accrued expenses 6,938 7,818 9,617 NOL carryforwards 6,092 8,174 3,560 Inventories 1,938 1,526 1,595 Investment in joint venture 636 754 588 Cumulative translation adjustment -- 4,574 2,494 Other 3,215 3,162 3,267 ------------------------------------------------------------------------------- Gross deferred tax assets 22,438 38,847 30,071 Valuation allowance $ (2,054) $ (4,499) $ (2,432) ------------------------------------------------------------------------------- Net deferred tax assets 20,384 34,348 27,639 Deferred tax liabilities: Depreciation and amortization (16,209) (14,626) (11,235) Other (618) (903) (1,625) ------------------------------------------------------------------------------- Gross deferred tax liabilities (16,827) (15,529) (12,860) ------------------------------------------------------------------------------- Net deferred tax assets $ 3,557 $ 18,819 $ 14,779 =============================================================================== 27

The following table reconciles the U.S. statutory income tax rate with the effective income tax rate: 2001 2000 1999 ------------------------------------------------------------------------------- Statutory U.S. federal rate 35.0% 35.0% 35.0% State income taxes 0.4 1.5 1.8 Foreign taxes at lower rates (8.2) (6.1) (5.5) Other 0.8 (0.4) (1.3) ------------------------------------------------------------------------------- 28.0% 30.0% 30.0% =============================================================================== At July 31, 2001, certain international subsidiaries had available net operating loss carryforwards of approximately $20.0 million to offset future taxable income. The majority of such carryforwards expire after 2003. Due to the uncertainty of the realizability of a portion of these losses, a valuation allowance of $2.1 million has been recorded as of July 31, 2001. Unremitted earnings of international subsidiaries amounted to approximately $133.5 million at July 31, 2001. The majority of those earnings are intended to be indefinitely reinvested and, accordingly, no deferred U.S. income taxes have been provided. If a portion were to be remitted, foreign tax credits would substantially offset any resulting incremental U.S. income tax liability. It is not practicable to estimate the amount of unrecognized taxes on these undistributed earnings due to the complexity of the computation. The company made cash payments for income taxes of $16.2 million, $24.6 million and $20.8 million in 2001, 2000 and 1999, respectively. H Segment Reporting The company adopted SFAS 131, "Disclosures about Segments of an Enterprise and Related Information," effective with fiscal year-end 1999. This standard requires companies to disclose selected financial data by operating segment. A segment is defined as a component with business activity resulting in revenue and expense that has separate financial information evaluated regularly by the company's chief operating decision maker in determining resource allocation and assessing performance. The company has identified two reportable segments: Engine Products and Industrial Products. Segment selection was based on the internal organizational structure, management of operations and performance evaluation by management and the company's Board of Directors. The Engine Products segment sells to original equipment manufacturers (OEMs) in the construction, industrial, mining, agriculture and transportation markets and to independent distributors, OEM dealer networks, private label accounts and large private fleets. Products include air intake systems, exhaust systems, liquid filtration systems and replacement filters. The Industrial Products segment sells to various industrial end-users, OEMs of gas-fired turbines, OEMs and end-users requiring highly purified air. Products include dust, fume and mist collectors, static and pulse-clean air filter systems and specialized air filtration systems. Corporate and Unallocated include corporate expenses determined to be non-allocable to the segments, interest income and expense, non-operating income and expense, and expenses not allocated to the business segments in the same period. Assets included in Corporate and Unallocated principally are cash and cash equivalents, inventory reserves, certain prepaids, certain investments, other assets and assets allocated to intercompany transactions. The company has developed an internal measurement system to evaluate performance and allocate resources based on profit or loss from operations before income taxes. The company's manufacturing facilities serve both reporting seg ments. Therefore, the company uses a complex allocation methodology to assign costs and assets to the segments. A certain amount of costs and assets are assigned to intercompany activity and are not assigned to either segment. Certain accounting policies applied to the reportable segments differ from those described in the summary of significant accounting policies. The reportable segments account for receivables on a gross basis and account for inventory on a standard cost basis. Segment allocated assets are primarily accounts receivable, inventories and property, plant and equipment. Reconciling items included in Corporate and Unallocated are created based on accounting differences between segment reporting and the consolidated, external reporting as well as internal allocation methodologies. 28

Segment detail is summarized as follows (in thousands): Engine Industrial Corporate & Total Products Products Unallocated Company -------------------------------------------------------------------------------- 2001 Net sales $ 606,810 $ 530,205 $ -- $1,137,015 Depreciation and amortization 23,100 11,268 4,209 38,577 Equity earnings in unconsolidated affiliates 3,017 -- -- 3,017 Earnings before income taxes 49,539 72,891 (17,502) 104,928 Assets 315,706 228,505 162,619 706,830 Equity investments in unconsolidated affiliates 14,115 -- -- 14,115 Capital expenditures, net of acquired businesses 23,308 11,370 4,246 38,924 ================================================================================ 2000 Net sales $ 673,982 $ 418,312 $ -- $1,092,294 Depreciation and amortization 20,959 8,509 4,858 34,326 Equity earnings in unconsolidated affiliates 4,392 -- -- 4,392 Earnings before income taxes 57,453 53,862 (10,982) 100,333 Assets 320,805 172,837 183,883 677,525 Equity investments in unconsolidated affiliates 13,600 -- -- 13,600 Capital expenditures, net of acquired businesses 22,236 9,028 5,153 36,417 ================================================================================ 1999 Net sales $ 611,378 $ 332,761 $ -- $ 944,139 Depreciation and amortization 18,486 7,506 1,694 27,686 Equity earnings in unconsolidated affiliates 3,610 -- -- 3,610 Earnings before income taxes 61,896 36,373 (9,059) 89,210 Assets 327,035 160,201 55,010 542,246 Equity investments in unconsolidated affiliates 13,833 -- -- 13,833 Capital expenditures, net of acquired businesses 19,723 8,008 1,808 29,539 ================================================================================ Following are net sales by product within the Engine Products segment and Industrial Products segment: (In thousands) 2001 2000 1999 -------------------------------------------------------------------------------- Engine Product segment: Off-road products $ 181,795 $ 193,229 $ 181,200 Transportation products 79,670 151,950 162,291 Aftermarket products 345,345 328,803 267,887 -------------------------------------------------------------------------------- Total Engine Product segment 606,810 673,982 611,378 -------------------------------------------------------------------------------- Industrial Product segment: Dust collection products 217,343 193,119 153,480 Gas turbine products 195,042 117,038 84,229 Special application products 117,820 108,155 95,052 -------------------------------------------------------------------------------- Total Industrial Product segment 530,205 418,312 332,761 -------------------------------------------------------------------------------- Total company $1,137,015 $1,092,294 $ 944,139 ================================================================================ Geographic sales by origination and property, plant and equipment (in thousands): Property, Plant & Net Sales Equipment - Net -------------------------------------------------------------------------------- 2001 United States $ 711,268 $ 138,631 Europe 211,397 36,801 Asia-Pacific 185,395 19,609 Other 28,955 12,617 -------------------------------------------------------------------------------- Total $1,137,015 $ 207,658 ================================================================================ 2000 United States $ 688,899 $ 135,480 Europe 206,429 37,698 Asia-Pacific 166,221 22,304 Other 30,745 9,063 -------------------------------------------------------------------------------- Total $1,092,294 $ 204,545 ================================================================================ 1999 United States $ 616,254 $ 122,513 Europe 166,431 28,616 Asia-Pacific 138,453 21,911 Other 23,001 9,140 -------------------------------------------------------------------------------- Total $ 944,139 $ 182,180 ================================================================================ Sales to one customer accounted for 12 percent of net sales in 2001. There were no sales over 10 percent of net sales to any customer in 2000. Sales to one customer accounted for 11 percent of net sales in 1999. 29

I Quarterly Financial Information (Unaudited) (Thousands of dollars, First Second Third Fourth except per share amounts) Quarter Quarter Quarter Quarter -------------------------------------------------------------------------------- 2001 Net Sales $289,869 $279,631 $269,721 $297,794 Gross Margin 85,956 86,316 79,180 90,282 Net Earnings 16,804 18,105 17,826 22,813 Diluted Earnings Per Share .37 .40 .39 .50 Dividends Declared Per Share .075 .075 .075 .075 -------------------------------------------------------------------------------- 2000 Net Sales $246,550 $259,256 $285,277 $301,211 Gross Margin 73,881 79,595 84,812 89,233 Net Earnings 17,008 17,406 17,450 18,369 Diluted Earnings Per Share .36 .37 .38 .40 Dividends Declared Per Share .07 .07 .07 .07 ================================================================================ J Commitments and Contingencies The company is involved in litigation arising in the ordinary course of business. In the opinion of management, the outcome of litigation currently pending will not materially affect the company's results of operations, financial condition or liquidity. 30

WORLDWIDE OPERATIONS WORLD HEADQUARTERS Donaldson Company, Inc. MINNEAPOLIS, MINNESOTA U.S. PLANTS AUBURN, ALABAMA OLD SAYBROOK, CONNECTICUT DIXON, ILLINOIS FRANKFORT, INDIANA CRESCO, IOWA GRINNELL, IOWA NICHOLASVILLE, KENTUCKY PORT HURON, MICHIGAN CHILLICOTHE, MISSOURI STOW, OHIO PHILADELPHIA, PENNSYLVANIA GREENEVILLE, TENNESSEE BALDWIN, WISCONSIN STEVENS POINT, WISCONSIN DISTRIBUTION CENTERS ONTARIO, CALIFORNIA RENSSELAER, INDIANA ANTWERP, BELGIUM SINGAPORE JOINT VENTURES Advanced Filtration Systems Inc. CHAMPAIGN, ILLINOIS MSCA, LLC MONTICELLO, INDIANA PT Panata Jaya Mandiri JAKARTA, INDONESIA SUBSIDIARIES Torit Australia Pty. Ltd. SYDNEY, AUSTRALIA Donaldson Australasia Pty. Limited WYONG, AUSTRALIA Donaldson Sales, Inc. BARBADOS Donaldson Coordination Center, B.V.B.A. LEUVEN, BELGIUM Donaldson Europe, B.V.B.A. LEUVEN, BELGIUM BRUGGE, BELGIUM (PLANT) DCE Scandinavia APS HORSHOLM, DENMARK Donaldson France, S.A.S. BRON, FRANCE Tecnov Donaldson, S.A.S. DOMJEAN, FRANCE DCE S.A. PARIS, FRANCE DCE Neotechnik GmbH BIELEFELD, GERMANY Donaldson Gesellschaft m.b.H. DULMEN, GERMANY Donaldson India Filter Systems Pvt. Ltd. NEW DELHI, INDIA PT Donaldson Systems Indonesia JAKARTA, INDONESIA Donaldson Italia s.r.l. OSTIGLIA, ITALY Nippon Donaldson Limited TOKYO, JAPAN Donaldson Luxembourg S.a.r.l. LUXEMBOURG Donaldson, S.A. de C.V. AGUASCALIENTES, MEXICO Diemo S.A. de C.V. GUADALAJARA, MEXICO Donaldson Filtration Industrial S. de R.L. de C.V. MONTERREY, MEXICO Donaldson Torit, B.V. HAARLEM, NETHERLANDS DCE Benelux B.V. KROMMENIE, NETHERLANDS Air Master China Ltd. HONG KONG, S.A.R., PEOPLE'S REPUBLIC OF CHINA Donaldson Far East Limited HONG KONG, S.A.R., PEOPLE'S REPUBLIC OF CHINA Guilin Air King Enterprises Ltd. GUILIN, PEOPLE'S REPUBLIC OF CHINA Donaldson (Wuxi) Filters Co., Ltd. WUXI, PEOPLE'S REPUBLIC OF CHINA Donaldson Filtration (Asia Pacific) Pte. Ltd. SINGAPORE Donaldson Filtration Systems (Proprietary) Ltd. CAPE TOWN, SOUTH AFRICA Donaldson Korea Co., Ltd. SEOUL, SOUTH KOREA DCE Donaldson Sistemas de Filtracion, S.L. BARCELONA, SPAIN Donaldson Filtros Iberica S.L. MADRID, SPAIN Donaldson Filter Components Limited HULL, UNITED KINGDOM DCE Donaldson Ltd. LEICESTER, UNITED KINGDOM Tetratec Europe Limited WIGAN, UNITED KINGDOM 31

CORPORATE AND SHAREHOLDER INFORMATION NYSE LISTING The common shares of Donaldson Company, Inc. are traded on the New York Stock Exchange, under the symbol DCI. SHAREHOLDER INFORMATION For any concerns relating to your current or prospective shareholdings, please contact Shareowner Services at (800)468-9716 or (651)450-4064. DIVIDEND REINVESTMENT PLAN As of September 21, 2001, 1,107 of Donaldson Company's approximately 1,799 shareholders of record were participating in the Dividend Reinvestment Plan. Under the plan, shareholders can invest Donaldson Company dividends in additional shares of company stock. They may also make periodic voluntary cash investments for the purchase of company stock. Both alternatives are provided without service charges or brokerage commissions. Shareholders may obtain a brochure giving further details by writing Wells Fargo Bank Minnesota, N.A., Shareowner Services, P.O. Box 64854, St. Paul, MN 55164-0854. ANNUAL MEETING The annual meeting of shareholders will be held at 10 a.m. on Friday, November 16, 2001, at Donaldson Company, Inc., 1400 West 94th Street, Bloomington, Minnesota. You are welcome to attend. 10-K REPORTS Copies of the Report 10-K, filed with the Securities and Exchange Commission, are available on request from Shareholder Services, Donaldson Company, Inc., M.S. 101, P.O. Box 1299, Minneapolis, MN 55440. AUDITORS Arthur Andersen LLP Minneapolis, Minnesota PUBLIC RELATIONS COUNSEL Padilla Speer Beardsley Inc. Minneapolis, Minnesota TRANSFER AGENT AND REGISTRAR Wells Fargo Bank Minnesota, N.A. South St. Paul, Minnesota SIX-YEAR QUARTERLY HIGH-LOW STOCK PRICES [BAR CHART] High Low -------------------------------------------------- 1996 1st Quarter 13.19 11.94 2nd Quarter 13.06 12.06 3rd Quarter 13.94 12.81 4th Quarter 14.00 12.00 -------------------------------------------------- 1997 1st Quarter 14.63 12.69 2nd Quarter 17.00 14.31 3rd Quarter 18.31 15.38 4th Quarter 20.38 17.75 -------------------------------------------------- 1998 1st Quarter 27.19 20.31 2nd Quarter 25.69 22.25 3rd Quarter 26.19 22.63 4th Quarter 25.13 18.56 -------------------------------------------------- 1999 1st Quarter 21.94 14.44 2nd Quarter 21.00 17.69 3rd Quarter 23.50 17.25 4th Quarter 25.88 21.94 -------------------------------------------------- 2000 1st Quarter 23.50 19.50 2nd Quarter 24.81 20.63 3rd Quarter 24.06 20.25 4th Quarter 24.25 19.13 -------------------------------------------------- 2001 1ST QUARTER 23.86 19.13 2ND QUARTER 29.48 21.62 3RD QUARTER 28.92 24.39 4TH QUARTER 33.05 27.30 -------------------------------------------------- 32

BOARD OF DIRECTORS F. GUILLAUME BASTIAENS, 58, Vice Chairman, Cargill, Inc., Minneapolis (Agribusiness). DIRECTOR SINCE 1995.(2)(3) PAUL B. BURKE, 45, Chairman and Chief Executive Officer, BMC Industries, Inc., Minneapolis (Manufacturing). DIRECTOR SINCE 1996.(1)(3) JANET M. DOLAN, 52, President and Chief Executive Officer, Tennant Company, Minneapolis (Manufacturing). DIRECTOR SINCE 1996.(2)(3) JACK W. EUGSTER, 56, Non- Executive Chairman, ShopKo Stores, Inc., Green Bay, WI (Specialty Discount Retailer). DIRECTOR SINCE 1993.(1)(3) JOHN F. GRUNDHOFER, 62, Chairman, U.S. Bancorp, Minneapolis (Financial Services). DIRECTOR SINCE 1997.(1)(3) KENDRICK B. MELROSE, 61, Chairman and Chief Executive Officer, The Toro Company, Minneapolis (Manufacturing). DIRECTOR SINCE 1991.(1)(2) JEFFREY NODDLE, 55, President and Chief Executive Officer, SUPERVALU INC., Minneapolis (Food Retailer and Distributor). DIRECTOR SINCE 2000.(1)(2) S. WALTER RICHEY, 65, Retired Chairman, President and Chief Executive Officer, Meritex, Inc., Minneapolis (Distribution Services). DIRECTOR SINCE 1991.(2)(3) STEPHEN W. SANGER, 55, Chairman and Chief Executive Officer, General Mills, Inc., Minneapolis (Consumer Products). DIRECTOR SINCE 1992.(1)(2) WILLIAM G. VAN DYKE, 56, Chairman, President and Chief Executive Officer, Donaldson Company, Inc. DIRECTOR SINCE 1994. (1) Human Resources Committee (2) Audit Committee (3) Corporate Governance Committee CORPORATE OFFICERS WILLIAM G. VAN DYKE, 56, Chairman, President and Chief Executive Officer. 29 YEARS SERVICE. WILLIAM M. COOK, 48, Senior Vice President, International and Chief Financial Officer. 21 YEARS SERVICE. JAMES R. GIERTZ, 44, Senior Vice President, Commercial and Industrial. 8 YEARS SERVICE. NICKOLAS PRIADKA, 55, Senior Vice President, Engine Systems and Parts. 32 YEARS SERVICE. LOWELL F. SCHWAB, 53, Senior Vice President, Operations. 22 YEARS SERVICE. DALE M. COUCH, 58, Vice President and General Manager, Asia Pacific. 4 YEARS SERVICE. NORMAN C. LINNELL, 42, Vice President, General Counsel and Secretary. 6 YEARS SERVICE. JOHN E. THAMES, 51, Vice President, Human Resources. 13 YEARS SERVICE. GEERT HENK TOUW, 56, Vice President and General Manager, Europe/Africa/Middle East. 16 YEARS SERVICE. THOMAS A. WINDFELDT, 52, Vice President, Controller and Treasurer. 21 YEARS SERVICE. 33

                                                                      EXHIBIT 23



                    CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS

     As independent public accountants, we hereby consent to the incorporation
of our report included in this Form 10-K, into the Company's previously filed
Registration Statement File Nos. 333-56027, 33-27086, 2-90488, and 33-44624.



/s/ Arthur Andersen LLP


Minneapolis, Minnesota,
October 26, 2001


                                       16

                                                                   EXHIBIT 23(A)



                         CONSENT OF INDEPENDENT AUDITORS

     We consent to the incorporation by reference in the Registration Statement
Number 333-56027 on Form S-8 dated June 4, 1998, Registration Statement Number
33-27086 on Form S-8 dated February 17, 1989, Registration Statement Number
2-90488 on Form S-8 dated May 2, 1984 as amended through Post Effective
Amendment No. 1 dated January 7, 1988, and Registration Statement Number
33-44624 dated December 20, 1991 of our report dated September 8, 1999, with
respect to the consolidated financial statements and related financial statement
schedule of Donaldson Company, Inc. included in the Annual Report on Form 10-K
for the year ended July 31, 2001.

                                        /s/ Ernst & Young LLP


Minneapolis, Minnesota
October 24, 2001


                                       17

                                                                      EXHIBIT 24



                                POWER OF ATTORNEY

         The undersigned does hereby constitute and appoint William G. Van Dyke
and Norman C. Linnell, and each of them, the undersigned's attorneys-in-fact and
agents for the purpose of signing in the undersigned's name and on the
undersigned's behalf as a Director of Donaldson Company, Inc., a report on Form
10-K for the Annual Report for Fiscal Year 2001, pursuant to Section 13 or 15(d)
of the Securities Act of 1934, of Donaldson Company, Inc., and any and all
amendments thereto, and to deliver on the undersigned's behalf said report so
signed for filing with the Securities and Exchange Commission.



Dated: October 2, 2001



                                       /s/ F. Guillaume Bastiaens
                                       -----------------------------------------
                                       F. Guillaume Bastiaens

POWER OF ATTORNEY The undersigned does hereby constitute and appoint William G. Van Dyke and Norman C. Linnell, and each of them, the undersigned's attorneys-in-fact and agents for the purpose of signing in the undersigned's name and on the undersigned's behalf as a Director of Donaldson Company, Inc., a report on Form 10-K for the Annual Report for Fiscal Year 2001, pursuant to Section 13 or 15(d) of the Securities Act of 1934, of Donaldson Company, Inc., and any and all amendments thereto, and to deliver on the undersigned's behalf said report so signed for filing with the Securities and Exchange Commission. Dated: October 9, 2001 /s/ Paul B. Burke ----------------------------------------- Paul B. Burke

POWER OF ATTORNEY The undersigned does hereby constitute and appoint William G. Van Dyke and Norman C. Linnell, and each of them, the undersigned's attorneys-in-fact and agents for the purpose of signing in the undersigned's name and on the undersigned's behalf as a Director of Donaldson Company, Inc., a report on Form 10-K for the Annual Report for Fiscal Year 2001, pursuant to Section 13 or 15(d) of the Securities Act of 1934, of Donaldson Company, Inc., and any and all amendments thereto, and to deliver on the undersigned's behalf said report so signed for filing with the Securities and Exchange Commission. Dated: October 4, 2001 /s/ Janet M. Dolan ----------------------------------------- Janet M. Dolan

POWER OF ATTORNEY The undersigned does hereby constitute and appoint William G. Van Dyke and Norman C. Linnell, and each of them, the undersigned's attorneys-in-fact and agents for the purpose of signing in the undersigned's name and on the undersigned's behalf as a Director of Donaldson Company, Inc., a report on Form 10-K for the Annual Report for Fiscal Year 2001, pursuant to Section 13 or 15(d) of the Securities Act of 1934, of Donaldson Company, Inc., and any and all amendments thereto, and to deliver on the undersigned's behalf said report so signed for filing with the Securities and Exchange Commission. Dated: October 2, 2001 /s/ Jack W. Eugster ----------------------------------------- Jack W. Eugster

POWER OF ATTORNEY The undersigned does hereby constitute and appoint William G. Van Dyke and Norman C. Linnell, and each of them, the undersigned's attorneys-in-fact and agents for the purpose of signing in the undersigned's name and on the undersigned's behalf as a Director of Donaldson Company, Inc., a report on Form 10-K for the Annual Report for Fiscal Year 2001, pursuant to Section 13 or 15(d) of the Securities Act of 1934, of Donaldson Company, Inc., and any and all amendments thereto, and to deliver on the undersigned's behalf said report so signed for filing with the Securities and Exchange Commission. Dated: October 3, 2001 /s/ John F. Grundhofer ----------------------------------------- John F. Grundhofer

POWER OF ATTORNEY The undersigned does hereby constitute and appoint William G. Van Dyke and Norman C. Linnell, and each of them, the undersigned's attorneys-in-fact and agents for the purpose of signing in the undersigned's name and on the undersigned's behalf as a Director of Donaldson Company, Inc., a report on Form 10-K for the Annual Report for Fiscal Year 2001, pursuant to Section 13 or 15(d) of the Securities Act of 1934, of Donaldson Company, Inc., and any and all amendments thereto, and to deliver on the undersigned's behalf said report so signed for filing with the Securities and Exchange Commission. Dated: October 2, 2001 /s/ Kendrick B. Melrose ----------------------------------------- Kendrick B. Melrose

POWER OF ATTORNEY The undersigned does hereby constitute and appoint William G. Van Dyke and Norman C. Linnell, and each of them, the undersigned's attorneys-in-fact and agents for the purpose of signing in the undersigned's name and on the undersigned's behalf as a Director of Donaldson Company, Inc., a report on Form 10-K for the Annual Report for Fiscal Year 2001, pursuant to Section 13 or 15(d) of the Securities Act of 1934, of Donaldson Company, Inc., and any and all amendments thereto, and to deliver on the undersigned's behalf said report so signed for filing with the Securities and Exchange Commission. Dated: October 2, 2001 /s/ Jeffrey Noddle ----------------------------------------- Jeffrey Noddle

POWER OF ATTORNEY The undersigned does hereby constitute and appoint William G. Van Dyke and Norman C. Linnell, and each of them, the undersigned's attorneys-in-fact and agents for the purpose of signing in the undersigned's name and on the undersigned's behalf as a Director of Donaldson Company, Inc., a report on Form 10-K for the Annual Report for Fiscal Year 2001, pursuant to Section 13 or 15(d) of the Securities Act of 1934, of Donaldson Company, Inc., and any and all amendments thereto, and to deliver on the undersigned's behalf said report so signed for filing with the Securities and Exchange Commission. Dated: October 5, 2001 /s/ S. Walter Richey ----------------------------------------- S. Walter Richey

POWER OF ATTORNEY The undersigned does hereby constitute and appoint William G. Van Dyke and Norman C. Linnell, and each of them, the undersigned's attorneys-in-fact and agents for the purpose of signing in the undersigned's name and on the undersigned's behalf as a Director of Donaldson Company, Inc., a report on Form 10-K for the Annual Report for Fiscal Year 2001, pursuant to Section 13 or 15(d) of the Securities Act of 1934, of Donaldson Company, Inc., and any and all amendments thereto, and to deliver on the undersigned's behalf said report so signed for filing with the Securities and Exchange Commission. Dated: October 5, 2001 /s/ Stephen W. Sanger ----------------------------------------- Stephen W. Sanger

                                                                      EXHIBIT 99


                   FACTORS AFFECTING FUTURE OPERATING RESULTS

From time to time, the Company, through its management, may make forward-looking
statements reflecting the Company's current views with respect to future events
and financial performance. These forward-looking statements, which may be in
reports filed under the Securities Exchange Act of 1934, as amended ( The
"Exchange Act"), in press releases and in other documents and materials as well
as in written or oral statements made by or on behalf of the company, are
subject to certain risks and uncertainties, including those discussed below
which could cause actual results to differ materially from historical results or
those anticipated. The words or phrases " will likely result," "are expected
to," "will continue," "estimate," "project," "believe," "expect," "anticipate,"
"forecast" and similar expressions are intended to identify forward-looking
statements within the meaning of Section 21e of the Exchange Act and Section 27A
of the Securities Act of 1933, as amended, as enacted by the Private Securities
Litigation Reform Act of 1995.

Readers are cautioned not to place undue reliance on these forward-looking
statements, which speak only as of the date such statements are made. In
addition, the company wishes to advise readers that the factors listed below, as
well as other factors could affect the company's financial or other performance
and could cause the Company's actual results for future periods to differ
materially from any opinions or statements expressed with respect to future
periods or events in any current statement. This discussion of factors is not
intended to be exhaustive, but rather to highlight important risk factors that
impact results. General economic and political conditions and many other
contingencies that may cause the Company's actual results to differ from those
currently anticipated are not separately discussed. The Company undertakes no
obligation to publicly update or revise any forward-looking statements, whether
as a result of new information, future events or otherwise.

RISKS ASSOCIATED WITH CURRENCY FLUCTUATIONS

The Company maintains international subsidiaries and operations in many
countries, and the results of operations and the financial position of each of
the company's subsidiaries is reported in the relevant foreign currency and then
translated into United States ("U.S.") dollars at the applicable foreign
currency exchange rate for inclusion in the Company's consolidated financial
statements. As exchange rates between these foreign currencies and the U.S.
dollar fluctuate, the translation effect of such fluctuations may have an
adverse effect on the Company's results of operations or financial position as
reported in U.S. dollars.

RISKS ASSOCIATED WITH INTERNATIONAL OPERATIONS

The Company does business and has manufacturing operations in numerous
countries, including China, Hong Kong, India, Indonesia, Japan, Korea, Singapore
and other Asia-Pacific countries, Europe, Canada, Mexico, Central America and
South America. The stability, growth and profitability of this portion of the
company's business may be affected by changes in political and military events,
trade, monetary and fiscal policies and the laws and regulations of the United
States and other trading nations. In addition, the Company's international
operations are subject to the risk of new and different political and military
events, legal and regulatory requirements in local jurisdictions, tariffs and
trade barriers, potential difficulties in staffing and managing local
operations, credit risk of local customers and distributors, potential
difficulties in protecting intellectual property,

risk of nationalization of private enterprises, potential imposition of restrictions on investments, potentially adverse tax consequences, including imposition or increase of withholding and other taxes on remittances and other payments by subsidiaries, and local economic, political and social conditions, including the possibility of hyper-inflationary conditions, in certain countries. If for whatever reason, the U.S. were to enter a recession, then demand for Company products would be negatively impacted in North America and throughout the rest of the world. COMPETITION AND TECHNOLOGY ISSUES The markets in which the Company operates are highly competitive and fragmented both geographically and by application. As a result, the Company competes with numerous regional or specialized competitors, many of which are well established in their respective markets. The Company has, from time to time, experienced price pressures from competitors in certain product lines and geographic markets. The Company's competitors and new entrants into the Company's lines of business can be expected to continue to improve the design and performance of their products and to introduce new products with competitive price and performance characteristics. Competition in the Company's lines of business may limit its ability to recover future increases in labor and raw material expenses. Although the Company believes that it has certain technological and other advantages over its competitors, realizing and maintaining these advantages will require continued productive investment by the Company in research and development, sales and marketing and customer service and support. There can be no assurance that the Company will be successful in maintaining such advantages. Successful product innovation by competitors that reach the market prior to comparable innovation by the Company or that are amenable to patent protection may adversely affect the Company's financial performance. A number of the Company's major OEM customers manufacture products for their own use that compete with the Company's products. Although these OEM customers have indicated that they will continue to rely on outside suppliers, the OEMs could elect to manufacture products for their own use and in place of the products now supplied by the Company. In addition, customers of the Company's engine filtration and exhaust products business line could decide to meet their filtration requirements through alternative methods, such as engine design modifications, rather than rely on the Company's products. RISKS RELATING TO FUTURE ACQUISITIONS The Company has in the past and may in the future pursue acquisitions of complementary product lines, technologies or businesses. Future acquisitions by the Company may result in potentially dilutive issuance's of equity securities, the incurrence of debt and contingent liabilities and amortization expenses related to goodwill and other intangible assets, which could adversely affect the Company's profitability. In addition, acquisitions involve numerous risks, including difficulties in the assimilation of the operations, technologies and products of the acquired companies, corporate culture conflicts, the diversion of management's attention from other business concerns, assumption of unanticipated legal liabilities and the potential loss of key employees of the acquired company. There can be no assurance that the Company will be able to identify and successfully complete and integrate potential acquisitions in the future. In the event that any such acquisition does occur, however, there can be no assurance as to the effect thereof on the Company's business or operating results.

ENVIRONMENTAL MATTERS The Company is subject to various environmental laws and regulations in the jurisdictions in which it operates, including those relating to air emissions, wastewater discharges, the handling and disposal of solid and hazardous wastes and the remediation of contamination associated with the use and disposal of hazardous substances. The Company, like many of its competitors, has incurred and will continue to incur, capital and operating expenditures and other costs in complying with such laws and regulations in both the United States and abroad. PRODUCT DEMAND CONSIDERATIONS Demand for certain of the Company's products tends to be cyclical, responding historically to varying levels of construction, agricultural, heavy equipment manufacturing, mining and industrial activity in the United States and in other industrialized nations. Other factors affecting demand include the availability and cost of financing for equipment purchases and the market availability of used equipment. Sales to each of Caterpillar, Inc. and its subsidiaries and General Electric and its subsidiaries have accounted for greater than 10 percent of the Company's net sales in one or more of the last three fiscal years. An adverse change in Caterpillar's or General Electric's financial performance, condition or results of operations or a material reduction in sales to this customer for any other reason could negatively impact the Company's operating results. AVAILABILITY OF PRODUCT COMPONENTS The Company obtains raw material and certain manufactured components from third-party suppliers. The Company maintains limited raw material inventories, even brief unanticipated delays in delivery by suppliers, including those due to capacity constraints, labor disputes, impaired financial condition of suppliers, weather emergencies or other natural disasters, may adversely affect the Company's ability to satisfy its customers on a timely basis and thereby affect the Company's financial performance. CHANGES IN THE MIX OF PRODUCTS COMPRISING REVENUE The Company's products constitute various product lines, which have varying profit margins. A change in the mix of products sold by the Company from that currently experienced could adversely affect the Company's financial performance. RESEARCH AND DEVELOPMENT The Company makes significant annual investment in research and development activities to develop new and improved products and manufacturing processes. There can be no assurance that research and development activities will yield new or improved products or products which will be purchased by the Company's customers, or new and improved manufacturing processes.