<PAGE>   1

                                    FORM 10-K

                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D. C. 20549

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

For the fiscal year ended December 31, 1998

Commission File No. 1-924

                             AEROQUIP-VICKERS, INC.
        ----------------------------------------------------------------
             (Exact name of registrant as specified in its charter)

         OHIO                                               34-4288310
  -----------------                                     ------------------
(State of Incorporation)                                 (I.R.S. Employer
                                                        Identification No.)

      3000 STRAYER, MAUMEE, OHIO                            43537-0050
-----------------------------------                     ------------------
(Address of principal executive office)                     (Zip Code)

Registrant's telephone number, including area code: (419) 867-2200
                                                    --------------
Securities registered pursuant to Section 12(b) of the Act:

                                                NAME OF EACH EXCHANGE ON
     TITLE OF EACH CLASS                            WHICH REGISTERED
  -------------------------                     ------------------------
Common Shares, $5.00 Par Value                  Frankfurt Stock Exchange
                                                Chicago Stock Exchange
                                                New York Stock Exchange
                                                Pacific Exchange, Inc.
                                                The Stock Exchange (London)


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, 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 (Section 229.405 of this chapter) 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. [ ]

                             [Cover page continued]


<PAGE>   2

The aggregate market value of the Common Shares held by non-affiliates of the
registrant as of March 5, 1999, was $1,573,268,645.

The number of Common Shares, $5 Par Value, outstanding as of March 5, 1999, was
27,638,225.

                       DOCUMENTS INCORPORATED BY REFERENCE

None.









              This document, including exhibits, contains 85 pages.

                       The cover page consists of 2 pages.

                  The Exhibit Index is located at pages 66-68.

                               [End of cover page]



                                      -2-
<PAGE>   3



                                     PART I
                                     ------

ITEM 1.  Business.
-------

(a) Aeroquip-Vickers, Inc. ("Aeroquip-Vickers") is a world leader in the
manufacture and distribution of engineered components and systems, sold through
its operating companies, Aeroquip Corporation ("Aeroquip") and Vickers,
Incorporated ("Vickers"), to the industrial, automotive and aerospace markets.

On February 1, 1999, Eaton Corporation and Aeroquip-Vickers, Inc. announced that
the companies had entered into an "Agreement and Plan of Merger" whereby Eaton
Corporation would acquire all of the outstanding shares of Aeroquip-Vickers,
Inc. for $58 per share in cash. The Boards of Directors of both companies have
approved the transaction, which is subject to normal closing conditions and the
approval of Aeroquip-Vickers shareholders. A special shareholders' meeting has
been called for April 8, 1999. The transaction is expected to be completed in
mid-April 1999.

In 1998, Aeroquip-Vickers paid a quarterly dividend of $.22 per share, or $.88
per share for the year.

During 1998, the Company purchased 657,500 shares of the Company's outstanding
common stock at a cost of $23.2 million. At December 31, 1998, $57.8 million of
additional common stock was available for purchase under the current Board of
Directors' authorization.

During 1998, the Company issued $65 million of medium-term notes with interest
rates from 6.40% to 7.09% due at various dates from 2005 to 2018. Under
provisions of the current shelf registration statement for the Medium-Term Note
program, $185 million remains available for issuance.

On February 3, 1998, the Company redeemed its 9.55% senior sinking fund
debentures. Proceeds from additional borrowings in 1998 under the Medium-Term
Note program were used to redeem the debentures. The pretax loss from redemption
of the debentures amounting to approximately $2.5 million was recognized in the
1998 first quarter.

On March 27, 1998, Vickers completed the acquisition of the assets of Precision
Hydrostatics, Inc. and the stock of Wooster Hydrostatics, Inc. Precision is
primarily an aftermarket supplier of remanufactured hydraulic products. Wooster
is an aftermarket supplier of remanufactured hydraulic parts and products.

On April 7, 1998, Vickers completed the purchase of Hydrokraft GmbH. Hydrokraft
manufactures high-pressure axial piston hydraulic pumps, motors and
transmissions for applications in stationary industrial equipment, marine,
mining, chemical processing, food processing and other markets.

On April 13, 1998, Aeroquip completed the acquisition of the assets of Aerotech
South Africa (Pty) Ltd. in Johannesburg, South Africa. Aerotech South Africa
supplies hose assemblies and fitting products to industrial and automotive
customers.

On April 16, 1998, Virgis W. Colbert, Executive Vice President of Miller Brewing
Company, was elected to the Board of Directors of Aeroquip-Vickers.

On May 11, 1998, Aeroquip completed the acquisition of Finimpresa S.r.l. and
Comaco S.r.l. of Milan, Italy. Finimpresa manufactures and distributes valves
and accessory products, and Comaco manufactures and distributes copper and
flexible linesets. Both products serve the residential and commercial air
conditioning and refrigeration markets. Finimpresa also manufactures and
distributes hydronic heating valves.

                                      -3-
<PAGE>   4

On August 26, 1998, John H. Weber resigned as president of Vickers and executive
vice president of Aeroquip-Vickers to accept a position in another industry.

On December 14, 1998, Vickers purchased all of the outstanding capital stock of
M.C. Aerospace Corporation. M.C. Aerospace designs, develops and manufactures
high-precision hydraulic and pneumatic components for military and commercial
aircraft and military land vehicles. Its product lines include hydraulic and
pneumatic valves, pumps, compressors and drives.

(b) Financial information about the industry segments can be found in the
Company's financial statements at "Note 14 - Business Segments" on pages 40 to
43 herein.

(c) A description of the business done and intended to be done by
Aeroquip-Vickers and its subsidiaries in each industry segment follows.

The Aeroquip segment designs, manufactures and distributes fluid connectors and
plastic products. Fluid connectors include all pressure ranges of hose and hose
assemblies; fittings, adapters, couplings and swivels; automotive air
conditioning, power steering, and oil and transmission cooler components and
assemblies; tube fittings and assemblies; refrigeration/air conditioning
connectors; clamps and V-band couplings; fuel-handling products; noise-reduction
products; chemical containment products; and electronic fluid system products.
Aeroquip plastic products include molded, extruded and co-extruded plastic
products. The Aeroquip segment serves original equipment and aftermarket
customers in industrial markets located principally in the U.S., Europe,
Asia-Pacific and Brazil; original equipment and aftermarket customers in
aerospace and defense markets located principally in the U.S. and Europe; and
automobile, light truck, sport utility and van manufacturers in automotive
markets located principally in the U.S. and Europe.

Aeroquip's business is highly competitive in terms of price, quality and
service. Aeroquip serves many customers in the industrial, automotive and
aerospace markets. Due to the diversity of Aeroquip products, there are a large
number of competitors scattered across a wide variety of market segments, with
no single competitor competing in each of Aeroquip's product lines.

Aeroquip is a preferred supplier to the world's automobile manufacturers.
Aeroquip has significant market position worldwide for aerospace hose, fittings
and quick-disconnect couplings. Aeroquip has significant market position
worldwide for industrial hose, fittings, couplings and adapters. Approximately
26% of Aeroquip's 1998 sales were made to three automotive customers.

The order backlog for the Aeroquip industrial and aerospace businesses was
$143.6 million as of December 31, 1998, compared to $130.8 million as of
December 31, 1997. Approximately 85% of the December 31, 1998, backlog is
expected to be filled in 1999.

Approximately 14% of Aeroquip's backlog at December 31, 1998, represents direct
government contracts or subcontracts on government programs which are subject to
termination at the election of the government. In the event any such contract
was terminated, Aeroquip would be entitled to reimbursement for costs incurred
according to a formula set forth in the affected contract.

The Vickers segment designs, manufactures and distributes power and motion
control products. Vickers products include hydraulic, electrohydraulic,
pneumatic and electronic control devices; piston and vane pumps and motors; open
architecture machine controls; hydraulic and pneumatic cylinders; hydraulic
power packages; electric motors and drives; fuel pumps; electric motorpumps and
generator packages; electrohydraulic and electromechanical actuators; sensors
and monitoring devices; hydraulic and lubrication filtration; and
fluid-evaluation products and services. The Vickers segment



                                      -4-
<PAGE>   5

serves original equipment and aftermarket customers in industrial markets
located principally in the U.S., Europe, Asia-Pacific and Brazil, and original
equipment and aftermarket customers in aerospace and defense markets located
principally in the U.S. and Europe.

Vickers' business is highly competitive in terms of price, quality and service.
Vickers serves many customers in the industrial and aerospace markets. Due to
the diversity of Vickers' products, there are a large number of competitors
scattered across a wide variety of market segments, with no single competitor
competing in each of Vickers' product lines.

Vickers has significant market position worldwide for hydraulic and
electrohydraulic controls; piston and vane pumps and motors; hydraulic power
packages; electronic controls, drives and motors; aerospace fixed- and
variable-displacement hydraulic pumps; hydraulic motors and motor packages; and
aerospace sensors and monitoring devices.

The order backlog for the Vickers business was $447.7 million as of December 31,
1998, compared to $481.2 million as of December 31, 1997. Approximately 90% of
the December 31, 1998, backlog is expected to be filled in 1999.

Approximately 21% of Vickers' backlog at December 31, 1998, represents direct
government contracts or subcontracts on government programs which are subject to
termination at the election of the government. In the event any such contract
was terminated, Vickers would be entitled to reimbursement for costs incurred
according to a formula set forth in the affected contract.

Aeroquip-Vickers and its subsidiaries are generally not dependent upon any one
source for raw materials or purchased components essential to their businesses,
and it is anticipated that such raw materials and components will be available
in adequate quantities to meet anticipated production schedules.

Aeroquip-Vickers owns or controls significant intellectual property, including a
sizable portfolio of patents, copyrights, trademarks and trade secrets, and is
involved in numerous licensing arrangements. Although Aeroquip-Vickers'
intellectual property plays an important role in maintaining Aeroquip-Vickers'
competitive position in the markets that it serves, no single patent, copyright,
trade secret or license, or group of related patents, copyrights, trade secrets
or licenses, is of such value to Aeroquip-Vickers that the business of
Aeroquip-Vickers would be materially affected by the expiration or termination
thereof. Aeroquip-Vickers continues to apply for patent and trademark protection
on its significant patentable developments in the United States and abroad.

Both the Aeroquip and Vickers names remain significant trademarks within the
respective industry segments. In addition, Aeroquip-Vickers owns a number of
trademarks, in the United States and abroad, applicable to certain of the
Aeroquip-Vickers products.

Aeroquip-Vickers devotes engineering, research and development efforts to new
products and improvement of existing products and production processes. During
1998, 1997 and 1996, Aeroquip-Vickers spent a total of $71.5 million, $72.2
million and $74.9 million, respectively, on these efforts.

Aeroquip-Vickers employed 15,168 persons at December 31, 1998.

(d) Financial information about foreign and U.S. sales and properties can be
found in the Company's financial statements at "Note 14 - Business Segments" on
pages 40 to 43 herein. As assessed by Aeroquip-Vickers, the risk attendant to
non-U.S. operations, which is primarily in developed countries, is not
significantly greater than that attendant to its U.S. operations.



                                      -5-
<PAGE>   6

ITEM 2.  Properties.

A description of Aeroquip-Vickers' principal properties follows. Except as
otherwise indicated, all properties are owned by Aeroquip-Vickers or its
subsidiaries.

Aeroquip-Vickers' executive offices (leased) are located in Maumee, Ohio.

AEROQUIP: Aeroquip has executive and administrative offices in Maumee (leased),
Ohio. Aeroquip has technical and administrative offices in Ann Arbor (leased)
and Mt. Clemens (leased), Michigan and Maumee (leased), Ohio; and manufacturing
facilities throughout the United States and abroad, including plants in Mountain
Home, Arkansas; Atlanta, Fitzgerald and Toccoa Georgia; New Haven, Indiana;
Williamsport, Maryland; Jackson, Michigan; Forest City, Middlesex, Mooresville
and Norwood, North Carolina; Fremont and Van Wert, Ohio; Gainesboro and
Livingston, Tennessee; Wausau, Wisconsin; Guaratingueta, Brazil;
Chambray-Les-Tours, and Serres-Castet (leased), France; Baden-Baden,
Hann-Muenden and Wolfsburg (leased), Germany; Livorno and Milan (leased), Italy;
Johannesburg (leased), South Africa; Alcala de Henares, Spain; and Brierley
Hill, Cardiff and Lakeside (leased), United Kingdom.

Aeroquip also owns or leases warehouse, assembly and distribution facilities and
sales offices in the United States and abroad.

VICKERS: Vickers, Incorporated has executive and administrative offices in
Maumee (leased), Ohio, and a technical center in Rochester Hills (leased),
Michigan. Vickers has manufacturing facilities throughout the United States and
abroad, including plants in Decatur, Alabama; Searcy, Arkansas; Los Angeles (2
locations, one leased), California; Carol Stream and Petersburg (leased),
Illinois; Grand Rapids, Jackson and Lake Orion, Michigan; Jackson, Mississippi;
Omaha, Nebraska; Hi-Nella, New Jersey; Lebanon (leased), South Lebanon and
Wooster, Ohio; White City, Oregon; Glenolden, Pennsylvania; Charleston and
Greenwood, South Carolina; Memphis, Tennessee; Sao Paulo, Brazil; Suzhou
(leased), China; Goeppingen (leased) and Wehrheim (leased), Germany; Mumbai and
Pune, India; Casella and Vignate (leased), Italy; and Bedford (leased),
Bedhampton, Havant and Telford (leased), United Kingdom.

Vickers also owns or leases warehouse, assembly and distribution facilities and
sales offices in the United States and abroad.

ITEM 3.  Legal Proceedings.

As previously reported, on March 26, 1992, the United States Environmental
Protection Agency ("USEPA") issued an Administrative Order ("106 Order") under
Section 106 of the Comprehensive Environmental Response, Compensation, and
Liability Act ("CERCLA") to Aeroquip-Vickers' subsidiary, Aeroquip Corporation
("Aeroquip"), and five other Potentially Responsible Parties ("PRPs") relative
to the San Fernando Valley Burbank Operable Unit ("BOU"), involving groundwater
contamination. (Reference is made to Part I, Item 3, of Aeroquip-Vickers' Annual
Report on Form 10-K for the year ended December 31, 1994.) The 106 Order
required the six PRPs to design and construct a water blending facility.
Aeroquip's portion of the cost was 18.33% based on a cost-sharing agreement
among the six PRPs, dated July 6, 1992. The final cost to Aeroquip for its share
was approximately $950,000.

Also related to the BOU, on May 15, 1994, USEPA issued to Lockheed Corporation
("Lockheed"), Aeroquip and other PRPs a Special Notice of Liability under CERCLA
for the remaining 18 years of operation and maintenance (O&M) costs associated
with the blending facility, as well as the groundwater treatment facility
constructed by Lockheed under its BOU Consent Decree with USEPA. The Special
Notice of Liability also covered USEPA's past response costs. On April 26, 1994,
Lockheed filed an action against Aeroquip and 105 other PRPs seeking
contribution toward costs Lockheed incurred to construct the BOU groundwater
treatment facility and related matters. In November 1995, a 



                                      -6-
<PAGE>   7

settlement agreement was entered into by Lockheed and most of the members of a
joint defense group (the "Joint Defense Group"), including Aeroquip, to resolve
this contribution action. The settlement agreement was to be effective upon the
satisfaction of certain conditions, including the payment of $16 million by the
Joint Defense Group and entry of a Second Consent Decree. Aeroquip's portion of
the settlement was approximately $104,000. This amount reflects a credit to
Aeroquip for its prior expenditures on the blending facility. The settlement was
also intended to resolve Aeroquip's potential liability for the interim remedy
at the Glendale Superfund site (see below); Aeroquip's potential liability for a
toxic tort suit (known as the "Fournier" matter) brought against Lockheed; and
the claims by other Joint Defense Group members against Aeroquip. The Second
Consent Decree has been entered by the court, substantially resolving Aeroquip's
alleged CERCLA liability at the BOU with respect to claims encompassed by the
Second Consent Decree and the settlement agreement with Lockheed. Aeroquip and
five other PRPs remain responsible for any future design defects in the blending
facility; the PRPs also have potential liability with respect to the reopener
provisions of the Second Consent Decree.

In December 1997, Aeroquip and over 50 other BOU PRPs were sued by over 2,800
plaintiffs in eight lawsuits pending in California state court (the "Abel
consolidated cases"). The plaintiffs allege that hazardous and toxic waste
dumped in the BOU leached into the groundwater and was released into the air
causing bodily injury and property damage to the plaintiffs who were, for the
most part, residents of the Burbank area. On May 15, 1998, the Abel consolidated
cases were stayed as to Aeroquip and most of the defendants, other than
Lockheed. Subsequent to imposition of the stay, plaintiffs agreed to settle with
Aeroquip and a group of 22 other defendants. Aeroquip's share of this settlement
is expected to be less than $100,000. If for some reason the settlement is not
concluded and plaintiffs were to pursue their claims against Aeroquip, then
Aeroquip intends to continue to deny any liability and vigorously defend itself
in the litigation.

As previously reported, on November 13, 1992, the USEPA, Region IX, issued a
General Notice of Liability letter to Aeroquip-Vickers' subsidiary Sterer
Engineering and Manufacturing Company ("Sterer"). On December 31, 1994, Sterer
was merged into Vickers, Incorporated ("Vickers"). (Reference is made to Part I,
Item 3, of Aeroquip-Vickers' Annual Report on Form 10-K for the year ended
December 31, 1994.) The letter notified Vickers of potential liability, as
defined by Section 107(a) of CERCLA, that it may incur with respect to the San
Fernando Valley Glendale South Operable Unit, involving groundwater
contamination. The USEPA issued its Record of Decision ("ROD") on June 18, 1993.
Twenty-seven PRPs (the "PRP Group"), including Vickers, entered into an
Administrative Order on Consent with the USEPA on March 21, 1994, to conduct the
Remedial Design ("RD") of the interim remedy. The remedial design is complete at
an approximate cost of $6 million. Vickers' portion of the RD costs was
approximately 2.95%, based on an interim allocation agreement among the PRPs.

On November 26, 1996, the USEPA issued a Unilateral Administrative Order under
Section 106 of CERCLA to all PRPs, including Vickers, to conduct the
pre-construction phase of the interim remedy. On September 30, 1997, USEPA
issued another administrative order directing the PRPs, including Vickers, to
carry out the interim remedial action work which includes construction and
operation and maintenance (over a 12-year period) of water treatment facilities
for the extraction and treatment of contaminated groundwater. The PRP Group is
now implementing the interim remedy. The PRP Group has entered into an agreement
to allocate the costs. Cost allocation between Lockheed and other PRPs was
determined by a technical arbitration panel, and that decision has been
confirmed by a California court. Lockheed has appealed the allocation decision,
but is participating in the funding of the interim remedy. In December 1997, a
final settlement agreement and mutual release was negotiated among the
intra-Glendale PRPs. The estimate for the cost of the interim remedy is a net
present value of $81 million. Vickers' share is 1.04% of the total interim
remedy work, assuming the allocation between Lockheed and the 

                                      -7-
<PAGE>   8

PRP group remains unchanged from the arbitration award. Vickers' allocated share
of the interim remedy-related costs is estimated to be in the range of $840,000
and $1.1 million.

As previously reported, on July 31, 1992, the Maine Department of Environmental
Protection issued an Administrative Enforcement Order to Aeroquip-Vickers and
its wholly owned subsidiaries, Aeroquip Corporation ("Aeroquip") and Sterling
Engineered Products Inc. ("Sterling"), as well as one other party, Pioneer
Plastics Corporation ("Pioneer Plastics"), (collectively the "respondents"),
pursuant to Title 38, section 1304(12) of the Maine Revised Statutes. (Reference
is made to Part I, Item 3, of Aeroquip-Vickers' Annual Report on Form 10-K for
the year ended December 31, 1994.) The Order, required the respondents to
conduct a complete Phase II environmental assessment of alleged soil and
groundwater contamination at a manufacturing site in Auburn, Maine, which was
formerly owned by Sterling and is now owned by Pioneer Plastics. The Order
further required the respondents to remediate any environmental contamination
identified in the Phase II assessment. On May 5, 1993, a Compliance Order on
Consent ("COC") was entered into by the State of Maine, Sterling and Pioneer
Plastics. The COC replaces and revokes the Order issued July 31, 1992. The COC
requires Sterling to conduct a site investigation and to develop and implement a
remedial work plan. Sterling was merged into Aeroquip Corporation effective
December 31, 1996. The cost to Aeroquip to conduct the COC site investigation,
develop the remedial work plan and complete a feasibility study (the
"Feasibility Study") is estimated to be approximately $2,000,000. Aeroquip's
remediation costs are undetermined at this time because the Feasibility Study
has not been completed.

On June 9, 1998, the Company became aware of an investigation at the Aeroquip
automotive facility located in Fitzgerald, Georgia, by the U.S Environmental
Protection Agency. The EPA is investigating alleged violations of the Clean Air
Act from approximately 1993 to 1995. The agency's allegations include: the
release of ozone depleting substances into the environment from refrigerant
equipment; use of non-certified technicians to service and maintain such
equipment; the performance of refrigerant maintenance without the proper
recovery equipment; and providing false statements to the agency. On January 14,
1999, the U. S. Department of Justice notified Aeroquip and Aeroquip-Vickers
that it was willing to enter into settlement negotiations to resolve these
alleged civil violations by entry of a consent decree and payment of an
undetermined civil penalty.

The Fitzgerald facility, which employs approximately 50 people, manufactures
custom-engineered extruded plastic products. The plant, with 1998 sales of
approximately $7 million, is located on 12 acres of land, with the building
occupying approximately 80,000 square feet.

A Vickers motor pump, which is a component of the hydraulic systems provided by
Aerospatiale for Airbus Industries for use in the A330/340 aircraft, was
involved in two separate fires which occurred on aircraft during ground
maintenance and cargo unloading procedures. No personal injuries occurred, and
Aerospatiale and Airbus Industries indicate that steps have been taken to
prevent further incidents. The panel of experts which was appointed to
investigate and report on the cause of the fires, related technical issues and
damages has issued a draft final report to the parties and to the French court.
The report of the panel, when completed, will be of an advisory nature and is
not legally binding, but would serve as evidence of the facts in the event that
claims are subsequently made on the merits. In its draft final report, the panel
expresses its belief that the Aerospatiale/Airbus system design, the Air
Malaysia and  Air Mauritius maintenance practices and the Vickers pump design
were all causes of the incidents. Vickers will have an opportunity to comment on
the draft final report and plans to present arguments to the panel in the near
future. The last meeting of the panel to discuss technical issues has been
scheduled for April 1999.

                                      -8-
<PAGE>   9
No claims for recovery of damages have been made at this time. Evidence was
presented to the panel through which Airbus and Aerospatiale allege that the
property damage to the aircraft involved is in excess of $45 million. Based upon
the evidence presented supporting potential airline claims against Airbus, the
alleged cost of retrofitting other A330/340 aircraft cannot exceed $23 million.
Any property damage claims which might ultimately be brought against Vickers as
a result of the fires would be covered by Vickers' aviation insurance. Vickers
denies responsibility for any damages and will vigorously defend its position.
Because the draft final report indicates that all parties share responsibility
for the cause  of the incidents, it is impossible for Vickers to determine at
this time what portion of any damages awarded in the event of claim would be
attributed to Vickers. The proceedings regarding determination of damages by the
expert panel will continue into June 1999.

Aeroquip-Vickers and certain subsidiaries are defendants in various lawsuits.
While the ultimate outcome of these lawsuits and the above matters cannot now be
predicted, management is of the opinion, based on the facts now known to it,
that the liability, if any, in these lawsuits (to the extent not provided for by
insurance or otherwise) and the above matters will not have a material adverse
effect upon Aeroquip-Vickers' consolidated financial position, results of
operations or cash flows.

ITEM 4.  Submission of Matters to a Vote of Security Holders.

       None.

                                     PART II
                                     -------

ITEM 5.  Market for Registrant's Common Equity and Related Stockholder
         Matters.

STOCK EXCHANGES - Aeroquip-Vickers' common stock is traded on the New York,
Chicago and Pacific Stock Exchanges, and on the London and Frankfurt Stock
Exchanges. Our NYSE ticker symbol is ANV.

QUARTERLY COMMON STOCK INFORMATION - The following table sets forth, for the
calendar quarter indicated, the high and low closing prices per Aeroquip-Vickers
common share as reported by the New York Stock Exchange:
<TABLE>
<CAPTION>

                                  1998                1997
                                  ----                ----
Quarter Ended               High        Low     High       Low

<S>                        <C>         <C>     <C>        <C>  
March 31                   $58.63      $44.94  $40.25     $33.50
June 30                     72.25       55.88   48.38      33.00
September 30                60.00       28.75   57.50      47.88
December 31                 38.50       22.81   55.81      47.31
</TABLE>

STOCK OWNERSHIP - On March 5, 1999, there were 8,305 record holders of
Aeroquip-Vickers' common stock. Although exact information is unavailable,
Aeroquip-Vickers estimates there are approximately 9,000 additional beneficial
owners, based upon the 1998 proxy solicitation.

DIVIDEND INFORMATION - Cash dividends have been paid without interruption on
common stock since 1933. The payment of dividends is subject to restrictions
described in Note 7 to the Company's financial statements on page 31 herein.
<TABLE>
<CAPTION>

DIVIDEND PAYMENTS PER SHARE OF COMMON STOCK
-------------------------------------------
                           1998           1997
                           ----          ----
<S>                         <C>          <C>   
March                       $  .22       $  .20
June                           .22          .20
September                      .22          .20
December                       .22          .20
                            ------       ------
                            $  .88       $  .80
                            ======       ======
</TABLE>

                                      -9-
<PAGE>   10



ITEM 6.  Selected Financial Data.
------
<TABLE>
<CAPTION>
                    5-Year Summary of Selected Financial Data
                       Years Ended December 31 (1998-1994)

                  (Dollars in millions, except per share data)

                                     1998            1997           1996           1995         1994
                                     ----            ----           ----           ----         ----
<S>                               <C>             <C>            <C>             <C>           <C>
Net sales                         $2,149.5        $2,112.3       $2,032.9        $1,884.0      $1,794.7
Income before cumulative
  effect of accounting change        100.3           100.9a         102.7b           94.9          65.9
Net income                            97.1           100.9          102.7            94.9          65.9
Income per share:
  Basic:

   Before cumulative
   effect of accounting change        3.58            3.60           3.62            3.29          2.29
   Net income                         3.46            3.60           3.62            3.29          2.29
  Diluted:
   Before cumulative
   effect of accounting change        3.56            3.51a          3.51b           3.20          2.26
   Net income                         3.44            3.51           3.51            3.20          2.26
Total assets                       1,458.8         1,376.6        1,289.5         1,224.2       1,001.0
Long-term debt                       278.3           256.7          257.7           302.4         234.9
Cash dividends per
  common share                         .88             .80            .80             .72           .68

</TABLE>

(a)  Includes a special charge of $30 million ($18.5 million net, or diluted net
     income per share of $.63) to exit the Company's automotive interior
     plastics business.

(b)  Includes a combined net gain from sale of unconsolidated affiliates of $5
     million (diluted net income per share of $.16) and a credit for settlement
     of claims for prior years' research and development tax credits of $4
     million (diluted net income per share of $.13).

ITEM 7.  Management's Discussion and Analysis of Financial Condition
         and Results of Operation.

RESULTS OF OPERATIONS

The Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 131, "Disclosures about Segments of an Enterprise and
Related Information," which was adopted in the 1998 fourth quarter. Statement
131 requires that segment financial information be reported on a basis
consistent with the Company's internal reporting used for evaluating segment
performance and allocating resources. Accordingly, in the 1998 fourth quarter,
the Company changed its business segments, which were previously based on
markets served, from Industrial, Automotive and Aerospace to Aeroquip and
Vickers. These segments reflect the way the Company is organized and managed and
how performance is measured. The Company evaluates performance and allocates
resources based on operating income before allocation of corporate costs.
Corporate costs represent the total of corporate headquarters costs. Although
Aeroquip and Vickers serve many of the same customers and markets, they are
managed separately because of significantly different product technologies and
manufacturing processes and the differing dynamics required to serve their
customers. The discussion of prior years' operations has been restated to
conform to the current year presentation. In order to provide additional
information to better understand the Company's operations, separate tables
showing sales and operating income by markets served are also included in this
discussion. Each market served has distinct characteristics, including differing
economic cycles, geographic potential, product life cycles and nature of
competition.


                                      -10-
<PAGE>   11

1998 COMPARED WITH 1997

The following data provide highlights for the year 1998 compared with the year
1997.
<TABLE>
<CAPTION>

                                                                                    
(dollars in thousands,                   YEAR ENDED DECEMBER 31                      Percent
except per share data)               ----------------------------                    Increase
                                          1998                  1997                (Decrease)
                                       --------              ----------             ----------
<S>                                   <C>                  <C>                         <C>
CONSOLIDATED
Net sales                            $2,149,474           $2,112,293                   1.8%
Manufacturing income                    529,569              557,625                  (5.0)
Manufacturing margin                       24.6%                26.4%
Operating income                        186,380              191,640 (a)              (2.7)
Operating margin                            8.7%                 9.1%(a)
Income before cumulative effect
of accounting change                    100,337              100,853 (a)               (.5)
Net income                               97,054              100,853 (a)              (3.8)
Diluted income per share
before cumulative effect of
accounting change                          3.56                 3.51 (a)               1.4
Diluted net income per share               3.44                 3.51 (a)              (2.0)

AEROQUIP
Net sales                             1,071,608            1,065,188                    .6
Operating income                        124,295               89,458 (a)              38.9
Operating margin                           11.6%                 8.4%(a)

VICKERS
Net sales                             1,077,866            1,047,105                   2.9
Operating income                         90,407              132,599                 (31.8)
Operating margin                            8.4%                12.7%
</TABLE>

(a)  After deducting a special charge of $30 million, or $18.5 million net
     (diluted net income per share of $.63).

Consolidated net sales in 1998 of $2.15 billion were $37.2 million, or 1.8%,
higher than in 1997. Sales for the Aeroquip and Vickers segments were .6% and
2.9% higher than in the prior year, respectively. U.S. sales were $37.9 million,
or 2.8%, higher in 1998, while non-U.S. sales declined nearly $1 million. Sales
generated by companies acquired in 1998 amounted to $31.7 million, and were
principally outside the U.S., while sales for 1997 included $67 million from
facilities that were sold or closed during 1997. Changes in currency exchange
rates reduced non-U.S. sales, principally in the Asia-Pacific region, by nearly
$17 million.

Aeroquip's sales for 1998 increased $6.4 million, or .6%, over 1997 to $1.07
billion. Aeroquip's sales in industrial markets increased 2.6% in 1998, with
higher sales in the U.S. partially offset by declines in Europe and the
Asia-Pacific region. Sales of U.S. mobile and stationary equipment, truck and
bus, and residential air conditioning products improved over the prior year, but
sales declined in most industrial markets served outside the U.S., except
residential air conditioning and commercial refrigeration. Aeroquip acquired a
small business in Italy during the 1998 second quarter that supplies components
to European residential air conditioning and commercial refrigeration markets.
Changes in currency exchange rates reduced Aeroquip's 1998 sales in industrial
markets in Europe, Brazil and the Asia-Pacific region by nearly $5 million.
Aeroquip's sales in automotive markets in 1998 declined $26.3 million, or 5.8%,
from 1997 sales. During 1997, Aeroquip sold or closed eight facilities that had
combined sales in 1997 of approximately $67 million. After adjusting to exclude
sales originating from those facilities, Aeroquip's sales in U.S. automotive
markets were nearly the same as in 1997, and sales in non-U.S. automotive
markets were nearly 16% greater than in 1997. This growth in non-U.S. automotive
sales included results from a company acquired during 1998. Aeroquip's sales in
aerospace markets increased nearly 14% over 1997. Sales to commercial and
military OEM and commercial aftermarket customers increased in 1998, but sales
in the military aftermarket declined.

                                      -11-
<PAGE>   12

Vickers' sales for 1998 increased $30.8 million, or 2.9%, over 1997 to $1.08
billion. Vickers' sales in industrial markets declined 1% from 1997, as sharply
higher sales in European markets were negated by declines in the U.S., Brazil
and the Asia-Pacific region. Changes in currency exchange rates contributed to
the decline in non-U.S. sales, most notably in the Asia-Pacific region.
Fourth-quarter sales in all major U.S. industrial markets declined from 1997,
particularly for agricultural and electronic machine control products, and led
to full year declines in sales for U.S. stationary equipment and electronic
machine control products. However, Vickers' sales for the year for U.S.
agricultural, mobile equipment, and truck and bus products showed improvement
over 1997. Vickers sales in aerospace markets, particularly in the U.S.,
increased substantially during 1998, leading to an overall increase of nearly
11.5% over the prior year. 1998 sales reflected strong increases over the prior
year in sales to commercial OEM and aftermarket customers, and to military OEMs.
Sales for military aftermarket applications declined approximately 5% from
1997's sales.

Consolidated manufacturing income fell $28.1 million, or 5%, from 1997.
Manufacturing margin likewise declined from 26.4% to 24.6%. Manufacturing income
for the Aeroquip segment improved over 1997, with a modest improvement in
manufacturing margin. Both manufacturing income and margin for Aeroquip's
industrial and aerospace products improved over 1997, and manufacturing margin
for its automotive products also improved, but manufacturing income declined.
Manufacturing income and margin for the Vickers segment declined significantly
from 1997. A number of factors contributed to the decline in manufacturing
income and margin for Vickers' industrial products, including the severe
economic downturn in the Asia-Pacific region and the sharp decline in new
orders, particularly during the last half of the year in the U.S. Manufacturing
income for Vickers' operations in the Asia-Pacific region was $12.9 million
lower in 1998 than in 1997. Losses associated with a new pump manufacturing
facility in the U.S. amounted to $7.9 million, and incurred severance and
related work force reduction costs charged to cost of products sold in the last
quarter of the year amounted to $1.7 million. Manufacturing income for Vickers'
aerospace products increased nearly 4% over 1997.

Operating income in 1998 amounting to $186.4 million was $5.3 million, or 2.7%,
lower than in 1997. Before a special charge of $30 million in 1997 to dispose of
Aeroquip's interior plastics facilities, as more fully discussed later,
operating income declined $35.3 million, or nearly 16%, from 1997. Before the
special charge, operating income in 1998 for the Aeroquip segment was $4.8
million, or 4%, higher than in 1997, but operating income for Vickers declined
$42.2 million, or 31.8%, from 1997. Operating income includes selling and
general administrative and engineering, research and development expenses
(SGA&E) that were $7.2 million, or 2.1%, higher than in 1997. SGA&E costs
associated with companies acquired in 1998 amounted to $5.6 million. In
addition, higher costs amounting to nearly $1 million in the Asia-Pacific region
during the first half of the year, and incurred severance and related work force
reduction costs totaling $1.2 million in the last quarter of the year
contributed to higher SGA&E costs in 1998. These higher SGA&E costs were
partially offset by cost reductions totaling $3 million resulting from
disposition of the interior plastics business.



                                      -12-
<PAGE>   13



The following tables provide net sales and operating income for the year 1998
compared with the year 1997 by markets served.
<TABLE>
<CAPTION>



(dollars in thousands)               YEAR ENDED DECEMBER 31              Percent
                                  ----------------------------           Increase
                                     1998                1997           (DECREASE)
                                     ----                ----           ----------
<S>                             <C>                   <C>                 <C>
Net sales
Industrial                       $1,174,157           $1,170,192            .3%
Automotive                          427,792              454,096          (5.8)
Aerospace                           547,525              488,005          12.2
                                 ----------           ----------
Consolidated net sales           $2,149,474           $2,112,293           1.8
                                 ==========           ==========

Operating income
Industrial                       $   68,707           $  110,697         (37.9)
Automotive                           47,009               20,007 (a)     135.0
Aerospace                            98,986               91,353           8.4
Unallocated corporate               (28,322)             (30,417)          6.9
                                 ----------           ----------
Consolidated operating income    $  186,380           $  191,640 (a)      (2.7)
                                 ==========           ==========
</TABLE>

(a)  After deducting a special charge of $30 million.

The Company's combined sales in industrial markets increased $4 million, or .3%,
over 1997. Despite the decline in sales and orders from agricultural customers
that began in the third quarter and accelerated in the fourth quarter, full-year
1998 sales in U.S. industrial markets increased 1.8% over 1997, as U.S. sales
for the year to agricultural, residential air conditioning, mobile equipment,
and truck and bus customers improved over 1997. Higher sales in those markets
were partially offset by declines in sales of stationary industrial machinery
and electronic machine control products. Sales in European industrial markets
increased 7% over 1997, with particular strength in sales of residential air
conditioning and commercial refrigeration, and electronic machine control
products. Sales of industrial products in the Asia-Pacific region and Brazil
were 25% and 11.5% lower than in 1997, respectively, with a significant portion
of the sales decline in both regions due to changes in currency exchange rates.
Sales in automotive markets in 1998 declined 5.8% from 1997. During 1997,
Aeroquip sold or closed eight facilities that had combined sales in 1997 of
approximately $67 million. After adjusting to exclude sales originating from
those facilities, sales in U.S. automotive markets were nearly the same as in
1997, and sales in non-U.S. automotive markets were nearly 16% greater than in
1997. Sales of aerospace products increased more than 12% over the prior year.
In both the U.S. and Europe, the Company recognized increases in sales in all
aerospace markets served except the military aftermarket, which declined
approximately 6%.

Operating income for industrial declined $42 million, or 37.9%, from 1997. This
significant reduction in operating income was attributable to a number of
factors. Because of the severe economic downturn in the Asia-Pacific region,
operating income for the industrial operations of Aeroquip and Vickers in that
region was $14.7 million lower than in 1997. Operating losses, including SGA&E
expenses, associated with a new pump manufacturing facility amounted to $9.3
million in 1998 and incurred severance and related work force reduction costs in
the 1998 fourth quarter amounted to $4.5 million. In addition, the sharp decline
in new orders in the U.S. for the Vickers segment, particularly during the last
half of 1998, adversely affected industrial's operating income for 1998. Before
deducting the special charge of $30 million in 1997 to dispose of Aeroquip's
interior plastics facilities, operating income for automotive declined $3
million, or 6%, from the prior year. Relocation of certain manufacturing
operations and related costs for new facilities in the U.S. during 1998
contributed to lower automotive earnings. Operating income for aerospace
increased $7.6 million, or 8.4%, over 1997, principally due to the
year-over-year increase in sales volume.


                                      -13-
<PAGE>   14

Charges to Other income (expense) - net were $4.5 million lower in 1998 than in
1997, primarily because exchange losses were $4.3 million lower in 1998. The
loss from redemption of the Company's 9.55% senior sinking fund debentures in
1998 in the amount of $2.5 million and the loss from redemption of the Company's
6% convertible subordinated debentures in 1997 in the amount of $1.5 million
were recorded in Other income (expense) -net.

The Company adopted the American Institute of Certified Public Accountants'
Statement of Position 98-5, "Reporting on the Costs of Start-Up Activities," in
1998 and recognized the cumulative effect of an accounting change of $4.8
million ($3.3 million after tax, or $.12 per share) to charge to income start-up
costs for new facilities that had previously been deferred. Income before
cumulative effect of accounting change in 1998 amounted to $100.3 million, or
basic and diluted income per share of $3.58 and $3.56, respectively. These
amounts compare with net income in 1997 of $100.9 million, or basic and diluted
net income per share of $3.60 and $3.51, respectively. 1997 net income and net
income per share included the special charge to exit Aeroquip's automotive
interior plastics business amounting to $18.5 million net, or basic and diluted
net income per share of $.66 and $.63, respectively. The effective income tax
rate for 1998 before cumulative effect of accounting change was 32% and compares
with 33% for 1997 exclusive of the special charge. The income tax provision
included the benefit of utilization of operating loss carryforwards for which
valuation allowances had previously been provided amounting to $1.2 million and
$1.8 million in 1998 and 1997, respectively. Valuation allowances have been
provided for deferred tax assets relating to deductible temporary differences
and non-U.S. operating loss and foreign tax credit carryforwards where evidence
did not exist to indicate that it was more likely than not that the associated
deferred tax assets would be realized. Valuation allowances have generally been
provided where future taxable earnings are not predictable and other tax
planning strategies are not available.

1997 COMPARED WITH 1996

The following data provide highlights for the year 1997 compared with the year
1996.
<TABLE>
<CAPTION>

                                                                                       
(dollars in thousands,                      YEAR ENDED DECEMBER 31                Percent 
except per share data)                  ----------------------------              Increase
                                            1997               1996             (DECREASE)
                                         ----------         ----------          ----------
<S>                                    <C>                  <C>                    <C>
CONSOLIDATED
Net sales                              $2,112,293           $2,032,915               3.9%
Manufacturing income                      557,625              512,179               8.9
Manufacturing margin                         26.4%                25.2%
Operating income                          191,640  (a)         176,575               8.5
Operating margin                              9.1% (a)             8.7%
Net income                                100,853  (a)         102,721 (b)          (1.8)
Diluted net income per share                 3.51  (a)            3.51 (b)

AEROQUIP

Net sales                               1,065,188            1,099,914              (3.2)
Operating income                           89,458  (a)          96,184              (7.0)
Operating margin                              8.4% (a)             8.7%

VICKERS

Net sales                               1,047,105              933,001              12.2
Operating income                          132,599              110,571              19.9
Operating margin                             12.7%                11.9%

</TABLE>

(a)  After deducting a special charge of $30 million, or $18.5 million net
     (diluted net income per share of $.63).

(b)  Includes a net gain from sales of investments in affiliates amounting to
     $17.3 million, or $5 million net (diluted net income per share of $.16) and
     an income tax credit of $4 million (diluted net income per share of $.13).


                                      -14-
<PAGE>   15


Consolidated net sales in 1997 of $2.11 billion were $79.4 million, or 3.9%,
greater than in 1996. Sales for the Aeroquip segment declined 3.2%, but sales
for the Vickers segment increased 12.2%. The sales decline for Aeroquip was due
to the sale or closure of certain interior automotive plastics plants. Sales for
these facilities that were sold or closed in 1997 were $67 million in 1997 and
$132 million in 1996. Exclusive of sales in both years for the divestitures,
consolidated net sales would have increased 7.6%. The divestitures are discussed
more specifically later. Companies acquired in 1996 generated 1997 sales
totaling approximately $41.9 million for the Vickers segment during the 1997
period for which there were no comparable 1996 sales. Including the results of
acquisitions, U.S. sales increased $64.5 million, or 5%, and non-U.S. sales
increased $14.9 million, or 2%. Changes in currency exchange rates reduced
non-U.S. sales, principally in the Aeroquip segment, by more than $44 million.

Aeroquip's sales for 1997 declined $34.7 million, or 3.2%, from 1996 to $1.07
billion. Aeroquip's sales in industrial markets were nearly the same as in 1996
as somewhat stronger sales in the U.S. and Brazil were offset by declines in
Europe. U.S. sales in mobile equipment and truck and bus markets remained
strong, but sales of residential air conditioning components were down in 1997
due to unseasonably cool spring and summer temperatures and high levels of
inventory at OEMs. Sales in European industrial markets declined primarily
because of the effects of currency exchange rate changes. Aeroquip's sales in
automotive markets declined nearly 10% from 1996 levels. As part of its strategy
to focus on fluid connectors in its automotive business, Aeroquip sold or closed
eight facilities during 1997 that had combined sales of approximately $67
million in 1997 and $132 million in 1996. Exclusive of the effects of these
divestitures, Aeroquip's sales in automotive markets increased approximately 4%.
This sales growth was recognized principally in European markets and was after
the significant effects of changes in currency exchange rates that lowered
Aeroquip's European automotive sales by nearly $28 million. Aeroquip's sales in
aerospace markets increased more than 10% over 1996. 1997 sales reflected
increases over 1996 in sales to commercial OEM and aftermarket customers and to
the military aftermarket, but sales for military original equipment applications
declined from the 1996 level.

Vickers' sales for 1997 increased $114.1 million, or 12.2%, over 1996 to $1.05
billion. Vickers' sales in industrial markets increased 4.6% over 1996. Sales in
industrial markets increased 5% in the U.S., 9% in Brazil and 18.7% in the
Asia-Pacific region, but declined nearly 3% in Europe. Industrial mobile
equipment and stationary industrial machinery product sales improved, although
sales were hindered by capacity constraints and delivery performance at a major
pump manufacturing facility. Vickers' sales in aerospace markets increased
substantially in both the U.S. and Europe, resulting in an overall increase of
nearly 33% over the prior year. 1997 sales reflected strong increases over 1996
in sales to commercial OEM and aftermarket customers and to the military
aftermarket. Sales for military original equipment applications declined from
the 1996 level.

Consolidated manufacturing income increased $45.4 million, or 8.9%, over 1996.
Manufacturing margin improved from 25.2% in 1996 to 26.4% in 1997. Manufacturing
income and margin for the Aeroquip segment improved in 1997. Although
manufacturing margin remained nearly the same in 1997 as in the prior year for
Aeroquip's industrial and aerospace products, manufacturing income increased.
Moreover, manufacturing income and margin for Aeroquip's automotive products
improved significantly over the prior year, reflecting the positive effects of
the divestiture of the automotive interior plastics facilities. Manufacturing
income for the Vickers segment improved over the prior year, but with a small
decline in manufacturing margin. Manufacturing income and margin for Vickers'
industrial products declined, principally due to manufacturing performance
issues at a major pump manufacturing facility where manufacturing income was
$15.1 million lower than in the prior year. Manufacturing income for Vickers'
aerospace products increased significantly, primarily due to the substantial
increase in sales volume.

The Aeroquip segment recorded a special charge of $30 million in the 1997 first
quarter to exit its automotive interior plastics business. The special charge
included a provision for severance payments of $6.3 million to terminate
approximately 1,500 salaried and hourly employees, principally in 



                                      -15-
<PAGE>   16

Germany. The special charge also included lease termination costs amounting to
$6.9 million; asset disposition costs, including environmental costs, amounting
to $9.6 million; litigation costs amounting to $3 million; and other costs
amounting to $4.2 million. The planned actions to which this special charge
related were substantially completed during 1997, and as of December 31, 1998,
all costs had been incurred.

Operating income for 1997 increased $15.1 million, or 8.5%, over 1996 to $191.6
million. Operating income in 1997 for Aeroquip was $6.7 million, or 7%, lower
than in 1996 because of the special charge amounting to $30 million that was
discussed above. Before the special charge, Aeroquip's operating income was
$23.3 million, or 24.2%, higher than in 1996. Operating income for Vickers
increased $22 million, or 19.9%. Operating income includes selling and general
administrative and engineering, research and development expenses (SGA&E) that
were nearly the same in 1997 as in 1996, but as a percent of sales were 15.9% in
1997 compared with 16.5% in 1996. SGA&E costs for Vickers' European operations
were substantially lower than in 1997 as a result of organizational realignments
and continuing process improvements. Such costs, however, were higher in
Asia-Pacific due to the expansion of operations in the region and were also
higher in the U.S. due to higher levels of business activity. The disposition of
its automotive interior plastics business also served to reduce Aeroquip's SGA&E
costs in 1997.

The following tables provide net sales and operating income for the year 1997
compared with the year 1996 according to markets served.
<TABLE>
<CAPTION>

                                                                                       
(dollars in thousands,                      YEAR ENDED DECEMBER 31            Percent 
except per share data)                  ----------------------------          Increase
                                            1997               1996          (DECREASE)
                                         ----------         ----------       ----------

<S>                                     <C>                  <C>               <C>
Net sales
Industrial                              $1,170,192           $1,138,501          2.8%
Automotive                                 454,096              503,781         (9.9)
Aerospace                                  488,005              390,633         24.9
                                        ----------           ----------
Consolidated net sales                  $2,112,293           $2,032,915          3.9
                                        ==========           ==========

Operating income

Industrial                              $  110,697           $  109,462          1.1
Automotive                                  20,007 (a)           36,352        (45.0)
Aerospace                                   91,353               60,941         49.9
Unallocated corporate                      (30,417)             (30,180)         (.8)
                                        ----------           ----------
Consolidated operating income           $  191,640 (a)       $  176,575          8.5
                                        ==========           ==========
</TABLE>

(a)  After deducting a special charge of $30 million.

The Company's combined sales for Aeroquip and Vickers in industrial markets
increased $31.7 million, or 2.8%, over 1996. Sales in U.S. industrial markets
increased 4.1% over 1996, as U.S. sales to mobile equipment, truck and bus, and
stationary industrial machinery customers remained strong. Sales of residential
air conditioning components were down in 1997 due to unseasonably cool spring
and summer temperatures and high levels of inventory at OEMs. Sales in European
industrial markets declined 6.3% from 1996, principally the result of the
effects of currency exchange rate changes. Sales of industrial products in
Asia-Pacific and Brazil collectively increased 15% over 1996. Sales in
automotive markets declined nearly 10% from 1996. As part of its strategy to
focus on fluid connectors in its automotive business, Aeroquip sold or closed
eight facilities during 1997 that had combined sales of approximately $67
million in 1997 and $132 million in 1996. Exclusive of the effects of these
divestitures, sales of automotive products increased approximately 4%. This
sales growth was recognized principally in European markets and was after the
significant effects of changes in currency exchange rates that lowered
Aeroquip's European automotive sales by nearly $28 million. Sales in aerospace
markets increased nearly 25% over 1996, reflecting strong increases in sales to
commercial OEM and aftermarket customers and to the 


                                      -16-
<PAGE>   17

military aftermarket. Sales for military original equipment applications
declined from the 1996 level.

Operating income for industrial increased $1.2 million, or 1.1%. A small decline
in manufacturing income for industrial was more than offset by reductions in
selling and general administrative and engineering, research and development
expenses due to organizational realignments and process improvements. Operating
income for automotive declined $16.3 million, or 45%, due to the special charge
of $30 million discussed earlier. Before considering the special charge,
operating income for automotive increased $13.7 million, reflecting the positive
effects of the divestiture and higher fluid connector sales in Europe. Operating
income for aerospace improved $30.4 million, or 49.9%, over that of the prior
year, principally due to the substantial increase in sales volume.

Interest expense for 1997 was $1.4 million higher than in 1996. The increase was
primarily attributable to a higher interest rate on long-term debt that was
issued in 1996. Other income (expense) - net for 1996 included a gain of $17.3
million resulting from the sales of investments in unconsolidated affiliates.

Net income for 1997 amounted to $100.9 million. Basic and diluted net income per
share was $3.60 and $3.51, respectively. 1997 net income and net income per
share included the special charge to exit Aeroquip's automotive interior
plastics business amounting to $18.5 million net, or basic and diluted net
income per share of $.66 and $.63, respectively. These amounts compare with 1996
net income of $102.7 million and basic and diluted net income per share of $3.62
and $3.51, respectively. Net income for 1996 included a net gain of $5 million
(basic and diluted net income per share of $.18 and $.16, respectively) from the
sale of unconsolidated affiliates and a credit for settlement of claims for
prior years' research and development tax credits of $4 million (basic and
diluted net income per share of $.14 and $.13, respectively). The income tax
provision for 1997 included a credit of $11.5 million related to the special
charge to exit Aeroquip's automotive interior plastics business. Exclusive of
this item, the effective income tax rate for 1997 was 33% and compares with the
1996 effective income tax rate of 31.1% before special items. The income tax
provision included the benefit of utilization of operating loss carryforwards
for which valuation allowances had previously been provided amounting to $1.8
million and $3.7 million in 1997 and 1996, respectively. Valuation allowances
have been provided for deferred tax assets relating to deductible temporary
differences and non-U.S. operating loss carryforwards where evidence did not
exist to indicate that it was more likely than not that the associated deferred
tax assets would be realized. Valuation allowances have generally been provided
where future taxable earnings are not predictable and other tax planning
strategies are not available.

LIQUIDITY AND CAPITAL RESOURCES

Cash provided by operating activities in 1998 amounted to $177.5 million,
compared with $137.7 million in 1997. Working capital requirements in 1998
included $21.9 million to reduce payables and accruals. These cash requirements
were partially offset by the effects of reductions to receivables and
inventories.

Capital expenditures during 1998 totaled $142.2 million compared with $139.8
million in 1997. In addition, the Company spent $30.7 million during 1998 to
acquire two companies in the Aeroquip segment and four companies in the Vickers
segment. In 1997, the Company received $43.4 million from the sales of its
automotive interior plastics facilities. Quarterly dividend payments were $.22
per share in 1998, or $.88 per share for the year. In January 1999, the
Company's Board of Directors approved a first-quarter 1999 dividend of $.22.

During 1998, the Company purchased 657,500 shares of its common stock at a cost
of $23.2 million. At December 31, 1998, $57.8 million of additional common stock
was available for purchase under the current Board of Directors authorization.


                                      -17-
<PAGE>   18


In the 1998 first quarter, the Company retired its 9.55% senior sinking fund
debentures in the amount of $42 million. Additional borrowings under the
Company's Medium Term Note program and short-term debt were used to redeem the
debentures and to meet other funding requirements. The remaining borrowing
capacity at December 31, 1998, under provisions of a current shelf registration
statement for the Medium Term Note program, was $185 million. The Company also
maintains a revolving credit agreement with a consortium of U.S. and non-U.S.
banks expiring in 2001 under which the Company may borrow up to $175 million.
The agreement is intended to support the Company's commercial paper borrowings
and, to the extent not so utilized, provide domestic borrowing capacity. The
remaining borrowing capacity under this agreement at December 31, 1998, was $120
million. In addition to this agreement, the Company has uncommitted arrangements
with various banks to provide short-term financing as necessary.

The Company expects that cash flow from operating activities and remaining
available credit lines will be sufficient to meet normal operating requirements,
including debt obligations maturing in the near term and planned capital
expenditures.

At December 31, 1998, the Company had forward exchange contracts outstanding
with notional and carrying amounts of $14.3 million and $121,000, respectively,
and option contracts maturing at various dates through November 1999, with
notional and carrying amounts of $28 million and $204,000, respectively. At
December 31, 1997, the Company had forward exchange contracts outstanding with
notional and carrying amounts of $12.8 million and $227,000, respectively, and
option contracts that matured at various dates through December 1998, with
notional and carrying amounts of $61.6 million and $600,000, respectively. The
effect of the Company's hedging activities on net income was not significant in
1998 or 1997.

CONTINGENCIES

The Company or certain of its subsidiaries have been named parties to various
lawsuits, claims and proceedings including being named potentially responsible
parties (PRP) for site investigation and cleanup costs under the Comprehensive
Environmental Response, Compensation, and Liability Act (superfund) or similar
regulations with respect to certain sites, as well as other product liability,
tort and contract claims and lawsuits which have arisen in the ordinary course
of the Company's business. While the ultimate outcome of the various lawsuits,
claims and proceedings, including PRP designations and other environmental
matters, cannot now be predicted, the Company believes that costs, in excess of
amounts provided or covered by insurance as it relates to litigation, arising
out of these matters, will not have a material adverse effect on the Company's
consolidated financial position, results of operations or cash flows.

YEAR 2000

The Company is continuing its efforts to assess and remediate problems caused by
the inability of certain of its information systems to properly process
transactions using dates in the Year 2000 and beyond, or to operate at the turn
of the century. During the 1998 first quarter, the Company completed an
inventory and identification of its mission-critical information systems
relative to Year 2000-related deficiencies. Each operating unit of the Company
is now engaged in the remediation and testing of its information systems for
Year 2000 compliance.

A Year 2000 steering committee was formed composed of the Company's information
technology leadership and other key executives to review and provide oversight
of all Year 2000-related activities. A Year 2000 program office was also
established as an adjunct to the steering committee to facilitate Year 2000
communications and coordinate Year 2000 efforts among the Company's operating
units.

During the 1998 third quarter, the Company engaged an independent consultant to
conduct a review of the Year 2000 program office and gauge operating unit
progress to date on Year 2000-related issues. The independent consultant



                                      -18-
<PAGE>   19

reported to the Company's senior management and Board of Directors that the Year
2000 program office management is sound and that the Company is managing Year
2000 projects according to plan.

The Company commenced testing of its mission-critical systems for Year 2000
compliance in the 1998 fourth quarter. This testing is being performed on an
"end-to-end" basis to assure that every major technology platform used by the
Company properly supports all business processes associated with acceptance of
orders, manufacture of product, shipment of product, and collection of payment.
Additionally, all supporting accounting and financial reporting systems are
being tested. The independent consultant is providing oversight and guidance
during the testing process. Following the successful conclusion of the Year 2000
compliance testing, the Year 2000 program office and the independent consultant
will report the test results to the Company's senior management and the Board of
Directors. Year 2000 compliance testing is expected to conclude in the 1999
third quarter.

The Company is also testing its embedded systems used in the manufacture and
distribution of its products for Year 2000 compliance to avert any disruption in
the supply of product to its customers. All remediation efforts and audits for
the embedded systems are targeted to be completed in the 1999 third quarter. The
Company has recently concluded testing of its microprocessor- based product line
and has certified its Year 2000 compliance to the customer base.

In order to assure continuous flow of products to end customers, the Company has
surveyed and is now assessing Year 2000 readiness on the part of the Company's
supply chain. The majority of suppliers responding to the Company's initial
survey indicated that they were in the process of implementing their own Year
2000 compliance programs. As a result of the preliminary nature of the initial
survey results, the Company is planning a supplemental survey and plans to
conduct on-site assessments of its critical suppliers. Based upon the outcome of
the Company's final assessment of its external supply chain components, any
business process or systems contingency plan will be developed and implemented
accordingly.

The Company is responding to Year 2000 inquiries from customers and financial
institutions. The Company will conduct on-site assessments of selected
independent distributors during the first half of 1999. Major OEM customers and
industry groups are conducting Year 2000 on-site assessments. To date, all
on-site assessments conducted by OEM customers or their designees have rated the
assessed Aeroquip-Vickers facilities as "low risk" relative to Year 2000
compliance. On-site OEM customer assessments are expected to continue into mid
1999.

From a cost perspective, the Company has budgeted the necessary funds to address
Year 2000-related projects. The Company estimates that its historical and
estimated costs of Year 2000 remediation will amount to approximately $17
million. This estimate includes costs directly related to fixing Year 2000
issues, costs associated with the accelerated replacement of non-compliant
systems, and costs associated with compensation of internal employees who are
assigned to work exclusively on Year 2000 projects.

The Company anticipates that its mission-critical systems will be Year 2000
compliant by the end of the 1999 third quarter. Failure to reach this
anticipated goal, however, could have a material effect on the Company's
business, results of operations or financial condition. Risk factors which may
affect the Company's ability to meet its Year 2000 project plan and the ability
of the Company's information systems to operate properly into the next century
include, but are not limited to, the availability and adequacy of date-compliant
software from vendors and the availability of necessary resources, both internal
and external, to install new purchased software or reprogram existing systems
and complete the necessary testing. In addition, the Company cannot predict the
outcome of the Year 2000 assessment of its supply chain or the ability of its
customers to achieve Year 2000 compliance by the end of 1999 or the impact of
either on the future operating results of the Company.


                                      -19-
<PAGE>   20

SUBSEQUENT EVENT

During the 1998 third quarter, the Industrial & Mobile business of Vickers (I&M)
began to experience a significant reduction in demand for its products in
certain industries as well as unfavorable sales mix in the products it did sell.
These developments were described in a press release issued on September 16,
1998, wherein the Company stated that it had lowered its expectations for the
1998 third quarter due to a number of factors, including the decline in higher
margin distributor business in North America, the continued economic turmoil in
the Asia-Pacific region, start-up costs for the new Greenwood, South Carolina,
pump facility and the negative effect of changes in currency exchange rates.

Aeroquip-Vickers management initiated a review of I&M in an effort to better
understand the industry dynamics affecting the business. Following this review,
Aeroquip-Vickers' management concluded that I&M faced a number of operational
challenges, including certain management issues, that would require substantial
time and resources to properly address. As a consequence of this review,
Aeroquip-Vickers' management began to consider various alternatives including a
restructuring, a sale or other disposition of I&M.

In late October 1998, the Company contacted a representative of Eaton
Corporation (Eaton) to explore acquisition of I&M by Eaton or a business
combination with Eaton involving I&M. Over a period of time, Eaton's interest
broadened to pursue acquisition of Aeroquip-Vickers in its entirety and,
following lengthy negotiations involving numerous meetings, on February 1, 1999,
Eaton and Aeroquip-Vickers announced that the companies had entered into an
"Agreement and Plan of Merger" whereby Eaton would acquire all of the
outstanding shares of Aeroquip-Vickers for $58 per share in cash. The Boards of
Directors of both companies have approved the transaction, which is subject to
normal closing conditions and the approval of Aeroquip-Vickers shareholders at a
special shareholders' meeting on April 8, 1999. The transaction is expected to
be completed in April 1999.

                                  * * * * * * *

Portions of this narrative, which are not historical in nature, are
forward-looking statements. The forward-looking statements made in this
narrative, as well as all other forward-looking statements or information
provided by the Company or its officers and employees, whether written or oral,
are made in reliance upon the safe harbor provisions of the Private Securities
Litigation Reform Act of 1995. Forward-looking statements of the Company are
based on, among other things, the performance of the U.S. and international
economies and the industrial, aerospace and automotive markets in which
Aeroquip-Vickers does business. These statements should be considered in light
of risks and uncertainties and other factors which may affect the Company's
actual performance including its ability to continually improve margins by
achieving anticipated cost reductions in manufacturing processes, to
consistently win new business in each of its industries by delivering quality
products and maintaining competitive pricing, and to successfully implement its
growth strategies.

ITEM 7A. Quantitative and Qualitative Disclosures about Market Risk.
-------
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities." This Statement will become effective for fiscal years
beginning after June 15, 1999. Early application is permitted. The Company is
currently evaluating the effect of the provisions of this Statement on its
accounting and reporting policies, and does not presently expect that adoption
of this Statement will have a material adverse effect on the Company's
consolidated financial position or results of operations.

The Company is exposed to market risks relating to fluctuations in interest
rates and currency exchange rates. The Company utilizes a mix of fixed- and
floating-rate debt to finance its investments and on going operations. The
Company also enters into forward exchange and option contracts to manage its
exposures to changes in currency exchange rates. In accordance with its


                                      -20-
<PAGE>   21
established policies, the Company enters into forward exchange contracts to
hedge certain of its firm commitments, including foreign currency denominated
receivables and payables, and enters into option contracts to hedge certain of
its projected foreign currency sales and purchases. Forward exchange and option
contracts are entered into with major commercial banks with high credit ratings.
Forward exchange and option contracts are not entered into or held for trading
or speculative purposes, and the Company is not a party to any leveraged
derivatives. The terms of these contracts are generally one year or less. The
Company's potential loss from a hypothetical 10% adverse change in interest
rates and currency exchange rates as it relates to financial instruments would
not have a material adverse effect on the Company's consolidated financial
position, results of operations or cash flows. See Notes 1 and 11 of Notes to
Financial Statements for further discussion of the Company's accounting policies
for and fair values of financial instruments.

ITEM 8.  Financial Statements and Supplementary Data.
------

REPORT OF ERNST & YOUNG LLP,
INDEPENDENT AUDITORS

Shareholders and Board of Directors
Aeroquip-Vickers, Inc.

We have audited the accompanying statement of financial position of
Aeroquip-Vickers, Inc. and subsidiaries at December 31, 1998 and 1997 and the
related statements of income, shareholders' equity and cash flows for each of
the three years in the period ended December 31, 1998. Our audits also included
the financial statement schedule listed at Item 14(a)(2). 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 audits.

We conducted our audits in accordance with generally accepted auditing
standards. 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 consolidated financial position of Aeroquip-Vickers,
Inc. and subsidiaries at December 31, 1998 and 1997, and the consolidated
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1998, in conformity with generally accepted
accounting principles. Also, in our opinion, the related financial statement
schedule, when considered in relation to the basic financial statements taken as
a whole, presents fairly in all material respects the information set forth
therein.

As discussed in Note 1 of Notes to Financial Statements, the Company changed its
method of accounting for start-up activities in 1998.

                                       /s/ ERNST & YOUNG LLP

Toledo, Ohio
January 27, 1999


                                      -21-
<PAGE>   22

<TABLE>
<CAPTION>

STATEMENT OF INCOME
Years ended December 31, 1998, 1997 and 1996
(In thousands, except per share data)

                                               1998                  1997                  1996
                                              --------             --------              --------

<S>                                         <C>                   <C>                   <C>       
Net sales                                   $2,149,474            $2,112,293            $2,032,915
Cost of products sold                        1,619,905             1,554,668             1,520,736
                                            ----------            ----------            ----------
MANUFACTURING INCOME                           529,569               557,625               512,179

Selling and general administrative
  expenses                                     271,718               263,824               260,712
Engineering, research and development
  expenses                                      71,471                72,161                74,892
Special charge                                      --                30,000                    --
                                            ----------            ----------            ----------
OPERATING INCOME                               186,380               191,640               176,575

Interest expense                               (27,013)              (27,171)              (25,813)
Other income (expense) - net                   (11,830)              (16,316)                2,659
                                            ----------            ----------            ----------

INCOME BEFORE INCOME TAXES AND
CUMULATIVE EFFECT OF ACCOUNTING CHANGE         147,537               148,153               153,421
Income taxes                                    47,200                47,300                50,700
                                            ----------            ----------            ----------

INCOME BEFORE CUMULATIVE EFFECT OF
ACCOUNTING CHANGE                              100,337               100,853               102,721
Cumulative effect of accounting change,
net of income tax benefit of $1,549             (3,283)                   --                    --
                                            ----------            ----------            ----------
NET INCOME                                  $   97,054            $  100,853            $  102,721
                                            ==========            ==========            ==========

BASIC INCOME PER SHARE
Before cumulative effect of
accounting change                           $     3.58            $     3.60            $     3.62
Cumulative effect of accounting
change                                            (.12)                   --                    --
                                            ----------            ----------            ----------
Basic net income per share                  $     3.46            $     3.60            $     3.62
                                            ==========            ==========            ==========

DILUTED INCOME PER SHARE
Before cumulative effect of
accounting change                           $     3.56            $     3.51            $     3.51
Cumulative effect of accounting
change                                            (.12)                   --                    --
                                            ----------            ----------            ----------
Diluted net income per share                $     3.44            $     3.51            $     3.51
                                            ==========            ==========            ==========
</TABLE>

The Notes to Financial Statements are an integral part of this statement.


                                      -22-
<PAGE>   23

<TABLE>
<CAPTION>


STATEMENT OF FINANCIAL POSITION
December 31, 1998 and 1997
(Dollars in thousands, except per share data)

                                                           1998                  1997
                                                       ------------          ------------
ASSETS
CURRENT ASSETS
<S>                                                    <C>                   <C>        
Cash and cash equivalents                              $    17,310           $    18,736
Receivables                                                341,825               348,822
Inventories                                                302,236               294,767
Other current assets                                        52,146                49,323
                                                       -----------           -----------
TOTAL CURRENT ASSETS                                       713,517               711,648

Plants and properties                                    1,119,557               993,002
Less accumulated depreciation                              571,340               518,860
                                                       -----------           -----------
                                                           548,217               474,142
Other assets                                               197,067               190,806
                                                       -----------           -----------
TOTAL ASSETS                                           $ 1,458,801           $ 1,376,596
                                                       ===========           ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Notes payable                                          $   101,829           $    84,044
Accounts payable                                           113,698               111,800
Income taxes                                                27,167                30,496
Other accrued liabilities                                  197,726               212,800
Current maturities of long-term debt                         1,035                 1,857
                                                       -----------           -----------
TOTAL CURRENT LIABILITIES                                  441,455               440,997

Long-term debt                                             278,343               256,707
Postretirement benefits other than pensions                121,715               122,272
Other liabilities                                           48,469                46,421

SHAREHOLDERS' EQUITY
Common stock - par value $5 a share
Authorized - 100,000,000 shares
Outstanding - 27,600,520 and
28,064,981 shares, respectively
(after deducting 6,680,326 and
6,215,865 shares, respectively, in treasury)               138,003               140,325
Additional paid-in capital                                  47,841                41,288
Retained earnings                                          419,178               366,676
Accumulated other comprehensive income (loss) -
 currency translation adjustments                          (36,203)              (38,090)
                                                       -----------           -----------
TOTAL SHAREHOLDERS' EQUITY                                 568,819               510,199
                                                       -----------           -----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY             $ 1,458,801           $ 1,376,596
                                                       ===========           ===========
</TABLE>

The Notes to Financial Statements are an integral part of this statement.


                                      -23-
<PAGE>   24
<TABLE>
<CAPTION>
STATEMENT OF CASH FLOWS

Years ended December 31, 1998, 1997 and 1996
(In thousands)

                                                              1998               1997               1996
                                                          --------           --------           --------
OPERATING ACTIVITIES
<S>                                                     <C>                <C>                <C>       
Net income                                              $   97,054         $  100,853         $  102,721
Adjustments to reconcile net income
to net cash provided by operating activities:
Cumulative effect of accounting change,
net of income tax benefit                                    3,283                 --                 --
Special charge                                                  --             30,000                 --
Depreciation                                                70,661             66,562             68,684
Amortization                                                 8,986              6,639              4,789
Gain on sales of affiliates                                     --                 --            (17,300)
Dividends received from affiliates                              --                 --              9,932
Deferred income taxes                                          511               (467)            11,997
Changes in certain assets and liabilities,
excluding effects from special charge,
acquisitions and dispositions
-Receivables                                                14,807            (31,073)           (44,783)
-Inventories                                                 4,113            (47,215)            10,656
-Accounts payable                                           (6,806)            19,018                (75)
-Income taxes                                               (4,654)            15,969            (15,929)
-Other assets, payables and accruals                       (18,438)            (9,354)            (5,991)
Restructuring payments - net                                 9,370            (16,666)               810
Other                                                       (1,404)             3,418                274
                                                        ----------         ----------         ----------
NET CASH PROVIDED BY OPERATING ACTIVITIES                  177,483            137,684            125,785

INVESTING ACTIVITIES
Capital expenditures                                      (142,243)          (139,811)           (90,626)
Businesses acquired                                        (30,741)                --            (42,540)
Sales of businesses and affiliates                              --             43,381             40,261
Other                                                        1,532              1,561              1,483
                                                        ----------         ----------         ----------
NET CASH USED BY INVESTING ACTIVITIES                     (171,452)           (94,869)           (91,422)

FINANCING ACTIVITIES
Cash dividends                                             (24,673)           (22,465)           (22,705)
Increase (decrease) in notes payable                        12,406             50,866             (1,444)
Long-term borrowings                                        65,000            100,000            107,145
Repayments of long-term borrowings                         (44,301)          (172,669)           (77,465)
Purchases of common stock                                  (23,166)           (21,590)           (32,213)
Stock issuance under stock plans                             7,518             20,133              3,287
Other                                                         (773)              (924)            (2,440)
                                                        ----------         ----------         ----------
NET CASH USED BY FINANCING ACTIVITIES                       (7,989)           (46,649)           (25,835)

Effect of exchange rate changes on
  cash and cash equivalents                                    532             (1,364)              (780)
                                                        ----------         ----------         ----------
INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS                                        (1,426)            (5,198)             7,748

Cash and cash equivalents at beginning of year              18,736             23,934             16,186
                                                        ----------         ----------         ----------
CASH AND CASH EQUIVALENTS AT END OF YEAR                $   17,310         $   18,736         $   23,934
                                                        ==========         ==========         ==========
</TABLE>

The Notes to Financial Statements are an integral part of this statement.



                                      -24-
<PAGE>   25

<TABLE>
<CAPTION>

STATEMENT OF SHAREHOLDERS' EQUITY
Years ended December 31, 1998, 1997 and 1996
(Dollars in thousands, except per share data)

                                                                                        Accumulated
                                                                                            Other
                                                                                        Comprehensive
                                                                                        Income (Loss) -
                                                            Additional                    Currency
                                                Common        Paid-In       Retained     Translation
                                                Stock         Capital       Earnings     Adjustments       Total
                                              ---------      ---------      --------     -----------     --------
<S>                                          <C>            <C>            <C>            <C>              <C>      
BALANCE AT JANUARY 1, 1996                   $ 144,125      $  17,933      $ 254,484      $ (15,670)       $ 400,872
Net income                                                                   102,721                         102,721
Other comprehensive income:
 Currency translation adjustments
 during the year                                                                                841
 Reclassification of realized amounts
 to net income                                                                               (6,387)          (5,546)
                                                                                                           ---------
Total comprehensive income                                                                                    97,175
Cash dividends paid ($.80 share)                                             (22,705)                        (22,705)
Issuance of 108,990 shares, net of
shares exchanged, under stock plans                545          2,742                                          3,287
Purchase of 1,022,100 treasury shares           (5,111)                      (27,102)                        (32,213)
                                             ---------      ---------      ---------      ---------        ---------
BALANCE AT DECEMBER 31, 1996                   139,559         20,675        307,398        (21,216)         446,416
Net income                                                                   100,853                         100,853
Other comprehensive income:
 Currency translation adjustments
 during the year                                                                            (19,144)
 Reclassification of realized amounts
 to net income                                                                                2,270          (16,874)
                                                                                                           ---------
Total comprehensive income                                                                                    83,979
Cash dividends paid ($.80 a share)                                           (22,465)                        (22,465)
Issuance of 578,054 shares, net of
shares exchanged, under stock plans             2,891          17,242                                         20,133
Issuance of 70,950 shares upon
 conversion of long-term debt                     355           3,371                                          3,726
Purchase of 496,100 treasury shares            (2,480)                       (19,110)                        (21,590)
                                            ---------       ---------      ---------      ---------        ---------
BALANCE AT DECEMBER 31, 1997                  140,325          41,288        366,676        (38,090)         510,199
Net income                                                                    97,054                          97,054
Other comprehensive income:
 Currency translation adjustments
 during the year                                                                              2,014
 Reclassification of realized amounts
 to net income                                                                                 (127)           1,887
                                                                                                           ---------
Total comprehensive income                                                                                    98,941
Cash dividends paid ($.88 a share)                                           (24,673)                        (24,673)
Issuance of 193,039 shares, net of
shares exchanged, under stock plans               965           6,553                                          7,518
Purchase of 657,500 treasury shares            (3,287)                       (19,879)                        (23,166)
                                            ---------       ---------      ---------      ---------        ---------
BALANCE AT DECEMBER 31, 1998                $ 138,003       $  47,841      $ 419,178      $ (36,203)       $ 568,819
                                            =========       =========      =========      =========        =========
</TABLE>

The Notes to Financial Statements are an integral part of this statement.



                                      -25-
<PAGE>   26
NOTES TO FINANCIAL STATEMENTS
December 31, 1998

(Dollars in thousands, except per share data)

NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES

Principles of Consolidation: The consolidated financial statements include the
accounts of the Company and its subsidiaries. Affiliated companies in which the
Company's ownership is 20% to 50% are accounted for by the equity method. All
significant intercompany transactions and accounts are eliminated upon
consolidation.

Use of Estimates: The preparation of financial statements in accordance with
generally accepted accounting principles requires management to make certain
estimates and exercise judgment affecting the reported amounts in the statements
of income, financial position and cash flows, including disclosures in the Notes
to Financial Statements. Actual results could differ from those estimates.

Revenue Recognition: Revenue is recognized when products are shipped to
customers.

Cash Equivalents: Marketable securities that are highly liquid and have original
maturities of three months or less are classified as cash equivalents. The
carrying amount approximates fair value.

Inventories: Inventories are stated at the lower of cost or market. Inventory
costs for U.S. operations are determined principally by the last-in, first-out
(LIFO) method. The remaining inventory costs are determined principally by the
first-in, first-out (FIFO) method.

Plants and Properties: Plants and properties are carried at cost. Depreciation
is generally computed by the straight-line method over the estimated useful
lives of the respective assets. In general, depreciation is provided at annual
rates of 2.5% to 3% on buildings and 8% to 12% on equipment.

Intangibles: Intangible assets are carried at cost less accumulated amortization
and consist principally of goodwill. Goodwill represents the excess of cost over
fair value of assets acquired, which is amortized over periods from 15 to 40
years using the straight-line method. Other intangibles include software and
patents which are amortized over periods from five to 15 years using the
straight-line method. The carrying amounts for goodwill and other long-lived
assets are reviewed for impairment whenever events or changes in circumstances
indicate that such carrying amounts may not be recoverable. For any long-lived
assets that are determined to be impaired, a loss would be recognized for the
difference between the carrying value and the fair value for assets to be held.

Life Insurance: The Company's investment in corporate-owned life insurance is
recorded net of policy loans. Net life insurance expense, including interest
expense of $6,300, $10,800 and $9,150 on policy loans in 1998, 1997 and 1996,
respectively, is included in Other income (expense) - net in the Statement of
Income.

Accounting Pronouncements: The Financial Accounting Standards Board (FASB)
issued Statement of Financial Accounting Standards Nos. 130, "Reporting
Comprehensive Income," and 131, "Disclosures about Segments of an Enterprise and
Related Information," in 1997. In 1998, the FASB issued Statements Nos. 132,
"Employers' Disclosures about Pensions and Other Postretirement Benefits," and
133, "Accounting for Derivative Instruments and Hedging Activities." Statement
130 requires that comprehensive income, which includes net income and other
comprehensive income consisting of foreign currency


                                      -26-
<PAGE>   27
NOTES TO FINANCIAL STATEMENTS

NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES (Continued)

items, minimum pension liability adjustments, and unrealized gains and losses on
certain security investments, be reported as a total in the financial
statements. Historically, the Company's only component of other comprehensive
income has been foreign currency items. The Company adopted Statement 130
effective January 1, 1998, and reclassified financial statements for prior
periods to reflect application of this Statement. Statement 131 requires that
operating segment financial information be reported on a basis consistent with
the Company's internal reporting that is used for evaluating segment performance
and allocating resources. Statement 132 revises and standardizes disclosures
about pensions and other postretirement benefit obligations and requires that
information about changes in benefit obligations and fair values of plan assets
be reported. Among other provisions, Statement 133 requires that all derivatives
be recognized as assets or liabilities in the Statement of Financial Position
and that those instruments be measured at fair value. The Company adopted
Statement Nos. 131 and 132 in 1998, changing its reportable segments and
providing the required disclosures for each of the statements. Prior-period
segment information and pension and postretirement benefit obligation
information were restated in accordance with the provisions of the statements.
The adoption of Statement Nos. 130, 131 and 132 did not affect the Company's
results of operations or consolidated financial position. Statement 133 will
become effective for fiscal years beginning after June 15, 1999. Early
application is permitted. The Company is currently evaluating the effect of the
provisions of this Statement on its accounting and reporting policies, and has
not determined when it will adopt the Statement. The Company does not expect
that adoption of this Statement will have a material adverse effect on its
consolidated financial position or results of operations.

In 1998, The American Institute of Certified Public Accountants issued
Statements of Position (SOP) 98-1, "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use," and 98-5, "Reporting on the
Costs of Start-Up Activities." SOP 98-1 requires the capitalization of certain
costs incurred after the date of adoption in connection with acquiring or
developing software for internal use. The Company adopted SOP 98-1 in 1998, and
since the Company's previous capitalization policy was similar to the
requirements of SOP 98-1, the adoption of this standard did not have a material
effect on the Company's consolidated financial position or results of
operations. SOP 98-5 requires that the costs of start-up activities, including
organization costs, be expensed as incurred and that initial application of this
standard be reported as the cumulative effect of a change in accounting
principle. The Company adopted SOP 98-5 in 1998, and recognized the cumulative
effect of an accounting change of $4,832 ($3,283 after tax, or $.12 per share).
The effect of this change in accounting was not material to income before
cumulative effect of accounting change for the year ended December 31, 1998.

Stock Options: The Company follows the intrinsic value method of accounting for
stock options under Accounting Principles Board Opinion No. 25. When stock
options are exercised, common stock is credited for the par value of shares
issued; additional paid-in capital is credited for the consideration received in
excess of par value and any related income tax benefits.

Derivative Financial Instruments: The Company uses forward exchange contracts
and option contracts to manage certain foreign exchange exposures. The Company
enters into forward exchange contracts to hedge the effects of changes in
exchange rates on certain recorded receivables and payables that are denominated
in currencies other than the functional currencies of the originating locations.
Forward exchange contracts are marked to market with changes in market value
recorded in income as foreign exchange gains or

                                      -27-
<PAGE>   28
NOTES TO FINANCIAL STATEMENTS

NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES (Continued)

losses, offsetting the losses or gains on the underlying transactions. The
Company enters into option contracts to hedge certain anticipated transactions.
These option contracts are designated as hedges of certain forecasted monthly
purchases and sales transactions that are denominated in currencies other than
the functional currencies of the originating locations, that otherwise would
expose the Company to foreign currency exchange rate risk. Gains on option
contracts are included in sales and cost of products sold when realized.
Premiums on option contracts are deferred and amortized to cost of products sold
on a straight-line basis over the life of the contracts. Forward exchange and
option contracts are entered into with major commercial banks with high credit
ratings. Forward exchange and option contracts are not held for trading or
speculative purposes, and the Company is not a party to any leveraged
derivatives. The terms of these contracts are generally one year or less.










                                      -28-
<PAGE>   29

<TABLE>
<CAPTION>
NOTES TO FINANCIAL STATEMENTS

NOTE 2 - INCOME PER SHARE

Following is a reconciliation of income and average shares for purposes of
calculating basic and diluted income per share:

                                                             1998                1997               1996
                                                             ----                ----               ----
Basic Income per Share
--------------------------
<S>                                                      <C>                <C>                <C>
Income before cumulative effect of
accounting change                                        $  100,337         $  100,853         $  102,721
Cumulative effect of accounting
change                                                       (3,283)                --                 --
                                                         ----------         ----------         ----------
Net Income                                               $   97,054         $  100,853         $  102,721
                                                         ==========         ==========         ==========
Average common shares outstanding                        28,035,748         28,049,749         28,384,089
                                                         ==========         ==========         ==========
Basic Income per Share
Before cumulative effect of
accounting change                                        $     3.58         $     3.60         $     3.62
Cumulative effect of accounting change                         (.12)                --                 --
                                                         ----------         ----------         ----------
Basic net income per share                               $     3.46         $     3.60         $     3.62
                                                         ==========         ==========         ==========
Diluted Income per Share
------------------------
Income before cumulative effect
of accounting change                                     $  100,337         $  100,853           $102,721
After-tax equivalent of interest
expense on 6% convertible debentures                             --              2,192              3,720
                                                         ----------         ----------         ----------
Income for purpose of computing diluted
income per share before cumulative
effect of accounting change                                 100,337            103,045            106,441
Cumulative effect of accounting change                       (3,283)                --                 --
                                                         ----------         ----------         ----------
Income for purpose of computing
diluted income per share                                 $   97,054         $  103,045         $  106,441
                                                         ==========         ==========         ==========
Average common shares outstanding                        28,035,748         28,049,749         28,384,089
Dilutive stock options                                      156,979            209,927             46,019
Assumed conversion of 6%
convertible debentures                                           --          1,109,298          1,904,762
                                                         ----------         ----------         ----------
Average common shares for purpose
of computing diluted income per share                    28,192,727         29,368,974         30,334,870
                                                         ==========         ==========         ==========
Diluted Income per Share
Before cumulative effect of
accounting change                                        $     3.56         $     3.51         $     3.51
Cumulative effect of accounting change                         (.12)                --                 --
                                                         ----------         ----------         ----------
Diluted net income per share                             $     3.44         $     3.51         $     3.51
                                                         ==========         ==========         ==========
</TABLE>


Options to purchase an average of 160,600 and 771,000 shares of common stock
were outstanding during 1998 and 1996, respectively, that were not included in
the computation of diluted income per share because the option exercise prices
were greater than the average market price of common shares and, therefore, the
effect would have been anti-dilutive.


                                      -29-
<PAGE>   30
NOTES TO FINANCIAL STATEMENTS

NOTE 3 - SPECIAL CHARGE

In 1997, the Company's Aeroquip segment exited its automotive interior plastics
business and recorded a special charge of $30,000 ($18,500 net, or diluted net
income per share of $.63). The special charge included a provision for severance
payments of $6.3 million to terminate approximately 1,500 salaried and hourly
employees, principally in Germany. The special charge also included lease
termination costs amounting to $6.9 million; asset disposal costs, including
environmental costs, amounting to $9.6 million; litigation costs amounting to
$3 million; and other costs amounting to $4.2 million. The Company sold or
closed eight facilities during 1997 that had combined sales of approximately
$67,000 and $132,000 in 1997 and 1996, respectively. The planned actions to
which this special charge related were substantially completed during 1997, and
as of December 31, 1998, all costs had been incurred.

NOTE 4 - ACQUISITIONS

During 1998, the Company's Aeroquip segment acquired two companies and its
Vickers segment acquired four companies for an aggregate purchase price of
$30,741, including acquisition costs. In 1996, the Company's Vickers segment
acquired two companies for an aggregate purchase price of $46,116, including
acquisition costs.

All of the above acquisitions were accounted for as purchases, and their
operations were included in the Statement of Income from their respective
acquisition dates. Had these acquisitions occurred as of the beginning of the
respective years, the pro forma results of operations giving effect to the
acquisitions would not be materially different from the net sales, net income
and net income per share presented in the Statement of Income.

NOTE 5 - GAIN ON SALE OF UNCONSOLIDATED AFFILIATES

In 1996, the Company sold its 35% interest in Yokohama Aeroquip K.K. and its 49%
interest in Aeroquip Mexicana S.A. The two transactions resulted in a net
combined pretax gain of $17,300 ($5,000 net, or diluted net income per share of
$.16). The combined pretax gain included a net translation gain of $6,387
previously deferred in accumulated other comprehensive income.

NOTE 6 - INVENTORIES

Inventory costs determined by the LIFO method accounted for approximately 58%
and 61% of total inventories at December 31, 1998 and 1997, respectively. If all
inventories valued by the LIFO method had been valued at current costs, these
inventories would have been approximately $27,591 and $27,884 higher than
reported at December 31, 1998 and 1997, respectively.

NOTE 7 - DEBT
<TABLE>
<CAPTION>

                                                             1998           1997
                                                            ------         ------
<S>                                                       <C>             <C>
7.875% senior debentures, due June 1, 2026                $100,000        $100,000
Medium term notes - interest rates from 6.40%
  to 7.58% - due at various dates from 2002 to 2018        165,000         100,000
9.55% senior sinking fund debentures                          --            42,000
Industrial revenue bonds - interest rates from
  5.8% to 7.625% - due at various dates to 2013              7,264           7,300
Other                                                        7,114           9,264
                                                          --------        --------
                                                           279,378         258,564
Less current maturities                                      1,035           1,857
                                                          --------        --------
                                                          $278,343        $256,707
                                                          ========        ========
</TABLE>



                                      -30-
<PAGE>   31

NOTES TO FINANCIAL STATEMENTS

NOTE 7 - DEBT (Continued)

In December 1997, the Company called its 9.55% senior sinking fund debentures
for redemption on February 3, 1998. The debentures were due to mature in
February 2018. Proceeds from additional borrowings under the Company's Medium
Term Note program were used to redeem the debentures. The loss from redemption
of the debentures amounting to approximately $2,500 was recorded in Other income
(expense) - net in 1998. In June 1997, the Company called its 6% convertible
subordinated debentures for redemption and recorded a loss of $1,487 in Other
income (expense) - net. The debentures, which were due to mature in October
2002, were convertible into common shares of the Company at a conversion price
of $52.50 per share. Prior to the redemption date, debentures in the amount of
$3,726 were converted into 70,950 shares of common stock.

In 1997, the Company established a Medium Term Note program. The remaining
borrowing capacity at December 31, 1998, under provisions of a shelf
registration statement designated for the Medium Term Note program was $185,000.

Under terms of a revolving credit agreement, expiring August 31, 2001, with a
consortium of U.S. and non-U.S. banks, the Company can borrow up to $175,000.
Borrowings under the credit agreement bear interest at rates agreed to by the
Company and lenders. The agreement is maintained to support the Company's
commercial paper borrowings and, to the extent not so utilized, to provide
domestic borrowings. The remaining borrowing capacity under this agreement at
December 31, 1998, was $120,000. Covenants of the revolving credit agreement and
certain other debt instruments require the Company to maintain certain financial
ratios, including a limitation that the Company's debt-to-capitalization ratio
(exclusive of the effects of the change in accounting for postretirement benefit
obligations) not exceed a specified amount. At December 31, 1998, retained
earnings of $255,000 were available for the payment of cash dividends and
purchase of common stock.

Maturities of long-term debt in 1999 and in the four succeeding years are
$1,035, $355, $271, $25,188 and $97. Interest paid on short- and long-term debt
during 1998, 1997 and 1996 amounted to $28,446, $27,664 and $27,392,
respectively. The weighted-average interest rate of outstanding notes payable at
December 31, 1998 and 1997, was 6.4% and 6.5%, respectively.

NOTE 8 - CONTINGENCIES

The Company or certain of its subsidiaries have been named parties to various
lawsuits, claims and proceedings, including being named potentially responsible
parties (PRP) for site investigation and cleanup costs under the Comprehensive
Environmental Response, Compensation, and Liability Act (Superfund) or similar
regulations with respect to certain sites, as well as other product liability,
tort and contract claims and lawsuits which have arisen in the ordinary course
of the Company's business. While the ultimate outcome of the various lawsuits,
claims and proceedings, including PRP designations and other environmental
matters, cannot now be predicted, the Company believes that any costs in excess
of amounts provided, or covered by insurance as it relates to litigation,
arising out of these matters will not have a material adverse effect on the
Company's consolidated financial position, results of operations or cash flows.



                                      -31-
<PAGE>   32

<TABLE>
<CAPTION>


NOTES TO FINANCIAL STATEMENTS

NOTE 9 - INCOME TAXES

The components of income before income taxes and cumulative effect of accounting
change consist of the following:

                                                      1998                  1997                  1996
                                                     ------                ------                ------
<S>                                                 <C>                   <C>                   <C>     
U.S.                                                $ 64,772              $ 84,300              $ 73,644
Non-U.S.                                              82,765                63,853                79,777
                                                    --------              --------              --------
                                                    $147,537              $148,153              $153,421
                                                    ========              ========              ========

Income tax expense consists of the following:

                                                     1998                  1997                  1996
                                                    ------                ------                ------
Current:
  U.S. federal                                      $ 20,101              $ 23,231              $ 21,920
  State and local                                      2,279                 2,070                 2,676
  Non-U.S.                                            24,309                22,466                14,107
                                                    --------              --------              --------
                                                      46,689                47,767                38,703

Deferred:
  U.S. federal                                           952                  (136)                4,356
  Non-U.S.                                              (441)                 (331)                7,641
                                                    --------              --------              --------
                                                         511                  (467)               11,997
                                                    --------              --------              --------
                                                    $ 47,200              $ 47,300              $ 50,700
                                                    ========              ========              ========

Reconciliation of the statutory U.S. federal income tax rate to the effective
income tax rate before cumulative effect of accounting change follows:

                                                       1998                 1997                 1996
                                                      ------                ------               -----
Statutory U.S. federal income tax rate                35.0%                 35.0%               35.0%
Increase (decrease) resulting from:
State and local taxes, net of U.S.
  federal tax benefit                                   .9                    .9                 1.1
Basis differences on affiliates sold                    --                    --                 4.1
Research and development credit                       (2.9)                 (1.9)               (2.6)
Taxes in excess of (less than) the
  U.S. tax rate on non-U.S. earnings,
  including utilization of net operating
  loss carryforwards                                  (1.0)                  1.0                (3.2)
Other                                                   --                  (3.1)               (1.4)
                                                      ----                  ----               -----
Effective income tax rate                             32.0%                 31.9%               33.0%
                                                      ====                  ====               =====
</TABLE>



                                      -32-
<PAGE>   33

NOTES TO FINANCIAL STATEMENTS

NOTE 9 - INCOME TAXES (Continued)

The effects of temporary differences and loss carryforwards giving rise to
deferred tax assets and liabilities are as follows:

<TABLE>
<CAPTION>

                                                         1998                      1997
                                                       ------                    ------
<S>                                                   <C>                       <C>
Gross Deferred Tax Assets:
Postretirement benefits other than pensions           $  42,729                 $  42,704
Tax credits and loss carryforwards                       14,943                     8,668
Employee benefit accruals                                15,088                    14,289
Other                                                    14,728                     9,617
                                                      ---------                 ---------
                                                         87,488                    75,278

Gross Deferred Tax Liabilities:
Depreciation                                            (38,067)                  (33,241)
Other                                                    (8,741)                   (7,980)
                                                      ---------                 ---------
                                                        (46,808)                  (41,221)
Valuation allowances                                    (12,969)                   (6,816)
                                                      ---------                 ---------
Net deferred tax assets                               $  27,711                 $  27,241
                                                      =========                 =========

The components of net deferred tax assets are recorded in the Statement of Financial Position as follows:

                                                         1998                      1997
                                                        ------                    ------
Current assets                                         $  10,066                 $   3,679
Non-current assets                                        27,711                    30,958
Non-current liabilities                                  (10,066)                   (7,396)
                                                       ---------                 ---------
                                                       $  27,711                 $  27,241
                                                       =========                 =========
</TABLE>



Valuation allowances increased $6,153 in 1998 and decreased $5,773 and $3,364 in
1997 and 1996, respectively.

At December 31, 1998, the Company had net non-U.S. operating loss and foreign
tax credit carryforwards of $20,700 and $8,200, respectively, for income tax
purposes. Loss carryforwards of approximately $13,800 have no expiration dates.
The remaining net operating loss and foreign tax credit carryforwards expire in
years through 2008. Income tax expense for the years 1998, 1997 and 1996 was
reduced by $1,190, $1,770 and $3,730, respectively, due to utilization of
operating loss carryforwards. Non-U.S. operating loss carryforwards in the
amount of $4,900 and $5,600 expired in 1998 and 1997, respectively, resulting in
the loss of future tax benefits and a reduction in valuation allowances in the
amount of $1,800 and $2,100, respectively. The Company does not provide deferred
income taxes on undistributed earnings of certain of its non-U.S. subsidiaries
which have been reinvested indefinitely. Undistributed earnings of non-U.S.
subsidiaries for which U.S. income taxes have not been provided approximated
$150,300 at December 31, 1998. Should these earnings be remitted, certain
countries would impose withholding taxes that would be available for use as
credits against any U.S. federal income tax liability, subject to certain
limitations. It is not practical to estimate the amount of tax that would be
payable should the Company remit these earnings.

Income taxes paid during 1998, 1997 and 1996 amounted to $51,343, $31,798 and
$54,633, respectively.


                                      -33-
<PAGE>   34




NOTES TO FINANCIAL STATEMENTS

NOTE 10 - LEASES

The Company and its subsidiaries lease a variety of real property and equipment.
Rent expense under operating leases amounted to approximately $22,554, $20,457
and $18,863 for 1998, 1997 and 1996, respectively. Future minimum rental
payments required under operating leases that have initial or remaining
non-cancelable lease terms in excess of one year as of December 31, 1998, are as
follows:

<TABLE>
<CAPTION>

<S>                                                  <C>     
         1999                                        $ 19,499
         2000                                          14,752
         2001                                          12,232
         2002                                           7,758
         2003                                           6,893
         Thereafter                                    11,526
                                                     --------
                                                     $ 72,660
                                                     ========
</TABLE>

NOTE 11 - FINANCIAL INSTRUMENTS

Fair value for long-term debt, including current maturities, at December 31,
1998 and 1997, was $292,000 and $269,000, respectively. Fair value for notes
payable at December 31, 1998 and 1997, approximated the carrying amounts at
those dates.

At December 31, 1998, the Company had forward exchange contracts outstanding
with notional amounts equivalent to $14,300. The carrying amount of these
outstanding forward exchange contracts was $121. Fair value was approximately
equal to the carrying amount. These forward exchange contracts will mature at
various dates through April 1999. At December 31, 1997, the Company had forward
exchange contracts outstanding with notional amounts equivalent to $12,800. The
carrying amount of these outstanding forward exchange contracts was $227. Fair
value was approximately equal to the carrying amount. These forward exchange
contracts matured at various dates through April 1998.

At December 31, 1998, the Company held option contracts maturing at various
dates through November 1999, with notional amounts equivalent to $28,000. Fair
value of these option contracts was approximately $204. At December 31, 1997,
the Company held option contracts maturing at various dates through December
1998, with notional amounts equivalent to $61,600. Fair value of these option
contracts was approximately $600.

NOTE 12 - BENEFIT PLANS

The Company sponsors trusteed defined-contribution pension plans as its primary
source of retirement benefits for U.S. and certain non-U.S. employees. In
addition, the Company sponsors trusteed defined-benefit pension plans that cover
a limited number of U.S. employees. The Company also provides access to
postretirement benefits under life insurance and health care plans for most
retired U.S. employees. Various pension plans are also in effect for
subsidiaries operating outside the U.S., including trusteed or insured,
government-sponsored and unfunded plans.

                                      -34-
<PAGE>   35

NOTES TO FINANCIAL STATEMENTS

NOTE 12 - BENEFIT PLANS (Continued)

Following is a reconciliation of the changes in benefit obligations and fair
values of plan assets for defined-benefit pension and postretirement benefit
plans for the two-year period ended December 31, 1998, and a summary of funded
status as of December 31, 1998 and 1997.

<TABLE>
<CAPTION>


                                                        Pension                    Postretirement
                                                         Plans                          Plans
                                                    ----------------               ----------------
                                                  1998           1997           1998            1997
                                                  ----           ----           ----            ----
<S>                                             <C>            <C>            <C>            <C>
CHANGE IN BENEFIT OBLIGATIONS
Benefit obligations at beginning
 of year                                        $ 160,600      $ 157,800      $ 102,600       $ 111,100
Service cost                                        2,400          2,200          1,700           1,700
Interest cost                                      11,500         11,300          7,400           8,100
Participant contributions                             300            200            100             200
Plan amendments                                       300          1,600             --              --
Actuarial (gains) losses                           16,000          1,700           (600)        (10,700)
Benefit payments                                  (10,000)        (9,500)        (8,100)         (7,800)
Settlements                                        (2,800)            --             --              --
Exchange rate changes                               1,700         (4,700)            --              --
                                                ---------      ---------      ---------       ---------
Benefit obligations at end of year              $ 180,000      $ 160,600      $ 103,100       $ 102,600
                                                =========      =========      =========       =========
CHANGE IN PLAN ASSETS
Fair value of plan assets at
 beginning of year                              $ 181,400      $ 154,200      $      --       $      --
Actual return on plan assets                       19,400         38,200             --              --
Employer contributions                              1,000            900          8,000           7,600
Participant contributions                             300            200            100             200
Benefit payments                                  (10,000)        (9,500)        (8,100)         (7,800)
Settlements                                        (1,700)            --             --              --
Exchange rate changes                               1,000         (2,600)            --              --
                                                ---------      ---------      ---------       ---------
Fair value of plan assets at end of year        $ 191,400      $ 181,400      $      --       $      --
                                                =========      =========      =========       =========
FUNDED STATUS
Funded status at end of year                    $  11,400      $  20,800      $(103,100)      $(102,600)
Unrecognized gains                                (19,500)       (33,700)        (9,815)         (9,172)
Unrecognized transition obligations                (1,500)           400             --              --
Unrecognized prior service cost (credit)            4,800          6,200         (8,800)        (10,500)
                                                ---------      ---------      ---------       ---------
Accrued benefit cost                            $  (4,800)     $  (6,300)     $(121,715)      $(122,272)
                                                =========      =========      =========       =========
AMOUNTS RECORDED IN THE STATEMENT
OF FINANCIAL POSITION CONSIST OF:
Prepaid benefit cost                            $  24,400      $  15,500      $      --       $      --
Accrued benefit cost                              (29,200)       (21,800)      (121,715)       (122,272)
                                                ---------      ---------      ---------       ---------
Net amount recorded                             $  (4,800)     $  (6,300)     $(121,715)      $(122,272)
                                                =========      =========      =========       =========
</TABLE>



                                      -35-
<PAGE>   36


NOTES TO FINANCIAL STATEMENTS

NOTE 12 - BENEFIT PLANS (Continued)

The aggregate accumulated benefit obligations and fair value of pension plan
assets at the end of each year for plans that have an accumulated benefit
obligation in excess of plan assets were as follows:
<TABLE>
<CAPTION>

                                        1998                            1997
                                       ------                          ------
<S>                                    <C>                            <C>    
Projected benefit obligations          $39,593                        $35,039
Accumulated benefit obligations         37,456                         33,358
Plan assets                             15,570                         14,228
</TABLE>


Components of net periodic benefit cost for the defined-benefit pension and
postretirement benefit plans, total contributions charged to pension expense for
the defined-contribution plans, and pension expense for other non-U.S. pension
plans are summarized below:
<TABLE>
<CAPTION>

                                                       Pension Plans                      Postretirement Plans

                                             ------------------------------          ------------------------------
                                             1998         1997         1996          1998         1997         1996
                                             ----         ----         ----          ----         ----         ----
<S>                                     <C>            <C>          <C>            <C>           <C>           <C>     
COMPONENTS OF NET PERIODIC
BENEFIT COST
Service cost                             $  2,400      $  2,200      $  2,400      $  1,700      $  1,700      $  1,700
Interest cost                              11,500        11,300        11,300         7,400         8,100         8,200
Expected return on plan assets            (14,800)      (13,700)      (13,000)         --            --            --
Amortization of (gains) losses               (600)         (200)         (200)         --            --            --
Amortization of transition
 obligation                                   200           200           300          --            --            --
Amortization of prior service
 cost                                         700           500           400        (1,600)       (1,700)       (1,700)
                                         --------      --------      --------      --------      --------      --------
Net periodic benefit cost (income)
 of defined benefit plans                    (600)          300         1,200         7,500         8,100         8,200
Defined contribution plans                 38,700        42,000        37,000          --            --            --
Other non-U.S. pension plans                1,100         1,000         1,200          --            --            --
                                         --------      --------      --------      --------      --------      --------
Totals                                   $ 39,200      $ 43,300      $ 39,400      $  7,500      $  8,100      $  8,200
                                         ========      ========      ========      ========      ========      ========
</TABLE>

The Company's health care plans are contributory. In general, most participants
meeting eligibility requirements and retiring after January 1, 1995, share in
the cost of postretirement health care benefits by paying, in the form of a
premium, the excess, if any, of the average of the Company's annual per-capita
claims cost in the previous year over the amount of the Company's contribution
as stated in the plans.

Following are the weighted-average assumptions used in determining the Company's
benefit obligations and net periodic benefit cost. The measurement date for
these plans was principally September 30.



                                      -36-
<PAGE>   37
<TABLE>
<CAPTION>

NOTES TO FINANCIAL STATEMENTS

NOTE 12 - BENEFIT PLANS (Continued)

                                           Pension Benefits             Postretirement Benefits
                                     ------------------------------    -------------------------
                                     1998         1997         1996    1998        1997     1996
                                     ----         ----         ----    ----        ----     ----
Discount rate:
<S>                                  <C>          <C>         <C>      <C>         <C>      <C>
 U.S.                                7.0%         7.5%         7.5%    7.0%        7.5%     7.5%
 Non-U.S.                            6.4          7.2          7.5
Expected return on plan assets       9.5         10.0         10.0
Rate of compensation increase        4.0          4.0          4.0
Projected health care cost
 trend rates:
   Under age 65                                                        7.95        8.6      9.1
   Over age 65                                                         5.95        6.4      6.7
   Ultimate                                                            5.0         5.25     5.25
Year ultimate health care cost
 trend rate is achieved                                                2008       2008     2008
</TABLE>


The projected health care cost trend rates listed above for under and over age
65 participants represent assumed increases in per capita cost of covered health
care benefits for 1999, 1998 and 1997, respectively. For future years, the rates
are assumed to decrease gradually and remain at the ultimate trend rate
thereafter. Because the amount of the Company's annual contribution to retiree
health care costs is limited, changes to the assumed health care cost trend
rates do not have a significant effect on the amounts reported for the health
care plans. Following are the effects of a one-percentage-point change in the
assumed health care cost trend rates.
<TABLE>
<CAPTION>


                                                 One-Percentage-    One-Percentage-
                                                 Point Increase     Point Decrease
                                                ----------------    ---------------
<S>                                             <C>                   <C>
Effect on total 1998 service and
 interest cost components of net periodic
 post-retirement health care benefit cost       $   331               $   (308)

Effect on the health care component of
 the accumulated postretirement benefit
 obligation as of September 30, 1998              4,430                 (4,121)
</TABLE>

NOTE 13 - CAPITAL STOCK AND EMPLOYEE STOCK OPTIONS

The Company has rights outstanding as set forth in a Rights Agreement, whereby
holders of common stock have one right for each share of common stock
outstanding. When exercisable, each right entitles its holder to buy one
one-hundredth of a new preferred share for $150. The Company has 4,000,000
shares of serial preferred stock authorized, of which no shares were outstanding
at December 31, 1998 or 1997. In the absence of further Board of Directors
action, the rights generally will become exercisable and allow the holder to
acquire the Company's common stock at a discounted price if a person or group
acquires 20% or more of the outstanding shares of the Company's common stock.

Rights held by persons who exceed the 20% threshold will be void. Under certain
circumstances, the rights will entitle the holder to buy shares in an acquiring
entity at a discounted price. The Agreement also includes an exchange option
that, in general, after the rights become exercisable, allows the Board of
Directors to, at its option, effect an exchange of part or all of the rights,
other than rights that have become void, for shares of the Company's common
stock. Under this option, the Company would issue one share of its common stock
for each right, subject to adjustment in certain


                                      -37-
<PAGE>   38

NOTES TO FINANCIAL STATEMENTS

NOTE 13 - CAPITAL STOCK AND EMPLOYEE STOCK OPTIONS (Continued)

circumstances. The Company may, at its option, redeem all rights for $.01 per
right, generally at any time prior to the rights becoming exercisable. The
rights will expire on February 7, 2009, unless earlier redeemed, exchanged or
amended by the Board of Directors.

In 1998, the Company's shareholders approved the 1998 Stock Incentive Plan (the
Plan) which permits the issuance of stock options, stock appreciation rights
(SARs), performance awards and restricted stock awards to selected salaried
employees as approved by the Organization and Compensation Committee of the
Board of Directors. The number of shares of common stock that may be issued or
transferred under the Plan may not exceed 1,772,299 shares (1,700,000 shares as
designated in the Plan, plus 72,299 remaining shares available for grant under
terms of the prior plan).

Among other considerations, options may be granted to selected employees to
purchase common stock at prices not less than 100% of the fair market value on
the date of grant. Options expire 10 years after date of grant. Options granted
under the Plan become exercisable ratably over a three-year period commencing
one year following date of grant. Options that expire, terminate or are canceled
without exercise are available for the grant of new awards.

Performance awards may be granted to selected employees to receive future
payments contingent on continuous service with the Company and achievement of
pre-established goals. In January 1998 and 1997, 16,925 and 44,314 shares of
common stock, respectively, were distributed to participants as performance
awards under provisions of a plan that was discontinued in 1998. At December 31,
1998, there were no outstanding SARs, performance awards or restricted stock
awards.

Also in 1998, the Company's shareholders approved the Non-Employee Directors'
Stock Award Plan (Directors' Plan). The Directors' Plan provides, among other
considerations, that upon election or re-election to the Board, each eligible
director will receive a stock option covering 1,200 common shares and a stock
award covering 200 common shares. Stock options are granted to purchase common
stock at the fair market value of the Company's common stock on the date of
grant. Stock options are exercisable ratably over a three-year period commencing
one year following date of grant and expire 10 years after date of grant. Stock
awards vest and become payable on the first anniversary following date of grant.

The Company accounts for stock options in accordance with Accounting Principles
Board Opinion No. 25 and related interpretations. As a result, no compensation
expense for stock options has been recognized in the financial statements
because such options were granted at market value at date of grant. However, pro
forma information regarding net income and net income per share is required by
Statement of Financial Accounting Standards No. 123, and has been determined for
disclosure purposes as if the Company had accounted for stock options under the
fair value method as prescribed by that Statement. The fair values of the
Company's stock options were estimated as of the dates of grant using the
Black-Scholes option pricing model with the following assumptions:
<TABLE>
<CAPTION>
                                                    1998             1997              1996
                                                   ------          -------           -------
<S>                                               <C>              <C>               <C>  
Risk-free interest rates                             5.49%            5.8%             6.52%
Expected dividend yields                              1.7%            1.9%              2.3%
Expected stock price volatility                      .330            .323              .319
Weighted-average expected option life             5 years         5 years           6 years
</TABLE>


                                      -38-
<PAGE>   39

NOTES TO FINANCIAL STATEMENTS

NOTE 13 - CAPITAL STOCK AND EMPLOYEE STOCK OPTIONS (Continued)

For purposes of pro forma disclosures, the estimated fair values of stock
options are amortized to expense over the options' vesting periods. The
estimated fair value per share of options granted during 1998, 1997 and 1996 was
$16.86, $13.43 and $11.36, respectively. Pro forma income and income per share
before cumulative effect of accounting change are as follows:
<TABLE>
<CAPTION>

                                                                  1998         1997        1996
                                                                 -------      -------     -------
<S>                                              <C>            <C>           <C>         <C>
Income before cumulative
effect of accounting change                      As reported    $100,337      $100,853    $102,721
                                                 Pro forma        98,248        99,505     101,293
Diluted income per share before
cumulative effect of accounting
change                                           As reported        3.56          3.51        3.51
                                                 Pro forma          3.48          3.46        3.46
</TABLE>

Options outstanding at December 31, 1998, with a range of exercise prices from
$22.50 to $33.75 had a weighted-average remaining contractual life of
approximately 6.4 years and options with a range of exercise prices from $42.13
to $60.31 had a weighted-average remaining contractual life of approximately
nine years.

At December 31, 1998, the Company had 2,787,331 shares of common stock reserved
for issuance in connection with stock options.


The following table summarizes employee stock option activity:
<TABLE>
<CAPTION>

                                                     1998                       1997                    1996
                                           ------------------------     ---------------------   ----------------------
                                                           Weighted-                Weighted-                Weighted-
                                                            Average                 Average                   Average
                                             Option         Exercise      Option    Exercise      Option      Exercise
                                             Shares           Price       Shares    Price         Shares        Price
                                           ------------------------     ---------------------   ----------------------

<S>                                         <C>            <C>        <C>            <C>        <C>            <C>
Outstanding at January 1                    1,129,911      $  35.44   1,405,950      $  31.30   1,164,980      $ 30.67
Granted                                       353,500         51.73     342,000         42.13     349,000        33.02
Exercised                                    (195,713)        32.57    (592,041)        29.52     (86,030)       29.18
Forfeited                                     (80,158)        42.24     (16,998)        34.77      (4,500)       33.58
Canceled                                      (11,335)        30.96      (9,000)        33.44     (17,500)       33.52
Outstanding at December 31                  1,196,205         40.30   1,129,911         35.44   1,405,950        31.30
Exercisable at December 31                    587,190         34.31     587,754         32.38   1,059,950        30.74
Available for future awards
  at December 31                            1,491,126                    58,133                   391,060
</TABLE>

In addition to the above, 9,800 options and stock awards were granted to
directors in 1998 under the Directors' Plan at a weighted-average exercise price
of $60.31. All options granted were outstanding at December 31, 1998, and none
were exercisable at that date. 90,200 options are available for future awards at
December 31, 1998.



                                      -39-
<PAGE>   40

NOTES TO FINANCIAL STATEMENTS

NOTE 14 - BUSINESS SEGMENTS

The Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 131, "Disclosures About Segments of an Enterprise and
Related Information," which was adopted in 1998. Statement 131 requires that
segment financial information be reported on a basis consistent with the
Company's internal reporting used for evaluating segment performance and
allocating resources. Accordingly, in 1998, the Company changed its business
segments, which were previously based on markets served, from Industrial,
Automotive and Aerospace to Aeroquip and Vickers. These segments reflect the way
the Company is organized and managed and how performance is measured. The
Company evaluates performance and allocates resources based on operating income
before allocation of corporate costs. Corporate costs represent the total of
corporate headquarters costs. Although Aeroquip and Vickers serve many of the
same customers and markets, they are managed separately because of significantly
different product technologies and manufacturing processes and the differing
dynamics required to serve their customers. Amounts for prior years have been
restated to conform to the current year presentation.

The Aeroquip segment designs, manufactures and distributes fluid connectors and
plastic products. Fluid connectors include all pressure ranges of hose and hose
assemblies; fittings, adapters, couplings and swivels; automotive air
conditioning, power steering, and oil and transmission cooler components and
assemblies; tube fittings and assemblies; refrigeration/air conditioning
connectors; clamps and V-band couplings; fuel-handling products; noise-reduction
products; chemical containment products; and electronic fluid system products.
Aeroquip plastic products include molded, extruded and co-extruded plastic
products. The Aeroquip segment serves original equipment and aftermarket
customers in industrial markets located principally in the U.S., Europe,
Asia-Pacific and Brazil; original equipment and aftermarket customers in
aerospace and defense markets located principally in the U.S. and Europe; and
automobile, light truck, sport utility and van manufacturers in automotive
markets located principally in the U.S. and Europe.

The Vickers segment designs, manufactures and distributes power and motion
control products. Vickers products include hydraulic, electrohydraulic,
pneumatic and electronic control devices; piston and vane pumps and motors; open
architecture machine controls; hydraulic and pneumatic cylinders; hydraulic
power packages; electric motors and drives; fuel pumps; electric motorpumps and
generator packages; electrohydraulic and electromechanical actuators; sensors
and monitoring devices; hydraulic and lubrication filtration; and
fluid-evaluation products and services. The Vickers segment serves original
equipment and aftermarket customers in industrial markets located principally in
the U.S., Europe, Asia-Pacific and Brazil, and original equipment and
aftermarket customers in aerospace and defense markets located principally in
the U.S. and Europe.

The accounting policies for the reportable segments are the same as those
described in Note 1 - Significant Accounting Policies. Intersegment sales are
not significant.

                                      -40-
<PAGE>   41

NOTES TO FINANCIAL STATEMENTS

NOTE 14 - BUSINESS SEGMENTS (Continued)

The following information relates to business segments:

<TABLE>
<CAPTION>


                                                                                     Reconciling
                                                                                      Amounts-
                                                                                     Corporate
                                                                                         and
                                                                                    Eliminations
                                                   Aeroquip        Vickers               Net            Totals
                                                  ----------      ---------    --------------------  ----------
1998
----
<S>                                             <C>                <C>             <C>               <C>       
Net sales                                       $1,071,608         $1,077,866      $       --        $2,149,474
Depreciation and amortization                       35,284             42,017           2,346            79,647
Segment income                                     124,295             90,407              --           214,702 (A)
Investments in unconsolidated affiliates             1,585                 --              --             1,585
Segment assets                                     581,553            795,070          82,178         1,458,801
Capital expenditures                                73,554             64,833           3,856           142,243
Expenditures for businesses acquired                11,762             18,979              --            30,741
                                                ==========         ==========      ==========        ==========

1997
----
Net sales                                       $1,065,188         $1,047,105      $       --        $2,112,293
Depreciation and amortization                       35,139             35,625           2,437            73,201
Segment income                                      89,458            132,599              --           222,057 (A)
Investments in unconsolidated affiliates               945                637              --             1,582
Segment assets                                     535,701            771,650          69,245         1,376,596
Capital expenditures                                66,195             70,315           3,301           139,811
                                                ==========         ==========      ==========        ==========

1996
----
Net sales                                       $1,099,914         $  933,001      $       --        $2,032,915
Depreciation and amortization                       39,314             31,499           2,660            73,473
Segment income                                      96,184            110,571              --           206,755 (A)
Investments in unconsolidated affiliates             1,041              1,152              --             2,193
Segment assets                                     570,300            667,381          51,806         1,289,487
Capital expenditures                                50,893             38,356           1,377            90,626
Expenditures for businesses acquired                    --             42,540              --            42,540
                                                ==========         ==========      ==========        ==========
</TABLE>

Note A - See following reconcilement of total segment income to income before
income taxes and cumulative effect of accounting change.



                                      -41-
<PAGE>   42

NOTES TO FINANCIAL STATEMENTS

NOTE 14 - BUSINESS SEGMENTS (Continued)

Following is a reconciliation of total segment income to income before income
taxes and cumulative effect of accounting change:

<TABLE>
<CAPTION>

                                                           1998                 1997                1996
                                                           ----                 ----                ----
<S>                                                   <C>                  <C>                <C>       
Segment income                                        $  214,702           $  222,057         $  206,755
Less unallocated corporate costs                          28,322               30,417             30,180
                                                      ----------           ----------         ----------
Consolidated operating income                            186,380              191,640            176,575
Interest expense                                         (27,013)             (27,171)           (25,813)
Other income (expense) - net                             (11,830)             (16,316)             2,659
                                                      ----------           ----------         ----------
income before income taxes and cumulative
effect of accounting change                           $  147,537           $  148,153         $  153,421
                                                      ==========           ==========         ==========

Following are net sales by product groupings:
Power and Motion Control                              $1,077,866           $1,047,105         $  933,001
Fluid Connectors                                         929,022              858,769            824,388
Plastics                                                 142,586              206,419            275,526
                                                      ----------           ----------         ----------
                                                      $2,149,474           $2,112,293         $2,032,915
                                                      ==========           ==========         ==========
</TABLE>


                                      -42-
<PAGE>   43


NOTES TO FINANCIAL STATEMENTS

NOTE 14 - BUSINESS SEGMENTS (Continued)

Following are net sales to external customers and plants and properties by
geographic area. Net sales are reported based on the geographic location from
which the sales originated. Amounts reported for plants and properties are based
on the country where located.

<TABLE>
<CAPTION>

                                                          Plants and
                                Net Sales                 Properties
                                ---------                 ----------
1998
----
<S>                             <C>                       <C>
United States                   $1,394,277                $  410,699
Europe
 United Kingdom                    271,660                    60,768
 Germany                           226,786                    36,040
 Other Europe                      140,257                    17,977
                                ----------                ----------
 Total Europe                      638,703                   114,785
Other                              116,494                    22,733
                                ----------                ----------
Totals                          $2,149,474                $  548,217
                                ==========                ==========
1997
----
United States                   $1,356,334                $  362,776
Europe
 United Kingdom                    245,965                    52,653
 Germany                           252,627                    26,859
 Other Europe                      125,548                    12,693
                                ----------                ----------
 Total Europe                      624,140                    92,205
Other                              131,819                    19,161
                                ----------                ----------
Totals                          $2,112,293                $  474,142
                                ==========                ==========

1996
----
United States                   $1,291,875                $  330,368
Europe
 United Kingdom                    238,590                    47,754
 Germany                           270,254                    33,063
 Other Europe                      117,567                    10,361
                                ----------                ----------
 Total Europe                      626,411                    91,178
Other                              114,629                    15,937
                                ----------                ----------
Totals                          $2,032,915                $  437,483
                                ==========                ==========
</TABLE>



                                      -43-
<PAGE>   44

NOTES TO FINANCIAL STATEMENTS

NOTE 15 - OTHER INFORMATION
<TABLE>
<CAPTION>

                                                                    1998             1997
                                                                 ----------      ----------
RECEIVABLES                                                           
<S>                                                               <C>             <C>      
Receivables                                                       $ 356,664       $ 363,523
Less allowance for doubtful accounts                                 14,839          14,701
                                                                  ---------       ---------
                                                                  $ 341,825       $ 348,822
INVENTORIES                                                       =========       =========
In-process and finished products                                  $ 231,842       $ 239,800
Raw materials and manufacturing supplies                             70,394          54,967
                                                                  ---------       ---------
                                                                  $ 302,236       $ 294,767
                                                                  =========       =========
OTHER CURRENT ASSETS                                                                          
Deferred income taxes                                             $  10,066       $   3,679
Prepaid expenses and other current assets                            42,080          45,644
                                                                  ---------       ---------
                                                                  $  52,146       $  49,323
                                                                  =========       =========
PLANTS AND PROPERTIES - AT COST                                                            
Land and improvements                                             $  22,634       $  21,458                         
Buildings                                                           223,405         198,882
Machinery and equipment                                             801,692         694,572  
Construction in progress                                             71,826          78,090            
                                                                  ---------       ---------
                                                                 $1,119,557       $ 993,002
                                                                  =========       =========
OTHER ASSETS                                                                              
Goodwill, net of accumulated amortization of $17,045              
 and $13,077 in 1998 and 1997, respectively                       $ 124,890       $ 111,905 
Deferred income taxes                                                27,711          30,958
Receivables, deposits and other assets                               44,466          47,943
                                                                  ---------       ---------  
                                                                  $ 197,067       $ 190,806                                     
                                                                  =========       =========                         
                                                                 
NOTES PAYABLE                                                    
Commercial paper                                                  $  55,096       $  36,177
Short-term notes payable to banks                                    46,733          47,867
                                                                  ---------       ---------   
                                                                  $ 101,829       $  84,044 
                                                                  =========       =========
 


OTHER ACCRUED LIABILITIES
Employees' compensation and amounts
  withheld therefrom                                             $ 106,502        $ 117,107
Taxes, other than income taxes                                       7,309           10,177
Other accrued liabilities                                           83,915           85,516
                                                                 ---------        ---------
                                                                 $ 197,726        $ 212,800
                                                                 =========        =========
</TABLE>

                                      -44-
<PAGE>   45


NOTES TO FINANCIAL STATEMENTS

NOTE 16 - SUBSEQUENT EVENT (Unaudited)

On February 1, 1999, Eaton Corporation and Aeroquip-Vickers, Inc. announced that
the companies had entered into an "Agreement and Plan of Merger" whereby Eaton
Corporation would acquire all of the outstanding shares of Aeroquip-Vickers,
Inc. for $58 per share in cash. The Boards of Directors of both companies have
approved the transaction, which is subject to normal closing conditions and the
approval of Aeroquip-Vickers shareholders. The transaction is expected to be
completed in April 1999.

QUARTERLY RESULTS OF OPERATIONS (Unaudited)

The following is a summary of the quarterly results of operations for the years
ended December 31, 1998 and 1997.

<TABLE>
<CAPTION>


                                                                               1998
                                             -----------------------------------------------------------------------
                                                                 Three Months Ended

                                            -----------------------------------------------------------    Year Ended
                                             Mar 31            Jun 30           Sep 30           Dec 31      Dec 31
                                            -------           -------          -------          -------    ----------
                                           (In thousands, except per share data)

<S>                                       <C>               <C>              <C>               <C>          <C>       
Net sales                                 $ 547,055         $ 574,314        $ 508,974         $ 519,131    $2,149,474
Manufacturing income                        144,232           151,575          123,821           109,941       529,569
Income before cumulative
effect of accounting change                  31,173            37,841           23,931             7,392       100,337
Cumulative effect of
accounting change                            (3,283)               --               --                --        (3,283)
Net income                                   27,890            37,841           23,931             7,392        97,054
Basic income per share
before cumulative effect
of accounting change                           1.11              1.34              .85               .27          3.58
Cumulative effect of
accounting change                              (.12)               --               --                --          (.12)
Basic net income per share                      .99              1.34              .85               .27          3.46

Diluted income per share
before cumulative effect of
accounting change                              1.10              1.33              .85               .27          3.56
Cumulative effect of
accounting change                              (.12)               --               --                --          (.12)
Diluted net income per share                    .98              1.33              .85               .27          3.44
Average shares outstanding
 Basic                                       28,119            28,199           28,166            27,669        28,036
 Diluted                                     28,336            28,454           28,302            27,674        28,193
</TABLE>



                                      -45-
<PAGE>   46

QUARTERLY RESULTS OF OPERATIONS (Unaudited) (Continued)
<TABLE>
<CAPTION>

                                                                  1997
                                   -------------------------------------------------------------------
                                                         Three Months Ended
  
                                   -------------------------------------------------------   Year Ended
                                    Mar 31            Jun 30           Sep 30       Dec 31     Dec 31
                                   -------           -------          -------      -------   ----------
                                 (In thousands, except per share data)

<S>                             <C>               <C>              <C>          <C>            <C>       
Net sales                       $  538,426        $  556,278       $  494,777   $  522,812     $2,112,293
Manufacturing income               132,475           147,037          134,406      143,707        557,625
Net income                           5,694            33,630           30,104       31,425        100,853
Net income per share
 Basic                                 .20              1.20             1.07         1.12           3.60
 Diluted                               .20              1.15             1.05         1.11           3.51
Average shares outstanding

 Basic                              27,974            27,948           28,153       28,150         28,050
 Diluted                            28,116            30,020           29,036       28,372         29,369
</TABLE>


(a)  The 1998 fourth quarter includes non-recurring charges (principally
     incurred severance costs) of $5 million, $3.1 million net (diluted net
     income per share of $.11).

(b)  In 1997, the Company redeemed its outstanding 6% convertible debentures,
     which were common stock equivalents. For purposes of computing diluted net
     income per share in 1997, the assumed conversion of the convertible
     debentures was included in average shares outstanding as follows: 1,904,762
     shares in the 1997 second quarter, 627,667 shares in the 1997 third quarter
     and 1,109,298 shares for the year.

(c)  The 1997 first quarter included a special charge of $30 million, $18.5
     million net (diluted net income per share of $.66 [$.63 for the year]) to
     exit Aeroquip's automotive interior plastics business.

(d)  In the 1997 third quarter, the annual effective income tax rate was
     reduced. The cumulative year-to-date adjustment increased third-quarter net
     income by $1.3 million (diluted net income per share of $.05).

(e)  The 1997 fourth quarter included income amounting to $4.3 million, $2.6
     million net (diluted net income per share of $.09) from recovery of
     previously incurred development and pre-production costs with a Vickers
     aerospace customer arising from the termination of a component design and
     production supply contract, reduced by a charge of $2.6 million, $1.6
     million net (diluted net income per share of $.05) to recognize a product
     liability claim from an Aeroquip industrial customer for a unique product
     that is no longer manufactured.

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

           None.

                                     PART III

ITEM 10.  Directors and Officers of the Registrant.

Following is a list of all of the directors of Aeroquip-Vickers, Inc. including
their ages, positions and recent business experience:


                                      -46-
<PAGE>   47



DARRYL F. ALLEN (55). An Aeroquip-Vickers director since 1984, Mr. Allen has
been Aeroquip-Vickers' Chairman of the Board since 1991 and Aeroquip-Vickers'
President and Chief Executive Officer since 1986. He is a director of Milacron
Inc. and Fifth Third Bancorp.

VIRGIS W. COLBERT (59). An Aeroquip-Vickers director since 1998, Mr. Colbert is
Executive Vice President of the Miller Brewing Company (consumer products) and
has held his current position since July 1997. From 1995 to 1997, Mr. Colbert
was Senior Vice President - World Wide Operations for Miller Brewing Company.
From 1993 to 1995, Mr. Colbert was Senior Vice President - Plant Operations for
Miller Brewing Company. He is also a member of the Board of Directors of Miller
Brewing Company, a wholly-owned subsidiary of Philip Morris Companies Inc., and
Delphi Automotive Systems.

PURDY CRAWFORD (67). An Aeroquip-Vickers director since 1990, Mr. Crawford is
Chairman and a director of Imasco Limited (a major Canadian consumer products
and services corporation with operations in Canada and the United States) and
Chairman and a director of CT Financial Services Inc. and Canada Trustco
Mortgage Company (98% owned by Imasco). From 1986 until May 1995, Mr. Crawford
was the Chief Executive Officer of Imasco. He is also a director of Avenor Inc.;
Camco, Inc.; Canadian National Railway Company; Inco Limited; Maple Leaf Foods
Inc.; Nova Scotia Power; Petro-Canada; and Woolworth Corporation.

JOSEPH C. FARRELL (63). An Aeroquip-Vickers director since 1994, Mr. Farrell is
the retired Chairman and Chief Executive Officer of The Pittston Company (coal
and minerals, security, transportation, air freight services and home security
services). Mr. Farrell was Chairman, President and Chief Operating Officer of
The Pittston Company from 1991 to 1997. He is also a director of Universal Corp.
and ASA Limited.

DAVID R. GOODE (58). An Aeroquip-Vickers director since 1993, Mr. Goode is
Chairman of the Board, President and Chief Executive Officer of Norfolk Southern
Corporation (transportation holding company). Mr. Goode has been in his current
position with Norfolk Southern Corporation since 1992. He is a director of
Caterpillar Inc., Georgia-Pacific Corporation and Texas Instruments
Incorporated.

PAUL A. ORMOND (49). An Aeroquip-Vickers director since 1992, Mr. Ormond is
President and Chief Executive Officer of HCR Manor Care (long-term care, skilled
nursing and rehabilitative services). Mr. Ormond was Chairman, President and
Chief Executive Officer of HCR Manor Care from October 1991 to September 1998.
He is a director of National City Bank, a wholly-owned subsidiary of National
City Corp.

JOHN P. REILLY (55). An Aeroquip-Vickers director since 1991, Mr. Reilly has
been a Partner of Reilly, Erwin & Company L.L.C. since September 1997. Reilly,
Erwin & Company L.L.C. works in partnership with Bessemer Holdings, L.P. to make
acquisitions and equity investments. Mr. Reilly held an advisory position with
Tomkins PLC (a U.K. based multi-industry company) from April 1997 to September
1997. He was President and Chief Executive Officer of Stant Corporation from
January 1997 to April 1997. Mr. Reilly was Chairman of the Board, President and
Chief Executive Officer of Figgie International Inc. from May 1995 to January
1997, was President & Chief Executive Officer of Figgie International Inc. from
February 1995 to May 1995, and was Chief Executive Officer of Figgie
International Inc. from January 1995 to February 1995. Mr. Reilly was President
and Chief Operating Officer of Brunswick Corporation from 1993 to 1994. He is a
non-employee director of Figgie International Inc.

WILLIAM R. TIMKEN, JR. (60). An Aeroquip-Vickers director since 1973, Mr. Timken
is Chairman, President and Chief Executive Officer of The Timken Company
(tapered roller bearings and quality alloy steel). He was Chairman of the Board
of The Timken Company from 1975 to November 1997. He is a director of Diebold
Incorporated.

                                      -47-
<PAGE>   48

Following is a list of each of the Executive Officers of Aeroquip-Vickers, Inc.
including their names, ages, positions and recent business experience.
<TABLE>
<CAPTION>

NAME AND POSITION                   AGE        BUSINESS EXPERIENCE
----------------------------        ---        ---------------------------------
<S>                                 <C>        <C>
Darryl F. Allen,                    55         Chairman of the Board, President
  Chairman of the Board,                       and Chief Executive Officer of
  President and Chief                          Aeroquip-Vickers since 1991.
  Executive Officer                            Chairman of the Board and President
                                               of Vickers, Incorporated since
                                               December 1998.

William R. Ammann,                  57         Vice President-Administration and
  Vice President-Administration                Treasurer of Aeroquip-Vickers since
                                               and Treasurer 1992.

James E. Kline,                     57         Vice President and General Counsel
  Vice President and                           of Aeroquip-Vickers since 1989.
  General Counsel

James M. Oathout,                   54         Corporate Secretary and Senior
  Corporate Secretary and                      Attorney of Aeroquip-Vickers since
  Senior Attorney                              March 1995.  Secretary and Associate 
                                               General Counsel of Aeroquip-Vickers from 
                                               1988 to March 1995.

Gregory R. Papp,                    52         Corporate Controller of Aeroquip-
  Corporate Controller                         Vickers since 1993.  Vice President and 
                                               Controller of Aeroquip Corporation from July
                                               1991 to 1993.

David M. Risley,                    54         Vice President - Finance and Chief
  Vice President - Finance                     Financial Officer of Aeroquip-
  and Chief Financial Officer                  Vickers since 1992.  Group Vice President
                                               - Administration and Control of Aeroquip 
                                               Corporation from 1991 to 1992.

Howard M. Selland,                  55         Executive Vice President of
  Executive Vice President of                  Aeroquip-Vickers and President of
  Aeroquip-Vickers and President               Aeroquip Corporation since 1989.
  Of Aeroquip Corporation

Philip G. Simonds,                  58         Vice President-Taxation of
  Vice President-Taxation                      Aeroquip-Vickers since 1983.
</TABLE>

There are no family relationships among the persons named above.

SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE

     In February 1999, it came to the Company's attention that Purdy Crawford, a
director of Aeroquip-Vickers, was the owner of 106 common shares of
Aeroquip-Vickers which were not reported as owned by Mr. Crawford in Section 16
filings. These 106 common shares were purchased by a trust for the benefit of
Mr. Crawford through the Aeroquip-Vickers Dividend Reinvestment Plan during the
period 1991 to 1996. The shares were reported late on Mr. Crawford's Form 5 for
1998.


                                      -48-
<PAGE>   49

   ITEM 11.  Executive Compensation
   Summary Compensation

   THE FOLLOWING TABLE SETS FORTH THE ANNUAL COMPENSATION, THE LONG-TERM
   COMPENSATION AND ALL OTHER COMPENSATION OF THE NAMED executive officers
   for each of the last three completed fiscal years.

                           SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>


----------------------------------------------------------------------------------------------
                                                          LONG-TERM COMPENSATION             
                                                        --------------------------             
                                 ANNUAL COMPENSATION      AWARDS(2)   PAYOUTS(3)            
                             -------------------------- --------------------------            
                                                                                            
                                                         SECURITIES               ALL OTHER 
                                                         UNDERLYING      LTIP     COMPENSA- 
       NAME AND                  SALARY     BONUS(1)      OPTIONS       PAYOUTS    TION(4)  
   PRINCIPAL POSITION    YEAR     ($)         ($)           (#)           ($)        ($)    
 --------------------------------------------------------------------------------------------- 
                                                                                            
<S>                    <C>     <C>         <C>           <C>         <C>         <C>        
 Darryl F. Allen          1998  $ 710,000   $ 267,200       60,000      $ N/A      $227,131  
   Chairman of the        1997    660,000     773,900       50,000        283,000   208,612  
   Board, President       1996    635,000     450,700       50,000        581,700   206,834  
   and Chief Executive                                                                      
   Officer of                                                                               
   Aeroquip-Vickers                                                                         
                                                                                            
 Howard M. Selland        1998  $ 442,000   $ 421,400       25,000      $ N/A      $178,964  
   Executive Vice         1997    423,077     441,400       20,000        131,400   121,171  
   President of           1996    405,000     180,300       20,000        269,100    84,157  
   Aeroquip-Vickers and                                                                     
   President of                                                                             
   Aeroquip Corporation                                                                     
                                                                                            
 William R. Ammann        1998  $ 316,250   $  91,200       14,000      $ N/A      $ 87,330  
   Vice President -       1997    306,224     265,700       11,000         84,900    84,582  
   Administration and     1996    296,740     155,100       11,000        173,400    85,081  
   Treasurer of                                                                             
   Aeroquip-Vickers                                                                         

</TABLE>


                                      -49-
<PAGE>   50

<TABLE>
<CAPTION>

---------------------------------------------------------------------------------------------
                                                           LONG-TERM COMPENSATION             
                                                         --------------------------             
                                 ANNUAL COMPENSATION      AWARDS(2)   PAYOUTS(3)            
                                 ----------------------- --------------------------             
                                                         SECURITIES               ALL OTHER 
                                                         UNDERLYING      LTIP     COMPENSA- 
       NAME AND                  SALARY     BONUS(1)      OPTIONS       PAYOUTS    TION(4)  
   PRINCIPAL POSITION    YEAR     ($)         ($)           (#)           ($)        ($)    
 -------------------------------------------------------------------------------------------- 
                                                                                            
<S>                   <C>     <C>         <C>           <C>         <C>         <C>       
 James E. Kline          1998  $ 296,250   $  91,200       12,000      $ N/A      $ 84,230  
   Vice President        1997    286,282     265,700       11,000         84,900    80,772  
   and General Counsel   1996    271,747     155,100       11,000        173,400    82,327  
   of Aeroquip-Vickers                                                                      
                                                                                            
  David M. Risley        1998  $ 281,000   $  91,200       14,000      $ N/A      $ 81,865  
   Vice President -      1997    265,000     265,700       11,000         84,900    76,708  
   Finance and Chief     1996    250,000     155,100       11,000        173,400    77,278  
   Financial Officer                                                                        
   of Aeroquip-Vickers                                                                      
                                                                                            
 -------------------------------------------------------------------------------------------------
</TABLE>



(1)  The payouts shown in this column were made pursuant to the Annual Executive
     Incentive Plan.

(2)  The awards shown in this column were made pursuant to the Aeroquip-Vickers,
     Inc. 1994 Stock Incentive Plan and the Aeroquip-Vickers, Inc. 1998 Stock
     Incentive Plan. Although both stock incentive plans permit grants of stock
     appreciation rights, no stock appreciation rights were outstanding as of
     December 31, 1998.

(3)  The amounts shown in this column reflect the amount of cash and the value
     of Common Shares paid out under the Mid-Term Incentive Plan for the Plan
     periods 1995-1997 and 1994-1996, respectively. The Mid-Term Incentive Plan
     ended on December 31, 1997.

(4)  The amounts shown in this column consist of annual company contributions
     (including the company match and the company profit-sharing allocation)
     under Aeroquip-Vickers' savings and profit-sharing plan and the
     Aeroquip-Vickers, Inc. Supplemental Benefit Plan. (See the table below.)



                                      -50-
<PAGE>   51


<TABLE>
<CAPTION>

--------------------------------------------------------------------------------------------
                  Savings and
               Profit-Sharing Plan           Supplemental Benefit Plan
             Match     Profit-Sharing        Match      Profit-Sharing          Total
--------------------------------------------------------------------------------------------

1998
<S>          <C>          <C>               <C>             <C>                <C>     
Allen        $4,800       $15,200           $39,717         $167,414           $227,131
Selland       4,800        15,200            21,702          137,262            178,964
Ammann        4,800        15,200            12,659           54,671             87,330
Kline         4,800        15,200            12,059           52,171             84,230
Risley        4,800        15,200            11,601           50,264             81,865
--------------------------------------------------------------------------------------------
</TABLE>











                                      -51-
<PAGE>   52


The following table contains information concerning grants of stock options made
during the last completed fiscal year to each of the named executive officers of
Aeroquip-Vickers:

                        OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
 -------------------------------------------------------------------------------------------------------
                          INDIVIDUAL GRANTS                                    GRANT DATE VALUE          
 ---------------------------------------------------------------------- -------------------------------- 
                      NUMBER OF    % OF TOTAL                                                            
                      SECURITIES    OPTIONS                                                              
                      UNDERLYING   GRANTED TO                                                            
                       OPTIONS     EMPLOYEES    EXERCISE                          GRANT DATE             
                      GRANTED(1)   IN FISCAL    PRICE(1)    EXPIRATION         PRESENT VALUE (2)         
        NAME             (#)         YEAR        ($/SH)        DATE                   ($)                
 ------------------------------------------------------------------------------------------------------- 
                                                                                                         
<S>                     <C>          <C>        <C>           <C>                 <C>                    
  Darryl F. Allen       60,000       17.0%      $51.813       7/23/08             $1,011,600             
                                                                                                         
  Howard M. Selland     25,000        7.1%       51.813       7/23/08             $  421,500             
                                                                                                         
  William R. Ammann     14,000        4.0%       51.813       7/23/08             $  236,040             
                                                                                                         
  James E. Kline        12,000        3.4%       51.813       7/23/08             $  202,320             
                                                                                                         
  David M. Risley       14,000        4.0%       51.813       7/23/08             $  236,040             
                                                                                                         
---------------------------------------------------------------------------------------------------------
</TABLE>

(1) Options were granted on July 23, 1998, under the Aeroquip-Vickers, Inc. 1998
Stock Incentive Plan. The options become exercisable as follows: one-third
become exercisable on July 23, 1999, one-third become exercisable on July 23,
2000, and one-third become exercisable on July 23, 2001. The exercise price of
$51.813 was the closing price of Aeroquip-Vickers Common Shares on the New York
Stock Exchange - Composite Transactions list on July 22, 1998.

(2) Valuation is based on the Black-Scholes option pricing model using the
following assumptions: risk-free interest rate of 5.49%, expected annual
dividend yield of 1.7%, expected volatility of .33 and expected five-year time
to exercise. Aeroquip-Vickers does not advocate or necessarily agree that the
Black-Scholes model can properly determine the value of an option. The actual
value, if any, a named executive officer may realize will depend on the excess
of the stock price over the exercise price on the date the option is exercised
so that there is no assurance the value realized by the named executive officer
will be at or near the value estimated by the Black-Scholes model.


                                      -52-
<PAGE>   53


The following table contains information concerning exercise of stock options
during the last completed fiscal year by each of the named executive officers
of Aeroquip-Vickers, and the fiscal year-end value of unexercised options held
by such executive officers:

               AGGREGATED OPTION EXERCISES IN THE LAST FISCAL YEAR
                      AND FISCAL YEAR-END OPTION VALUES(1)
<TABLE>
<CAPTION>

----------------------------------------------------------------------------------------------------------------------
                                                                      NUMBER OF                                      
                                                               SECURITIES UNDERLYING         VALUE OF UNEXERCISED    
                                                               UNEXERCISED OPTIONS AT       IN-THE-MONEY OPTIONS AT  
                                                                   FISCAL YEAR-END              FISCAL YEAR-END        
                                                                        (#)                          ($)              
                      SHARES ACQUIRED                       ----------------------------- ---------------------------  
                        ON EXERCISE       VALUE REALIZED                                                               
       NAME                 (#)                ($)          EXERCISABLE  UNEXERCISABLE(2) EXERCISABLE   UNEXERCISABLE  
 -------------------------------------------------------------------------------------------------------------------- 
                                                                                                                    
<S>                       <C>                <C>              <C>            <C>          <C>            <C>        
  Darryl F. Allen         30,000             $858,750         150,001        109,999      $      0       $      0   
                                                                                                                    
  Howard M. Selland            0                    0          40,001         44,999             0              0   
                                                                                                                    
  William R. Ammann       10,000              295,000          53,001         24,999        42,500              0   
                                                                                                                    
  James E. Kline               0                    0           7,334         22,999             0              0   
                                                                                                                    
  David M. Risley              0                    0          33,001         24,999             0              0   
                                                                                                                   
 --------------------------------------------------------------------------------------------------------------------
</TABLE>

(1) The options shown in this table were granted under the Aeroquip-Vickers,
Inc. 1987 Stock Option Plan and the Aeroquip-Vickers, Inc. 1994 and 1998 Stock
Incentive Plans.

(2) The options become exercisable as follows: One-third of the grant amount
becomes exercisable on the first anniversary of the grant date, one-third of the
grant becomes exercisable on the second anniversary of the grant date, and the
remaining one-third becomes exercisable on the third anniversary of the grant
date.


                                      -53-
<PAGE>   54


DIRECTOR COMPENSATION

During 1998, each director who was not an employee of the company was paid an
annual retainer of $25,000 ($27,500 for committee chairmen), plus a $1,000 fee
for each Board or committee meeting attended.

During 1998, the Directors' Retirement Plan was amended to prohibit any further
retirement eligibility beyond December 31, 1997, and to convert the present
value of accrued retirement benefits for current non-employee directors to a
stock unit account. Pursuant to the 1998 amendment, a deferred common stock
account was created for each non-employee director. Each director's account is
credited with dividend equivalents converted into additional units of Common
Stock as dividends on the Common Shares are paid. Upon retirement or at age 70,
each non-employee director will receive, as a distribution, a number of Common
Shares equal to the number of stock units held in his account.

Under the Aeroquip-Vickers, Inc. Non-Employee Directors' Stock Award Plan, each
non-employee director will receive upon election or re-election to the Board at
each annual meeting of the company both a stock option grant and an award of
deferred Common Shares. The awards made for 1998 for each non-employee director
consisted of 200 deferred Common Shares and options to purchase 1,200 Common
Shares.

Under the Aeroquip-Vickers, Inc. Plan for Optional Deferment of Directors' Fees,
a director may defer his or her annual retainer fees until his or her
directorship ceases, at which time the deferred amounts will be paid in cash in
a lump sum or installments commencing on a date designated by the director. A
director may elect to have all, or a specified percentage, of his or her
deferred fees credited to a recordkeeping account either in dollar amounts or in
units equal in value to one Common Share of Aeroquip-Vickers. Each recordkeeping
account to which fees have been credited in dollar amounts will be credited
quarterly with accrued interest at a rate equal to two percentage points in
excess of the Moody's Corporate Bond Yield Average. Each recordkeeping account
to which fees have been credited in units will be credited with additional units
equal in value to the amount of cash dividends paid on Common Shares of
Aeroquip-Vickers. Upon the death of a director prior to distribution of the
entire balance of his or her account, such balance shall be paid as soon as is
administratively feasible in a lump sum to the beneficiary or beneficiaries
designated by the director, or, in the absence of such designation, to the
estate of the director.

Under the Aeroquip-Vickers, Inc. 1989 Non-Employee Directors' Equity Plan,
non-employee directors were entitled to receive awards consisting of such number
of Common Shares of Aeroquip-Vickers as have an aggregate fair market value on
the date of the grant of $25,000 rounded upward to the nearest 10 shares.
Non-employee directors who were directors on the effective date of the plan
(April 20, 1989) received an award on that date, and each person who thereafter
became a non-employee director was entitled to receive an award on the date of
his initial election. Each non-employee director was entitled to receive a
second, final award on the date of his re-election which most nearly coincided
with the fifth anniversary of his initial award. All Common Shares granted
pursuant to the awards are subject to forfeiture for a five-year period. In
1998, the Aeroquip-Vickers, Inc. 1989 Non-Employee Directors' Equity Plan was
amended to limit participation to individuals who were elected to the Board
prior to April 16, 1998. Only one director, Joseph Farrell, has not received his
second award under the plan and will be eligible for his final award if he is
re-elected to the Aeroquip-Vickers' Board of Directors at the 1999 annual
meeting of shareholders.

The Aeroquip-Vickers, Inc. Directors' Charitable Award Program was established
to recognize the interest of Aeroquip-Vickers and its directors in supporting
worthy educational institutions and other charitable organizations and to
provide an additional method of funding for the Aeroquip-Vickers Foundation. The
Program is also intended to assist Aeroquip-Vickers in attracting and retaining
directors of outstanding experience and ability. All directors, 

                                      -54-
<PAGE>   55

including Darryl F. Allen, currently participate in the Program. The Program is
administered by the Organization and Compensation Committee of the Board of
Directors. Each director may recommend up to nine charitable organizations that
qualify under section 501(c)(3) of the Internal Revenue Code. The recommendation
of a director who dies or becomes disabled while serving on the Board or after
completing five years of Board service will be considered by the Committee after
the director's death. If the recommendation is approved, Aeroquip-Vickers will
donate an aggregate of $900,000 in nine equal installments to the designated
charity or charities. Aeroquip-Vickers will also donate $100,000 to the
Aeroquip-Vickers Foundation after the director's death. Aeroquip-Vickers
purchased life insurance policies on the lives of its current directors to fund
the Program, and the Program provides for establishment of a fully funded trust
upon a change in control. The Program also permits self-funding.
Aeroquip-Vickers believes that the after-tax cost of the Program over its life
will be relatively small compared to the benefits it provides. Directors derive
no personal financial or tax benefit from the Program because all insurance
proceeds and tax deductions accrue solely to Aeroquip-Vickers.

Change in Control Agreements
----------------------------

Aeroquip-Vickers has entered into agreements with Messrs. Allen, Ammann, Kline,
Risley, Selland and each of its other executive officers. These agreements are
designed primarily to aid in ensuring continued management in the event of an
actual or threatened change in control of Aeroquip-Vickers (as defined in the
agreements). The agreements provide that in the event an executive officer is
terminated by Aeroquip-Vickers other than upon his death, disability or for
cause (as defined in the agreements) within three years after a change in
control, he would be entitled to: (i) a lump sum payment equal to two years' (or
in the case of Mr. Allen, three years') salary and incentive compensation under
the Annual Executive Incentive Compensation Plan (based upon an average of his
highest compensation in two of the previous five years); (ii) a contribution by
Aeroquip-Vickers to the executive's retirement savings plan account in an amount
equal to two times (or, in the case of Mr. Allen, three times) the company's
average aggregate contribution to the executive's accounts in the savings plan
for the previous three years; and (iii) continued participation in 
Aeroquip-Vickers' welfare-benefit plans for two years (or, in the case of 
Mr. Allen, three years). The officer would also be entitled to receive the 
payments and benefits described above if he resigned within a period between 
six months and two years following a change in control for reasons set forth
in the agreements relating to changed circumstances.

                                      -55-

<PAGE>   56


ITEM 12.  Security Ownership of Certain Beneficial Owners and Management.
-------
       
     Information with respect to ownership by beneficial owners of more than 5%
of any class of Aeroquip-Vickers common shares is set forth below. This
information is based upon reports filed by certain beneficial owners with the
Securities and Exchange Commission pursuant to Sections 13(d) or 13(g) of the
Securities Exchange Act of 1934 as of February 28, 1999.
<TABLE>
<CAPTION>

       Name & Address                        Amount & Nature
       of Beneficial                         of Beneficial               Percent of
       Owner                                 Ownership                   Class
-----------------------------------------------------------------------------------------------
<S>                                          <C>                         <C>
       Morgan Stanley Dean
       Witter & Co.                          3,856,424 (1)               13.9%
       and its subsidiaries
                1585 Broadway
                New York, NY 10036


       Gabelli Funds, Inc.
                and its affiliates           5,350,350 (2)               19.29%
                One Corporate Center
                Rye, NY 10580
-----------------------------------------------------------------------------------------------
</TABLE>

(1)  Morgan Stanley Dean Witter & Co. and its subsidiaries have sole voting
     power over 0 shares, shared voting power over 3,367,735 shares, sole
     dispositive power over 0 shares and shared dispositive power over 3,856,424
     shares.

(2)  Gabelli Funds, Inc. and its related entities have sole voting power over
     5,270,250 shares, shared voting power over 0 shares, sole dispositive power
     over 5,350,350 shares and shared dispositive power over 0 shares.

The following table sets forth, as of February 28, 1999, information known to
Aeroquip-Vickers concerning the beneficial ownership of Aeroquip-Vickers common
shares by each of its present directors individually, each of the named
executive officers individually, and all present directors and executive
officers as a group. The totals for each person and for the group include shares
held personally; shares held by immediate family members sharing the same
household; shares held as of February 28, 1999, under Aeroquip-Vickers' dividend
reinvestment plan and savings and profit-sharing plan; and shares that may be
acquired within 60 days following February 28, 1999, through the exercise of
stock options.


                                      -56-
<PAGE>   57

<TABLE>
<CAPTION>


                                        AMOUNT & NATURE OF          PERCENT
NAME OF BENEFICIAL OWNER            BENEFICIAL OWNERSHIP(1)(3)    OF CLASS(2)
------------------------------------------------------------------------------
<S>                                        <C>                     <C>
Virgis W. Colbert                             1,403                  *
--------------------------------------------------------------------------------
Purdy Crawford                                6,355                  *
--------------------------------------------------------------------------------
Joseph C. Farrell                             6,113                  *
--------------------------------------------------------------------------------
David R. Goode                                2,893                  *
--------------------------------------------------------------------------------
Paul A. Ormond                                3,013                  *
--------------------------------------------------------------------------------
John P. Reilly                                4,273                  *
--------------------------------------------------------------------------------
William R. Timken, Jr.                        5,003                  *
--------------------------------------------------------------------------------
Darryl F. Allen(3)                          347,477                  1%
--------------------------------------------------------------------------------
     Chairman of the Board, President
     and Chief Executive Officer of
     Aeroquip-Vickers
William R. Ammann(3)                        102,605                  *
--------------------------------------------------------------------------------
     Vice President - Administration and
     Treasurer of Aeroquip-Vickers
James E. Kline(3)                            42,821                  *
--------------------------------------------------------------------------------
     Vice President and General Counsel
     of Aeroquip-Vickers
David M. Risley(3)                           76,616                  *
--------------------------------------------------------------------------------
     Vice President - Finance and Chief
     Financial Officer of Aeroquip-Vickers
Howard M. Selland(3)                        108,679                  *
--------------------------------------------------------------------------------
     Executive Vice President of
     Aeroquip-Vickers and President of
     Aeroquip Corporation
All Directors and Executive
Officers as a Group (18 persons)            858,270                  3%(4)
--------------------------------------------------------------------------------
</TABLE>

*Indicates beneficial ownership of less than 1.0%

     (1)  Each director and named executive officer has sole voting and
          dispositive power with respect to all Common Shares indicated except
          that (i) 5,727 shares listed for Darryl F. Allen are held by Mr.
          Allen's wife, and (ii) 450 shares listed for Darryl F. Allen are held
          by one of Mr. Allen's children, who resides with Mr. Allen; Mr.
          Allen has disclaimed beneficial ownership of such shares.

     (2)  Each director and named executive officer, other than Mr. Allen, owns
          less than 1% of the outstanding Aeroquip-Vickers common Shares as of
          February 28, 1999.

     (3)  A portion of the total for the named executive officers and the group
          includes Aeroquip-Vickers common shares that could be acquired within
          60 days following February 28, 1999 through the exercise of stock
          options: 260,000 common shares for Darryl F. Allen; 78,000 common
          shares for William R. Ammann; 30,333 common shares for James E. Kline;
          58,000 common shares for David M. Risley; 85,000 common shares for
          Howard M. Selland; and 628,233 Common Shares for all executive
          officers included in the group of directors and executive officers.
          Two hundred three shares of restricted stock issued pursuant to the
          Non-employee Directors' Stock Award Plan have been included in the
          total for each director. The restrictions on these shares lapsed upon
          the filing of the preliminary proxy statement on February 12, 199.
          These 1,421 shares are also included in the group total.

     (4)  For the purpose of computing the percent of class, the
          Aeroquip-Vickers common shares for which all directors and executive
          officers as a group may acquire beneficial ownership within 60 days
          following February 28, 1999, through the exercise of stock options,
          are deemed to be outstanding.


                                      -57-
<PAGE>   58

ITEM 13.  Certain Relationships and Related Transactions.
-------
       None.

                                     PART IV
                                     -------

ITEM 14.  Exhibits, Financial Statement Schedules, and Reports on Form 8-K.
-------
(a)  The following documents are filed as a part of this report.

          (1) The following consolidated financial statements of
Aeroquip-Vickers and its subsidiaries are filed as part of this report.

    Report of Ernst & Young LLP, Independent Auditors

    Statement of Income - Years ended December 31, 1998, 1997 and 1996

    Statement of Financial Position - December 31, 1998 and 1997

    Statement of Cash Flows - Years ended December 31, 1998, 1997 and 1996

    Statement of Shareholders' Equity - Years ended December 31, 1998, 1997
    and 1996

    Notes to Financial Statements - December 31, 1998

          (2) The following consolidated financial statement schedule of
Aeroquip-Vickers and its subsidiaries is filed under Item 14(d):
<TABLE>
<CAPTION>

    SCHEDULE                                                           PAGE(S)
    --------                                                           -------
<S>                                                                     <C>  
    Schedule II - Valuation and qualifying accounts                     63-65
</TABLE>

All other schedules for which provision is made in the applicable accounting
regulations of the Securities and Exchange Commission are either not required
under the related instructions or are inapplicable, and therefore have been
omitted.

          (3) The following exhibits are incorporated by reference hereunder,
and those exhibits marked with an asterisk (*) are management contracts or
compensatory plans or arrangements required to be filed as exhibits pursuant to
Item 14(c) of this report:

 EXHIBIT
 NUMBER
--------
  
(3)-1     Amended Code of Regulations (amended April 21, 1988), filed as Exhibit
          (3)-1 to Form 10-K filed on March 19, 1998

(4)-1     Rights Agreement, dated February 7, 1999, between Aeroquip-Vickers,
          Inc. and First Chicago Trust Company of New York filed as Exhibit 4.1
          to Form 8-A filed on December 22, 1998

(4)-2     Indenture, dated as of May 1, 1996, between Aeroquip-Vickers, Inc. and
          the First National Bank of Chicago (as successor in interest to NBD
          Bank) filed as Exhibit 4.1 to Form S-3 filed on August 29, 1997

(4)-3     First Supplemental Indenture, dated as of April 17, 1997, between
          Aeroquip-Vickers, Inc. and the First National Bank of Chicago (as
          successor in interest to NBD Bank) filed as Exhibit 4.2 to Form S-3
          filed on August 29, 1997


                                      -58-
<PAGE>   59


(4)-4     Form of 7.875% Debentures due June 1, 2026, filed as Exhibit (4)-1 to
          Form 8-K filed on June 3, 1996

(4)-5     Form of Fixed Rate Notes, filed as Exhibit (4)-1(b) to Form 8-K filed
          April 25, 1997

(4)-6     Form of Floating Rate Notes, filed as Exhibit (4)-2(b) to Form 8-K
          filed April 25, 1997

(4)-7     Form of Fixed Rate Notes, filed as Exhibit (4)-1(a) to Form 8-K filed
          on October 2, 1997

(4)-8     Form of Floating Rate Notes, filed as Exhibit (4)-1(b) to Form 8-K
          filed on October 2, 1997

*(10)-1   Aeroquip-Vickers, Inc. 1987 Stock Option Plan, filed as Exhibit (10)-1
          to Form 10-K filed on March 19, 1998

*(10)-2   Change in Control Severance Agreement for Chief Executive Officer,
          filed as Exhibit (10)-1 to Form 10-Q filed on August 11, 1998

*(10)-3   Change in Control Severance Agreement for Executive Officers, filed as
          Exhibit (10)-2 to Form 10-Q filed on August 11, 1998 (the Agreements
          executed by the Company and various executive officers of the Company
          are identical in all respects to the form of Agreement filed as
          Exhibit (10)-2 except as to differences in the identity of the
          officers, the dates of execution, the identity of the employer of the
          executive [operating subsidiary or parent corporation], and as to
          other variations directly necessitated by said differences)

*(10)-4   Change in Control Severance Agreement for other executives, filed as
          Exhibit (10)-3 to Form 10-Q filed on August 11, 1998 (the Agreements
          executed by the Company and various other executives of the Company
          are identical in all respects to the form of Agreement filed as
          Exhibit (10)-3 except as to differences in the identity of the
          executives and the dates of execution, and as to other variations
          directly necessitated by said differences)

*(10)-5   Aeroquip-Vickers, Inc. 1994 Stock Incentive Plan, filed as Appendix A
          to the proxy statement for the annual meeting held on April 21, 1994

*(10)-6   Aeroquip-Vickers 1989 Non-Employee Directors' Equity Plan, filed as
          Exhibit (10)-12 to Form 10-K filed on March 18, 1994

*(10)-7   Aeroquip-Vickers, Inc. Plan for Optional Deferment of Directors' Fees
          (amended and restated effective April 1, 1995), filed as Exhibit
          (10)-8 to Form 10-K filed March 20, 1995

*(10)-8   Aeroquip-Vickers, Inc. Directors' Retirement Plan (amended and
          restated effective January 1, 1998), filed as Exhibit 4(c) to Form S-8
          filed May 7, 1998

*(10)-9   Aeroquip-Vickers, Inc. Voluntary Deferred Compensation Plan (effective
          April 1, 1995), filed as Exhibit (10)-11 to Form 10-K filed March 20,
          1995

*(10)-10  Aeroquip-Vickers, Inc. Supplemental Benefit Plan (amended and restated
          effective January 1, 1995), filed as Exhibit (10)-10 to Form 10-Q
          filed August 10, 1995

*(10)-11  Aeroquip-Vickers, Inc. 1998 Stock Incentive Plan, filed as Appendix A
          to the proxy statement for the annual meeting of shareholders held on
          April 16, 1998


                                      -59-
<PAGE>   60

*(10)-12  Aeroquip-Vickers, Inc. Non-Employee Directors' Stock Award Plan, filed
          as Appendix B to the proxy statement for the annual meeting of
          shareholders held on April 16, 1998

(99)-1    Aeroquip-Vickers, Inc. Directors' Charitable Award Program, filed as
          Exhibit (99(i))-2 to Form 10-K filed on March 18, 1994

(99)-2    Credit Agreement, dated as of September 27, 1996, among
          Aeroquip-Vickers, Inc. (formerly TRINOVA Corporation) (borrower) and
          The Bank of Tokyo - Mitsubishi Trust Company; Citibank, N.A.; Dresdner
          Bank AG, New York and Grand Cayman branches; The First National Bank
          of Chicago; Morgan Guaranty Trust Company of New York; The Chase
          Manhattan Bank; and Union Bank of Switzerland, Chicago branch (banks);
          and Citibank, N.A. (administrative agent), filed as Exhibit (99(i))-2
          to Form 10-Q filed November 14, 1996

          The following exhibits are filed hereunder:

(3)-2     Amended Articles of Incorporation (amended December 10, 1998)

(12)      Statement re: Computation of Ratios

(21)      Subsidiaries of the Registrant

(23)      Consent of Independent Auditors

(24)      Powers of Attorney

(27)      Financial Data Schedule

(27)-1    Financial Data Schedule - 1998 Restated

(b)       Aeroquip-Vickers filed current reports on Form 8-K on December 22,
          1998, February 2, 1999 and February 12, 1999, which are incorporated
          by reference hereunder.

(c)       The exhibits which are listed under Item 14(a)(3) are filed or
          incorporated by reference hereunder.

(d)       The financial statement schedule which is listed under Item 14(a)(2)
          is filed hereunder.


                                      -60-
<PAGE>   61

                                   SIGNATURES

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.

AEROQUIP-VICKERS, INC. (Registrant)

By: /s/ DARRYL F. ALLEN
   --------------------------------
Darryl F. Allen
Director, Chairman of the Board,
President and Chief Executive Officer

Date:  March 26, 1999


Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.

/s/ DARRYL F. ALLEN
---------------------------------------
Darryl F. Allen                 3/26/99
Director, Chairman of the       (Date)
Board, President and Chief
Executive Officer
(Principal Executive Officer)

/s/ DAVID M. RISLEY
---------------------------------------
David M. Risley                 3/26/99
Vice President - Finance        (Date)
and Chief Financial Officer
(Principal Financial Officer)

/s/ GREGORY R. PAPP
---------------------------------------
Gregory R. Papp                 3/26/99
Corporate Controller
(Principal Accounting Officer)

VIRGIS W. COLBERT*
---------------------------------------
Virgis W. Colbert*              3/26/99
Director                        (Date)


                                      -61-
<PAGE>   62



PURDY CRAWFORD*
---------------------------------------
Purdy Crawford*                 3/26/99
Director                        (Date)


JOSEPH C. FARRELL*
---------------------------------------
Joseph C. Farrell*              3/26/99
Director                        (Date)


DAVID R. GOODE*
---------------------------------------
David R. Goode*                 3/26/99
Director                        (Date)


PAUL A. ORMOND*
---------------------------------------
Paul A. Ormond*                 3/26/99
Director                        (Date)


JOHN P. REILLY*
---------------------------------------
John P. Reilly*                 3/26/99
Director                        (Date)


WILLIAM R. TIMKEN, JR.*
---------------------------------------
William R. Timken, Jr.*         3/26/99
Director                        (Date)





*By James E. Kline, Attorney-in-fact

/s/ JAMES E. KLINE
------------------------------------------
James E. Kline                     3/26/99
Vice President and General Counsel  (Date)


                                      -62-
<PAGE>   63


                SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS

                             AEROQUIP-VICKERS, INC.
<TABLE>
<CAPTION>

----------------------------------------------------------------------------------------------------------------------------
              COL. A                    COL. B                    COL. C                        COL. D        COL. E
----------------------------------------------------------------------------------------------------------------------------
                                                                    ADDITIONS

                                     BALANCE AT           (1)                  (2)                              BALANCE
   DESCRIPTION                       BEGINNING      CHARGED TO COSTS     CHARGED TO OTHER       DEDUCTIONS     AT END OF
                                     OF PERIOD        AND EXPENSES       ACCOUNTS-DESCRIBE        DESCRIBE      PERIOD
----------------------------------------------------------------------------------------------------------------------------
                                                         (In Thousands)

<S>                                     <C>             <C>                  <C>                 <C>            <C>
YEAR ENDED DECEMBER 31, 1998
 Deducted from asset accounts:
  Allowance for doubtful accounts        $ 14,701       $  4,770             $      -            $  4,632 -A    $ 14,839

  Deferred tax valuation allowance          6,816          7,927                    -              (1,810)-B      12,969
                                                                                                       36 -C
</TABLE>



Note A - Doubtful accounts charged off, net of recoveries
Note B - Effect of expiration of operating loss carryforward
Note C - Currency translation adjustments


                                      -63-
<PAGE>   64


                 SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS

                             AEROQUIP-VICKERS, INC.
<TABLE>
<CAPTION>

---------------------------------------------------------------------------------------------------------------------------
              COL. A                    COL. B                         COL. C                        COL. D      COL. E
---------------------------------------------------------------------------------------------------------------------------
                                                                      ADDITIONS

                                        BALANCE AT          (1)                    (2)                             BALANCE
   DESCRIPTION                          BEGINNING     CHARGED TO COSTS       CHARGED TO OTHER       DEDUCTIONS    AT END OF
                                        OF PERIOD       AND EXPENSES         ACCOUNTS-DESCRIBE       DESCRIBE      PERIOD

---------------------------------------------------------------------------------------------------------------------------
                                                       (In Thousands)


<S>                                     <C>           <C>                    <C>                   <C>            <C>
YEAR ENDED DECEMBER 31, 1997
 Deducted from asset accounts:
  Allowance for doubtful accounts       $ 16,032      $  1,485               $      -              $ (2,816)-A    $ 14,701

  Deferred tax valuation allowance        12,589        (1,767)                     -                (2,064)-B       6,816
                                                                                                     (1,942)-C
</TABLE>

Note A - Doubtful accounts charged off, net of recoveries
Note B - Effect of expiration of operating loss carryforward
Note C - Currency translation adjustments



                                      -64-
<PAGE>   65



                SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS

                             AEROQUIP-VICKERS, INC.
<TABLE>
<CAPTION>

---------------------------------------------------------------------------------------------------------------------------
              COL. A                    COL. B                         COL. C                        COL. D      COL. E
---------------------------------------------------------------------------------------------------------------------------
                                                                      ADDITIONS

                                        BALANCE AT          (1)                    (2)                             BALANCE
   DESCRIPTION                          BEGINNING     CHARGED TO COSTS       CHARGED TO OTHER       DEDUCTIONS    AT END OF
                                        OF PERIOD       AND EXPENSES         ACCOUNTS-DESCRIBE       DESCRIBE      PERIOD
---------------------------------------------------------------------------------------------------------------------------
                                                       (In Thousands)                                            


<S>                                    <C>                 <C>                  <C>                <C>             <C>
YEAR ENDED DECEMBER 31, 1996
 Deducted from asset accounts:
  Allowance for doubtful accounts      $ 13,241            $  3,899             $      -           $ (1,108)-A     $ 16,032

  Deferred tax valuation allowance       15,953              (3,853)                   -                489 -B       12,589
</TABLE>







Note A - Doubtful accounts charged off, net of recoveries
Note B - Currency translation adjustments


                                      -65-
<PAGE>   66
<TABLE>
<CAPTION>


EXHIBIT INDEX

EXHIBIT                                                                        PAGE(S)
-------                                                                        -------


<S>              <C>                                                         <C>
(3)-1            Amended Code of Regulations (amended April 21, 1988)        Incorporated
                 filed as Exhibit (3)-1 to Form 10-K filed on                by Reference
                 March 19, 1998

(3)-2            Amended Articles of Incorporation (amended                       69
                 December 10, 1998)

(4)-1            Rights Agreement, dated February 7, 1999, between           Incorporated
                 Aeroquip-Vickers, Inc. and First Chicago Trust              by Reference
                 Company of New York filed as Exhibit 4.1 to
                 Form 8-A filed on December 22, 1998

(4)-2            Indenture, dated as of May 1, 1996, between                 Incorporated
                 Aeroquip-Vickers, Inc. and the First National               by Reference
                 Bank of Chicago (as successor in interest to NBD
                 Bank) filed as Exhibit 4.1 to Form S-3 filed on
                 August 29, 1997

(4)-3            First Supplemental Indenture, dated as of April 17,         Incorporated
                 1997, between Aeroquip-Vickers, Inc. and the First          by Reference
                 National Bank of Chicago (as successor in interest
                 to NBD Bank) filed as Exhibit 4.2 to Form S-3 filed
                 on August 29, 1997

(4)-4            Form of 7.875% Debentures due June 1, 2026, filed as        Incorporated
                 Exhibit (4)-1 to Form 8-K filed on June 3, 1996             by Reference

(4)-5            Form of Fixed Rate Notes, filed as Exhibit (4)-1(b)         Incorporated
                 to Form 8-K filed April 25, 1997                            by Reference

(4)-6            Form of Floating Rate Notes, filed as Exhibit               Incorporated
                 (4)-2(b) to Form 8-K filed April 25, 1997                   by Reference

(4)-7            Form of Fixed Rate Notes, filed as Exhibit (4)-1(a)         Incorporated
                 to Form 8-K filed on October 2, 1997                        by Reference

(4)-8            Form of Floating Rate Notes, filed as Exhibit               Incorporated
                 (4)-1(b) to Form 8-K filed on October 2, 1997               by Reference

(10)-1           Aeroquip-Vickers, Inc. 1987 Stock Option Plan,              Incorporated
                 filed as Exhibit (10)-1 to Form 10-K filed on               by Reference
                 March 24, 1998

(10)-2           Change in Control Severance Agreement for Chief             Incorporated
                 Executive Officer, filed as Exhibit (10)-1 to               by Reference
                 Form 10-Q filed on August 11, 1998

(10)-3           Change in Control Severance Agreement for Executive         Incorporated
                 Officers, filed as Exhibit (10)-2 to Form 10-Q              by Reference
                 filed on August 11, 1998 (the Agreements executed
                 by the Company and various executive officers of
                 the Company are identical in all respects to the
                 form of Agreement filed as Exhibit (10)-2 except
                 as to differences in the identity of the officers,
                 the dates of execution, the identity of the employer
                 of the executive [operating subsidiary or parent
                 corporation], and as to other variations directly
                 necessitated by said differences)
</TABLE>

                                      -66-
<PAGE>   67

<TABLE>
<CAPTION>


<S>              <C>                                                             <C>
(10)-4           Change in Control Severance Agreement for other                 Incorporated
                 executives, filed as Exhibit (10)-3 to Form 10-Q                by Reference
                 filed on August 11, 1998 (the Agreements executed
                 by the Company and various other executives of the
                 Company are identical in all respects to the form
                 of Agreement filed as Exhibit (10)-3 except as to
                 differences in the identity of the executives and
                 the dates of execution, and as to other variations
                 directly necessitated by said differences)

(10)-5           Aeroquip-Vickers, Inc. 1994 Stock Incentive Plan,               Incorporated
                 filed as Appendix A to the proxy statement for the              by Reference
                 annual meeting held on April 21, 1994

(10)-6           Aeroquip-Vickers 1989 Non-Employee Directors'                   Incorporated
                 Equity Plan, filed as Exhibit (10)-12 to Form 10-K              by Reference
                 filed on March 18, 1994

(10)-7           Aeroquip-Vickers, Inc. Plan for Optional Deferment              Incorporated
                 of Directors' Fees (amended and restated effective              by Reference
                 April 1, 1995), filed as Exhibit (10)-8 to Form 10-K
                 filed March 20, 1995

(10)-8           Aeroquip-Vickers, Inc. Directors' Retirement Plan               Incorporated
                 (amended and restated effective January 1, 1998),               by Reference
                 filed as Exhibit 4(c) to Form S-8 filed May 7, 1998

(10)-9           Aeroquip-Vickers, Inc. Voluntary Deferred                       Incorporated
                 Compensation Plan (effective April 1, 1995), filed              by Reference
                 as Exhibit (10)-11 to Form 10-K filed March 20, 1995

(10)-10          Aeroquip-Vickers, Inc. Supplemental Benefit Plan                Incorporated
                 (amended and restated effective January 1, 1995),               by Reference
                 filed as Exhibit (10)-10 to Form 10-Q filed
                 August 10, 1995

(10)-11          Aeroquip-Vickers, Inc. 1998 Stock Incentive Plan,               Incorporated
                 filed as Appendix A to the proxy statement for                  by Reference
                 the annual meeting of shareholders held on
                 April 16, 1998

(10)-12          Aeroquip-Vickers, Inc. Non-Employee Directors'                  Incorporated
                 Stock Award Plan, filed as Appendix B to the proxy              by Reference
                 statement for the annual meeting of shareholders
                 held on April 16, 1998

(12)             Statement re:  Computation of Ratios                                 81

(21)             Subsidiaries of the Registrant                                       82

(23)             Consent of Independent Auditors                                      83

(24)             Power of Attorney                                                    84

(27)             Financial Data Schedule                                              85

(27)-1           Financial Data Schedule - 1998 Restated                              86

(99)-1           Aeroquip-Vickers, Inc. Directors' Charitable                    Incorporated
                 Award Program, filed as Exhibit (99(i))-2 to                    by Reference
                 Form 10-K filed on March 18, 1994
</TABLE>


                                      -67-
<PAGE>   68

<TABLE>
<CAPTION>

<S>              <C>                                                           <C>
(99)-2           Credit Agreement, dated as of September 27, 1996,             Incorporated
                 among Aeroquip-Vickers, Inc. (formerly TRINOVA                by Reference
                 Corporation) (borrower) and The Bank of Tokyo -
                 Mitsubishi Trust Company; Citibank, N.A.; Dresdner
                 Bank AG, New York and Grand Cayman branches;
                 The First National Bank of Chicago; Morgan Guaranty
                 Trust Company of New York; The Chase Manhattan Bank;
                 and Union Bank of Switzerland, Chicago branch (banks);
                 and Citibank, N.A. (administrative agent), filed as Exhibit
                 (99(i))-2 to Form 10-Q filed November 14, 1996

</TABLE>

                                      -68-