<PAGE>
 
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                      SECURITIES AND EXCHANGE COMMISSION
                            WASHINGTON, D.C. 20549
 
                                   FORM 10-K
 
             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 number
                                                               0-4538
 
                           CYBEX International, Inc.
            (Exact name of registrant as specified in its charter)
 
               New York                              11-1731581
    (State or other jurisdiction of               (I.R.S. Employer
    incorporation or organization)               Identification No.)
 
       10 Trotter Drive, Medway,                        02053
             Massachusetts                           (Zip Code)
    (Address of principal executive
                office)
 
Registrant's telephone number, including area code (508) 533-4300
 
Securities registered pursuant to Section 12(b) of the Act:
 
<TABLE>
<CAPTION>
                                                          Name of each exchange on
             Title of Each Class                              which registered
             -------------------                          ------------------------
<S>                                            <C>
        Common Stock, $.10 Par Value                      American Stock Exchange
</TABLE>
 
Securities registered pursuant to Section 12(g) of the Act:
 
                                     NONE
                               (Title of Class)
 
  Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing required for the past 90 days. Yes [X] No [_]
 
  Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [_]
 
                               ----------------
 The aggregate market value of the voting stock held by non-affiliates of the
                        registrant as of March 23, 1999
                   Common Stock, $.10 Par Value--$45,562,997
 
                               ----------------
The number of shares outstanding of each of the registrant's classes of common
                          stock, as of March 23, 1999
                Common Stock, $.10 Par Value--8,678,666 shares
 
                               ----------------
 
DOCUMENTS INCORPORATED BY REFERENCE:
  The information required by Part III (items 10, 11, 12 and 13) is
incorporated by reference from the Registrant's definitive proxy statement for
its Annual Meeting of Stockholders, to be filed with the Commission pursuant
to Regulation 14A, or if such proxy statement is not filed with the Commission
on or before 120 days after the end of the fiscal year covered by this Report,
such information will be included in an amendment to this Report filed no
later than the end of such 120-day period.
 
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<PAGE>
 
                                    PART I
 
ITEM 1. BUSINESS
 
General
 
  Cybex International, Inc. (the "Company" or "Cybex"), a New York
Corporation, is a strength and cardiovascular fitness equipment company which
develops, manufactures and markets premium performance, professional quality,
human performance products for the commercial and consumer markets. Cybex is
comprised of three formerly independent companies, Cybex, Trotter Inc.
("Trotter") and Tectrix Fitness Equipment, Inc. ("Tectrix"). The Company
operates in one business segment.
 
  On May 21, 1998, Cybex entered into an agreement with Tectrix and its
stockholders whereby Cybex acquired all of the outstanding Common Stock of
Tectrix (the "Acquisition"). In connection with the Acquisition, the Company
discontinued Tectrix's Virtual Reality products and treadmill development
program, closed Tectrix's Cambridge, Massachusetts research and development
facility and is closing Tectrix's two international sales offices.
 
  On May 23, 1997, the merger between a wholly owned subsidiary of Cybex
International, Inc. and Trotter Inc. was consummated (the "Merger") with
Trotter surviving the Merger as a subsidiary of Cybex. This transaction was
accounted for as a purchase with Trotter deemed to be the acquiring company
for accounting purposes and, therefore, the surviving company for financial
reporting purposes.
 
  The Company has a wholly owned finance subsidiary, Cybex Financial Corp
("CFC"), which provides capital equipment lease financing for the Company's
products, primarily to its commercial domestic customer base.
 
Products
 
  The Company develops, manufactures, and markets premium performance,
professional quality, human performance products for the commercial and
consumer markets. These products can generally be grouped into two major
categories: cardiovascular products and strength systems.
 
  The Company's products are of professional quality and are typically among
the best in the category in which they compete, featuring high performance and
durability suitable for utilization in health clubs or by professional
athletes. Accordingly, the majority of the Company's products are premium-
priced.
 
  The contribution to net sales of the Company's product lines over the past
three years is as follows (dollars in millions):
 
<TABLE>
<CAPTION>
                                           1998          1997          1996
                                      -------------- ------------- -------------
                                       Net            Net           Net
                                      Sales  Percent Sales Percent Sales Percent
                                      ------ ------- ----- ------- ----- -------
<S>                                   <C>    <C>     <C>   <C>     <C>   <C>
Cardiovascular Products.............. $ 68.9    54%  $46.2    51%  $35.3    74%
Strength Systems.....................   58.7    46    41.4    46    12.3    26
Isokinetics (1)......................    --    --      2.6     3     --    --
                                      ------   ---   -----   ---   -----   ---
                                      $127.6   100%  $90.2   100%  $47.6   100%
                                      ======   ===   =====   ===   =====   ===
</TABLE>
--------
(1) Represents sales of Cybex isokinetics testing and rehabilitation product
    lines from the May 23, 1997 Merger date to September 30, 1997, the date
    the product line was sold.
 
 Cardiovascular Products
 
  The Company's cardiovascular equipment is designed to provide aerobic
conditioning by elevating the heart rate, increasing lung capacity, endurance
and circulation, and burning body fat. Trotter commenced operations in 1973 as
one of the pioneers in design and manufacture of treadmills specifically
intended for use by individuals in their home as part of a home fitness
program. The Company's cardiovascular products today include
 
                                       2
<PAGE>
 
treadmills, bikes, personal climbers and the Hiker (introduced in March of
1998). All of the Company's cardiovascular products incorporate computerized
electronics which control the unit and provide feedback to the user.
 
  Treadmills. Each treadmill model is motorized and incorporates computerized
electronics controlling speed, incline, and both preset and customized
exercise programs. The electronics also provide displays to indicate program
profiles, calories burned, calories per hour, speed, incline, distance,
elapsed time and pace. In addition, diagnostic information can be accessed
through the computer system which is useful in the maintenance of the product.
The Company presently sells six treadmill models, with list prices ranging
from $2,995 to $7,995.
 
  Bikes. The BikeMax models 3000 and 1000 are commercial and consumer exercise
bikes, respectively, which are available in both upright and recumbent riding
positions. The bikes incorporate an ergonomic design, epoxy powdercoated
finish and a welded steel frame. The BikeMax 3000 has a full-featured control
console, including a heart rate control program. The BikeMax 1000 has a
simplified console suitable for low-support locations. These two products have
list prices ranging from $1,995 to $2,895.
 
  Climbers. The ClimbMax models 3000, 2000, and 1000 are the latest versions
of the ClimbMax stairclimber family. Along with the home version, the Personal
Climber, the ClimbMax line is designed for high performance and reliability.
Each model incorporates a biomechanically correct design, durable epoxy
powdercoating and welded steel frame. The model 3000 features an advanced
ergonomic handrail design; a traditional design is used in the 2000 and 1000,
with the 1000 having a simpler control console especially suited for use
outside the health club environment. These four products have list prices
ranging from $2,395 to $3,195.
 
  Hiker. The Hiker is a commercial cardiovascular product that has a free
stride climbing motion with a natural movement that emphasizes an upper and
lower body workout within natural hiking motion. It features a biomechanically
correct design, several pre-programmed operating modes, durable welded
structural steel frame and heart rate monitoring. This product has a list
price of $3,895.
 
 Strength Training Products
 
  Strength training equipment provides a physical workout by exercising the
muscular system. The Company's strength training equipment uses weights for
resistance. This product line includes selectorized single station equipment,
modular multi-station units, a personal gym, plate loaded and free-weight
equipment.
 
  Selectorized Equipment. The Company's selectorized equipment is sold under
the trademarks "VR2", "Galileo" and "VR". Selectorized single station
equipment incorporates stacked weights, permitting the user to select
different weight levels for a given exercise by inserting a pin at the
appropriate weight level. Each selectorized product is designed for a specific
muscle group with each product line utilizing a different technology. The
Company currently sells approximately 82 selectorized equipment products with
list prices between $1,995 and $5,395.
 
  Modular Multi-Station Units. This product line has the advanced design and
high performance features of the VR selectorized equipment line while being
able to be configured into multiple station design. List price begins at
$1,395 and pricing depends on configuration.
 
  Personal Gym. The Company's personal gym (introduced in the fourth quarter
of 1998) features over 30 biomechanically correct exercises. It is made of
components including cold-rolled weight stacks and guide rods, fully welded 11
gauge frames, texture powder coating and upholstery. Since it uses
considerably less space than multiple selectorized single station equipment,
it is sold for home use. This product has a list price of $4,195.
 
  Plate Loaded Equipment. The Company manufactures and distributes a wide
range of strength equipment which mimics many of the movements found on our
selectorized machines but are manually loaded with weights. These are simple,
space efficient products ranging in price from $695 to $2,795. There are
approximately 21 plate-loaded products.
 
                                       3
<PAGE>
 
  Free-Weight Equipment. The Company also sells free-weight equipment,
including benches, bars, weights and racks. This line is complimented by
barbells and plates. The Company offers approximately 29 items of free weight
equipment with list prices ranging from $195 to $1,195.
 
Customers and Distribution
 
  The Company currently markets its products to commercial customers and to
individuals interested in purchasing premium quality equipment. A commercial
customer is defined as any purchaser who does not intend the product for home
use. Typical commercial customers are health clubs, corporate fitness centers,
hotels, resorts, spas, educational institutions, sports teams, sports medicine
clinics, military installations and community centers.
 
  The Company distributes its products through independent authorized dealers,
its own domestic sales force and international distributors.
 
  Independent authorized dealers operate independent stores specializing in
fitness-related products and promote home and in certain instances commercial
sales of Company products. The operations of the independent dealers are
primarily local or regional in nature. In North America, the Company enters
into performance standards agreements with its dealers which are designed to
assure that the Company brand is properly positioned in the marketplace. The
dealers must, in order to qualify as an authorized dealer, maintain a retail
showroom, achieve sales and promotional objectives, and have personnel trained
to install and service Company products. Today, the Company has approximately
190 active dealers in North America. The Company believes that its current
dealer network is adequate to service its targeted markets.
 
  The Company's domestic sales force is comprised of 28 territory managers and
three national account managers supported by three sales directors and one
national accounts director. The domestic sales force focuses on users such as
professional sports teams, university physical education and physiology
departments, health clubs, sports medicine clinics and individuals. The
Company may also involve its dealers in direct sales and utilize the dealer in
the delivery and installation of the product, and in follow-up sales and
service. Dealers also receive a fee for providing delivery and installation
services.
 
  International sales accounted for approximately 18% of the Company's net
sales for 1998. The international sales force consists of two regional sales
directors, one regional sales manager, and four account representatives. There
are approximately 66 independent distributors in 65 countries currently
representing Cybex. The Company enters into international distributor
agreements with these distributors which define territories, performance
standards and volume requirements.
 
  The Company markets certain products by advertising in publications which
appeal to individuals within its targeted demographic profiles. The Company's
authorized dealers are provided cooperative allowances, pursuant to which the
dealer advertises its store and the Company's products on a shared cost basis.
In addition, the Company advertises in trade publications such as Club
Industry Magazine, Club Business International and Fitness Management Magazine
and participates in industry trade shows.
 
  The Company offers lease financing for its products through CFC, its wholly
owned finance subsidiary. The Company periodically enters into agreements to
sell lease receivables to financial institutions.
 
Warranties
 
  The Company promotes its warranty as a statement of the quality of its
products, and believes that its warranty helps differentiate the Company's
products from those of its competitors. The cardiovascular products have a
three year warranty. The various components for strength products are
warranted for varying periods of time, up to a lifetime warranty with respect
to the structural frame. Warranty expense for the years ended December 31,
1998, 1997 and 1996 was $5,315,000, $3,269,000 and $1,968,000, respectively.
 
                                       4
<PAGE>
 
Competition
 
  The market in which the Company operates is highly competitive. Numerous
companies manufacture, sell or distribute exercise equipment. The Company
currently competes primarily in the premium-performance, professional quality
equipment segment of the market, which management estimates to be
approximately 20% of the total exercise equipment market. Its competitors vary
according to product line and include companies with greater name recognition
and more extensive financial and other resources than the Company.
 
  Important competitive factors include price, product quality and
performance, diversity of features, warranties and customer service. The
Company follows a policy of premium quality, responsive customer service and a
comprehensive warranty program, which results in products having suggested
retail prices at or above those of its competitors in most cases. The Company
currently focuses on the segment of the market which values quality and is
willing to pay a premium for products with performance advantages over the
competition. The Company believes that its reputation for producing products
of high quality and dependability, accompanied by strong warranties and
customer service, constitutes a competitive advantage.
 
Product Development
 
  Research and development expense was $3,479,000, $2,616,000 and $1,167,000
in 1998, 1997 and 1996, respectively. At December 31, 1998, the Company had
the equivalent of 17 employees engaged in ongoing research and development
programs. The Company's development efforts focus on improving existing
products and developing new products, with the goal of producing user-
friendly, ergonomically and bio-mechanically correct, durable exercise
equipment.
 
Manufacturing and Supply
 
  The Company maintains three facilities of which two are integrated
manufacturing facilities which are equipped to perform certain fabrication,
welding, grinding, assembly and finishing of its products and one is an
assembled components facility. The Company believes that its facilities
provide the Company with better control over product quality and cost and
shortened delivery time.
 
  The Company manufactures treadmill and hiker cardiovascular products in its
facility located in Medway, Massachusetts and manufactures strength equipment
in its facility located in Owatonna, Minnesota. Raw materials and purchased
components are comprised primarily of steel, aluminum, wooden decks, electric
motors, molded or extruded plastics, milled products, circuit boards for
computerized controls and upholstery. These materials are assembled,
fabricated, machined, welded, powder coated and upholstered to create finished
products. The electronics are specifically designed by Company employees for
use in the Company's products and all electrical motors are made to the
Company's specifications.
 
  The Company assembles bike and climber cardiovascular products in its
facility located in Irvine, California. Purchased components include
prefabricated steel, alternators, molded or extruded plastics, milled
products, circuit boards for computerized controls and upholstery. The
electronics are specifically designed by the Company for use in the Company's
products and all electrical components are made to the Company's
specifications.
 
  The Company single sources certain of its raw materials and component parts,
including drive motors, belts, running decks, molded plastic components and
electronics, where it believes that sole sourcing is beneficial for reasons
such as quality control and reliability of the vendor or cost. The Company
attempts to reduce the risk of sole source suppliers by maintaining varying
levels of parts inventory. However, the loss of a significant supplier, or
delays or disruptions in the delivery of components or materials, or increases
in material costs, could have a material adverse effect on the Company's
operations.
 
  The Company manufacturers most of its strength-training equipment on a
"build-to-order" basis which responds to specific sales orders. The Company
manufactures its other products based upon projected sales.
 
                                       5
<PAGE>
 
Backlog
 
  Backlog historically has not been a significant factor in the Company's
business.
 
Patents and Trademarks
 
  The Company owns, licenses or has applied for various patents with respect
to its products and has also registered or applied for a number of trademarks.
While these patents and trademarks are of value, the Company does not believe
that it is dependent to any material extent upon patent or trademark
protection.
 
Insurance
 
  The Company's product liability insurance is written on an occurrence form
and provides an aggregate of $5,000,000 of coverage, with a deductible of up
to $50,000 per occurrence with an annual aggregate deductible of $500,000.
This occurrence form policy also provides a seven year extended reporting
period for the previously expired claims-made product liability policy.
 
Governmental Regulation
 
  The Company's products are not subject to material governmental regulation.
 
  The Company's operations are subject to federal, state and local laws and
regulations relating to the environment. The Company regularly monitors and
reviews its operations and practices for compliance with these laws and
regulations, and the Company believes that it is in material compliance with
such environmental laws and regulations. Despite these compliance efforts,
some risk of liability is inherent in the operation of the business of the
Company, as it is with other companies engaged in similar businesses, and
there can be no assurance that the Company will not incur material costs in
the future for environmental compliance.
 
Employees
 
  On December 31, 1998, the Company employed 632 persons on a full-time basis.
None of the Company's employees are represented by a union. The Company
considers its relations with its employees to be good.
 
ITEM 2. PROPERTIES
 
  The Company occupies approximately 120,000 square feet of space in Medway,
Massachusetts, approximately 210,000 square feet of space in Owatonna,
Minnesota and approximately 74,000 square feet in Irvine, California for
administrative offices, manufacturing, assembly and warehousing. The Medway,
Massachusetts and Owatonna, Minnesota facilities are owned by the Company. The
Company leases the Irvine, California facility pursuant to a lease whose term
expires in the year 2001. The Company also utilizes outside warehousing.
 
  The Company's two manufacturing facilities in Medway, Massachusetts and
Owatonna, Minnesota are equipped to perform fabrication, machining, welding,
grinding, assembly and powder coating of its products. The Irvine, California
facility is designed for assembly of purchased parts. The Company believes
that its facilities provide adequate capacity for its operations for the
foreseeable future, and the facilities are well maintained and kept in good
repair.
 
  Additional information concerning the financing of the Company's owned
facilities is described in Note 5 to the Company's consolidated financial
statements.
 
ITEM 3. LEGAL PROCEEDINGS
 
  As a manufacturer of fitness products, the Company is inherently subject to
the hazards of product liability litigation; however, the Company has
maintained, and expects to continue to maintain, insurance coverage which the
Company believes is adequate to protect against these risks.
 
                                       6
<PAGE>
 
Fuqua Arbitration and Litigation
 
  In April 1996, the Company completed the sale of substantially all the
assets of its Lumex Division to Fuqua Enterprises, Inc. (together with its
successors, "Fuqua"). The asset sale agreement with Fuqua provided for a post-
closing adjustment to the sales price based on the change in the value of the
net assets of the Lumex Division from December 31, 1995, through the closing
date. Subsequent to the closing, Fuqua asserted that the stated amount of the
net assets of the Lumex Division as of the closing date was overstated and
demanded arbitration to resolve this dispute. The arbitration of the dispute
proceeded and on February 13, 1998 a final decision was rendered in the
arbitration, awarding to Fuqua claims totaling $3,180,000, resulting in a net
payment due to Fuqua, including interest, of approximately $2,400,000, after
offsetting the Company's post-closing adjustment claim against Fuqua which
amounted to $1,146,000.
 
  During 1997, Fuqua notified the Company of claims for breaches of certain of
the Company's representations and warranties in the asset sale agreement
involving substantially the same matters submitted to the arbitrator, and in
February 1998, Fuqua commenced an action with respect to these and other
matters in the State Court of Fulton County, State of Georgia against the
Company and certain of its former officers. On February 11, 1999, the parties
executed a Mutual Release and Settlement Agreement and provided mutual
releases, and on February 12, the court dismissed the action with prejudice.
As part of this final settlement, Cybex paid to the plaintiff the sum of
$2,600,000.
 
Kirila et al v. Cybex International, Inc., et al
 
  This action was commenced in the Court of Common Pleas of Mercer County,
Pennsylvania in May 1997 against the Company, the Company's wholly-owned
subsidiary, Trotter, and certain officers, directors and affiliates of the
Company. The plaintiffs include companies which sold to Trotter, a strength
equipment company in 1993, a principal of the corporate plaintiffs who was
employed by Trotter following the acquisition, and a company which leased to
Trotter a plant located in Sharpsville, Pennsylvania. In accordance with
Pennsylvania practice, the complaint in this matter was not served upon the
defendants until the second quarter of 1998. The complaint, among other
things, alleges that the closure of the Sharpsville facility was wrongful,
wrongful termination of the individual plaintiff's employment and nonpayment
of compensation, breach of the lease agreement and the asset purchase
agreement, tortious interference with business relationships, fraud, negligent
misrepresentation, unjust enrichment, breach of the covenant of good faith and
fair dealing, conversion, unfair competition and violation of the Wage Payment
and Collection Law. The complaint seeks specific performance of the lease, the
employment agreement and the indemnification provisions of the asset purchase
agreement, and an unspecified amount of compensatory and punitive damages and
expenses. The Company has filed an Answer to the complaint denying the
material allegations of the complaint and denying liability. It has further
asserted counterclaims against the plaintiffs, including for repayment of
over-allocations of expenses under the lease and certain excess incentive
compensation payments which were made to the individual plaintiff. The Company
intends to vigorously defend this matter.
 
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
 
  No matters were submitted to a vote of the Company's security holders during
the fourth quarter of 1998.
 
SPECIAL ITEM. EXECUTIVE OFFICERS OF REGISTRANT
 
  Officers are elected by the Board of Directors and serve at the pleasure of
the Board. The executive officers of the Company are as follows:
 
<TABLE>
<CAPTION>
Name                                   Age Position
----                                   --- --------
<S>                                    <C> <C>
Peter C. Haines.......................  48 President and Chief Executive Officer
William S. Hurley.....................  54 Vice President and Chief Financial
                                           Officer
Karen A. Slein........................  41 Vice President--Human Resources
Michael T. Sweeney....................  45 Vice President--Technology and
                                           Development
</TABLE>
 
 
                                       7
<PAGE>
 
  Mr. Haines has served as the Company's President and Chief Executive Officer
since the May 23, 1997 Merger date. Prior to the Merger, he was employed by
Trotter since 1980, serving as the President of Trotter since 1983, and acting
as its Sales and Marketing Manager from 1980 to 1983. Prior thereto, he served
as Import/Export Manager for Donley Manufacturing for three years.
 
  Mr. Hurley has served as the Company's Vice President and Chief Financial
Officer since the date of the Merger. He joined Trotter as its Vice President
and Chief Financial Officer in 1996. Prior to joining Trotter, from 1992 to
1995, Mr. Hurley was Vice President and Controller of the former BBN Company
(now GTE Internetworking, a division of GTE) of Cambridge, Massachusetts, a
diversified high technology company. For nineteen years prior to 1992, he was
employed in various management positions, most recently Vice President and
Controller, at Wyman Gordon Company, a North Grafton, Massachusetts
manufacturer of forgings, investment castings and advanced composite
structures. Mr. Hurley is also a member of the Board of Directors of L.S.
Starrett Company of Athol, Massachusetts.
 
  Ms. Slein has served as the Company's Vice President of Human Resources
since the date of the Merger. She joined Trotter in 1995 as Manager of Human
Resources and was promoted to Director of Human Resources in 1996. From 1992
to 1995, she was Director of Human Resources for EcoScience, a publicly traded
biotechnology company. Prior to that, she spent seven years as Manager of
Administration for New England Shrimp Company.
 
  Mr. Sweeney has served as the Company's Vice President of Technology and
Development since December 1998 and as Chief of Operations, Irvine Development
Group, from May to December 1998. Prior to such time he served as the
President and Chief Executive Officer of Tectrix from its inception in 1988
until its sale to the Company in May 1998. Prior to such time he was employed
by Unisen Inc. for eleven years, initially as an engineer and subsequently as
Vice President Manufacturing for eight years.
 
                                       8
<PAGE>
 
                                    PART II
 
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
        MATTERS
 
  The Company's common shares are traded on the American Stock Exchange
(Amex). The Company's Amex symbol is CYB.
 
  The following table shows the high and low market prices as reported by the
Amex:
 
<TABLE>
<CAPTION>
                                                       1997            1996
                                                  --------------- --------------
   Calendar                                        High     Low    High    Low
   --------                                       ------- ------- ------- ------
   <S>                                            <C>     <C>     <C>     <C>
   First Quarter................................. $14.375 $11.500 $11.875 $8.938
   Second Quarter................................  13.250   8.500  12.500 10.125
   Third Quarter.................................   9.250   6.000  12.125 10.000
   Fourth Quarter................................   6.750   3.840  12.250 10.125
</TABLE>
 
  As of February 28, 1999 there were approximately 480 common shareholders of
record. This figure does not include stockholders with shares held under
beneficial ownership in nominee name.
 
  On December 31, 1998, in accordance with the Board compensation policy, the
Company issued 5,000 shares of its common stock to John Aglialoro for serving
as Chairman of the Board of Directors. In issuing these shares, the Company
relied on the exemption from registration provided by Section 4(2) of the
Securities Act of 1933, as amended.
 
  The Company's ability to pay dividends is limited to 50% of its net income,
by the terms of its financing arrangements with its principal lender. The
present policy of the Company is to retain any future earnings to provide
funds for the operation and expansion of its business, and the Company does
not anticipate paying any cash dividends in the immediate future.
 
ITEM 6. SELECTED FINANCIAL DATA
 
  The following information has been extracted from the Company's consolidated
financial statements for the five years ended December 31, 1998. This selected
consolidated financial data should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the Company's consolidated financial statements and notes thereto included
elsewhere in this report.
 
<TABLE>
<CAPTION>
                                    Year Ended December 31,
                            --------------------------------------------------
                            1998(a)      1997(b)      1996     1995     1994
                            --------     -------     -------  -------  -------
                             (in thousands, except per share data)
<S>                         <C>          <C>         <C>      <C>      <C>
Statement of Operations
 Data:
Net sales.................  $127,575     $90,234     $47,605  $43,719  $41,365
Cost of sales.............    77,705 (c)  54,101 (e)  29,541   27,860   24,836
                            --------     -------     -------  -------  -------
  Gross profit............    49,870      36,133      18,064   15,859   16,529
Selling, general and
 administrative expenses..    40,280      35,069 (f)  13,797   12,762   12,260
Nonrecurring charges......     5,898 (d)   7,134 (g)     --       --       --
                            --------     -------     -------  -------  -------
  Operating income
   (loss).................     3,692      (6,070)      4,267    3,097    4,269
Interest income...........       723         427          49        4      --
Interest expense..........    (2,405)     (1,188)     (1,004)    (260)    (219)
                            --------     -------     -------  -------  -------
  Income (loss) before
   income taxes...........     2,010      (6,831)      3,312    2,841    4,050
Income tax provision
 (benefit)................       992      (1,586)      1,344    1,171    1,675
                            --------     -------     -------  -------  -------
Net income (loss).........  $  1,018 (h) $(5,245)(i) $ 1,968  $ 1,670  $ 2,375
                            ========     =======     =======  =======  =======
Basic earnings (loss) per
 share                      $    .12 (h) $  (.76)(i) $   .46  $   .39  $   .56
                            ========     =======     =======  =======  =======
Diluted earnings (loss)
 per share                  $    .12 (h) $  (.76)(i) $   .45  $   .38  $   .56
                            ========     =======     =======  =======  =======
</TABLE>
 
                                       9
<PAGE>
 
--------
(a) 1998 includes the results of Tectrix from the May 21, 1998 acquisition
    date.
(b) 1997 includes the results of Trotter plus the results of Cybex from the
    May 23, 1997 merger date.
(c) Includes $300 of costs related to the Cybex bike and $372 of costs related
    to the elimination of the Reactor product line both of which are
    considered unusual or nonrecurring.
(d) Includes $3,000 of costs related to the Fuqua litigation, $1,435 of costs
    related to the Cybex bike, $952 of costs related to the elimination of the
    Reactor product line and $511 of other nonrecurring costs considered
    unusual or a direct result of the Tectrix acquisition.
(e) Includes $2,375 of costs considered unusual or nonrecurring, or a direct
    result of the Cybex/Trotter merger.
(f) Includes $4,599 of costs considered unusual or nonrecurring, or a direct
    result of the Cybex/Trotter merger.
(g) Includes $2,734 of costs related to the Sharpsville plant closure, a
    $2,500 charge for acquired research and development and a $1,900 charge
    related to the arbitrator's decision in connection with the dispute with
    Fuqua.
(h) Includes $6,570 of pre-tax charges ($3,958, on an after-tax basis) for
    nonrecurring or merger-related costs comprised of the items listed in (c)
    and (d) above.
(i) Includes $14,108 of pre-tax charges ($9,465, on an after-tax basis) for
    nonrecurring or merger-related costs comprised of the items listed in (e),
    (f) and (g) above.
 
<TABLE>
<CAPTION>
                                                    December 31,
                                      -----------------------------------------
                                        1998    1997    1996    1995     1994
                                      -------- ------- ------- -------  -------
                                                   (in thousands)
<S>                                   <C>      <C>     <C>     <C>      <C>
Balance Sheet Data:
Working capital...................... $ 18,772 $19,013 $ 4,205 $ 5,206  $   594
Total assets.........................  107,897  78,725  20,367  21,067   19,306
Long-term debt.......................   38,926  13,639  11,369  14,825    3,900
Stockholders' equity (deficit).......   39,928  38,908   1,396    (572)   4,263
</TABLE>
 
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
        RESULTS OF OPERATIONS
 
OVERVIEW
 
  Cybex International, Inc. (the "Company" or "Cybex"), a New York
Corporation, is a strength and cardiovascular fitness equipment company which
develops, manufactures and markets premium performance, professional quality,
human performance products for the commercial and consumer markets. Cybex is
comprised of three formerly independent companies, Cybex, Trotter Inc.
("Trotter") and Tectrix Fitness Equipment, Inc. ("Tectrix").
 
  On May 21, 1998, Cybex entered into an agreement with Tectrix and its
stockholders whereby Cybex acquired all of the outstanding Common Stock of
Tectrix (the "Acquisition"). In connection with the Acquisition, the Company
discontinued Tectrix's Virtual Reality products and treadmill development
program, closed its Cambridge, Massachusetts research and development facility
and is closing Tectrix's two international sales offices.
 
  On May 23, 1997, the merger between a wholly owned subsidiary of Cybex and
Trotter was consummated (the "Merger") with Trotter surviving the Merger as a
subsidiary of Cybex. This transaction was accounted for as a purchase with
Trotter deemed to be the acquiring company for accounting purposes and,
therefore, the surviving company for financial reporting purposes.
 
RESULTS OF OPERATIONS
 
  In connection with the Acquisition in May 1998 and the Merger in May 1997,
the Company has incurred unusual and nonrecurring charges for the years ended
December 31, 1998 and 1997.
 
                                      10
<PAGE>
 
  Pre-tax unusual or nonrecurring charges for the twelve months ended December
31, 1998 totaled $6,570,000, or $.45 per share ($3,570,000 incurred in the
second quarter of 1998 primarily related to the acquisition and integration of
Tectrix and the elimination of the Reactor product line and $3,000,000
incurred in the fourth quarter of 1998 in connection with the Fuqua litigation
settlement). Pre-tax unusual or nonrecurring charges for the twelve months
ended December 31, 1997 totaled $14,108,000, or $1.36 per share ($12,208,000
incurred in the second quarter of 1997 reflecting plant closures, acquired
research and development and other costs considered unusual or a direct result
of the Merger and $1,900,000 incurred in the fourth quarter related to the
Fuqua arbitration settlement). The following table sets forth selected items
from the Consolidated Statements of Operations as a percentage of net sales,
exclusive of unusual or nonrecurring Acquisition-related and Merger-related
charges.
 
<TABLE>
<CAPTION>
                                                   Year Ended December 31,
                                                   ---------------------------
                                                    1998      1997      1996
                                                   -------   -------   -------
   <S>                                             <C>       <C>       <C>
   Net sales......................................     100%      100%      100%
   Cost of sales..................................      60        57        62
                                                   -------   -------   -------
   Gross profit...................................      40        43        38
   Selling, general and administrative expenses...      32        34        29
                                                   -------   -------   -------
   Operating income...............................       8         9         9
   Interest expense (net).........................      (1)       (1)       (2)
                                                   -------   -------   -------
   Income before income taxes.....................       7%        8%        7%
                                                   =======   =======   =======
</TABLE>
 
YEAR ENDED DECEMBER 31, 1998 VS. YEAR ENDED DECEMBER 31, 1997
 
NET SALES
 
  For the year ended December 31, 1998, the Company's net sales increased to
$127,575,000 from $90,234,000 for the year ended December 31, 1997. This
increase is directly due to the Merger and Acquisition as the 1998 period
includes a full year of Cybex sales (Trotter and Cybex) and seven months of
Tectrix sales while the 1997 period includes a full year of Trotter sales and
only seven months of Cybex sales.
 
GROSS PROFIT
 
  Gross profit increased to $49,870,000 for the year ended December 31, 1998
from $36,133,000 for the year ended December 31, 1997. The increase is
primarily due to the Merger and Acquisition including a decrease in charges
for unusual or nonrecurring merger and acquisition related costs from
$2,375,000 in 1997 to $672,000 in 1998. Gross profit, excluding nonrecurring
charges, as a percentage of net sales, declined to 40% for 1998 from 43% for
1997. The decline in gross profit as a percentage of sales is primarily due to
higher warranty costs in 1998 and the inclusion of the results of Tectrix,
which have historically had lower margins.
 
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
 
  Selling, general and administrative expenses increased to $40,280,000 for
the year ended December 31, 1998 from $35,069,000 for the year ended December
31, 1997, primarily as a result of the Merger and Acquisition. Selling,
general and administrative expense, excluding the $4,599,000 one-time charge
in 1997, as a percent of net sales, decreased to 32% for 1998, from 34% for
1997. The percentage decline in 1998 is primarily due to cost containment
efforts and synergies from the Merger and Acquisition.
 
NONRECURRING CHARGES
 
  Nonrecurring charges of $5,898,000 during 1998 include $3,000,000 related to
the Fuqua litigation, $1,435,000 of costs related to the elimination of the
Cybex bike, $952,000 of costs related to the elimination of the Reactor
product line and $511,000 of other nonrecurring costs considered unusual or a
direct result of the Tectrix acquisition.
 
                                      11
<PAGE>
 
  Nonrecurring charges of $7,134,000 during 1997 include $2,734,000 of costs
related to closing the Sharpsville manufacturing plant (primarily the write-
off of goodwill and other intangibles, severance costs and lease termination
costs), $2,500,000 for the write-off of in-process research and development
acquired in the Merger and $1,900,000 of costs related to the Fuqua
arbitration settlement.
 
INTEREST INCOME
 
  Interest income increased to $723,000 for the year ended December 31, 1998
from $427,000 for the year ended December 31, 1997 due primarily to a larger
cash balance in 1998.
 
INTEREST EXPENSE
 
  Interest expense increased to $2,405,000 for the year ended December 31,
1998 from $1,188,000 for the year ended December 31, 1997. The increase is due
to larger average outstanding debt balances during 1998 as a result of
borrowings incurred in connection with the Acquisition.
 
INCOME TAX PROVISION (BENEFIT)
 
  The Company's effective tax rate was 49% for the year ended December 31,
1998 versus 23% for the year ended December 31, 1997. The 1998 rate exceeds
statutory rates due to the impact of permanent differences of primarily non-
deductible goodwill amortization, while the 1997 rate is below statutory rates
due primarily to the write-off of acquired in-process research and development
which is not deductible for income tax purposes.
 
YEAR ENDED DECEMBER 31, 1997 VS. YEAR ENDED DECEMBER 31, 1996
 
NET SALES
 
  Net sales increased to $90,234,000 for the year ended December 31, 1997 from
$47,605,000 for the year ended December 31, 1996. The increase is primarily
due to the combined operations of Trotter and Cybex after the 1997 Merger,
while 1996 includes only Trotter results.
 
GROSS PROFIT
 
  Gross profit increased to $36,133,000 for the year ended December 31, 1997
from $18,064,000 for the year ended December 31, 1996. As a percentage of net
sales and excluding $2,375,000 of one-time charges in 1997, gross profit
increased to 43% in 1997 from 38% in 1996. This improvement was primarily due
to the Merger along with a more favorable product mix as well as certain
productivity improvements.
 
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
 
  Selling, general and administrative expenses increased to $35,069,000 for
the year ended December 31, 1997 from $13,797,000 for the year ended December
31, 1996 primarily as a result of the Merger. Selling, general and
administrative expense, excluding the $4,599,000 one-time charge, as a percent
of net sales, increased to 34% for 1997, from 29% for 1996. The percentage
increase in 1997 is primarily due to the addition of Cybex's results (whose
business historically had higher sales and marketing costs due to its direct
distribution system).
 
NONRECURRING CHARGES
 
  The nonrecurring charges of $7,134,000 during 1997 include $2,734,000 of
costs related to closing the Sharpsville manufacturing plant (primarily the
write-off of goodwill and other intangibles, severance costs and lease
termination costs), $2,500,000 for the write-off of in-process research and
development acquired in the Merger and $1,900,000 of costs related to the
Fuqua arbitration settlement.
 
INTEREST EXPENSE
 
  Interest expense increased to $1,188,000 for the year ended December 31,
1997 from $1,004,000 for the year ended December 31, 1996. The increase is due
to a higher level of outstanding indebtedness in 1997.
 
                                      12
<PAGE>
 
INCOME TAX PROVISION (BENEFIT)
 
  The Company's effective tax rate was 23% for the year ended December 31,
1997 versus 41% for the year ended December 31, 1996. The 1997 tax benefit
rate is below statutory rates due to the write-off of acquired in-process
research and development which is not deductible for tax purposes and
permanent differences.
 
LIQUIDITY AND CAPITAL RESOURCES
 
  Cash and cash equivalents decreased to $1,899,000 at December 31, 1998 from
$6,689,000, at December 31, 1997. For the year ended December 31, 1998, net
cash used in operating activities was $1,855,000 compared to net cash used in
operating activities of $2,301,000 for the year ended December 31, 1997.
 
  Cash used in investing activities of $28,990,000 for the year ended December
31, 1998, resulted primarily from the $21,331,000 Acquisition and $7,659,000
of purchased property, plant and equipment, primarily comprised of a new
Enterprise Resource Planning System ("ERP") and the construction and
furnishing of the Cybex Institute, where all Company products are available
for customer training and demonstration within the Medway facility. As a
result of the Acquisition, goodwill increased from $10,785,000 at December 31,
1997 to $30,208,000 at December 31, 1998.
 
  Cash provided by financing activities was $26,055,000 for the year ended
December 31, 1998 comprised primarily of the net proceeds from the Credit
Agreement and the sale of lease receivables.
 
  On May 21, 1998, the Company entered into a Credit Agreement with several
banks that consisted of a $26,700,000 revolving loan and a $25,000,000 term
loan replacing its existing Loan and Security Agreement. At December 31, 1998,
there was $16,428,000 available under the revolving loan. The Company's debt-
to-equity ratio increased to .97-to-1 at December 31, 1998 from 0.3-to-1 at
December 31, 1997. Additionally, the Company's finance subsidiary is expected
to continue to support working capital requirements through periodic sales of
its lease portfolios to third party financial institutions.
 
  Management believes that the cash flow from its operations and available
borrowings under its line of credit will be sufficient to meet its general
working capital and capital expenditure requirements in the near term.
 
YEAR 2000
 
  The year 2000 computer issue creates certain risks for the Company,
including the functionality of internal systems and the availability of key
products and services.
 
  Following the 1997 Merger, the Company performed an analysis of its then
current information technology ("IT") and non-information technology systems
("NIT") for manufacturing, finance, sales and marketing and human resources.
Such analysis led to a decision in late 1997 to replace all IT systems in
their entirety. Commencing in 1998, the Company began the installation of a
new ERP System and currently anticipates full implementation in 1999. The
Company expects the ERP system to be Year 2000 compliant. In the NIT area, the
Company has conducted an analysis of its operations to identify potential
problems and is in the process of remedial action on an as needed basis.
 
  The Company has also surveyed its suppliers of products and services to
determine that the suppliers operations are year 2000 capable, or where
applicable, to monitor their progress towards year 2000 compatibility and to
identify alternative suppliers.
 
  In addition, the Company has commenced work on contingency planning to
address potential problem areas with internal systems, suppliers and other
third parties. It is expected that assessment, remediation and contingency
planning activities will be ongoing throughout the remainder of 1999 with the
goal of appropriately resolving all identifiable material internal systems and
third party issues in 1999.
 
                                      13
<PAGE>
 
  Committed costs to date related to these replacement programs approximate
$6.0 million. The Company currently expects that the total cost of these
programs, including both incremental spending and redeployed resources, will
approximate $6.5 million. The total cost estimate does not include potential
costs related to any customer or other third party claims.
 
  Based on currently available information, management does not believe that
the year 2000 matters discussed above related to internal systems or products
sold to customers will have a material adverse impact on the Company's
financial condition or overall trends in results of operations; however, it is
uncertain to what extent the Company may be affected by such matters. In
addition, there can be no assurance that the failure to ensure year 2000
capability by a supplier or another third party would not have a material
adverse effect on the Company.
 
CAUTIONARY STATEMENT FOR FORWARD LOOKING INFORMATION
 
  Statements included in this Management's Discussion and Analysis of
Financial Condition and Results of Operations may contain forward-looking
statements. There are a number of risks and uncertainties that could cause
actual results to differ materially from those anticipated by the statements
made above. These include, but are not limited to, competitive factors,
technological and product developments, market demand, and uncertainties
relating to the consolidation of the merged and acquired companies'
businesses. Further information on these and other factors which could affect
the Company's financial results can be found in the Company's Reports filed
with the Securities and Exchange Commission on Form 10-Q for the nine months
ended September 26, 1998, Form 8-K filed June 2, 1998 and its proxy statement
dated April 3, 1998.
 
ITEM 7a. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
 
  The table below sets forth information about the Company's financial
instruments including debt obligations and an interest rate swap. For debt
obligations, the table presents principal cash flows and related weighted
average interest rates by expected maturity dates. For interest rate swaps,
the table presents notional amounts and weighted average interest rates by
contractual maturity dates. Notional amounts are used to calculate the
contractual payments to be exchanged under the contract. Weighted average
variable rates are based on implied forward rates in the yield curve at the
reporting date.
 
<TABLE>
<CAPTION>
                                           Expected Maturity Date
                         ---------------------------------------------------------------
                                                December 31,
                         ---------------------------------------------------------------
                            1999         2000         2001         2002         2003      Thereafter      Total     Fair Value
                         -----------  -----------  -----------  -----------  -----------  -----------  -----------  -----------
<S>                      <C>          <C>          <C>          <C>          <C>          <C>          <C>          <C>
Debt obligations
 Long-term debt
  Fixed rate............ $   452,000  $   322,000  $ 2,152,000          --           --           --   $ 2,926,000  $ 2,926,000
 Weighted average
  interest rate.........        9.21%        9.07%        5.99%         --           --           --          6.82%         --
 Variable rate.......... $ 3,300,000  $ 4,300,000  $ 5,300,000  $ 6,300,000  $ 7,300,000  $ 9,500,000  $36,000,000  $36,000,000
 Weighted average
  interest rate.........        6.82%        7.01%        7.16%        7.13%        7.26%        7.06%        7.10%         --
Interest rate
 derivatives
Variable to fixed:
 Notional amount........ $22,000,000  $18,000,000  $13,000,000  $ 7,000,000          --           --           --           --
 Average pay rate
  (fixed)...............        5.04%        5.04%        5.04%        5.04%         --           --           --           --
 Average receive rate
  (variable)............        5.11%        5.24%        5.36%        5.29%        5.40%         --           --           --
</TABLE>
 
                                      14
<PAGE>
 
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
 
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULE
 
<TABLE>
<S>                                                                          <C>
Report of Independent Public Accountants.................................... F-2
Consolidated Financial Statements:
  Consolidated Balance Sheets............................................... F-3
  Consolidated Statements of Operations..................................... F-4
  Consolidated Statements of Stockholders' Equity........................... F-5
  Consolidated Statements of Cash Flows..................................... F-6
  Notes to Consolidated Financial Statements................................ F-7
Consolidated Financial Statement Schedule:
  II. Valuation and Qualifying Accounts..................................... S-1
</TABLE>
 
  All schedules for which provision is made in the applicable accounting
regulation of the Securities and Exchange Commission that are not required
under the related instructions or are inapplicable have been omitted.
 
                                      F-1
<PAGE>
 
                   REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
 
To Cybex International, Inc.:
 
  We have audited the accompanying consolidated balance sheets of Cybex
International, Inc. and subsidiaries as of December 31, 1998 and 1997, and the
related consolidated statements of operations, stockholders' equity and cash
flows for each of the three years in the period ended December 31, 1998. These
financial statements and the schedule referred to below 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 financial position of Cybex International, Inc.
and subsidiaries as of December 31, 1998 and 1997, and the 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.
 
  Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The schedule listed in the Index to
Consolidated Financial Statements and Schedule is presented for purposes of
complying with the Securities and Exchange Commission's rules and is not part
of the basic financial statements. This schedule has been subjected to the
auditing procedures applied in our audit of the basic financial statements
and, in our opinion, fairly states in all material respects the financial data
required to be set forth therein in relation to the basic financial statements
taken as a whole.
 
                                          Arthur Andersen LLP
 
Philadelphia, PA
February 12, 1999
 
                                      F-2
<PAGE>
 
                   CYBEX INTERNATIONAL, INC. AND SUBSIDIARIES
 
                          CONSOLIDATED BALANCE SHEETS
                    (in thousands, except share information)
 
<TABLE>
<CAPTION>
                                                               December 31,
                                                             -----------------
                                                               1998     1997
                                                             --------  -------
<S>                                                          <C>       <C>
                           ASSETS
Current Assets:
  Cash and cash equivalents................................. $  1,899  $ 6,689
  Accounts receivable, net of allowance of $3,336 and
   $2,615...................................................   28,627   21,906
  Lease receivables.........................................      694    1,200
  Inventories...............................................   10,715    6,980
  Deferred income taxes.....................................    5,669    6,913
  Prepaid expenses and other................................    1,672    3,217
                                                             --------  -------
    Total current assets....................................   49,276   46,905
Property, plant and equipment, net..........................   18,467   13,103
Lease receivables...........................................      500      999
Goodwill, net...............................................   30,208   10,785
Deferred income taxes.......................................    6,515    5,960
Other assets................................................    2,931      973
                                                             --------  -------
                                                             $107,897  $78,725
                                                             ========  =======
            LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
  Current maturities of long-term debt...................... $  3,752  $ 2,954
  Accounts payable..........................................    7,610    5,192
  Accrued expenses..........................................   17,933   18,305
  Income taxes payable......................................    1,209    1,441
                                                             --------  -------
    Total current liabilities...............................   30,504   27,892
Long-term debt..............................................   35,174   10,685
Accrued warranty obligation.................................    2,291    1,240
                                                             --------  -------
    Total liabilities.......................................   67,969   39,817
                                                             --------  -------
Commitments and contingencies (Notes 3, 10 and 13)
Stockholders' Equity:
  Common Stock, $.10 par value, 20,000,000 shares autho-
   rized, 8,894,724 and 8,853,756 shares issued.............      889      885
  Additional paid-in capital................................   44,549   44,189
  Treasury stock, at cost (216,058 and 189,707 shares)......   (2,252)  (1,890)
  Retained earnings (accumulated deficit)...................   (3,258)  (4,276)
                                                             --------  -------
    Total stockholders' equity..............................   39,928   38,908
                                                             --------  -------
                                                             $107,897  $78,725
                                                             ========  =======
</TABLE>
 
        The accompanying notes are an integral part of these statements.
 
                                      F-3
<PAGE>
 
                  CYBEX INTERNATIONAL, INC. AND SUBSIDIARIES
 
                     CONSOLIDATED STATEMENTS OF OPERATIONS
                     (in thousands, except per share data)
 
<TABLE>
<CAPTION>
                                                Year Ended December 31,
                                                -------------------------------
                                                1998(1)     1997(2)      1996
                                                --------    -------     -------
<S>                                             <C>         <C>         <C>
Net sales.....................................  $127,575    $90,234     $47,605
Cost of sales.................................    77,705(a)  54,101 (c)  29,541
                                                --------    -------     -------
  Gross profit................................    49,870     36,133      18,064
Selling, general and administrative expenses..    40,280     35,069 (d)  13,797
Nonrecurring charges..........................     5,898(b)   7,134 (e)     --
                                                --------    -------     -------
  Operating income (loss).....................     3,692     (6,070)      4,267
Interest income...............................       723        427          49
Interest expense..............................    (2,405)    (1,188)     (1,004)
                                                --------    -------     -------
Income (loss) before income taxes.............     2,010     (6,831)      3,312
Income tax provision (benefit)................       992     (1,586)      1,344
                                                --------    -------     -------
Net income (loss).............................  $  1,018    $(5,245)    $ 1,968
                                                ========    =======     =======
Basic earnings (loss) per share...............  $    .12    $  (.76)    $   .46
                                                ========    =======     =======
Diluted earnings (loss) per share.............  $    .12    $  (.76)    $   .45
                                                ========    =======     =======
</TABLE>
--------
 
(1) 1998 includes the results of Tectrix from the May 21, 1998 acquisition
date (see Note 1).
(2) 1997 includes the results of Trotter plus the results of Cybex from the
    May 23, 1997 merger date (see Note 1).
(a) Includes $300 of costs related to the Cybex bike and $372 of costs related
    to the elimination of the Reactor product line, both of which are
    considered unusual or nonrecurring.
(b) Includes $3,000 of costs related to the Fuqua litigation, $1,435 of costs
    related to the Cybex bike, $952 of costs related to the elimination of the
    Reactor product line and $511 of other nonrecurring costs considered
    unusual or a direct result of the Tectrix acquisition.
(c) Includes $2,375 of costs considered unusual or nonrecurring, or a direct
    result of the Cybex / Trotter Merger.
(d) Includes $4,599 of costs considered unusual or nonrecurring, or a direct
    result of the Cybex / Trotter Merger.
 
(e)  Includes $2,734 of costs related to the Sharpsville plant closure, a
     $2,500 charge for acquired research and development and a $1,900 charge
     related to the arbitrators decision in connection with the dispute with
     Fuqua.
 
 
       The accompanying notes are an integral part of these statements.
 
                                      F-4
<PAGE>
 
                   CYBEX INTERNATIONAL, INC. AND SUBSIDIARIES
 
                CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
                                 (in thousands)
 
<TABLE>
<CAPTION>
                                                               Retained
                                                               Earnings   Total
                            Common Stock  Additional           (Accum-    Stock-
                            -------------  Paid-in   Treasury   ulated   holder's
                            Shares Amount  Capital    Stock    Deficit)   Equity
                            ------ ------ ---------- --------  --------  --------
<S>                         <C>    <C>    <C>        <C>       <C>       <C>
Balance, December 31,
 1995...................... 4,273   $427   $   --    $   --    $  (999)  $  (572)
  Net income...............   --     --        --        --      1,968     1,968
                            -----   ----   -------   -------   -------   -------
Balance, December 31,
 1996...................... 4,273    427       --        --        969     1,396
  Merger between Trotter
   Inc. and Cybex
   International, Inc...... 4,512    451    43,448    (1,442)      --     42,457
  Exercise of stock
   options.................    60      6       643      (486)      --        163
  Common stock issued to
   Directors...............     9      1        98        38       --        137
  Net loss.................   --     --        --        --     (5,245)   (5,245)
                            -----   ----   -------   -------   -------   -------
Balance, December 31,
 1997...................... 8,854    885    44,189    (1,890)   (4,276)   38,908
  Exercise of stock
   options.................    33      3       325       (70)      --        258
  Common stock issued to
   Directors...............     8      1        35        21       --         57
  ESOP distribution........   --     --        --       (313)      --       (313)
  Net income...............   --     --        --        --      1,018     1,018
                            -----   ----   -------   -------   -------   -------
Balance, December 31,
 1998...................... 8,895   $889   $44,549   $(2,252)  $(3,258)  $39,928
                            =====   ====   =======   =======   =======   =======
</TABLE>
 
 
        The accompanying notes are an integral part of these statements.
 
                                      F-5
<PAGE>
 
                   CYBEX INTERNATIONAL, INC. AND SUBSIDIARIES
 
                     CONSOLIDATED STATEMENTS OF CASH FLOWS
                                 (in thousands)
 
<TABLE>
<CAPTION>
                                                       Year Ended December
                                                               31,
                                                      ------------------------
                                                       1998     1997     1996
                                                      -------  -------  ------
<S>                                                   <C>      <C>      <C>
OPERATING ACTIVITIES:
  Net income (loss).................................. $ 1,018  $(5,245) $1,968
  Adjustments to reconcile net income (loss) to net
   cash provided by (used in) operating activities:
    Depreciation and amortization....................   3,241    2,324   1,269
    Deferred income taxes............................     992   (2,620)   (447)
    Provisions for losses on accounts and lease
     receivables.....................................   1,683    2,071     567
    Write-off of intangibles, fixed assets and in-
     process research and development                   1,659    4,877     --
    Changes in operating assets and liabilities, net
     of effect of the Cybex/Trotter merger and
     Tectrix acquisition:
      Accounts receivable............................  (4,601)  (1,084)     60
      Lease receivables..............................  (2,246)    (678)    --
      Inventories....................................     421     (602)    225
      Prepaid expenses and other.....................     397    1,972     253
      Accounts payable, accrued liabilities and other
       current liabilities...........................  (4,419)  (3,316)    927
                                                      -------  -------  ------
    NET CASH PROVIDED BY (USED IN) OPERATING
     ACTIVITIES......................................  (1,855)  (2,301)  4,822
                                                      -------  -------  ------
INVESTING ACTIVITIES:
  Purchases of property, plant and equipment.........  (7,659)  (1,610)   (605)
  Cash acquired in Cybex/Trotter Merger, net of
   transaction costs of $1,645.......................     --       705     --
  Cash paid for Tectrix stock, net of cash acquired
   of $143 and including transaction costs of $414... (21,331)     --      --
  Proceeds from sale of acquired assets held for
   sale, net.........................................     --     6,837     --
                                                      -------  -------  ------
    NET CASH PROVIDED BY (USED IN) INVESTING
     ACTIVITIES...................................... (28,990)   5,932    (605)
                                                      -------  -------  ------
FINANCING ACTIVITIES:
  Proceeds from sales of lease receivables...........   3,252    4,288     --
  Proceeds from long-term debt.......................  25,000      --       75
  Principal payments of long-term debt...............  (9,528)  (2,886) (1,406)
  Net borrowings (repayments) under revolving loan...   7,900      --   (2,125)
  Deferred financing costs...........................    (571)    (125)    --
  Remittances from (repayments to) related party.....     --       --      890
  Purchase of treasury stock from ESOP...............    (313)     --      --
  Exercise of stock options..........................     315      125     --
                                                      -------  -------  ------
    NET CASH PROVIDED BY (USED IN) FINANCING
     ACTIVITIES......................................  26,055    1,402  (2,566)
                                                      -------  -------  ------
NET INCREASE (DECREASE) IN CASH AND CASH
 EQUIVALENTS.........................................  (4,790)   5,033   1,651
CASH AND CASH EQUIVALENTS, beginning of year.........   6,689    1,656       5
                                                      -------  -------  ------
CASH AND CASH EQUIVALENTS, end of year............... $ 1,899  $ 6,689  $1,656
                                                      =======  =======  ======
</TABLE>
 
        The accompanying notes are an integral part of these statements.
 
 
                                      F-6
<PAGE>
 
                  CYBEX INTERNATIONAL, INC. AND SUBSIDIARIES
 
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                               December 31, 1998
 
NOTE 1--BACKGROUND AND BASIS OF PRESENTATION
 
  Cybex International, Inc. (the "Company" or "Cybex"), a New York
Corporation, is a strength and cardiovascular fitness equipment company which
develops, manufactures and markets premium performance, professional quality,
human performance products for the commercial and consumer markets. Cybex is
comprised of three formerly independent companies, Cybex, Trotter Inc.
("Trotter") and Tectrix Fitness Equipment, Inc. ("Tectrix").
 
  On May 21, 1998, Cybex entered into an agreement (the "Agreement") with
Tectrix and its stockholders whereby Cybex acquired all of the outstanding
Common Stock of Tectrix (the "Acquisition"). The purchase price consisted of
cash of $21,060,000, of which $2,670,000 was used to repay Tectrix debt, and a
promissory note in the amount of $1,915,000. In addition, the selling
stockholders have the right to receive aggregate additional payments of up to
$6,600,000 based on Tectrix's post-closing margin performance during the
three-year period following the Acquisition. The Acquisition has been
accounted for using the purchase method of accounting and the parties have
made a Section 338(h)10 election for the Acquisition to be accounted for as an
asset purchase for income tax purposes. In order to fund the Acquisition,
Cybex entered into a credit agreement, which provides for a term loan of
$25,000,000 and revolving loans of up to $26,700,000 (see Note 5).
 
  In connection with the Acquisition, the Company discontinued Tectrix's
Virtual Reality products and treadmill development program, closed its
Cambridge, Massachusetts research and development facility and is closing
Tectrix's two international sales offices. The costs associated with the
discontinuance of the Virtual Reality and treadmill product lines, as well as
the exit costs of the international sales offices, have been included in the
application of purchase accounting by the Company. The Company also
discontinued the manufacture of Cybex branded bikes in connection with the
Acquisition, thereby eliminating a duplicate product line. The costs to
discontinue the Cybex bike have been charged to the statement of operations in
the second quarter of 1998 (see Note 4).
 
  On May 23, 1997, the merger between a wholly owned subsidiary of Cybex and
Trotter was consummated (the "Merger") with Trotter surviving the Merger as a
subsidiary of Cybex. This transaction was accounted for as a purchase with
Trotter deemed to be the acquiring company for accounting purposes and,
therefore, the surviving company for financial reporting purposes. Pursuant to
the terms of the Merger, 4,273,056 shares of the Company's Common Stock were
issued to a subsidiary of UM Holdings, Ltd. (UM)., the sole stockholder of
Trotter, in exchange for all of the issued and outstanding Trotter shares.
Additionally, options to purchase Trotter shares were converted to options to
purchase 436,920 shares of Company Common Stock, using the exchange ratio
implied in the Merger of 1.1244884-to-1.0. All historical share amounts have
been retroactively adjusted to reflect the exchange. The purchase price of the
Merger was $44,102,000, which consists of the $42,457,000 market value of
Cybex Common Stock (4,381,555 shares outstanding multiplied by the $9.69 per
share five day average share price ending December 31, 1996) and transaction
costs of $1,645,000.
 
  The following table summarizes the unaudited pro forma combined results of
operations for the years ended December 31, 1998 and 1997 as if the Merger and
Acquisition had occurred on January 1, 1997. The pro forma information does
not purport to be indicative of the results that would have been attained if
the operations had actually been combined during the periods presented:
 
<TABLE>
<CAPTION>
                                                   Year Ended December 31,
                                                  -------------------------
                                                      1998         1997
                                                  ------------ ------------
                                                         (unaudited)
<S>                                               <C>          <C>
Net sales........................................ $138,466,000 $143,666,000(1)
Operating income (loss)..........................    7,930,000   (1,191,000)
Net income (loss)................................    3,111,000   (2,546,000)
Basic and diluted earnings (loss) per share......          .36         (.29)
Shares used in computing earnings (loss) per
 share...........................................    8,671,000    8,664,000
</TABLE>
 
 
                                      F-7
<PAGE>
 
                  CYBEX INTERNATIONAL, INC. AND SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
 
NOTE 1--BACKGROUND AND BASIS OF PRESENTATION (continued)
 
--------
(1) Pro forma sales for the year ended December 31, 1997 include $7,060,000 of
    isokinetic product sales. The isokinetic product line was acquired as part
    of the Merger and was sold on September 30, 1997.
 
  The pro forma data for the year ended December 31, 1998 excludes net sales,
cost of sales and other direct costs associated with the Tectrix Virtual
Reality product and other adjustments as a direct result of the Acquisition.
The data does not include $1,435,000, ($832,000, or $0.10 per share on an
after-tax basis) of nonrecurring charges expensed by the Company in the second
quarter of 1998 related to the Cybex bike and $3,000,000, ($1,740,000, or
$0.20 per share on an after-tax basis) of nonrecurring charges expenses by the
Company in the fourth quarter of 1998 related to the Fuqua litigation
settlement (see Note 3) but includes $2,135,000, ($1,238,000, or $0.16 per
share on an after-tax basis), of unusual costs primarily related to the
elimination of the Reactor product line.
 
  The pro forma data for the year ended December 31, 1997 excludes net sales,
cost of sales and other direct costs associated with Cybex's pre-merger
treadmill product line, and the Tectrix Virtual Reality product line and
adjustments for certain duplicate costs, which were eliminated as a direct
result of the Merger and Acquisition. Pro forma sales for the year ended
December 31, 1997 include $7,060,000 of isokinetic product sales. The
isokinetic product line was acquired as part of the Cybex merger and was sold
on September 30, 1997. The data does not include $7,134,000, ($5,280,000, or
$0.61 per share on an after-tax basis) of nonrecurring charges expensed by the
Company in the second quarter of 1997 related to the Sharpsville plant
closure, acquired research and development expenses and the settlement of the
Fuqua arbitration, but includes $6,974,000, ($4,185,000, or $0.48 per share on
an after-tax basis), of unusual and nonrecurring merger related costs related
primarily to conforming to new accounting and operating policies of the merged
companies, including reorganizing the Company's domestic and international
sales operations and manufacturing initiatives aimed at achieving the full
benefit of synergies.
 
NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 
 Principles of Consolidation
 
  The consolidated financial statements include the accounts of the Company
and its subsidiaries, after elimination of all significant intercompany
accounts and transactions.
 
 Cash and cash equivalents
 
  The Company considers all highly liquid investments with an original
maturity of three months or less when purchased to be cash equivalents.
 
 Inventories
 
  Inventories are valued at the lower of cost (first in, first out) or market.
Costs include materials, labor and manufacturing overhead. Inventories are
summarized as follows (in thousands):
 
<TABLE>
<CAPTION>
                                                               December 31,
                                                          ----------------------
                                                             1998        1997
                                                          ----------- ----------
     <S>                                                  <C>         <C>
     Finished goods...................................... $ 3,741,000 $1,199,000
     Work in process.....................................   1,251,000  1,137,000
     Raw materials.......................................   5,723,000  4,644,000
                                                          ----------- ----------
                                                          $10,715,000 $6,980,000
                                                          =========== ==========
</TABLE>
 
 
                                      F-8
<PAGE>
 
                  CYBEX INTERNATIONAL, INC. AND SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
 
NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
 
 Property and equipment
 
  Property and equipment are recorded at cost. Depreciation is calculated
using the straight-line method based on estimated useful lives for financial
statement purposes and various prescribed methods for tax purposes. The
estimated useful lives for financial statement purposes are 25 years for
buildings and improvements and 3 to 10 years for equipment and furniture.
 
 Impairment of Long-Lived Assets
 
  The Company continually evaluates whether later events and circumstances
have occurred that indicate that the remaining estimated useful life of long-
lived assets and intangible assets may warrant revision or that the remaining
balance may not be recoverable. When factors indicate that such assets should
be evaluated for possible impairment, the Company uses an estimate of the
related future undiscounted cash flow in measuring whether the asset should be
written down to fair value. As of December 31, 1998, management believes that
no revision to the remaining useful lives or write-down of such assets is
required.
 
 Goodwill
 
  Goodwill is being amortized over periods ranging from 30 to 40 years. As of
December 31, 1998 and 1997, accumulated amortization was $1,500,000 and
$726,000, respectively. Amortization expense for the years ended December 31,
1998, 1997 and 1996 was $774,000, $293,000 and $130,000, respectively.
 
 Other Assets
 
  At December 31, 1998, other assets included recoverable income taxes,
deferred financing costs, prepaid insurance, intangibles and other long term
deposits. Amortization expense of other intangibles were $320,000, $417,000
and $295,000 for the years ended December 31, 1998, 1997 and 1996,
respectively.
 
 Deferred Financing
 
  In connection with the financing described in Note 5, the Company has
capitalized debt issuance costs consisting of brokerage and legal fees,
totaling $571,000 which are included as other assets at December 31, 1998. The
Company is amortizing these costs on a straight line basis which approximates
the effective interest rate method over the term of the related debt.
Accumulated amortization and amortization expense was $60,000 as of December
31, 1998.
 
 Fair Value of Financial Instruments
 
  The company's financial instruments consist primarily of cash and cash
equivalents, accounts receivable, accounts payable, accrued expenses, and debt
instruments. The book values of cash and cash equivalents, accounts
receivable, accounts payable, and accrued expenses are considered to be
representative of their respective fair values. Based on the terms of the
Company's debt instruments that are outstanding as of December 31, 1998, the
carrying values are considered to approximate their respective fair values.
See Note 5 for the terms and carrying value of the Company's various debt
instruments.
 
 Concentration of Credit Risk and Export Sales
 
  The majority of the Company's customers are specialty fitness-related
dealers, health clubs, and consumers located in the United States. Financial
instruments that potentially subject the Company to concentrations of
 
                                      F-9
<PAGE>
 
                  CYBEX INTERNATIONAL, INC. AND SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
 
NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
 
credit risk consist primarily of trade accounts and lease receivables. No
single customer accounted for more than 10% of the Company's net sales for the
year ended December 31, 1998 and 1997. For the year ended December 31, 1996,
one customer accounted for 11% of net sales. There is no single geographic
area of significant concentration, and the Company utilizes third-party
insurers for certain trade accounts receivable. Export sales accounted for
approximately 18%, 18% and 14% of total net sales for the years ended December
31, 1998, 1997 and 1996, respectively.
 
 Accrued Warranty Obligations
 
The Company generally provides a three-year warranty on cardiovascular
products and a warranty on strength products that varies by components.
Warranty expense was $5,315,000, $3,269,000 and $1,968,000 for the years ended
December 31, 1998, 1997 and 1996 respectively. The accrued warranty obligation
is provided at the time of product sale based on management estimates which
are developed from historical information and certain assumptions about future
events which are subject to change.
 
 Revenue recognition
 
  Revenue is recorded when products are shipped.
 
 Advertising Costs
 
  The Company expenses advertising costs as incurred. For the years ended
December 31, 1998, 1997 and 1996, advertising expense was $3,696,000,
$2,712,000 and $1,610,000, respectively. Included in advertising expense is
the cost to reimburse certain customers for a portion of their advertising
costs under a cooperative advertising program. These obligations are accrued
when the related revenues are recognized.
 
 Research and Development Costs
 
  Research and development costs are charged to expense as incurred. Such
costs were $3,479,000, $2,616,000 and $1,167,000 for the years ended December
31, 1998, 1997 and 1996, respectively, exclusive of the 1997, $2,500,000
write-off of acquired in-process research and development. These expenditures
are included in selling, general and administrative expenses in the
accompanying consolidated statements of operations.
 
 Supplemental Cash Flow Disclosures
 
  Cash paid for interest was $2,173,000, $1,197,000 and $1,004,000 for the
years ended December 31, 1998, 1997 and 1996, respectively. Cash paid for
income taxes, including amounts paid to UM (see Note 7), was $187,000,
$1,663,000, and $1,235,000 for the years ended December 31, 1998, 1997 and
1996, respectively.
 
                                     F-10
<PAGE>
 
                  CYBEX INTERNATIONAL, INC. AND SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
 
NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
 
  The following table displays the net non-cash assets and liabilities that
were acquired in 1998 and 1997 as a result of the Acquisition and Merger,
respectively.
 
<TABLE>
<CAPTION>
                                                      Year Ended December 31
                                                     -------------------------
                                                        1998          1997
      <S>                                            <C>          <C>
                                                     -----------  ------------
      Non-cash assets (liabilities):
        Accounts receivable........................  $ 3,803,000  $ 14,989,000
        Lease receivables..........................          --      6,109,000
        Inventories................................    4,156,000     4,295,000
        Assets held for sale.......................          --      6,837,000
        Prepaid expenses and other.................      119,000     5,307,000
        Property, plant and equipment..............    1,058,000     8,810,000
        In process research and development........          --      2,500,000
        Intangibles and other assets...............      819,000     1,254,000
        Goodwill...................................   18,225,000    10,097,000
        Deferred income taxes......................      277,000     8,776,000
        Accounts payable and accrued expenses......   (5,211,000)  (23,710,000)
        Long-term debt.............................          --     (5,157,000)
                                                     -----------  ------------
                                                      23,246,000    40,107,000
      Issuance of common stock.....................          --    (42,457,000)
      Less note payable to seller..................   (1,915,000)          --
                                                     -----------  ------------
      Net cash paid (acquired).....................  $21,331,000  $ (2,350,000)
                                                     ===========  ============
</TABLE>
 
 Use of Estimates
 
  The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
 
 Income Taxes
 
  Income taxes are calculated using the liability method. Accordingly,
deferred tax assets and liabilities are recognized currently for the future
tax consequences attributable to differences between the financial statement
carrying amounts of assets and liabilities and their respective tax basis. The
effect on deferred tax assets and liabilities of a change in tax rates is
recognized in income in the period that includes the enactment date.
 
                                     F-11
<PAGE>
 
                  CYBEX INTERNATIONAL, INC. AND SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
 
NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
 
 Reclassifications
 
  Certain amounts reported in prior years have been reclassified to conform to
the current year's presentation.
 
 Earnings (loss) per common share
 
  The table below sets forth the reconciliation of the basic and diluted
earnings (loss) per share computations:
 
<TABLE>
<CAPTION>
                                                 Year Ended December 31
                                            ----------------------------------
                                               1998       1997         1996
                                            ---------- -----------  ----------
   <S>                                      <C>        <C>          <C>
   Net income (loss)....................... $1,018,000 $(5,245,000) $1,968,000
                                            ========== ===========  ==========
   Shares used in computing basic earnings
    (loss) per share.......................  8,671,000   6,937,000   4,273,000
   Dilutive effect of options..............     47,000         --      109,000
                                            ---------- -----------  ----------
   Shares used in computing diluted
    earnings (loss) per share..............  8,718,000   6,937,000   4,382,000
                                            ========== ===========  ==========
</TABLE>
 
  For the year ended December 31, 1998 and 1997, options to purchase 755,189
and 794,789 shares of Common Stock at exercise prices ranging from $4.31 to
$12.13 and $5.85 to $12.75 per share were outstanding, respectively, but not
included in the computation of diluted earnings per share as the result would
be anti-dilutive.
 
 Segment Reporting
 
  In June of 1997, the FASB issued SFAS No. 131, "Disclosure About Segments of
an Enterprise and Related Information". This statement establishes additional
standards for segment reporting in the financial statements and is effective
for fiscal years beginning after December 15, 1997. The Company operates in a
single business segment and, therefore, no additional disclosure is required.
 
NOTE 3--CONTINGENCY RELATED TO SALE OF BUSINESS
 
  Prior to the Merger, Lumex/Basic American Holdings, Inc. formerly known as
Fuqua Enterprises, Inc. ("Fuqua"), asserted a claim against the Company in
connection with the sale of substantially all of the assets of the Lumex
Division to Fuqua in 1996.
 
  At the Merger date, the Company provided a reserve for the Fuqua claim based
on the information available at that time in accordance with SFAS No. 38,
"Accounting for Pre-acquisition Contingencies of Purchased Enterprises". A
final decision with respect to the arbitration was received on February 13,
1998, awarding a payment of approximately $2,400,000, including interest, to
Fuqua. The Company recorded a $1,900,000 charge in the fourth quarter of 1997
related to the arbitration and accrued professional fees. While the
arbitration is complete, during 1997 Fuqua notified Cybex of a separate claim
for breaches of certain of Cybex's representations and warranties in the asset
sale agreement involving substantially the same matters submitted to the
arbitrator and in February 1998, Fuqua commenced an action with respect to
these and other matters in the State Courts of Georgia against the Company and
certain former executives. In February 1999, the Company entered into a final
settlement resolving all claims made by Fuqua against the Company and these
former executives. The Company has recognized a fourth quarter 1998 charge of
$3,000,000 representing the final settlement and related expenses.
 
                                     F-12
<PAGE>
 
                  CYBEX INTERNATIONAL, INC. AND SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
 
NOTE 4--UNUSUAL AND NONRECURRING MERGER-RELATED COSTS
 
  The statement of operations for the year ended December 31, 1998 includes
pre-tax charges totaling $6,570,000 ($3,958,000, or $.45 per share on an
after-tax basis) for unusual and nonrecurring items. This charge is comprised
of (i) $3,000,000 related to a final settlement with Fuqua (see Note 3) (ii)
$1,735,000 for asset write-downs and exit activities related to the
discontinuance of the Cybex branded bike in connection with the Tectrix
acquisition (iii) $1,324,000 for asset write-downs and exit activities related
to the discontinuance of the Reactor product line; (iv) $155,000 for the
write-off of deferred financing as a result of the refinancing of the
Company's debt in connection with the Tectrix acquisition (see Note 5) and (v)
$356,000 of other unusual costs. The costs associated with the discontinuance
of the Cybex branded bike include charges for the write-off of specific
tooling ($919,000), the write-off of obsolete inventory ($516,000) and a
provision for unusual warranty costs ($300,000), which is included as part of
cost of sales. The costs associated with the discontinuance of the Reactor
product line include charges for the write-off of intangible assets related to
an exclusive technology license ($585,000), a provision for future minimum
royalty payments ($210,000), employee severance and lease termination costs
($157,000) and the write-off of obsolete inventory and a provision for unusual
warranty costs ($372,000), which is included as part of cost of sales. The
Company's activities with respect to the discontinuance of the Cybex branded
bike and Reactor product line are substantially complete and no adjustments to
the asset write-down or liabilities recorded are anticipated. For the year
ended December 31, 1998, revenues from the Cybex branded bike and Reactor were
$3,389,000 and $546,000, respectively.
 
  The statement of operations for the year ended December 31, 1997 includes
pre-tax charges for unusual and nonrecurring merger-related costs of
$14,108,000 ($9,465,000, or $1.36 per share on an after-tax basis), comprised
of $7,134,000 ($5,280,000 or $.76 per share, on an after-tax basis) related to
closing the Sharpsville manufacturing facility, the write-off of acquired in-
process research and development and charges related to the Fuqua arbitration,
and $6,974,000 ($4,185,000 on an after-tax basis or $.60 per share) of costs
and expenses considered by management to be unusual, or a direct result of the
Merger, and not representative of the ongoing business. These latter costs and
expenses are included in cost of sales ($2,375,000) and selling, general and
administrative expenses ($4,599,000). Such costs and expenses relate primarily
to conforming to new accounting and operating policies of the merged company,
including reorganizing the Company's domestic and international sales
operations and manufacturing initiatives aimed at achieving the full benefit
of synergies and efficiencies which the Company believes are available as a
result of the Merger.
 
  At December 31, 1998 and 1997, the severance and the merger related reserve
balances were $605,000 and $2,177,000, respectively.
 
NOTE 5--LONG-TERM DEBT AND OTHER FINANCING ARRANGEMENTS
 
<TABLE>
<CAPTION>
                                                             December 31
                                                       ------------------------
                                                          1998         1997
                                                       -----------  -----------
     <S>                                               <C>          <C>
     Bank revolver loan............................... $ 7,900,000  $       --
     Bank term loans..................................  25,341,000    7,728,000
     Industrial development revenue note..............         --     1,750,000
     Industrial development revenue bond..............   3,100,000    3,300,000
     Promissory note..................................   1,915,000          --
     Other............................................     670,000      861,000
                                                       -----------  -----------
                                                        38,926,000   13,639,000
     Less--Current portion............................  (3,752,000)  (2,954,000)
                                                       -----------  -----------
                                                       $35,174,000  $10,685,000
                                                       ===========  ===========
</TABLE>
 
 
                                     F-13
<PAGE>
 
                  CYBEX INTERNATIONAL, INC. AND SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
 
NOTE 5--LONG-TERM DEBT AND OTHER FINANCING ARRANGEMENTS (continued)
 
  On May 21, 1998, the Company entered into a Credit Agreement (the
"Agreement") with several banks that consisted of a $26,700,000 revolving loan
(the "Revolver") and a $25,000,000 term loan the ("Term loan"). In connection
with this transaction, the Company repaid its obligations under its loan and
security agreement dated December 7, 1995, as amended, which consisted of a
$12,000,000 revolving loan and a $9,000,000 term loan. The Revolver matures in
May 2004 and the Term loan matures in December 2003. Borrowings under the
Revolver bear interest at the Company's option of either Base Rate (as
defined) or LIBOR plus 0.25% to 2.25%, which is adjusted based on the
Company's level of compliance with certain financial covenants, as defined.
The average outstanding Revolver balance during 1998 and 1997 was
approximately $5,135,000 and $2,011,000, respectively, and the weighted
average interest rate in 1998 and 1997 was 7.69% and 7.67%, respectively.
Interest expense on the revolver was $397,000, and $177,000 for the years
ended December 31, 1998 and 1997, respectively. At December 31, 1998,
$16,428,000 was available under the Revolver, net of $2,372,000 in stand-by
letters of credit outstanding in connection with the Acquisition.
 
  Borrowings under the Term loan bear interest at the Company's option at
either the base rate (as defined) or LIBOR plus .25% to 2.25%, which is
adjusted based on the Company's level of compliance with certain financial
covenants, as defined. The interest rate at December 31, 1998 was 7.69%. In
January 1996, the Company entered into an interest rate cap agreement which,
in effect fixed the LIBOR rate at 5.625% on the term debt from the December 7,
1995 facility through January 1999. This interest rate cap carried forward to
the term debt from the May 21, 1998 credit facility. In November 1998, the
Company entered into an Interest Rate Swap Agreement which fixed the LIBOR
rate at 5.04% on the term loan through December 2003. As of December 31, 1998
and 1997, $25,000,000 and $6,600,000 were outstanding under the Term loans,
respectively. Interest expense on the Term loans was $1,367,000, and $568,000
for the years ended December 31, 1998 and 1997, respectively.
 
  Pursuant to the Agreement, the Company is required to maintain certain
financial and non-financial covenants, as defined, including certain liquidity
ratios, restrictions on dividends and capital expenditures. Additionally, the
Company is limited in its ability to pay cash dividends to 50% of its net
income. Borrowings under the Agreement are secured by substantially all of the
Company's assets with certain exceptions.
 
  In connection with the Merger, the Company assumed a bank term loan in the
original amount of $2,465,000 pursuant to a five year, 9.48% fixed rate term
loan agreement. The term loan is payable in equal monthly principal
installments plus interest through March 2001. The term loan is secured by
specific lease receivables. As of December 31, 1998 and 1997, $341,000 and
$1,128,000, respectively, was outstanding under this term loan. Interest
expense on the term loan was $71,000 and $84,000 for the years ended December
31, 1998 and 1997, respectively.
 
  In December 1997, an industrial development revenue note assumed in the
Merger was assigned to the Bank. The industrial development revenue note was
used to construct and equip the manufacturing facility in Owatonna, Minnesota.
The note was paid in full in connection with the May 21, 1998 credit facility.
Interest expense on the note was $31,000 and $57,000 for the years ended
December 31, 1998 and 1997, respectively.
 
  In 1992, an industrial development revenue bond provided the funds to
construct and equip the manufacturing and administrative facility in Medway,
Massachusetts. The bonds bear interest at a rate that resets weekly (3.90% at
December 31, 1998) with interest payable monthly and principal payable
annually through May 2007. Interest expense on the bonds was $167,000,
$194,000 and $190,000 for the years ended December 31, 1998, 1997 and 1996
respectively. A letter of credit in the amount of $3,179,000 is outstanding
for the benefit of the bondholders to guarantee principal and interest
payments.
 
                                     F-14
<PAGE>
 
                  CYBEX INTERNATIONAL, INC. AND SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
 
NOTE 5--LONG-TERM DEBT AND OTHER FINANCING ARRANGEMENTS (continued)
 
  In connection with the Acquisition, the Company issued a 5.63% note payable
to the former Tectrix stockholders in the original amount of $2,340,000. This
note was adjusted to $1,915,000 based on the closing Tectrix balance sheet and
certain adjustments for income taxes, as defined. This note is payable in June
2001. Interest expense on the note was $68,000 for the year ended December 31,
1998.
 
  In connection with the Merger, the Company assumed an 8.9% note payable to a
finance company in the original amount of $1,051,000. The note is payable in
equal monthly payments of principal and interest of $22,000 through November
2001. The note is collateralized by certain manufacturing equipment. Interest
expense on the note was $69,000 and $50,000 for the years ended December 31,
1998 and 1997, respectively.
 
  At December 31, 1998, long-term debt maturities are as follows:
 
<TABLE>
<CAPTION>
     1999.......................................................... $ 3,752,000
     <S>                                                            <C>
     2000..........................................................   4,622,000
     2001..........................................................   7,452,000
     2002..........................................................   6,300,000
     2003..........................................................   7,300,000
     Thereafter....................................................   9,500,000
                                                                    -----------
                                                                    $38,926,000
                                                                    ===========
</TABLE>
 
NOTE 6--STOCKHOLDERS' EQUITY
 
 Stock Options
 
 1995 Omnibus Incentive Plan
 
  Cybex's Omnibus Incentive Plan ("Omnibus Plan"), as amended, is designed to
provide incentives that will attract and retain individuals key to the success
of the Company through direct or indirect ownership of the Company's common
stock. The Omnibus Plan provides for the granting of stock options, stock
appreciation rights, stock awards, performance awards and bonus stock purchase
awards. The Company has reserved 750,000 shares of Common Stock for issuance
pursuant to the Plan. The terms and conditions of each award are determined by
a committee of the Board of Directors of the Company. Under the Omnibus Plan,
the committee may grant either qualified or nonqualified stock options with a
term not to exceed ten years from the grant date and at an exercise price per
share that the committee may determine (which in the case of incentive stock
options may not be less than the fair market value of a share of the Company's
common stock on the date of grant).
 
                                     F-15
<PAGE>
 
                  CYBEX INTERNATIONAL, INC. AND SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
 
NOTE 6--STOCKHOLDERS' EQUITY (continued)
 
1987 Stock Option Plan
 
  The terms and conditions of grants of stock options under the 1987 Stock
Option Plan were determined by a committee of the Board of Directors. Options
outstanding under this plan were granted at exercise prices which were not
less than fair market value on the date of grant and were generally
exercisable over a period not to exceed ten years from the original date of
grant. No future grants may be made under this plan.
 
  Information with respect to options under the Company's plans is as follows:
<TABLE>
<CAPTION>
                                                                        Weighted
                                                  Number     Range of   Average
                                                    of       Exercise   Exercise
                                                  Shares      Price      Price
                                                  -------  ------------ --------
   <S>                                            <C>      <C>          <C>
   Outstanding at December 31, 1995.............. 379,234  $       5.85  $5.85
     Granted.....................................   4,273          5.85   5.85
     Forfeited................................... (10,683)         5.85   5.85
                                                  -------  ------------  -----
   Outstanding at December 31, 1996.............. 372,824          5.85   5.85
     Merger...................................... 131,050    9.38-12.75  11.00
     Granted..................................... 373,096   10.38-11.75  10.96
     Exercised................................... (60,681)   5.85-10.00   7.22
     Forfeited................................... (21,500)   9.38-12.75  12.46
                                                  -------  ------------  -----
   Outstanding at December 31, 1997.............. 794,789    5.85-12.75   8.81
     Granted.....................................  37,000          4.31   4.31
     Exercised................................... (32,600)   9.38-12.75   9.84
     Forfeited................................... (44,000)  10.70-12.75  11.73
                                                  -------  ------------  -----
   Outstanding at December 31, 1998.............. 755,189  $4.31-$12.13  $8.35
                                                  =======  ============  =====
</TABLE>
 
  At December 31, 1998, 435,389 options with a weighted average exercise price
of $6.96 were exercisable and 97,345 options were available for future grant.
The options generally vest over a four or five year period except for an
option to purchase 238,000 shares issued to the Company's President in 1997
which is exercisable in June 2004, or sooner if certain performance criteria
is met. The weighted average remaining contractual life of outstanding options
at December 31, 1998 was 6.24 years.
 
                                     F-16
<PAGE>
 
                  CYBEX INTERNATIONAL, INC. AND SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
 
NOTE 6--STOCKHOLDERS' EQUITY (continued)
 
  The Company applies Accounting Principles Board Opinion No. 25 "Accounting
for Stock Issued to Employees" and the related interpretations in accounting
for its stock option plans. Had compensation cost for the plans been
determined based upon the fair value of the options as prescribed by SFAS No.
123, "Accounting for Stock Based Compensation", the Company's net income
(loss) and earnings (loss) per share would have been as follows:
 
<TABLE>
<CAPTION>
                                                  Year Ended December 31
                                             ----------------------------------
                                                1998       1997         1996
                                             ---------- -----------  ----------
   <S>                                       <C>        <C>          <C>
   Net income (loss):
    As Reported............................  $1,018,000 $(5,245,000) $1,968,000
                                             ========== ===========  ==========
    Pro Forma..............................  $  956,000 $(5,426,000) $1,809,000
                                             ========== ===========  ==========
   Basic earnings (loss) per share:
    As Reported............................  $      .12 $      (.76) $      .46
                                             ========== ===========  ==========
    Pro Forma..............................  $      .11 $      (.78) $      .42
                                             ========== ===========  ==========
   Diluted earnings (loss) per share:
    As Reported............................  $      .12 $      (.76) $      .45
                                             ========== ===========  ==========
    Pro Forma..............................  $      .11 $      (.78) $      .41
                                             ========== ===========  ==========
</TABLE>
 
  The weighted average fair value of each stock option granted during the
years ended December 31, 1998, 1997 and 1996 was $2.88, $7.35 and $2.62,
respectively. The fair value of each option grant is estimated on the date of
grant using the Black-Scholes option pricing model with the following
weighted-average assumptions:
 
<TABLE>
<CAPTION>
                                                      Year Ended December 31
                                                      -------------------------
                                                       1998     1997     1996
                                                      -------  -------  -------
   <S>                                                <C>      <C>      <C>
   Risk free interest rate...........................     5.6%     6.3%     6.3%
   Expected dividend yield...........................     --       --       --
   Expected life..................................... 7 years  7 years  3 years
   Expected volatility...............................      60%      60%     --
</TABLE>
 
  The above pro forma amounts may not be indicative of future amounts because
option grants prior to January 1, 1995, have not been included and because
future option grants are expected.
 
 Stock Retainer Plan for Nonemployee Directors
 
  The Company's Amended and Restated Stock Retainer Plan for Nonemployee
Directors ("Retainer Plan"), provides that each nonemployee director will
receive 70% of their annual retainer in shares of Common Stock of the Company.
The number of shares to be issued is computed by dividing the applicable
amount of the annual retainer to be paid in stock by the fair market value of
a common share on January 1 of each calendar year. Up to 35,000 shares of
Common Stock may be issued pursuant to the Retainer Plan. The issuance of
shares in payment of annual retainers results in expense based on the fair
market value of such shares. As of December 31, 1998, 2,394 shares of Common
Stock are available for issuance under the Retainer Plan.
 
 Leveraged Employee Stock Ownership Plan
 
  The Company's leveraged Employee Stock Ownership Plan (ESOP) is a
noncontributory plan covering substantially all employees meeting a one year
length of service requirement. The plan is designed to give employees a
proprietary interest in the Company through Common Stock ownership. At
December 31, 1998, no unallocated shares were held by the ESOP.
 
 
                                     F-17
<PAGE>
 
                   CYBEX INTERNATIONAL, INC. AND SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
 
NOTE 7--INCOME TAXES
 
  The income tax provision (benefit) consists of the following:
 
<TABLE>
<CAPTION>
                                                  Year Ended December 31
                                             ----------------------------------
                                               1998        1997         1996
                                             --------- ------------  ----------
   <S>                                       <C>       <C>           <C>
   Current provision:
     Federal...............................  $     --  $    823,000  $1,423,000
     State.................................        --       211,000     368,000
                                             --------- ------------  ----------
                                                   --     1,034,000   1,791,000
                                             --------- ------------  ----------
   Deferred provision (benefit):
     Federal...............................    829,000   (2,070,000)   (336,000)
     State.................................    163,000     (550,000)   (111,000)
                                             --------- ------------  ----------
                                               992,000   (2,620,000)   (447,000)
                                             --------- ------------  ----------
                                             $ 992,000 $ (1,586,000) $1,344,000
                                             ========= ============  ==========
</TABLE>
 
  The reconciliation between income taxes at the federal statutory rate and the
amount recorded in the accompanying consolidated financial statements is as
follows (in thousands):
 
<TABLE>
<CAPTION>
                                                     Year Ended December 31
                                                     --------------------------
                                                      1998     1997      1996
                                                     -------  -------   -------
   <S>                                               <C>      <C>       <C>
   Tax at statutory rate...........................     34.0%   (34.0)%   34.0%
   State income taxes, net of federal tax benefit..      5.4     (3.3)     5.1
   Acquired in-process research and development....      --      12.4      --
   Other permanent differences, primarily non-
    deductible goodwill amortization...............   10.0     1.7       1.5
                                                     -------  -------   ------
                                                        49.4%   (23.2)%   40.6%
                                                     =======  =======   ======
</TABLE>
 
  The significant components of the Company's net deferred tax assets are as
follows:
 
<TABLE>
<CAPTION>
                                      December 31,
                                 ------------------------
                                    1998         1997
                                 -----------  -----------
     <S>                         <C>          <C>
     Deferred tax assets:
       Net operating and
        capital loss
        carryforwards..........  $ 7,359,000  $ 7,715,000
       Litigation reserves.....    1,238,000    1,427,000
       Warranty reserves.......    1,984,000    1,310,000
       Other accruals and
        reserves...............    1,193,000    1,579,000
       Bad debt and lease
        reserves...............    1,273,000    1,234,000
       Depreciation............   (1,030,000)    (613,000)
       Intangible
        amortization...........      251,000      429,000
       Other--net..............      (84,000)    (208,000)
                                 -----------  -----------
                                 $12,184,000  $12,873,000
                                 ===========  ===========
</TABLE>
 
                                      F-18
<PAGE>
 
                  CYBEX INTERNATIONAL, INC. AND SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
 
 
NOTE 7--INCOME TAXES (continued)
 
  At December 31, 1998, the Company had federal net operating and capital loss
carryforwards which are scheduled to expire as follows:
 
<TABLE>
             <S>                          <C>
             2011........................ $  6,691,000
             2012........................   11,984,000
             2018........................      707,000
                                          ------------
                                          $ 19,382,000
                                          ============
</TABLE>
 
  In addition, the Company has federal alternative minimum tax credit
carryforwards of $269,000, which do not expire, a federal tax credit
carryforward of $129,000, which expires in 2008, and capital loss
carryforwards of $430,000 which begins to expire in 2000.
 
  Pursuant to the Tax Reform Act of 1986, annual use of the Company's federal
net operating loss and credit carryforwards is limited as a result of a
cumulative change in ownership of more than 50% during a three-year period
ended in November, 1998. The annual limitation is approximately $2,400,000 per
year, which is equal to (i) the aggregate fair market value of the Company's
common stock immediately before the ownership change multiplied by (ii) the
long-term tax exempt rate (within the meaning of the Section 382(f) of the
Internal Revenue Code) in effect at that time. The Section 382 rate in effect
as of the date of ownership change was 5.02%. The $2,400,000 annual limitation
is cumulative and, therefore, if not fully utilized in a year, can be utilized
in future years in addition to the Section 382 limitation for those years. The
Company estimates that its net operating loss and credit carryforwards will be
fully utilized after approximately eight years. Management believes that it is
more likely than not that future taxable income will be sufficient to realize
the net deferred tax asset. Approximately $34,000,000 of future taxable income
is needed to fully realize the net deferred tax asset recorded at December 31,
1998.
 
  As a result of the Merger, Trotter's federal tax for the period from January
1, 1997 to May 23, 1997, was included in the consolidated tax return of UM
Holdings, Ltd. ("UM"), and for the period from May 24, 1997 to December 31,
1997, Trotter's taxable income was included in the Company's consolidated
return. The portion of the Company's 1997 net operating loss attributable to
Trotter represents a net operating loss carryforward available to UM. UM has
agreed to remit $585,000 to Cybex upon their utilization of the $1,723,000 net
operating loss carryforward. Such amount is included in long-term deferred
taxes in the accompanying financial statements.
 
  Prior to the Merger, pursuant to a tax-sharing agreement Trotter paid UM
amounts equal to the taxes calculated on a separate return basis. Trotter paid
$1,582,000 and $1,235,000 to UM for federal income taxes for the period from
January 1, 1997 to May 23, 1997 and for the year ended December 31, 1996,
respectively.
 
NOTE 8--BENEFIT PLANS
 
  The Company has a 401(k) defined contribution retirement plan. The Company
currently matches 100% of the first 2% of the employee's eligible compensation
contributions and 50% of the next 4% of the employee's eligible compensation
contributions. Contributions by the Company to the Plan were $746,000,
$230,000 and $97,000 for the years ended December 31, 1998, 1997 and 1996,
respectively. Additionally, the Company may make discretionary contributions
to the Plan. No discretionary contributions were made for the years ended
December 31, 1998 and 1997.
 
 
                                     F-19
<PAGE>
 
                  CYBEX INTERNATIONAL, INC. AND SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
 
 
NOTE 9--RELATED PARTY TRANSACTIONS
 
  For the years ended December 31, 1998 and 1997, the Company paid $293,000
and $227,000, respectively, to a law firm of which one of the directors of the
Company is a member.
 
NOTE 10--COMMERCIAL LEASING
 
  Subsequent to the Merger, the Company continued Cybex's lease financing
program for selected products to its commercial customers through its wholly-
owned leasing subsidiary. Such leases are accounted for as sales-type leases
and are generally for terms of three to five years at which time title
transfers to the lessee. Leases are secured by the equipment financed, often
with additional security in the form of other equipment liens, letters of
credit, cash down payments and personal guarantees.
 
  At December 31, 1998, lease receivables were comprised of the following:
 
<TABLE>
     <S>                                                             <C>
     Minimum lease payments receivable.............................. $1,316,000
     Less--Unearned interest income.................................   (122,000)
                                                                     ----------
                                                                     $1,194,000
                                                                     ==========
</TABLE>
 
  Minimum lease payments receivable as of December 31, 1998 are due as
follows:
 
<TABLE>
             <S>                            <C>
             1999.......................... $  777,000
             2000..........................    396,000
             2001..........................    114,000
             2002..........................     86,000
             2003..........................        --
             Thereafter....................        --
                                            ----------
                                            $1,316,000
                                            ==========
</TABLE>
 
  The Company provided lease financing for $8,601,000 and $4,604,000 of its
sales for the years ended December 31, 1998 and 1997, respectively. Income
before income taxes from leasing activities was $97,000 and $130,000 for the
years ended December 31, 1998 and 1997, respectively.
 
  The Company periodically enters into agreements, generally subject to
limited recourse, to sell lease receivables to financial institutions through
qualified special purpose entities. For the year ended December 31, 1998, the
Company generated net proceeds of $3,252,000 from the sale of lease
receivables. Under the terms of these agreements, the Company continues to
bill and collect the monthly lease payments which are then remitted to the
respective financial institutions each month. The Company is subject to
recourse provisions which may require it to repurchase or replace leases in
default. In return, the Company receives the collateral position in the
defaulted leases. The recourse provisions, which range from 15% to 100% of the
outstanding net lease receivables, may be reduced annually based upon the
remaining outstanding lease payment streams. At December 31, 1998, the maximum
contingent liability under these recourse provisions was approximately
$2,400,000. A reserve for estimated losses under recourse provisions has been
recorded based upon historical and industry experience, and is included in
accrued liabilities at December 31, 1998.
 
 
                                     F-20
<PAGE>
 
                  CYBEX INTERNATIONAL, INC. AND SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
 
 
NOTE 11--ACCRUED LIABILITIES
 
<TABLE>
<CAPTION>
                                                             December 31,
                                                        -----------------------
                                                           1998        1997
                                                        ----------- -----------
     <S>                                                <C>         <C>
     Customer deposits................................. $ 1,949,000 $ 1,563,000
     Warranty reserves.................................   3,410,000   2,465,000
     Self insurance reserves...........................   1,875,000   2,842,000
     Severance and merger-related reserves.............     605,000   2,177,000
     Fuqua reserve.....................................   3,000,000   2,385,000
     Payroll related and other.........................   7,094,000   6,873,000
                                                        ----------- -----------
                                                        $17,933,000 $18,305,000
                                                        =========== ===========
</TABLE>
 
NOTE 12--PROPERTY PLANT AND EQUIPMENT
 
<TABLE>
<CAPTION>
                                                            December 31,
                                                       ------------------------
                                                          1998         1997
                                                       -----------  -----------
     <S>                                               <C>          <C>
     Land, building and improvements.................. $10,080,000  $ 7,646,000
     Equipment and furniture..........................  16,424,000   11,644,000
                                                       -----------  -----------
                                                        26,504,000   19,290,000
     Less--Accumulated depreciation...................  (8,037,000)  (6,187,000)
                                                       -----------  -----------
                                                       $18,467,000  $13,103,000
                                                       ===========  ===========
</TABLE>
 
  Depreciation expense was $2,087,000, $1,614,000, and $844,000 for the years
ended December 31, 1998, 1997 and 1996 respectively.
 
NOTE 13--COMMITMENTS AND CONTINGENCIES
 
 Operating Lease Commitments
 
  The Company has lease commitments expiring at various dates through 2001,
for equipment under noncancelable operating leases and a building lease.
Future minimum payments under these leases at December 31, 1998 are as
follows:
 
<TABLE>
             <S>                            <C>
             1999.......................... $  590,000
             2000..........................    512,000
             2001..........................    325,000
                                            ----------
                                            $1,427,000
                                            ==========
</TABLE>
 
  Rent expense under all operating leases for the years ended December 31,
1998, 1997 and 1996 was $516,000, $352,000 and $291,000, respectively.
 
                                     F-21
<PAGE>
 
                  CYBEX INTERNATIONAL, INC. AND SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
 
NOTE 13--COMMITMENTS AND CONTINGENCIES (continued)
 
 Risk Retention
 
  The Company's risk retention amounts per occurrence are as follows:
 
<TABLE>
   <S>                                                            <C>
   Product liability............................................. $50,000
   Employee medical and hospitalization.......................... 50,000--70,000
</TABLE>
 
  The Company has excess primary coverage on a per-claim and aggregate basis
beyond the deductible levels and also maintains umbrella policies to
supplement the primary liability coverage. Reserves for self-insured
retention, including claims incurred but not yet reported, are included in
accrued liabilities in the accompanying balance sheets, based on management's
review of outstanding claims and claims history and consultation with its
third-party claims administrators. Actual results may vary from management
estimates.
 
 Product Liability
 
  Due to the nature of its products, the Company is involved in certain
pending product liability claims and lawsuits. The Company maintains product
liability insurance coverage subject to deductibles. Management believes that
the outcome of known product liability claims will not have a material effect
on its financial position or results of operations.
 
 Fuqua Litigation
 
  See Note 3 for a description of the Fuqua litigation.
 
 Kirila et al v. Cybex International, Inc., et al
 
  This action was commenced in the Court of Common Pleas of Mercer County,
Pennsylvania in May 1997 against the Company, the Company's wholly-owned
subsidiary, Trotter Inc., and certain officers, directors and affiliates of
the Company. The plaintiffs include companies which sold to Trotter Inc. a
strength company in 1993, a principal of the corporate plaintiffs who was
employed by Trotter Inc. following the acquisition, and a company which leased
to Trotter Inc a plant located in Sharpsville Pennsylvania. In accordance with
Pennsylvania practice, the complaint in this matter was not served upon the
defendants until the second quarter of 1998. The complaint, among other
things, alleges that the closure of the Sharpsville facility was wrongful,
wrongful termination of the individual plaintiff's employment and nonpayment
of compensation, breach of the lease agreement and the asset purchase
agreement, tortious interference with business relationships, fraud, negligent
misrepresentation, unjust enrichment, breach of the covenant of good faith and
fair dealing, conversion, unfair competition and violation of the Wage Payment
and Collection Law. The complaint seeks specific performance of the lease, the
employment agreement and the indemnification provisions of the asset purchase
agreement, and an unspecified amount of compensatory and punitive damages and
expenses. The Company has filed an Answer to the complaint denying the
material allegations of the complaint and denying liability. It has further
asserted counterclaims against the plaintiffs, including for repayment of
over-allocations of expenses under the lease and certain excess incentive
compensation payments which were made to the individual plaintiff. The Company
intends to vigorously defend this matter.
 
 Other Litigation
 
  The Company is involved in certain other legal actions and claims arising in
the ordinary course of business. Management believes that the outcome of such
litigation and claims will not have a material adverse effect on its financial
position or results of operations.
 
                                     F-22
<PAGE>
 
                   CYBEX INTERNATIONAL, INC. AND SUBSIDIARIES
 
                 CONSOLIDATED VALUATION AND QUALIFYING ACCOUNTS
 
                                  SCHEDULE II
 
<TABLE>
<CAPTION>
                          Balance at
                          Beginning                             Balance at End
Description               of Period  Additions     Deductions     of Period
-----------               ---------- ----------    -----------  --------------
<S>                       <C>        <C>           <C>          <C>
For the year ended
 December 31, 1998
  Allowance for doubtful
   accounts.............. $2,615,000 $1,947,000(1) $ 1,226,000    $3,336,000
                          ========== ==========    ===========    ==========
  Restructuring reserve..  2,177,000  1,375,000(2)  (2,947,000)      605,000
                          ========== ==========    ===========    ==========
For the year ended
 December 31, 1997
  Allowance for doubtful
   accounts.............. $  477,000 $2,808,000(3) $  (670,000)   $2,615,000
                          ========== ==========    ===========    ==========
  Restructuring reserve..        --   5,679,000(4)  (3,502,000)    2,177,000
                          ========== ==========    ===========    ==========
For the year ended
 December 31, 1996
  Allowance for doubtful
   accounts.............. $  305,000 $  567,000    $  (395,000)   $  477,000
                          ========== ==========    ===========    ==========
</TABLE>
--------
(1)Includes allowance for doubtful accounts of $264,000 assumed in the Tectrix
acquisition.
(2) Includes a restructuring reserve of $628,000 recorded in the application of
    purchase accounting for the Tectrix acquisition for the discontinuance of
    the Tectrix treadmill, the shutdown of Tectrix's international subsidiaries
    and severance payments to Tectrix employees. Additionally, 1998 additions
    include $747,000 for final adjustments to pre-acquisition contingencies
    related to the Cybex/Trotter Merger, primarily related to final information
    received with respect to the cost of closing Cybex's international
    subsidiary.
(3)Includes allowance for doubtful accounts of $737,000 assumed in the Merger.
(4) Represents a restructuring reserve related to the Cybex/Trotter merger,
    primarily for severance costs related to the termination of Cybex's joint
    venture and moving costs related to acquired employees.
 
 
                                      S-1
<PAGE>
 
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
 
  Not applicable.
 
                                   PART III
 
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
 
  Information regarding the Directors of the Company and compliance with
Section 16(a) of the Securities Exchange Act of 1934 is incorporated herein by
reference from the sections captioned "Election of Directors" and "Security
Ownership of Certain Beneficial Owners and Management--Section 16(a)
Beneficial Ownership Reporting Compliance" in the Company's definitive proxy
statement for its 1999 Annual Meeting of Shareholders (the "Proxy Statement").
For information concerning the executive officers of the Company, see
"Executive Officers of the Registrant" in Part I of this Report.
 
ITEM 11. EXECUTIVE COMPENSATION
 
  The information set forth under the captions "Executive Compensation" and
"Election of Directors--Compensation of Directors" in the Proxy Statement is
incorporated herein by reference.
 
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
 
  The information set forth under the captions "Security Ownership of Certain
Beneficial Owners and Management" in the Proxy Statement is incorporated
herein by reference.
 
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
 
  The information set forth under the captions "Election of Directors" in the
Proxy Statement is incorporated herein by reference.
 
 
                                     II-1
<PAGE>
 
                                    PART IV
 
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
 
(a)The following documents are filed or incorporated by reference as a part of
this report:
 
(1) (2)Exhibits
 
    27      Financial Statements and Schedules See Index to Consolidated
            Financial Statements and Schedules (Part II--Item 8).
 
(3)Exhibits
 
    2(a)    Asset Sale Agreement, dated as of March 13, 1996, by and
            between the Company, MUL Acquisition Corp. I, MUL Acquisition
            Corp. II and Fuqua Enterprises, Inc., incorporated by reference
            to Exhibit 2.1 to the Company's Current Report on Form 8-K,
            dated April 3, 1996.
 
    2(b)(i) Agreement and Plan of Merger, dated as of December 27, 1996, by
            and among the Company, Trotter Inc., and CAT'S TAIL, INC.,
            incorporated by reference to Exhibit 2(b)(i) to the Company's
            Annual Report on Form 10-K for the year ended December 31, 1997
            (the "1997 10-K").
 
    2(b)(ii) First Amendment to Agreement and Plan of Merger, dated as of
             January 16, 1997, to Agreement and Plan of Merger, dated as of
             December 27, 1996, by and among the Company, Trotter Inc., and
             CATS TAIL, INC., incorporated by reference to Exhibit 2(b)(ii)
             to the 1997 10-K.
 
    3(a)(1) Restated Certificate of Incorporation of the Company, dated May
            20, 1988, incorporated by reference to Exhibit 3(a)(1) to the
            Company's Quarterly Report on Form 10-Q for the quarter ended
            June 30,1996 (the "June 1996-10-Q").
 
    3(a)(2) Certificate of Amendment of the Certificate of Incorporation of
            the Company, dated May 30, 1988, incorporated by reference to
            Exhibit 3(a)(2) to the June 1996 10-Q.
 
    3(a)(3) Certificate of Amendment of the Certificate of Incorporation of
            the Company, dated August 7, 1996, incorporated by reference to
            Exhibit 3(a)(3) to the June 1996 10-Q.
 
    3(a)(4) Certificate of Amendment of the Certificate of Incorporation of
            the Company, dated May 27, 1997, incorporated by reference to
            Exhibit 3.1 to the Quarterly Report on Form 10-Q for the
            quarter ended June 30, 1997 (the "June 1997 10-Q").
 
    3(b)    By-Laws of the Company, as amended, incorporated by reference
            to Exhibit 3(b) to the Company's Annual Report on Form 10-K for
            the year ended December 31, 1987.
 
    10(i)(a) Assignment Agreement from Norwest Bank Minnesota South, N.A.,
             successor in interest to Norwest Bank, Owatonna N.A., to
             Summit Bank filed by reference to Exhibit 10(i)(g) to the 1997
             10-K.
 
    10(i)(b) Credit Agreement dated May 21, 1998 among First Union National
             Bank, the Company and the Company's subsidiaries, incorporated
             by reference to Exhibit 10.1 to the Company's quarterly report
             on Form 10-Q for the quarter ended June 27, 1998.
 
    10(ii)  Lumex, Inc. Amended and Restated 1987 Stock Option Plan,
            incorporated by reference to Exhibit 28 to the Company's
            Registration Statement on Form S-8 (No. 33-48124), filed May
            26, 1992.*
 
    10(iii)(a) Amended and Restated Loan and Security Agreement, dated June
               16, 1997, among Summit Bank, the Company and the Company's
               subsidiaries, incorporated by reference to Exhibit 10.3(a)
               to the June, 1997 10-Q.
 
                                     II-2
<PAGE>
 
    10(iii)b) First Amendment to Amended and Restated Loan and Security
              Agreement, dated July 15, 1997, among Summit Bank, the
              Company and the Company's subsidiaries, incorporated by
              reference to Exhibit 10.3(b) to the June, 1997 10-Q
 
    10(iii)(c) Second Amendment to Amended and Restated Loan and Security
               Agreement, dated August 11, 1997, among Summit Bank, the
               Company and the Company's subsidiaries, incorporated by
               reference to Exhibit 10.1 to the Company's Quarterly Report
               on Form 10-Q for the quarter ended September 27, 1997
 
    10(iii)(d) Third Amendment to Amended and Restated Loan and Security
               Agreement, dated December 17, 1997, among Summit Bank, the
               Company and the Company's subsidiaries filed by reference to
               Exhibit 10(iii)(d) to the 1997 10-K.
 
    10(iii)(e) Fourth Amendment to Amended and Restated Loan Security
               Agreement dated December 17, 1997, among Summit Bank, the
               Company and the Company's subsidiaries, incorporated by
               reference to Exhibit 10.1 to the Company's quarterly report
               on Form 10-Q for the quarter ended March 28, 1998.
 
    10(iv)  Distributor Agreement dated June 5, 1997 among the Company,
            Trotter Inc., Forza Fitness Equipment, Ltd. and Forza Group,
            Ltd., incorporated by reference to Exhibit 10.1 to the June,
            1997 10-Q.
 
    10(v)   Asset Purchase Agreement between Henley Healthcare, Inc. and
            the Company, dated September 30, 1997 incorporated by reference
            to Exhibit 10(vii) to the 1997 10-K.
 
    10(vi)  Ultimate Net Loss Vendor Agreement with Portfolio Purchase,
            dated December 30, 1994, among the Company, CYBEX Financial
            Corp. and C.I.T., incorporated by reference to Exhibit 10(x) to
            the 1994 10-K.
 
    10(vii) Portfolio Purchase Agreement, dated December 30, 1994, among
            the Company, CYBEX Financial Corp. and European American Bank,
            incorporated by reference to Exhibit 10(xi) to the 1994 10-K.
 
    10(viii) Amended and Restated 1995 Stock Retainer Plan for Non-Employee
             Directors of the Company incorporated by reference to Exhibit
             10(xi) to the 1997 10-K.*
 
    10(ix)  1995 Omnibus Incentive Plan, as amended, incorporated by
            reference by Exhibit 10(xx) to the Company's Registration
            Statement on Form S-8 (No. 333-29045), filed June 12, 1997.*
 
    10(x)   Covenant Not to Compete, dated as of April 3, 1996, by and
            among the Company, Lumex Medical Products, Inc. (f/k/a MUL
            Acquisition Corp. I), MUL Acquisition Corp. II, and Fuqua
            Enterprises, Inc., incorporated by reference to Exhibit 10
            (xvii) to the June 1996 10-Q.
 
    10(xi)  Management Employment Agreement between the Company and Peter
            C. Haines, incorporated by reference to Exhibit 10.2 to the
            June, 1997 10-Q.*
 
    10(xii) Tectrix Stock Purchase Agreement dated May 21, 1998 among the
            Company and Tectrix Fitness Equipment, Inc., incorporated by
            reference to Form 8-K filed June 4, 1998.
 
    21.0    Subsidiaries of the Registrant (filed herewith)
 
    23.1    Consent of Independent Public Accountants--Arthur Andersen LLP
            (filed herewith)
 
    27      Financial Data Schedule. (filed herewith)
--------
*Executive Compensation Plans and Arrangements
(b)Reports on Form 8-K
               No reports on Form 8-K have been filed during the quarter ended
               December 31, 1998.
 
                                     II-3
<PAGE>
 
                                  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.
 
                                                CYBEX International, Inc.
                                          _____________________________________
                                                      (Registrant)
 
 March 25, 1999                                     /s/ Peter C. Haines
________________                          By: _________________________________
     (Date)                                              President
 
  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.
 
<TABLE>
<S>  <C>
 March 25, 1999                                     /s/ Peter C. Haines
________________
                                          By: _________________________________
     (Date)                                  Peter Haines, President and Chief
                                               Executive Officer (principal
                                                    executive officer)
 
 March 25, 1999                                    /s/ William S. Hurley
________________
                                          By: _________________________________
     (Date)                                  William S. Hurley, Vice President
                                                and Chief Financial Officer
                                                 (principal financial and
                                                    accounting officer)
 
 March 25, 1999                                     /s/ John Aglialoro
________________
                                          By: _________________________________
     (Date)                                      John Aglialoro, Director
 
 March 25, 1999                                     /s/ James H. Carll
________________
                                          By: _________________________________
     (Date)                                      James H. Carll, Director
 
 March 25, 1999                                       /s/ Joan Carter
________________
                                          By: _________________________________
     (Date)                                        Joan Carter, Director
 
 March 25, 1999                                    /s/ Kay Knight Clarke
________________
                                          By: _________________________________
     (Date)                                     Kay Knight Clarke, Director
 
 March 25, 1999                                  /s/ Arthur W. Hicks, Jr.
________________
                                          By: _________________________________
     (Date)                                   Arthur W. Hicks, Jr., Director
 
 March 25, 1999                                        /s/ Jerry Lee
________________
                                          By: _________________________________
     (Date)                                         Jerry Lee, Director
 
 March 25, 1999                                     /s/ Thomas W. Kahle
________________
                                          By: _________________________________
     (Date)                                      Thomas W. Kahle, Director
 
 March 25, 1999                                   /s/ Alan H. Weingarten
________________
                                          By: _________________________________
     (Date)                                    Alan H. Weingarten, Director
</TABLE>
 
                                     II-4