WASHINGTON, D.C.  20549
                                        
                                   Form 10-K/A

            [ X ]  ANNUAL REPORT PURSUANT TO SECTION 13 or 15 (d) OF
                       THE SECURITIES EXCHANGE ACT OF 1934

                  For the Fiscal Year Ended:  December 31, 1997

                                       OR

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

                 For the transition period from _______ to _______

                         Commission File No.:  33-62598


                          Fairfield Manufacturing Company, Inc.
             (Exact name of Registrant as specified in its charter)


          Delaware                                    63-0500160
     (State or other jurisdiction of                (I.R.S. Employer
     incorporation or organization)                 Identification No.)


     U. S. 52 South, Lafayette, IN                            47905
(Address of principal executive offices)                    (Zip Code)

     Registrant's telephone number, including area code:  (765) 474-3474

     Securities registered pursuant to Section 12(b) of the Act:  None
     Securities registered pursuant to Section 12(g) of the Act:
     $85,000,000 11-3/8% Senior Subordinated Notes
     $50,000,000 11-1/4% Series A Cumulative Exchangeable Preferred Stock


Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.

                         Yes   X             No

     The number of shares outstanding of each of the issuer's classes of common
stock as of December 31, 1997 is as follows:

                          8,190,000 shares of Common Stock
Index for exhibits is located on page 18
Total number of pages 44
<PAGE>

                      FAIRFIELD MANUFACTURING COMPANY, INC.

                          Annual Report on Form 10-K/A

                                December 31, 1997

                                Table of Contents

  Item                                                       Page
 Number                                                     Number
                              PART I                           
   1     Business                                             1
   2     Properties                                           6
   3     Legal Proceedings                                    6
   4     Submission of Matters to a Vote of Security          6
         Holders
                                                               
                             PART II                           
   5     Market for the Registrant's Common Equity and        6
         Related Stockholder Matters
   6     Selected Financial Data                              6
   7     Management's Discussion and Analysis of              8
         Financial Condition and Results of Operations
   8     Financial Statements and Supplementary Data          10
   9     Changes in and Disagreements with Accountants        10
         on Accounting and Financial Disclosure
                                                               
                             PART III                          
   10    Directors and Executive Officers of the              11
         Registrant
   11    Executive Compensation                               13
   12    Security Ownership of Certain Beneficial Owners      16
         and Management
   13    Certain Relationships and Related Transactions       17
                                                               
                             PART IV                           
   14    Exhibits, Financial Statement Schedules, and         18
         Reports on Form 8-K
         Signatures                                           23
         Index to Consolidated Financial Statements and        
         Schedule

<PAGE>

                      FAIRFIELD MANUFACTURING COMPANY, INC.
                                   Form 10-K/A
                       Fiscal Year Ended December 31, 1997

                                     PART I


Item 1.        BUSINESS

General

     Fairfield Manufacturing Company, Inc. (the "Company") believes that it is
the leading independent manufacturer (based on sales) of high precision custom
gears and planetary gear systems in North America, with an estimated market
share in each of the custom gear and planetary gear system markets of more than
two times that of its nearest competitors.  The majority of the Company's custom
gears and planetary gear systems are used by original equipment manufacturers
("OEMs") as components in various kinds of heavy mobile equipment.  The
Company's customers include many industry leaders.  For the year ended December
31, 1997, the Company had net sales of $192.3 million.

     Custom gears, which accounted for $107.1 million, or 55.7%, of the
Company's 1997 net sales, are components of larger systems such as axles, drive
differentials and transmission units.  The Company's custom gear customers
consist principally of OEMs of rail (such as locomotives), mining, agricultural
(such as tractors and specialty harvesting equipment), industrial, construction
and materials-handling equipment, for many of whom the Company is the sole
independent supplier of selected gear products.

     Planetary gear systems, which accounted for $85.2 million, or 44.3%, of the
Company's 1997 net sales, are integrated, self-contained power transmission and
torque conversion systems that provide propulsion, swing and/or rotation to
wheels, axles and other components in applications where the use of axles would
otherwise present design difficulties.  The Company markets its planetary gear
systems under its Torque-Hub name ("Torque-Hub").  The Company believes that, as
a result of the performance history and reputation for quality of the Company's
Torque-Hub products, the Torque-Hub name has become closely identified with
planetary gear systems.  Customers for the Company's Torque-Hub products include
OEMs of access platform (such as aerial-lifts), road rehabilitation (such as
pavers and road rollers), construction (such as excavators), forestry and
agricultural (such as crop sprayers) equipment.

     The Company has been certified as a "preferred supplier" (based on systems
compliance and on-site inspections) by all of its major customers that have
certification procedures.  The Company has also been certified as meeting "ISO-
9001" standards, which are increasingly being used by OEMs in lieu of individual
certification procedures.  In addition, the Company has been certified as
meeting "QS-9000" standards, which is the level of certification required by
automotive OEMs beginning in 1998.  The Company believes that certification
provides it with a competitive advantage because a number of OEMs require
certification as a condition to doing business.

     The Company believes that its strong market position in the custom gear and
planetary gear systems markets is the result of its (i) breadth and quality of
product offerings, (ii) longstanding relationships (in many cases of 20 years or
more) with its major custom gear and planetary gear system customers, (iii)
state-of-the-art engineering and manufacturing technology, including its in-
house heat treating facilities, computer-aided design and manufacturing systems
and computer numerically-controlled machine tools and gear grinders, (iv)
ability to deliver products within short lead times, (v) cost competitiveness,
(vi) experienced engineering staff, which together with the Company's sales
force, works closely with customers in designing and developing products to meet
customers' needs and (vii) stable, knowledgeable sales force, many of whose
members have engineering degrees and have worked with the same customers for
many years.  In addition, the Company believes that its

<PAGE>

management team, which has an average of over 25 years of experience in general
manufacturing, will be instrumental in further strengthening the Company's
market position.

     The Company was founded in 1919 as a manufacturer of custom gear products
and was family-owned until 1977.  At that time, the Company was purchased by
Rexnord Corporation, which subsequently sold the Company in 1987 to Neoax Inc.
Lancer Industries Inc. ("Lancer") purchased the Company in 1989.  Fairfield's
principal executive offices are located at U.S. 52 South, Lafayette, Indiana
47905.  The Company's telephone number is (765) 474-3474.

Products

     Custom Gears.  Custom gears accounted for approximately $107.1 million, or
55.7%, of the Company's net sales in 1997.  The Company manufactures a wide
variety of custom gears, ranging in type (e.g. helical, spiral bevel, spur and
HYPOID) and size (from one inch to five feet), and has manufacturing
capabilities which the Company believes are the broadest in the custom gear
business.  The Company's custom gears are manufactured according to customers'
specifications, sometimes developed by or with the assistance of the Company,
for use as component parts in various types of heavy mobile equipment.  Custom
gears are engineering-intensive and, although such products represent a
relatively small portion of the cost of the equipment in which they are used,
are critical to the operation of such equipment.

     Historically, the Company has focused on high margin custom gears.  Such
products, which are design- and engineering-intensive, are used in rail, mining,
agricultural, construction, and materials-handling and other equipment demanding
a high degree of product quality and reliability.  Many customers in these
markets do not have the necessary engineering and/or manufacturing facilities,
and/or personnel to design and manufacture their gear requirements in-house.  In
addition, there is a trend among OEMs to focus on their core competencies rather
than produce gears in-house.

     Torque-Hub Products.  Torque-Hub products accounted for approximately $85.2
million, or 44.3%, of the Company's net sales in 1997.  The Company believes
that the Torque-Hub name has become closely identified with planetary gear
systems, which provide drive, swing, and/or rotation to the equipment in which
they are used and are primarily employed in cases where the use of axles present
design difficulties.  The Company produces a broad line of planetary gear
systems under its Torque-Hub trade name, including wheel drives (used to propel
off-highway equipment), shaft outputs (used to power remote in-plant machinery
like mixers as well as mobile aerial lifts and cranes) and spindle outputs
(which power the drive wheels of vehicles with small diameter wheels such as
small lift trucks and mowers).

     The Company has introduced a number of new Torque-Hub products in recent
years, including two-speed drives (Torque II series) and compact drives (CW and
CT series) for wheeled or tracked vehicles.  The Company believes that the two-
speed drive is ideal for machinery requiring low- and high-speed settings, such
as road paving equipment.  The compact drive incorporates the brakes and
hydraulic drive systems into a single compact unit, which the Company believes
allows for better flexibility and is well-suited for a variety of applications.
These products are used in a wide range of industrial and construction
equipment, including excavators, crawler dozers and loaders, rubber-tired pavers
and multi-speed winches.

Marketing and Distribution

     The Company's customers are OEMs and include many industry leaders with
whom the Company has had relationships of 20 years or more.  No single customer
accounted for more than 10% of the Company's 1997 net sales.

     The Company has been certified as a "preferred supplier" by each of its
major customers that have certification procedures.  The Company has also been
certified as meeting "ISO-9001" standards, which are 

<PAGE>

increasingly being used by OEMs in lieu of individual certification procedures.
In addition, the Company has been certified as meeting "QS-9000" standards,
which is the level of certification required by automotive OEMs beginning in 
1998.  The Company believes that certification provides it with a competitive 
advantage because a number of OEMs require certification as a condition to
doing business.

     The Company believes its stable, experienced sales force is a primary
reason for the Company's success in maintaining customer loyalty and building
new customer relationships.  The Company's sales department is organized
geographically and consists of 14 sales engineers, who have an average of over
11 years of service and most of whom have worked with the same customers for
many years.  In addition, each sales engineer has substantial expertise
concerning the Company's products and product applications.  Application
engineers work closely with the Company's sales department and provide customers
with guidance concerning product applications and specific design problems.  By
becoming a part of the customer's purchasing and design decisions, the Company
has developed close working relationships with many of its customers.  Customer
loyalty to the Company is further enhanced by the development, tooling and
production costs associated with changing gear sources, as such costs are
typically borne by the customer.

     All of the Company's custom gear products and approximately 70% of its
Torque-Hub products are sold directly to OEMs.  Since Torque-Hub products can be
sold to more than one customer, the Company uses distributors to increase its
penetration of the planetary gear systems market.  The Company sells
approximately 30% of its Torque-Hub line through a network of approximately 40
distributors located in the United States and abroad.  International sales
accounted for approximately $13 million, or approximately 7% of the Company's
1997 net sales.

Design and Manufacturing

     The Company believes that its state-of-the-art technology and experienced
engineering staff provide it with a competitive advantage and are major factors
behind the Company's strong market position.

     Technology.  The Company has selectively invested in state-of-the-art
manufacturing technology in recent years to improve product quality and price
competitiveness, and to reduce lead time.  The Company's manufacturing
technology includes the latest computer-aided design and manufacturing (CAD/CAM)
systems, and over one hundred computer numerically controlled (CNC) machine
tools and gear grinders.

     The Company's CAD/CAM systems, which enable hundreds of design solutions to
be visualized quickly and easily, facilitate product design and manufacturing.
The Company's computer systems are capable of finite element analysis and
simulation which allows many aspects of a design to be evaluated prior to
production, resulting in lower tooling costs, reduced testing requirements and
quicker time to market.  In addition, the Company's CNC gear cutting machines
allow for many different styles and sizes of gears to be run quickly in small
lot sizes with a high degree of accuracy.  The Company is in the process of
installing an enhanced computer program designed to improve customer order
scheduling and inventory management.
     
     The Company has its own comprehensive heat treating facilities.  These in-
house facilities allow the Company to control the annealing and carburizing
processes that determine the load-carrying capacity of the final product.  The
Company's heat treating operations help ensure proper development and
maintenance of gear tooth characteristics.  As a result, the Company believes
that it is able to provide its customers with improved quality and reduced lead
times in filling orders.  In-line dual frequency induction hardening equipment
was added in 1997, continuing the Company's practice of selectively adding
advanced technology in its manufacturing processes.

     Engineering Staff.  The Company's engineering department consists of
approximately 70 engineers and technicians, including specialists in product,
tool, manufacturing and industrial engineering.  In addition, the Company has a
metallurgy laboratory which determines the appropriate metallurgy for a specific
gear

<PAGE>

application.  These engineering groups, with their distinct specialties,
work together as a team to develop solutions to specific customer requirements.
These capabilities enable the Company to service clients who demand high
quality, creative solutions to their product needs.

Materials and Supply Arrangements

     The Company generally manufactures its custom gear and Torque-Hub products
to its customers' specifications and, as a result, does not generally contract
for or maintain substantial inventory in raw materials or components.  The
Company purchases its three principal raw material needs (steel forgings, steel
bars and castings) on a spot basis based on specific customer orders.  Material
purchases were made from one supplier representing more than 10% of raw material
purchases amounting to $9.0 million in 1997.  Alternative sources are available
to fulfill each of the Company's major raw material requirements.  The Company
has never experienced a delay in production as a result of a supply shortage of
a major raw material.

Competition

     The North American custom gear business is highly competitive but very
fragmented.  Competition can be broken down into four principal groups: major
domestic manufacturers, regional domestic manufacturers, foreign producers and
captive gear manufacturers.  Although captive gear manufacturers supply all or a
portion of their internal gear requirements and constitute a significant portion
of the custom gear market, the Company believes there is a trend among such
manufacturers to outsource, or purchase their gears from independent
manufacturers such as the Company.  The North American planetary gear market is
also highly competitive and is concentrated among several large competitors,
with the remaining market divided among a large number of relatively small
suppliers.  The Company competes with other manufacturers based on a number of
factors, including delivery capability, quality and price.  The Company believes
that its breadth of manufacturing, engineering and technological capabilities
provide it with a competitive advantage.

Employees

     At December 31, 1997, the Company had 1,325 permanent employees, of whom
approximately 84% were employed in manufacturing.  The Company's production and
maintenance employees became members of the United Auto Workers (UAW) union in
October 1994 and the Company entered into a labor contract with the union in
October 1995, which is scheduled to expire in October 1998.  The Company
considers its relations with its employees to be satisfactory.

Backlog

     As of December 31, 1997 and December 31, 1996, the Company had total order
backlog of approximately $110.8 million and $77.0 million, respectively, for
shipments due to be delivered by the Company for the six-month period following
such dates.  This increase is attributable to increased market demand for the
Company's products.

Environmental Matters

     The Company's operations and properties are subject to a wide variety of
increasingly complex and stringent environmental laws.  As such, the nature of
the Company's operations exposes it to the risk of claims with respect to such
matters and there can be no assurance that material costs or liabilities will
not be incurred in connection with such claims.  The Company believes its
operations and properties are in substantial compliance with such environmental
laws.  Based upon its experience to date, the Company believes that the future
cost of compliance with existing environmental laws, and liability for known
environmental claims pursuant to such environmental laws, will not have a
material adverse effect on the Company's business, financial condition or

<PAGE>

operating results.  However, future events, such as changes in existing
environmental laws or their interpretation and more vigorous enforcement
policies of regulatory agencies, may give rise to additional expenditures or
liabilities that could be material.

Recent Developments

     During February 1997, the Company declared a $3.1 million dividend to
Lancer.  The dividend was used in settlement of the $3.0 million advance to
Lancer and accrued interest of $0.1 million.
     
On March 12, 1997, the Company completed an offering of 50,000 shares of 11-1/4%
Cumulative Exchangeable Preferred Stock ("Old Preferred Stock").  The net
proceeds from this offering ($47.7 million) were used to fund a dividend to
Lancer, and used by Lancer to redeem approximately $47.7 million of its Series C
Preferred Stock. In July 1997, the Company completed an exchange offer pursuant
to which each share of the Old Preferred Stock was exchanged for a new share of
11-1/4% Series A Cumulative Exchangeable Preferred Stock (the "New Preferred
Stock").  The terms of the New Preferred Stock are substantially identical to
the terms of the Old Preferred Stock, except that the New Preferred Stock is
registered under the Securities Act of 1933, as amended.  Each share of New
Preferred Stock has a liquidation preference of $1,000, plus accumulated and
unpaid dividends.  The Company is required, subject to certain conditions, to
redeem all of the Preferred Stock outstanding on March 15, 2009 at a redemption
price equal to 100% of the liquidation preference.  Dividends are payable semi-
annually at an annual rate of 11-1/4%, and may (prior to March 15, 2002) be
paid, at the Company's option, either in cash or in additional shares of New
Preferred Stock.  Concurrent with the offering, the loan agreement with a senior
lending institution was amended to allow for the sales of the offering and the
$47.7 million dividend to Lancer.

     On March 27, 1997, First Colony Farms, Inc., a Delaware corporation and
wholly-owned subsidiary of Lancer ("First Colony"), merged with and into the
Company, with the Company being the surviving corporation of the merger.
Immediately prior to the merger, First Colony had (i) no known liabilities
(including contingent liabilities) and (ii) assets consisting of approximately
$10,000 in cash and certain net operating loss carry forwards.

Susceptibility to General Economic Conditions

     The Company's revenues and results of operations will be subject to
fluctuations based upon general economic conditions.  If there were to be a
general economic downturn or a recession in the United States or certain other
markets, the Company believes that certain of its customers may reduce or delay
their demand for the Company's products which may have a negative effect on the
Company's revenues.  Most of the factors that might influence customers and
prospective customers to reduce their capital budgets under these circumstances
are beyond the Company's control.  During prior recessionary periods, the
Company's operating performance has been negatively affected, and there can be
no assurance that any future economic downturn would not materially and
adversely affect the Company's business, financial condition and operating
results.  In addition, there can be no assurance that growth in the markets from
the Company's products will occur or that such growth will result in increased
demand for the Company's products.

Intellectual Property

     The trade name Torque-Hub ("Torque-Hub") is a registered trademark.  The
Company's planetary gear systems are sold under the Torque-Hub trade name.  The
Company, directly and through its wholly-owned subsidiary, T-H Licensing, Inc.,
owns numerous patents worldwide.  None of such patents is considered material to
the Company's business.

<PAGE>

Item 2.        PROPERTIES

     The Company owns and operates a single facility in Lafayette, Indiana
consisting of 39 acres of land, approximately 520,000 square feet of
manufacturing space and approximately 60,000 square feet of office space.  The
Lafayette facility is well maintained and is in good condition.

Item 3.        LEGAL PROCEEDINGS

     The Company is a party to routine litigation incidental to the conduct of
its business, much of which is covered by insurance and none of which is
expected to have a material adverse effect on the Company.

Item 4.        SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

     No matter was submitted to a vote of the Company's security holders during
the fiscal year ended December 31, 1997.

                                     PART II


Item 5.   MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

Market Information:

     There is currently no established public trading market for the Company's
common stock which is wholly-owned by Lancer.

Dividends:

     During February 1997, the Company declared a $3.1 million dividend to
Lancer.  The dividend was used to repay the $3.0 million advance to Lancer and
accrued interest of $0.1 million.

     On March 12, 1997, the Company used the net proceeds of $47.7 million from
the offering of its 11-1/4% Series A Cumulative Exchangeable Preferred Stock to
fund a dividend to Lancer.  Lancer used the dividend to redeem approximately
$47.7 million of its Series C Preferred Stock.
     
Issuance of Common Stock:

     The Company issued 52,000 additional shares of its common stock on March
31, 1997, 53,000 shares on June 30, 1997, and 280,000 shares on December 31,
1997 to Lancer in consideration of certain capital contributions made by Lancer
to the Company pursuant to the Tax Sharing Agreement (as defined in Item 13).

Item 6.        SELECTED FINANCIAL DATA

     The following selected financial data for the Company for the five years
ended December 31, 1997 has been derived from the audited consolidated financial
information for the Company for such periods.  The following selected financial
data should be read in connection with "Management's Discussion and Analysis of
Financial Condition and Results of Operations", and is qualified in its entirety
by reference to, the Consolidated Financial Statements and Notes thereto of the
Company and contained elsewhere herein.

<PAGE>

                                          Year Ended December 31,
                                 1997     1996      1995     1994     1993
                                 (dollars in thousands, except share data)
Income Statement Data:                                                      
Net sales                     $192,281 $195,205  $192,111 $150,689  $124,779
Cost of sales                  157,715  158,668   151,890  123,091   103,603
Selling, general and            16,989   16,868    14,759   15,924    12,323
administrative expenses
Operating income                17,577   19,669    25,462   11,673     8,853
Interest expense                12,676   11,930    12,905   12,377    11,345
Other expense, net                  80       90       127      199       227
Income (loss) before income      4,821    7,649    12,430    (903)   (2,719)
taxes, extraordinary
item and cumulative
effect of change in
accounting principle
Provision (benefit) for          2,640    3,730     5,520    (164)     (935)
income taxes
Income (loss) before             2,181    3,919     6,910    (739)   (1,784)
extraordinary item and
cumulative effect of
change in accounting
principle
Extraordinary loss on early         --       --        --       --   (4,455)
extinguishment of debt,
net of tax (1)
Cumulative effect of change         --       --        --  (1,554)   (4,625)
in accounting principle,
net of tax (2)
Net income (loss)               $2,181   $3,919    $6,910 $(2,293) $(10,864)
Dividends and discount         (4,686)       --        --       --        --
accretion of cumulative
exchangeable preferred
stock
Net income  (loss)  available $(2,505)   $3,919    $6,910 $(2,293) $(10,864)
to common stockholder 
Net income  (loss) per common  $(0.32)    $0.51     $1.15  $(0.77)   $(3.65)
share
Dividend declared per common     $6.50    $2.19        --       --     $0.67
share
Weighted average common      7,871,776 7,726,557 6,018,072 2,976,471 2,976,471
shares outstanding
                                                                            
Balance Sheet Data (at period                                               
end):
Working capital                 $7,824  $12,123   $17,280   $8,348   $18,125
Total assets                   173,212  176,370   183,155  170,581   174,470
Long-term debt (including      114,000  118,000   113,000  115,000   121,444
current maturities)
Stockholder's equity          (52,188)  (4,570)     9,958       45     1,278
(deficit)
                                                                            
Other Data:                                                                 
EBITDA(3)                      $30,104  $32,016   $36,971  $22,621   $19,475
Depreciation                    11,000   10,830    10,027    9,540     9,242
Amortization(4)                  2,278    2,277     2,245    2,310     2,604
Cash interest expense, net(5)   12,005   11,260    12,269   11,674    10,348
Capital expenditures            10,005    9,986    15,090    9,164     4,145
                                                                            
(1)  During 1993, the Company recorded an extraordinary loss of $4.5 million,
  net of tax, relating to the early extinguishment, and refinancing of, the
  outstanding debt at June 30, 1993.
(2)  During 1993, the Company recorded a one time non-cash charge of
  $4.6 million, net of tax, relating to the cumulative effect of adopting
  Statement of Financial Accounting Standards No. 106 "Employers Accounting for
  Postretirement Benefits Other Than Pensions."
During 1994, the Company recorded a one-time non-cash charge of $1.6 million,
  net of tax, relating to the cumulative effect of adopting Statement of
  Financial Accounting Standards No. 112, "Employers Accounting for
  Postemployment Benefits."
(3)  EBITDA represents income (loss) before income taxes, preferred stock
  dividends and discount accretion, extraordinary item, cumulative effect of a
  change in accounting principle, interest expense, net, depreciation and
  amortization.  EBITDA is not presented herein as an alternative measure of
  operating results or cash flow but rather to provide additional information
  related to debt service capability.
(4)  Includes the amortization of deferred financing costs and the amortization
  of the excess of investment over net assets acquired.
(5)  Cash interest expense, net includes interest income, but excludes
  amortization of deferred financing costs of $0.7 million for fiscal 1997 and
  fiscal 1996, $0.6 million for fiscal 1995, $0.7 million for fiscal 1994 and
 $1.0 million for fiscal 1993.

<PAGE>

          Item 7.        MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
                         CONDITION AND RESULTS OF OPERATIONS

Results of Operations

Fiscal Year 1997 Compared with Fiscal Year 1996

     Net sales for 1997 decreased by $2.9 million, or 1.5%, to $192.3 million
compared to $195.2 million in 1996 principally due to weaker demand for the
Company's products during the first quarter of 1997 versus the first quarter of
1996.

     Cost of sales for 1997 decreased by $1.0 million, or 0.6%, to $157.7
million, or 82.0% of net sales, compared to $158.7 million, or 81.3% of net
sales in 1996.  This decrease is primarily due to the decrease in net sales
partially offset by increased employment and training costs during the second
half of 1997 to meet increased demand (see Item 1, Backlog).

     Selling, general and administrative expenses ("SG&A"), including goodwill
amortization, increased to $17.0 million in 1997, compared to $16.9 million in
1996.  SG&A expenses for 1997 included $1.1 million primarily related to a
consulting agreement with the Company's former Chairman of the Board (see Note
12 to the Company's 1997 Consolidated Financial Statements) and for 1996
included a $0.5 million write-off of a receivable due to a customer's
bankruptcy.

     Earnings from operations for 1997 decreased $2.1 million to $17.6 million,
compared to $19.7 million in 1996, primarily due to the factors above.

     Interest expense, including amortization of deferred financing costs, was
$12.7 million for 1997, compared to $11.9 million for 1996.  The principal
reason for the increase was higher outstanding debt levels during 1997 due to a
$15.0 million increase in debt during December 1996 which was used to fund a
$17.0 million dividend to Lancer.

         Income before income taxes was $4.8 million for 1997, compared to $7.6
million for 1996.      

     The effective tax rates for 1997 and 1996 were 54.8% and 48.8%,
respectively.  See the Notes to the Consolidated Financial Statements for a
further discussion of income taxes.

         The Company's net income for 1997 was $2.5 million, as compared to $3.9
million for 1996.      

Fiscal Year 1996 Compared with Fiscal Year 1995

     Net sales for 1996 increased by $3.1 million, or 1.6%, to $195.2 million
compared to $192.1 million in 1995.  This increase was primarily due to an
increase in planetary gear sales of $8.8 million, partially offset by a decrease
in custom gear sales of $5.7 million.

     Cost of sales for 1996 increased by $6.8 million, or 4.5%, to $158.7
million, or 81.3% of net sales, compared to $151.9 million, or 79.1% of net
sales in 1995.  This increase primarily resulted from the increased sales of
planetary gear systems, which have a higher material cost component compared to
custom gear products, as well as increased costs associated with the Company's
investment in new processes that reduced manufacturing cycle times from 50 days
in 1995 to 32 days at the end of 1996, and resulted in a reduction in inventory.

<PAGE>

     Selling, general and administrative expenses, including goodwill
amortization, increased to $16.9 million in 1996, compared to $14.8 million in
1995.  This increase resulted primarily from investments in marketing, sales and
design engineering and the write-off of a $0.5 million receivable due to a
customer's bankruptcy.

     Earnings from operations for 1996 decreased $5.8 million to $19.7 million,
compared to $25.5 million in 1995, primarily due to the factors mentioned above.

     Interest expense, including amortization of deferred financing costs, was
$11.9 million for 1996, compared to $12.9 million for 1995.  The principal
reason for the decrease was lower average outstanding debt levels due to
improvements in working capital management and the reduction in inventory
described above.

     Income before income taxes was $7.6 million for 1996, compared to $12.4
million for 1995.

     The effective tax rates for 1996 and 1995 were 48.8% and 44.4%,
respectively.  See the Notes to the Consolidated Financial Statements for a
further discussion of income taxes.

     The Company's net income was $3.9 million for 1996, compared to $6.9
million for 1995.


Liquidity and Capital Resources

     On July 7, 1993, the Company completed the sale of $85.0 million of 11-3/8%
Senior Subordinated Notes (the "Notes").  The Notes mature on July 1, 2001 and
are redeemable at the option of the Company, in whole or in part, on or after
July 1, 1998, at certain specified redemption prices.  Concurrent with the
issuance of the Notes, the Company entered into a loan agreement with a senior
lending institution which provides for a revolving credit facility and a term
loan.  The revolving credit facility matures on July 1, 2001 and the term loan
matures on December 31, 2000.  The loan agreement was amended in March 1997 in
connection with the sale of Series A 11-1/4% Cumulative Exchangeable Preferred
Stock (the "Preferred Stock") to allow for the sale of the Preferred Stock and
the $47.7 million dividend to Lancer.

         Net cash provided by operating activities was $12.1 million in 1997
compared to $26.6 million in 1996 and $13.9 million in 1995.  The decrease in
cash flow from operating activities was principally due to an increase of $5.0
million in inventory in 1997 versus a $6.0 million decrease in inventory in
1996.  The Company increased inventory at December 31, 1997 to meet the
significant increase in the demand for its products (see Item 1, Backlog).      

     Capital expenditures totaled $10.0 million, $10.0 million and $15.1 million
in 1997, 1996 and 1995, respectively.  The level of capital spending during 1995
to 1997 was primarily a result of increased manufacturing requirements due to
increased sales volume and increased order backlog.

         Net cash from financing activities was a net usage of $4.3 million and
$13.6 million in 1997 and 1996, respectively, and a net source of $0.7 million
in 1995.  The 1996 net usage funded a portion of the $17.0 million dividend paid
to Lancer and the $3.0 million advance made to Lancer in December 1996.      

     Under the Tax Sharing Agreement (as defined hereinafter), Lancer made
capital contributions to the Company of $2.6 million, $1.6 million, and $2.5
million in 1997, 1996 and 1995, respectively.  See Notes to the Consolidated
Financial Statements for a further discussion of capital contributions made
pursuant to the Tax Sharing Agreement.

<PAGE>

Inflation

     The impact of inflation on the Company's operations has not been
significant to date.  However, there can be no assurance that a high rate of
inflation in the future would not have an adverse effect on the Company's
operating results.

Impact of the Year 2000 Issue

     The Company reviewed and estimated its planned expenditures to become Year
2000 compliant.  The Company estimates these costs will not materially affect
income over the next two years.

Information Concerning Forward-Looking Statements

     This report contains certain forward-looking statements within the meaning
of Section 27A of the Securities Act of 1933.  Such statements are subject to a
number of risks and uncertainties, including among other things, competition,
susceptibility, of the Company's business, control of the Company by Lancer
Industries Inc., dependence on suppliers, and risks related to unionized
employees.  Actual results in the future could differ materially from those
described in the forward-looking statements as a result of such risk factors.
The Company undertakes no obligation to publicly release the result of any
revisions of these forward-looking statements that may be made to reflect any
future events or circumstances.

Item 8.   FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

     Reference is made to the Consolidated Financial Statements beginning at
page F-1 herein.

Item 9.   CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
          FINANCIAL DISCLOSURE

     None.

<PAGE>
                                    PART III


Item 10.  DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

     The following table sets forth certain information with respect to the
directors and executive officers of the Company.


     Name                     Age    Position
                                     
     Kenneth A. Burns         45     Chairman of the Board, President
                                     and Chief Executive Officer
     Paul S. Levy             50     Director, Vice President and
                                     Assistant Secretary
     Peter A. Joseph          45     Director, Vice President and
                                     Secretary
     W. B. Lechman            65     Director
     Jess C. Ball             56     Director
     Richard A. Bush          40     Vice President Finance
     James R. Dammon          54     Vice President Engineering
     Mark D. Gustus           38     Vice President Operations
     Michael M. Manty         54     Vice President Human Resources
                                     and Total Quality
     Frederick G. Sharp       43     Vice President Marketing and
                                     Sales

     Mr. Burns was appointed Chairman of the Board effective August 1997.  Mr.
Burns was named President and Chief Executive Officer effective April 1997.
Prior to his appointment, Mr. Burns had been President and Chief Operating
Officer of the Company from May 1996 to April 1997.  Mr. Burns also served as
Vice President Operations from January 1996 to May 1996.  From 1987 through July
1995, Mr. Burns served as an executive officer, including Executive Vice
President, of Abex/NWL Aerospace and its predecessors.
     
     Mr. Levy has been Vice President and Assistant Secretary and a Director of
the Company since 1989.  Mr. Levy has been a General Partner of Joseph
Littlejohn & Levy since its inception in 1988.  Mr. Levy has served as Chief
Executive Officer and Chairman of the Board of Directors of Lancer since July
1989.  Mr. Levy is also on the Board of Directors of Freedom Chemical Company,
Hayes Wheels International, Inc., and Peregrine Inc.

     Mr. Joseph has been Vice President and Secretary and a Director of the
Company since 1989.  Mr. Joseph has served as President of Lancer since April
1992 and as Secretary and Director of Lancer since July 1989.  Mr. Joseph is
also on the Board of Directors of Freedom Chemical Company.

     Mr. Lechman served as Chairman of the Board from October 1994 to July 1997.
Prior to his appointment, Mr. Lechman had been President of the Company from
1983 to October 1994 and was Chief Executive Officer from 1989 to October 1994.
Mr. Lechman has been a Director of the Company since 1989.  Mr. Lechman serves
on the Board of Directors of Bank One Lafayette, Lafayette Life Insurance Co.,
Lafayette Community Foundation, Lafayette Junior Achievement, The Salvation Army
and is President Emeritus of the American Gear Manufacturers Association.

<PAGE>
     
     Mr. Ball is currently the President and CEO of Peregrine Inc.  Mr. Ball was
President and Chief Executive Officer of the Company from October 1994 to May
1996.  Mr. Ball has been a Director of the Company since 1991.  From December
1991 through September 1994, Mr. Ball was President and Chief Executive Officer
of Alford Industries (a company which filed for bankruptcy protection and has
been liquidated).  From February 1991 through November 1991, Mr. Ball served as
President and Chief Executive Officer of Golding Industries, Inc.

     Mr. Bush has been Vice President of Finance of the Company since November
1994.  From 1990 to 1994, Mr. Bush was Controller for two different aerospace
units of Abex Inc.  From 1980 to 1990, Mr. Bush was with Arthur Andersen & Co.
in the audit and financial consulting practice.

     Mr. Dammon has been Vice President of Engineering since 1987.  Prior to his
present position, Mr. Dammon was Director of Engineering, Manager of New Product
Development, Manager of Customer Engineering Service and Gear Design Engineer.
Mr. Dammon has been with the Company for over 30 years.

     Mr. Gustus has been Vice President of Operations since July 1997.  Prior to
his present position, Mr. Gustus was Director of Materials and Assembly.  Mr.
Gustus has been with the Company for over 15 years.

     Mr. Manty has been Vice President of Human Resources of the Company since
February 1995 and Vice President Total Quality and Human Resources since January
1997.  From 1990 to 1995, Mr. Manty was Director of Human Resources for Allied
Signal Aerospace.  Prior to 1990, Mr. Manty performed labor relations consulting
work with Modern Management, Inc. and held senior level human resource positions
with Pneumo Corporation and Chrysler Corporation.

     Mr. Sharp was Vice President of Marketing and Sales of the Company from
August 1996 to February, 1998.  Effective February 6, 1998, Mr. Sharp resigned
from the Company.  From 1991 to July 1996, Mr. Sharp served as Director of
Program Management for United Defense L.P. and its predecessor BMY Combat
Systems Division.  Prior to 1991, Mr. Sharp held senior level positions with
General Electric and NWL Control Systems.
     
Compensation of Directors

     Messrs. Ball and Lechman each receive an annual fee of $30,000 per year for
services as a director.  Mr. Ball did not receive any fees during the period
October 1994 to December 1996.  Mr. Lechman did not receive any fees prior to
August 1997.  No other director receives any additional compensation for
services as a director or for serving on committees of the Board of Directors of
the Company or for meeting attendance.

<PAGE>

Item 11.  EXECUTIVE COMPENSATION

     The following table sets forth for each of the fiscal years ending December
31, 1997, 1996 and 1995, the compensation paid to or accrued by (i) the Chairman
of the Board (the "Chairman") of the Company and (ii) each of the four most
highly compensated executive officers other than the Chairman.

                           Summary Compensation Table

          Name and         Annual Compensation       All Other
     Principal Position  Year   Salary  Bonus(1)  Compensation(2)
                                                            
     W. B. Lechman (3)   1997  $253,860      $--      $31,650
     Chairman of the     1996   256,668   50,000      135,720
     Board               1995   253,891       --      131,363
                                                             
     Kenneth A. Burns    1997  $250,000  $65,000      $12,900
     Chairman of the     1996   185,279  100,000        3,325
     Board,
     President and Chief                                     
     Executive Officer
                                                             
     James R. Dammon     1997  $114,000  $30,000       $6,079
     Vice President      1996   114,437   57,000        4,988
     Engineering         1995   110,431   65,467        5,524
                                                             
     Michael M. Manty    1997  $111,600  $30,000       $6,507
     Vice President      1996   102,257   52,000       24,981
     Human               1995    93,495   94,154        5,234
     Resources and Total Quality
                                                             
     Richard A. Bush     1997  $104,004  $30,000       $6,874
     Vice President      1996   103,537   52,000        5,950
     Finance             1995   100,031   59,300        4,399
                                                             
     Frederick G. Sharp  1997  $110,000  $30,000       $5,714
     (4) Vice President  1996    40,595   20,296      110,810
     Marketing and Sales

(1)    Amounts shown were earned under the Fairfield Manufacturing Company
  Management Incentive Compensation Plan.

(2)  Amounts shown include contributions by the Company to The Savings Plan For
  Employees of Fairfield Manufacturing Company, Inc. for the benefit of the
  named executives, imputed income on life insurance provided by the Company,
  reimbursement of relocation expenses for Mr. Burns, Mr. Manty and Mr. Sharp, a
  signing bonus for Mr. Sharp, imputed income on an automobile for Mr. Lechman,
  the purchase of Equity Participation Rights held by Mr. Lechman, and
  contributions to an insurance company of $110,000 for 1996 and 1995 to fund a
  supplemental retirement annuity policy for Mr. Lechman.

(3)  Mr. Lechman is no longer employed by the Company and as of August 1, 1997
  entered into a consulting agreement with the Company (see Note 12 to the
  Company's 1997 Consolidated Financial Statements).

(4)  Mr. Sharp resigned from the Company effective February 6, 1998.

<PAGE>

                               FY- End SAR Values

                      No. of Unexercised      Value of
                        SARs at FY-End       Unexercised
                         Exercisable/      SARs at FY-End
       Name           Unexercisable (1)     Exercisable/
                                            Unexercisable
                                                  
James R. Dammon            0/10,800              0/0



(1)  Equity Participation Rights (the "Rights" issued to participants in the
     Fairfield Manufacturing Company, Inc. Equity Participation Plan (the
     "Equity Participation Plan"). Mr. Dammon holds 10,800 Rights, under the
     Equity Participation Plan, all of which are fully vested.  Each Right
     entitles Mr. Dammon to receive, upon the occurrence of a Trigger Event (as
     defined in the Equity Participation Plan), an amount in cash equal to the
     difference between the Fair Market Value of a Right (as of the Trigger
     Event) and $16.67, the initial value assigned to each Right.

     Pension Plan Table

     The Company maintains the Retirement Plan for Employees of Fairfield
Manufacturing Company, Inc., a qualified defined benefit pension plan intended
to be qualified under the Internal Revenue Code (the "Pension Plan").

                                        Estimated Annual Benefits for
                                      Years of Benefit Service Indicated(2)

                                                                    
                                                                       
     Remuneration       5     10       15     20      25      30      35
     (1)
     $100,000        $6,707 $13,414 $20,121 $26,828 $33,535 $40,242 $41,492
     $125,000         8,519  17,039  25,558  34,078  42,597  51,117  52,679
     $150,000 and    10,332  20,664  30,996  41,208  51,660  61,992  63,867
     over

(1)  The preceding table illustrates the aggregate pension benefits provided by
     the Pension Plan calculated on a straight life annuity basis.  The amounts
     set forth in the table are subject to reduction for any Social Security
     offset.  Average annual compensation covered under the Pension Plan is the
     highest average annual total compensation received from the Company for any
     60 month period during the 120 months immediately preceding the
     participant's separation from service.  Annual total compensation for
     Pension Plan purposes includes all compensation disclosed in the Summary
     Compensation Table.

(2)  At December 31, 1997, Messrs. Burns, Dammon, Manty, Bush, and Sharp had 2,
     32, 3, 3 and 1 whole years of credited service, respectively, for purposes
     of calculating their benefits under the Pension Plan.

<PAGE>

Employment, Consulting and Change in Control Agreements

     Effective July 31, 1997, W. B. Lechman resigned as Chairman of the
Company's Board of Directors (the "Board") but will continue as a member of the
Board.  Kenneth A. Burns, President and Chief Executive Officer was appointed as
Chairman of the Board upon Mr. Lechman's resignation.

     Effective August 1, 1997, Mr. Lechman entered into a consulting agreement
(the "Agreement") with the Company.  In consideration for services to be
rendered under the Agreement, Mr. Lechman will receive quarterly payments
through July 31, 2001 ("the consulting period") totaling $1.0 million.  In the
event that Mr. Lechman dies prior to the end of the consulting period or is
unable to perform the services requested due to mental or physical disabilities,
the Company shall pay to his legal representatives or beneficiaries the
remaining unpaid balance under the Agreement which would have been due under the
agreement had Mr. Lechman continued to provide such services for the term of the
Agreement.  Due to the provisions of the agreement, the Company has recognized
the entire $1.0 million as expense in 1997.
     
     The Company entered into an employment agreement with Kenneth A. Burns,
effective June 1, 1996.

     Mr. Burns' employment agreement provides that he will serve as President
and Chief Operating Officer of the Company.  The agreement is for a term that
expires on June 1, 1998.  The agreement provides for Mr. Burns to receive a base
salary of $200,000 or such greater amount as may be determined by the Board of
Directors of the Company.  In addition, Mr. Burns is eligible to participate in
any benefit plan that the Company provides to its executives from time to time.

     Mr. Burns' employment agreement contains restrictions on disclosure by him
of confidential information and generally restricts his right to compete with
the Company during the term of his employment.  Mr. Burns' employment pursuant
to the agreement is terminable upon his death or disability or by the Company or
Mr. Burns for cause (as defined therein) or without cause.  Upon Mr. Burns'
death or disability prior to June 1, 1998, he or his estate will receive any
salary accrued through the termination date.  If, prior to June 1, 1998,
Mr. Burns' employment is terminated by the Company for cause, or he terminates
his employment other than for cause, he will receive his salary accrued through
the termination date.  In the event Mr. Burns terminates his employment for
cause or the Company terminates his employment without cause prior to June 1,
1998, he will be entitled to his base salary through June 1, 1998.

<PAGE>

Item 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

     The following table sets forth information regarding the beneficial
ownership of the common stock of the Company by (i) each director of the
Company, (ii) the executive officers of the Company listed under the caption
"Management" and (iii) each person known by the Company to beneficially own in
excess of 5% of the outstanding shares of the Company's common stock as of
December 31, 1997.

                                Number      Percent   Number        
                                of          of        of Fully    Percent of
Name                            Shares      shares    Diluted     Fully
                                Owned       Outstand  Shares      Diluted
                                            ing                   Shares
                                                                        
  Lancer Industries Inc.(1)   8,190,000        100%  8,190,000       100%
  450 Lexington Avenue,
  Suite 3350
  New York, New York 10017
Chase Manhattan Bank, as            --  (2)      --         --         --
  Trustee of the Lancer                
  Industries Inc. Employee
  Stock Ownership Plan, 1
  Chase Manhattan Plaza,
  New York, New York 10005
Paul S. Levy                        --  (2)       --        --          --
Peter A. Joseph                     --  (2)       --        --          --
W. B. Lechman                       --            --        --          --
Jess C. Ball                        --            --        --          --
Kenneth A. Burns                    --            --        --          --
Richard A. Bush                     --            --        --          --
James R. Dammon                     --            --        --          --
Mark D. Gustus                      --            --        --          --
Michael M. Manty                    --            --        --          --
Frederick G. Sharp                  --            --        --          --
All directors and executive         --            --        --          --
  officers as a group
  (10 persons)

(1)  100% of the capital stock of the Company is owned by Lancer.  Lancer has
     pledged such shares to the lender under the GE Credit Agreement (as
     defined) as security for the Company's obligations thereunder.

(2)  Lancer, which is currently the owner of 100% of the capital stock of the
     Company, has one class of common stock, Class B Common Stock, with a par
     value of $478.44 per share.  7.3 shares, or approximately 42.8%, of the
     Class B Common Stock are held by the ESOP.  Messrs. Levy and Joseph are
     participants in the ESOP.  Each of Messrs. Levy and Joseph have sole voting
     power with respect to approximately 2.7 shares of the Class B Common Stock
     held by the ESOP; and other participants in the ESOP have sole voting power
     with respect to approximately 1.81 shares of such stock.  Messrs. Levy and
     Joseph, and in limited circumstances the ESOP trustee, have shared
     investment power with respect to 7.3 shares of such stock.  Messrs. Levy
     and Joseph have been allocated an aggregate of approximately 5.5 shares, or
     approximately 32.2%, of the Class B Common Stock held by the ESOP.  Each of
     Messrs. Levy and Joseph disclaim beneficial ownership of any shares of
     Class B Common Stock held by the ESOP that have been allocated to other
     parties.  In addition, Messrs. Levy and Joseph have the right to purchase
     approximately 0.26 shares of Class B Common Stock, or approximately 3.0% of
     Class B Common Stock in the aggregate and directly own approximately 1.37
     shares of Class B Common Stock.  In addition, certain funds affiliated with
     Mutual Series Fund Inc. beneficially own the remaining 41% of the Class B
     Common Stock.

<PAGE>

Item 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

Controlling Stockholders

     The Company is a wholly-owned subsidiary of Lancer.  A majority of Lancer's
voting stock is owned by the ESOP.  Two participants in the ESOP, Messrs. Paul
S. Levy and  Peter A. Joseph, collectively have the power to direct the voting
of approximately 48.2% of Lancer's common stock.  In addition, each of Messrs.
Levy and Joseph have the right to purchase an aggregate of approximately 3.0% of
Lancer's common stock.  As a result, these two participants in the ESOP have the
ability to exercise control over the current and future business and affairs of
the Company, including the ability to cause or prevent a change of control of
the Company, through their ability to elect the Company's Board of Directors and
their voting power with respect to actions requiring stockholder approval.

Tax Sharing Agreement

     The Company is included in the affiliated group of which Lancer is the
common parent, and the Company's federal taxable income and loss will be
included in such group's consolidated tax return filed by Lancer.  The Company
and Lancer have entered into a tax sharing agreement (the "Tax Sharing
Agreement") pursuant to which the Company has agreed to pay to Lancer amounts
equal to the taxes that the Company would otherwise have to pay if it were to
file separate federal, state or local tax returns (including amounts determined
to be due as a result of a redetermination of the tax liability of Lancer).  In
addition, pursuant to the Tax Sharing Agreement, to the extent that the
Company's separate return liability is absorbed by net operating losses or other
credits and deductions of Lancer or its subsidiaries (other than the Company and
its subsidiaries), Lancer will make a capital contribution to the Company in an
amount equal to 50% of such separate return liability.  Under certain
circumstances, however, such as the Company ceasing to be a member of the Lancer
consolidated group or the disallowance by the IRS of the use of Lancer's net
operating losses, Lancer no longer would be required to make capital
contributions under the Tax Sharing Agreement.  See the Notes to the
Consolidated Financial Statements for a further discussion of income taxes.

Other Arrangements with Lancer

     From time to time, Lancer incurs legal, accounting and miscellaneous other
expenses on behalf of the Company.  In fiscal 1997, 1996 and 1995, the Company
made aggregate payments to Lancer in respect of such expenses incurred by Lancer
on the Company's behalf in the amounts of approximately $0.5 million, $0.6
million and $0.6 million, respectively.

     During February 1997, the Company declared a $3.1 million dividend to
Lancer.  The dividend was used in settlement of $3.0 million advance to Lancer
and accrued interest of $0.1 million.

     On March 12, 1997, with the net proceeds from the sale of the Preferred
Stock, the Company paid a $47.7 million dividend to Lancer.  The dividend was
used by Lancer to redeem approximately $47.7 million of its Series C Preferred
Stock.

<PAGE>

                                     PART IV


Item 14.  EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.

          (a) (1) and (2):

          See Index to Consolidated Financial Statements and Financial Statement
Schedule appearing on page F-1.

          (3)  The following is a list of exhibits hereto required to be filed
by Item 601 of Regulation S-K of the Securities and Exchange Commission:

     Exhibit No.                 Description
     (2) (a)      Merger Agreement under the State of Delaware between
                  First Colony Farms, Inc. ("First Colony") and
                  Fairfield Manufacturing Company, Inc. ("Fairfield")
                  dated as of March 24, 1997, incorporated by reference
                  from Exhibit 2(c) to Fairfield's Form S-4 as filed
                  with the Securities and Exchange Commission on April
                  9, 1997 (the "1997 Form S-4").
     (2) (b)      Certificate of Merger, merging First Colony with and
                  into Fairfield, incorporated by reference from
                  exhibit 2(d) to the 1997 Form S-4.
     (3) (a)      Restated Certificate of Incorporation of Fairfield,
                  together with the Certificate of Amendment, dated
                  March 7, 1997, and filed on March 11, 1997,
                  incorporated by reference from Exhibit 3(a) to the
                  1997 Form S-4.
     (3) (b)      By-Laws of Fairfield, incorporated by reference from
                  Exhibit 3(c) to Fairfield's Form 10-K as filed with
                  the Securities and Exchange Commission on March 22,
                  1995 (the "1994 Form 10-K").
     (4) (a)      Indenture, dated as of July 7, 1993, between
                  Fairfield and First Fidelity Bank, National
                  Association, New York, as trustee, incorporated by
                  reference from Exhibit 4(a) to Fairfield's Form 10-Q
                  as filed with the Securities and Exchange Commission
                  on August 16, 1993 (the "Second Quarter 1993 Form 10-
                  Q").
     (4) (b)      Supplemental Indenture No. 1, dated as of March 31,
                  1995, between CAG as successor-in-interest to
                  Fairfield and First Fidelity Bank, National
                  Association, as trustee, incorporated by reference
                  from Exhibit 4(b) to the 1994 Form 10-K.
     (4) (c)      Indenture, dated as of March 12, 1997, between
                  Fairfield and United States Trust Company of New York
                  as Trustee, incorporated by reference from Exhibit
                  4(c) to the 1997 Form S-4.
     (4) (d)      Certificate of Designation, dated March 12, 1997, for
                  the Existing Preferred Stock, incorporated by
                  reference from Exhibit 4(d) to the 1997 Form S-4.
     (9)          Voting Trust Agreement

                          Not Applicable.

<PAGE>

     (10) (a)     Loan Agreement, dated as of July 7, 1993, among
                  Fairfield, the lenders named therein and General
                  Electric Capital Corporation ("GECC"), as agent,
                  incorporated by reference from Exhibit 10(a) to the
                  Second Quarter 1993 Form 10-Q.
     (10) (b)     Security Agreement, dated as of July 7, 1993, between
                  T-H Licensing, Inc. ("T-H Licensing") and GECC, as
                  agent, incorporated by reference from Exhibit 10(d)
                  to the Second Quarter 1993 Form 10-Q.
     (10) (c)     Stock Pledge Agreement, dated as of July 7, 1993,
                  between Fairfield and GECC, as agent, incorporated by
                  reference from Exhibit 10(e) to the Second Quarter
                  1993 Form 10-Q.
     (10) (d)     Trademark Security Agreement, dated as of July 7,
                  1993, between Fairfield and GECC, as agent,
                  incorporated by reference from Exhibit 10(g) to the
                  Second Quarter 1993 Form 10-Q.
     (10) (e)     Trademark Security Agreement, dated as of July 7,
                  1993, between T-H Licensing and GECC, as agent,
                  incorporated by reference from Exhibit 10(h) to the
                  Second Quarter 1993 Form 10-Q.
     (10) (f)     Patent Security Agreement, dated as of July 7, 1993,
                  between Fairfield  and GECC, as agent, incorporated
                  by reference from Exhibit 10(i) to the Second Quarter
                  1993 Form 10-Q.
     (10) (g)     Patent Security Agreement, dated as of July 7, 1993,
                  between T-H Licensing and GECC, as agent,
                  incorporated by reference from Exhibit 10(j) to the
                  Second Quarter 1993 Form 10-Q.
     (10) (h)     Subsidiary Guaranty, dated as of July 7, 1993,
                  between T-H Licensing and GECC, as agent,
                  incorporated by reference from Exhibit 10(k) to the
                  Second Quarter 1993 Form 10-Q.
     (10) (i)     Mortgage, Assignment of Leases, Rents and Profits,
                  Security Agreement and Fixture Filing, dated as of
                  July 7, 1993, between Fairfield and GECC, as agent,
                  incorporated by reference from Exhibit 10(l) to the
                  Second Quarter 1993 Form 10-Q.
     (10) (j)     Collection Account Agreement, dated as of July 7,
                  1993, among Fairfield and GECC, and acknowledged by
                  Bank One, Lafayette, N.A., incorporated by reference
                  from Exhibit 10(m) to the Second Quarter 1993 Form 10-
                  Q.
     (10) (k)     Used Machinery Account Agreement, dated as of July 7,
                  1993, among Fairfield and GECC, and acknowledged by
                  Bank One, Lafayette, N.A., incorporated by reference
                  from Exhibit 10(n) to the Second Quarter 1993 Form 10-
                  Q.
     (10) (l)     Quitclaim Grant of Security Interest, dated as of
                  July 7, 1993, between Fairfield and GECC, as agent,
                  incorporated by reference from Exhibit 10(o) to the
                  Second Quarter 1993 Form 10-Q.
     (10) (m)     Supplemental Quitclaim Grant of Security Interest
                  (Patents only), dated as of July 7, 1993, between
                  Fairfield and GECC, as agent, incorporated by
                  reference from Exhibit 10(p) to the Second Quarter
                  1993 Form 10-Q.
     (10) (n)     First Amendment to Loan Agreement, dated as of
                  September 30, 1994, among Fairfield, the lenders
                  named therein and GECC, as agent, incorporated by
                  reference from Exhibit 10(q) as filed with the
                  Securities and Exchange Commission on November 14,
                  1994.

<PAGE>

     (10) (o)     Second Amendment to Loan Agreement, dated as of March
                  30, 1995, among Fairfield, the lenders named therein
                  and GECC, as agent, incorporated by reference from
                  Exhibit 10(r) to the 1994 Form 10-K.
     (10) (p)     Third Amendment to Loan Agreement, dated as of March
                  31, 1995, among Fairfield, the lenders named therein
                  and GECC, as agent, incorporated by reference from
                  Exhibit 10(s) to the 1994 Form 10-K.
     (10) (q)     First Amendment to Mortgage Assignment of Leases,
                  Rents and Profits, Security Agreement and Fixture
                  Filing, dated as of March 31, 1995, between Fairfield
                  and GECC, as agent,  incorporated by reference from
                  Exhibit 10(t) to the 1994 Form 10-K.
     (10) (r)     Stock Pledge Agreement, dated as of March 31, 1995,
                  between Lancer Industries Inc. ("Lancer") and GECC,
                  as agent, incorporated by reference from Exhibit
                  10(u) to the 1994 Form 10-K.
     (10) (s)     Amended and Restated Security Agreement, dated as of
                  March 31, 1995, between Fairfield and GECC, as agent,
                  incorporated by reference from Exhibit 10(v) to the
                  1994 Form 10-K.
     (10) (t)     The Fairfield Manufacturing Company, Inc. Equity
                  Participation Plan, dated August 21, 1989
                  incorporated by reference from Exhibit 10(x) to
                  Fairfield's Form 10-K as filed with the Securities
                  and Exchange Commission on March 15, 1996 (to the
                  "1995 Form 10-K").
     (10) (u)     The Collective Bargaining Agreement, ratified October
                  28, 1995, between Fairfield and United Auto Workers'
                  Local 2317 incorporated by reference from Exhibit
                  10(y) to the 1995 Form 10-K.
     (10) (v)     The Tax Sharing Agreement, dated as of July 18, 1990,
                  between Fairfield and Lancer, incorporated by
                  reference from Exhibit 10(z) to the 1995 Form 10-K.
     (10) (w)     The Fairfield Manufacturing Company, Inc. (1992)
                  Supplemental Executive Retirement Plan incorporated
                  by reference from Exhibit 10(aa) to the 1995 Form 10-
                  K.
     (10) (x)     Letter Agreement, dated December 29, 1989, granting
                  exclusive license from T-H Licensing to Fairfield
                  incorporated by reference from Exhibit 10(bb) to the
                  1995 Form 10-K.
     (10) (y)     Fourth Amendment to Loan Agreement, dated as of
                  December 5, 1996, among Fairfield, the lenders named
                  therein and GECC, as agent, incorporated by reference
                  from Exhibit 10(cc) to Fairfield's Form 10-K as filed
                  with the Securities and Exchange Commission on
                  February 25, 1997 (the "1996 Form 10-K").
     (10) (z)     Second Amendment to Mortgage Assignment of Leases,
                  Rents and Profits, Security Agreement and Fixture
                  Filing, dated as of December 5, 1996, between
                  Fairfield and GECC, as agent, incorporated by
                  reference from Exhibit 10(dd) to the 1996 Form 10-K.
     (10) (aa)    Fifth Amendment to the Loan Agreement, dated as of
                  February 26, 1997, among Fairfield, the lenders named
                  therein and GECC, as agent, incorporated by reference
                  from Exhibit 10(ee) to the 1997 Form S-4.
     (10) (bb)    The Employment Agreement, dated as of June 1, 1996,
                  between Fairfield and K. A. Burns, incorporated by
                  reference from Exhibit 10(ee) to the 1996 Form 10-K.

<PAGE>

     (10) (cc)    Consent and Amendment, dated as of March 27, 1997,
                  among Fairfield and GECC, as sole lender and agent,
                  incorporated by reference from Exhibit 10(gg) to the
                  1997 Form S-4.
     (10) (dd)    Securities Purchase Agreement, dated March 7, 1997,
                  between Fairfield and the Initial Purchaser,
                  incorporated by reference from Exhibit 10(hh) to the
                  1997 Form S-4.
     (10) (ee)    Share Registration Rights Agreement, dated March 12,
                  1997, between Fairfield and the Initial Purchaser,
                  incorporated by reference from Exhibit 10(ii) to the
                  1997 Form S-4.
     (10) (ff)    Consulting Agreement, dated August 1, 1997, between
                  Fairfield and Wolodymyr B. Lechman, incorporated by
                  reference from Exhibit 10(hh) to Fairfield's Form 10-
                  Q as filed with the Securities and Exchange
                  Commission on November 12, 1997.
     (11)         Statement re computation of per share earnings.
                  
                            Not Applicable.
     (12)         Statement re Computation of ratios.
                  
                            Not Applicable.
     (13)         Annual Report to Security Holders, Form 10-Q or
                  Quarterly Report to Security Holders.
                  
                            Not Applicable.
     (16)         Letter re Change in Certifying Accountant.
                  
                            Not Applicable.
     (18)         Letter re change in accounting principles.
                  
                            Not Applicable.
     (21)         Subsidiaries of Fairfield Manufacturing Company, Inc.
                  
                            T-H Licensing, Inc.
     (22)         Published report regarding matters submitted to vote
                  of security holders.
                  
                            Not Applicable.
     (23)         Consents of experts and counsel.
                  
                            Not Applicable.
     (24)         Power of attorney.
                  
                            Not Applicable.
     (28)         Information from Reports Furnished to State Insurance
                  Regulatory Authorities.
                  
                            Not Applicable.

<PAGE>

     (99)         Additional exhibits.
                  
                            Not Applicable.

          (b) No reports on Form 8-K have been filed during the last quarter of
          the period covered by this report.

<PAGE>

                           SIGNATURE

     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 on the 30th day of
July, 1998.

                              FAIRFIELD MANUFACTURING
                              COMPANY, INC.


                              By:  /s/ Richard A. Bush
                                   Richard A. Bush
                                   Vice President Finance

<PAGE>

                      FAIRFIELD MANUFACTURING COMPANY, INC.
                                        
                 INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND
                                        
                          FINANCIAL STATEMENT SCHEDULE



                                                                     Page
                                                                     
Report of Independent Accountants                                    F - 2
                                                                     
Consolidated Balance Sheets, December 31, 1997 and 1996              F - 3
                                                                     
Consolidated Statements of Operations for the three years            F - 4
     ended December 31, 1997
                                                                     
Consolidated Statements of Stockholder's Equity (Deficit)            F - 5
     for the three years ended December 31, 1997
                                                                     
Consolidated Statements of Cash Flows for the three years            F - 6
     ended December 31, 1997
                                                                     
Notes to Consolidated Financial Statements                           F - 7
                                                                     
Report of Independent Accountants on Consolidated Financial          F - 18
     Statement Schedule
                                                                     
Schedule:                                                            
                                                                     
II.       Valuation and Qualifying Accounts and Reserves, for the    F - 19
     three years ended December 31, 1997


<PAGE>

                        REPORT OF INDEPENDENT ACCOUNTANTS





Board of Directors and Stockholder of
Fairfield Manufacturing Company, Inc.



We have audited the accompanying consolidated balance sheets of Fairfield
Manufacturing Company, Inc. as of December 31, 1997 and 1996, and the related
consolidated statements of operations, stockholder's equity (deficit), and cash
flows for each of the three years in the period ended December 31, 1997.  These
financial statements are the responsibility of the Company's management.  Our
responsibility is to express an opinion on these financial statements based on
our audits.

We conducted our audits in accordance with 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 consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Fairfield Manufacturing Company, Inc. as of December 31, 1997 and 1996, and the
consolidated results of its operations and its consolidated cash flows for each
of the three years in the period ended December 31, 1997 in conformity with
generally accepted accounting principles.






Coopers & Lybrand L.L.P.



Indianapolis, Indiana
January 30, 1998

<PAGE>
                                        
                      FAIRFIELD MANUFACTURING COMPANY, INC.
                                        
                           CONSOLIDATED BALANCE SHEETS
                                        
                           December 31, 1997 and 1996
                        (In thousands except share data)

                                                         1997        1996
                         ASSETS                                          
                                                                         
CURRENT ASSETS:                                                          
Cash and cash equivalents                              $3,059      $6,185
Trade receivables, less allowance of $600 in 1997      22,733      24,696
     and in 1996
Inventory                                              23,875      18,918
Prepaid expenses                                        1,048         853
     Total current assets                              50,715      50,652
                                                                         
PROPERTY, PLANT AND EQUIPMENT, NET                     69,227      70,211
                                                                         
OTHER ASSETS:                                                            
Excess of investment over net assets acquired, less    50,884      52,491
     accumulated amortization of $13,475 in 1997 and
     $11,868 in 1996
Deferred financing costs, less accumulated              2,386       3,016
     amortization of $3,026 in 1997 and $2,355 in
     1996
     Total other assets                                53,270      55,507
                                                                         
     Total assets                                    $173,212    $176,370
                                                                         
     LIABILITIES AND STOCKHOLDER'S EQUITY (DEFICIT)                      
                                                                         
CURRENT LIABILITIES:                                                     
Current maturities of long-term debt                   $4,000      $3,000
Accounts payable                                       10,896      13,260
Due to parent                                           2,208         287
Accrued liabilities                                    22,987      18,182
Deferred income taxes                                   2,800       3,800
     Total current liabilities                         42,891      38,529
                                                                         
ACCRUED RETIREMENT COSTS                               15,778      15,423
DEFERRED INCOME TAXES                                   8,881      11,988
LONG-TERM DEBT, NET OF CURRENT MATURITIES             110,000     115,000
                                                                         
CUMULATIVE EXCHANGEABLE PREFERRED STOCK                47,850          --
                                                                         
STOCKHOLDER'S EQUITY (DEFICIT):                                          
Common stock, par value $.01 per share; 10,000,000         82          78
     shares authorized; 8,190,000 and 7,805,000
     issued and outstanding in 1997 and 1996,
     respectively
Additional paid-in capital                             39,414      36,788
Accumulated deficit                                  (91,684)    (41,436)
     Total stockholder's equity (deficit)            (52,188)     (4,570)
                                                                         
     Total liabilities and stockholder's equity      $173,212    $176,370
     (deficit)
                                        
                                        
           The accompanying notes to consolidated financial statements
                    are an integral part of these statements.

<PAGE>

                      FAIRFIELD MANUFACTURING COMPANY, INC.
                                        
                      CONSOLIDATED STATEMENTS OF OPERATIONS
                   For the Three Years Ended December 31, 1997
                      (In thousands, except per share data)

                                            1997       1996       1995
                                                                   
Net sales                               $192,281   $195,205   $192,111
Cost of sales                            157,714    158,668    151,890
Selling, general and administrative       16,989     16,868     14,759
    expenses
                                                                  
    OPERATING INCOME                      17,577     19,669     25,462
                                                                  
Interest expense, net                     12,676     11,930     12,905
Other expense, net                            80         90        127
                                                                  
INCOME BEFORE INCOME TAXES                 4,821      7,649     12,430
                                                                  
Provision for income taxes                 2,640      3,730      5,520
                                                                  
NET INCOME                                $2,181     $3,919     $6,910
                                                                  
                                                                  
Dividends and discount accretion on     $(4,686)        $--        $--
    cumulative exchangeable preferred
    stock
                                                                  
NET INCOME (LOSS) AVAILABLE TO COMMON   $(2,505)     $3,919     $6,910
    STOCKHOLDER                        
                                                                  
                                                                  
                                                                  
NET INCOME (LOSS) PER SHARE DATA:                                 
                                                                  
    Net income (loss) per common share   $(0.32)      $0.51      $1.15
                                                                  
    Weighted average common shares     7,871,776  7,726,557  6,018,072
    outstanding


           The accompanying notes to consolidated financial statements
                    are an integral part of these statements.

<PAGE>

                      FAIRFIELD MANUFACTURING COMPANY, INC.
                                        
            CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY (DEFICIT)
                   For the Three Years Ended December 31, 1997
                                 (In thousands)
                                        
                                        
                                        
                                        
                                 Common Additional Accumulated   Stockholder's
                                  Stock    Paid-In     Deficit       Equity
                                           Capital                  (Deficit)
                                                                         
BALANCE, JANUARY 1, 1995            $30    $32,253   $(32,238)        $45
                                                                         
Contributed capital                  47      2,956         --       3,003
                                                                         
Net income                           --         --      6,910       6,910
                                                                         
BALANCE, DECEMBER 31, 1995           77     35,209   (25,328)       9,958
                                                                         
Contributed capital                   1      1,579         --       1,580
                                                                         
Common stock dividends               --         --   (17,000)    (17,000)
                                                                         
Advance to Parent                    --         --    (3,027)     (3,027)
                                                                         
Net income                           --         --      3,919       3,919
                                                                         
BALANCE, DECEMBER 31, 1996           78     36,788   (41,436)     (4,570)
                                                                         
Contributed capital                   4      2,616         --       2,620
                                                                         
Common stock dividends               --         --   (50,770)    (50,770)
                                                                         
Preferred stock dividend accrual     --         --    (4,536)     (4,536)
                                                                         
Preferred stock discount             --         --      (150)       (150)
    accretion
                                                                         
Advance to Parent                    --         --      3,027       3,027
                                                                         
Merger  with First Colony Farms,     --         10         --          10
    Inc.
                                                                         
Net income                           --         --      2,181       2,181
                                                                         
BALANCE, DECEMBER 31, 1997          $82    $39,414  $(91,684)   $(52,188)
                                                                         


           The accompanying notes to consolidated financial statements
                    are an integral part of these statements.

<PAGE>

                      FAIRFIELD MANUFACTURING COMPANY, INC.
                                       
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                   For the Three Years Ended December 31, 1997
                                 (In thousands)
                                                   1997     1996    1995
                                                                        
OPERATING ACTIVITIES:                                                   
Net income                                       $2,181   $3,919  $6,910
  Adjustments to reconcile net income to net                            
    cash provided by operating activities:
    Depreciation and amortization                13,277   13,108  12,272
    Deferred income tax benefit                 (4,107)    (170) (1,178)
    Increase in accrued retirement costs            355      665   2,079
    (Increase) decrease in current assets:                              
    Trade receivables                             1,963    (368) (7,886)
    Receivable from parent                           --       --   1,097
    Inventory                                   (4,957)    5,994     681
    Prepaids                                      (195)       44   (434)
    Increase (decrease) in current                                      
    liabilities:
    Accounts payable                            (1,467)    3,289 (2,418)
    Due to parent                                 1,921    (520)     807
    Accrued liabilities                           3,128      658   1,926
                                                                        
    Net cash provided by operating activities    12,099   26,619  13,856
                                                                        
INVESTING ACTIVITIES:                                                   
Additions to plant and equipment, net          (10,902) (11,165) (11,645)
                                                                        
    Net cash used by investing activities      (10,902) (11,165) (11,645)
                                                                        
FINANCING ACTIVITIES:                                                   
Proceeds from additional capital contribution     2,620    1,580   3,003
Payment of dividends                           (47,743) (17,000)      --
Advance to Parent                                    --  (3,027)      --
Proceeds of long-term debt                        9,000   20,000  11,000
Payment of long-term debt                      (13,000) (15,000) (13,000)
Proceeds of preferred stock offering             50,000       --      --
Payment of preferred stock issuance costs       (2,300)       --      --
Payment of debt issuance costs                     (41)    (146)   (340)
Payment of preferred stock dividend             (2,859)       --      --
                                                                        
    Net cash (used) provided by financing       (4,323) (13,593)     663
    activities
                                                                        
(DECREASE) INCREASE IN CASH AND CASH            (3,126)    1,861   2,874
    EQUIVALENTS
                                                                        
CASH AND CASH EQUIVALENTS:                                              
Beginning of year                                 6,185    4,324   1,450
                                                                        
End of year                                      $3,059   $6,185  $4,324
                                                                        
Supplemental Disclosures:                                               
Cash paid for:                                                          
    Interest                                    $12,135  $11,627 $12,387
                                                                      
    Taxes to parent                              $1,400   $2,450  $1,650
     Non-cash activities:
         Plant and equipment included in accounts payable at December 31, 
          1997, 1996 and 1995 of $1,369, $2,266 and $3,445, respectively.

         Preferred stock dividend accrued of $1,677 at December 31, 1997.

           The accompanying notes to consolidated financial statements
                    are an integral part of these statements.

<PAGE>

                     FAIRFIELD MANUFACTURING COMPANY, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                       (In thousands, except share data)
     
1.   Summary of Significant Accounting Policies

     Organization

     Fairfield Manufacturing Company, Inc. ("the Company") is wholly-owned by
     Lancer Industries Inc. ("Lancer").  The Company, its subsidiary and Lancer
     are Delaware corporations.  The Company has one subsidiary, T-H Licensing,
     Inc., which owns certain of the Company's intangible assets.  These
     consolidated financial statements include the accounts of Fairfield
     Manufacturing Company, Inc. and its wholly-owned subsidiary.  All
     significant intercompany accounts and transactions have been eliminated.

     The Company manufactures high precision custom gears and planetary gear
     systems at its Lafayette, Indiana facility.  Customers consist of original
     equipment manufacturers serving diverse markets which include rail,
     industrial, construction, road rehabilitation, mining, materials handling,
     forestry, and agricultural.

     Concentration of Credit Risk

     The Company grants credit without collateral to its customers.

     During 1997 and 1996, no single customer accounted for more than 10% of
     consolidated net sales.  Net sales to one customer were $21,109 in 1995.
     Foreign sales are not material.

     Revenue Recognition

     Sales are recognized at the time of shipment to the customer.

     Cash and Cash Equivalents

     The Company considers all highly liquid debt instruments with original
     maturities of three months or less to be cash equivalents.

     Inventory

     Inventory is valued at the lower of last-in, first-out (LIFO) cost or
     market.

     Property, Plant and Equipment, Net

     Property, plant and equipment, net are carried at cost less accumulated
     depreciation.  Depreciation is computed on the straight-line method over
     the estimated useful lives of the assets which are not more than 40 years
     for buildings and building improvements, 5 to 20 years for machinery and
     equipment, 2 to 5 years for furniture and office equipment.

     Income Taxes

     Income taxes are provided based on the liability method of accounting
     pursuant to Statement of Financial Accounting Standards No. 109,
     "Accounting for Income Taxes" ("SFAS 109").  The liability method 

<PAGE>

     measures the expected tax impact of future taxable income or deductions 
     resulting from differences in the tax and financial reporting bases of
     assets and liabilities reflected in the consolidated balance sheets and the
     expected tax impact of carryforwards for tax purposes.

     Excess of Investment Over Net Assets Acquired

     Excess of investment cost over net assets acquired is amortized using the
     straight-line method over 40 years.  The Company's criteria for
     periodically evaluating the carrying value of the excess of investment over
     net assets acquired includes evaluation of products and markets as well as
     current and expected levels of undiscounted cash flow from operations.  The
     Company has concluded the excess of investment over net assets acquired is
     not impaired and the products and markets continue to support a 40-year
     life.

     Deferred Financing Costs

     Debt issuance costs are being amortized by the use of the effective
     interest method over the expected term of the related debt agreement.

     Computation of Net Income (Loss) Per Share

     Income (loss) per share is based upon the weighted average number of shares
     of common stock outstanding.

     Use of Estimates

     The preparation of financial statements in conformity with generally
     accepted accounting principles requires management to make estimates and
     assumptions that effect the reported amounts of assets and liabilities and
     disclosure of contingent assets and liabilities and the reported amounts of
     revenues and expenses.  Actual results could differ from those estimates.

     Fair Value of Financial Instruments

     The fair value of financial assets held by the Company approximate their
     carrying value.  The fair value of the financial liabilities which consist
     of senior and subordinated debt, also approximate their carrying value.

     Reclassifications

     Certain amounts in the 1995 and 1996 consolidated financial statements and
     notes to consolidated financial statements have been reclassified to
     conform with the 1997 presentation.

<PAGE>

2.   Inventory

     Inventory at December 31, consists of:

                                            1997      1996
                                                          
Raw materials                             $3,495    $4,178
Work in process                           11,892     8,070
Finished products                          8,488     7,490
                                                          
                                          23,875    19,738

Less:  Excess of FIFO cost over LIFO          --     (820)
     cost
                                                          
                                         $23,875   $18,918

3.   Property, Plant and Equipment, Net

     Property, plant and equipment, net at December 31, includes the following:

                                            1997      1996
                                                          
     Land and improvements                $1,256    $1,227
     Buildings and improvements           19,248    18,812
     Machinery and equipment             133,024   122,889
                                         153,528   142,928
     Less:  Accumulated depreciation    (84,301)  (72,717)
                                                          
                                         $69,227   $70,211

4.   Advance to Parent

     On December 5, 1996, the Company advanced $3,000 to Lancer.  This advance
     was classified as a component of stockholder's equity (deficit) at December
     31, 1996, at which date the related accrued interest was $27.  During
     February 1997, the Company declared a dividend $3,070 in settlement of the
     advance and the accrued interest of $70.

<PAGE>

5.   Accrued Liabilities

     Accrued liabilities at December 31, are as follows:

                                                    1997       1996
                                                                   
     Compensation and employee                    $6,610     $5,970
     benefits
     Accrued retirement and                        2,902      3,002
     postemployment costs
     Interest payable                              5,075      5,021
     Other                                         8,400      4,189
                                                                   
                                                 $22,987    $18,182

6.   Employee Benefit Plans

     The Company has a noncontributory defined benefit pension plan which covers
     substantially all of its employees.  The benefits are based on years of
     service and the employee's earnings preceding retirement.  The Company's
     funding policy is to contribute each year an amount at least equal to the
     minimum required contribution as defined by the Employee Retirement Income
     Security Act of 1974.  Assets of the plan are principally deposit
     administration insurance contracts.  The projected benefit obligation has
     been determined by using the projected unit credit method.

     Net pension cost for years ended December 31, consists of:

                                         1997       1996     1995
                                                                 
  Service cost - benefits earned       $1,445     $1,387   $1,180
        during the period
  Interest cost                         2,911      2,862    2,626
  Actual return on plan assets        (2,109)    (2,043)  (3,061)
  Net amortization and deferral         (387)      (317)      906
                                                                 
  Net pension cost                     $1,860     $1,889   $1,651

<PAGE>

     The plan's funded status and amounts included in the December 31 balance
     sheets based upon actuarial valuations at October 1, 1997 and 1996 are:

                                                         1997      1996
     Actuarial present value of benefit obligation:                    
       Vested benefits                                $27,526   $27,420
       Nonvested benefits                               2,167     1,984
                                                                       
     Accumulated benefit obligation                    29,693    29,404
     Effect of projected future compensation           13,978    13,568
     increases
                                                                       
     Projected benefit obligation                      43,671    42,972
     Plan assets at fair value                         33,685    31,349
                                                                       
     Projected benefit obligation in excess of plan     9,986    11,623
     assets
     Unrecognized gain                                  1,513        33
     Unrecognized prior service cost                  (1,733)   (1,921)
                                                                       
     Accrued liability included in balance sheet       $9,766    $9,735
                                                                       
     Assumed discount rate                              7.25%     7.25%
     Assumed long-term return on plan assets            8.50%     8.50%

     The Company has a contributory defined contribution savings plan which
     covers all of its eligible employees.  Eligibility in the plan is obtained
     the month following hire with no minimum age requirement.  A participant
     may make a basic contribution to the plan ranging from 2% to 6% of the
     participant's salary and a supplemental contribution of 2%, 4%, or 6% of
     the participant's salary.  The Company matches 70% of the participant's
     basic contribution.  Expense recognized each of the years ended December
     31, 1997, 1996 and 1995 was $1,347, $1,356 and $1,238, respectively.

     In addition to pension and savings plan benefits, the Company provides
     limited health care and life insurance benefits for certain retired
     employees.

     Net periodic postretirement benefit cost for years ended December 31,
     includes the following components:

                                     1997    1996    1995
                                                         
     Service cost                    $342    $332    $257
     Interest cost                    646     656     587
     Unrecognized net loss            166     214      78
     Prior service cost              (63)    (63)    (63)
                                                         
                                   $1,091  $1,139    $859

<PAGE>


     The actuarial and recorded liabilities for these postretirement benefits,
     none of which have been funded, are as follows at December 31:

                                                          1997       1996
     Actuarial present value of postretirement                           
     benefit obligation
     Retirees and dependents                            $5,812     $5,817
     Active employees eligible to retire and receive       674        840
     benefits
     Active employees not yet eligible to retire and     2,947      2,939
     receive benefits
                                                                         
     Total accumulated postretirement benefit            9,433      9,596
     obligation
     Unrecognized loss                                 (2,676)    (3,118)
     Unrecognized prior service cost                       251        314
                                                                         
     Accrued postretirement benefit liability           $7,008     $6,792
     included in balance sheet

     The weighted average discount rate used in determining the accumulated
     postretirement benefit obligation was 7.25% for both 1997 and 1996.  The
     health care cost trend rate is not a factor in the calculation of the
     accumulated postretirement benefit obligation as the plan limits benefits
     paid to retirees to a lifetime maximum amount per retiree.  Claims in
     excess of this amount are the responsibility of the retiree.

     The Company provides postemployment benefits to certain former and inactive
     employees.  Net periodic postemployment benefit cost for years ended
     December 31, included the following components:

                                         1997      1996      1995
                                                                 
                 Service Cost            $137      $115      $131
                 Interest Cost            179       157       349
                                                                 
                                         $316      $272      $480
                 

     The recorded liabilities for these postemployment benefits, none of which
     have been funded, are $1,906 and $1,894 at December 31, 1997 and 1996,
     respectively.

7.   Income Taxes

     The Company files separate state income tax returns and is included in the
     consolidated federal income tax return of its parent company, Lancer.  The
     Company and Lancer have entered into a Tax Sharing Agreement under which
     the Company is required to calculate its federal income tax liability on a
     separate return basis.  Accordingly, the Company has also calculated its
     expense equivalent to provision for federal income taxes on a separate
     return basis.

     The expense equivalent to provision for income taxes in each of the three
     years in the period ended December 31, consists of:

<PAGE>

                                         1997       1996     1995
                                                                 
     Current, principally federal      $5,120     $3,900   $6,698
     Deferred, principally federal    (2,480)      (170)  (1,178)
                                                                 
                                       $2,640     $3,730   $5,520

     The expense equivalent to provision for income taxes for 1997, 1996 and
     1995 results principally from current year operating results.

     A reconciliation of the expected expense equivalent to provision for income
     taxes at the statutory federal income tax rate and the actual tax provision
     each of the three years ended December 31, is as follows:

                                  1997            1996           1995  
                         Amount      %   Amount      %  Amount      %  
                                                                       
Expected total tax       $1,687  35.0%   $2,677  35.0%  $4,351  35.0%  
     provision at
     statutory rate
State taxes, net of         370    7.7      231    3.0     626    5.0 
     federal
Non-deductible              555   11.5      555    7.3     555    4.4  
     amortization of
     excess of
     investment over
     net assets
     acquired
Other, net                   28    0.6      267    3.5    (12)   (0.0) 
                                                                       
                         $2,640  54.8%   $3,730  48.8%  $5,520   44.4%  

     Deferred income taxes applicable to temporary differences at December 31,
     1997 (net of a $1.6 million reclassification from deferred tax liabilities
     to currently payable taxes made in conjunction with the filing of  the 1996
     tax return) and 1996 are as follows:

                                                 1997      1996
Current:                                                       
     Inventory basis difference              $(5,398)  $(6,317)
     Employee benefits                          1,673     1,288
     Other, net                                   925     1,229
     Total current deferred tax liability,    (2,800)   (3,800)
     net
                                                               
Long-term:                                                     
     Inventory basis difference                   574       626
     Property, plant and equipment basis     (16,242)  (18,952)
     difference
     Employee benefits                          7,472     7,381
     Other, net                                 (685)   (1,043)
     Total long-term deferred tax liability,  (8,881)  (11,988)
     net
                                                               
     Total deferred tax liability, net      $(11,681) $(15,788)

<PAGE>

     Under the Tax Sharing Agreement between the Company and Lancer, the Company
     is required to pay Lancer an amount equal to the Company's current federal
     income tax liability calculated on a separate return basis.  To the extent
     such tax liability subsequently reduces Lancer's available tax benefits,
     Lancer is required to reimburse the Company in an amount equivalent to 50%
     of such reduction by making a capital contribution to the Company.  Lancer
     made capital contributions to the Company pursuant to this agreement of
     $2,620, $1,580, and $2,503 during 1997, 1996 and 1995, respectively.  The
     Company issued common stock to Lancer in recognition of these capital
     contributions (see Note 10).

8.   Long-Term Debt

     Long-term debt consists of the following at December 31:

                                          1997        1996
                                                          
        Senior Term Credit             $27,000     $33,000
        Senior Revolving Credit          2,000          --
        Senior Subordinated Notes       85,000      85,000
                                       114,000     118,000
        Less current maturities        (4,000)     (3,000)
                                                          
                                      $110,000    $115,000

     The future maturities of long-term debt as of December 31, 1997 are as
     follows:

         1998                                      $4,000
         1999                                       7,000
         2000                                      16,000
         2001                                      87,000
                                                         
                                                 $114,000

     The Company's Senior Subordinated Notes (the "Notes") bear interest at a
     rate of 11-3/8% and mature on July 1, 2001.  The Notes are redeemable at
     the option of the Company, in whole or in part, on or after July 1998 at
     certain specified redemption prices.

     Concurrent with the issuance of the Notes, the Company entered into a loan
     agreement with a senior lending institution which provides for a Revolving
     Credit Facility and a Term Loan (together, the "Credit Facilities").  The
     loan agreement was amended during March 1997, to allow the sale of the
     Preferred Stock (see Note 9) and the $47,700 dividend to Lancer.  The Term
     Loan is payable quarterly through December 2000.  The Revolving Credit
     Facility permits the Company to borrow up to $20,000 subject to borrowing
     base availability (as defined) and, at the option of the Company (subject
     to certain conditions), may be increased by an additional $5,000.  The
     Revolving Credit Facility matures on July 1, 2001.  Interest under the
     Credit Facilities is payable at varying rates based on prime or Eurodollar
     rates.  At December 31, 1997, the Eurodollar rate loans ranged from 8.09%
     to 8.25% resulting in a weighted average rate of 8.17%.  The unused
     Revolving Credit Facility at December 31, 1997, net of $325 of outstanding
     letters of credit, was $17,675.

<PAGE>

     Borrowings under the Credit Facilities are collateralized by substantially
     all the assets of the Company, including the assignment of all leases and
     rents and a pledge of the outstanding common stock of the Company.  The
     Credit Facilities and the Notes contain various restrictive covenants that,
     among other restrictions, require the Company to maintain certain financial
     ratios.  The Credit Facility and the Notes allow the payment of dividends
     provided certain financial covenants are met.

9.   Sale of Preferred Stock

     On March 12, 1997, the Company completed a private offering of 50,000
     shares of 11-1/4% Series A Cumulative Exchangeable Preferred Stock
     ("Preferred Stock").  Each share has a liquidation preference of one
     thousand dollars, plus accumulated and unpaid dividends.  The Company is
     required, subject to certain conditions, to redeem all of the Preferred
     Stock outstanding on March 15, 2009 at a redemption price equal to 100% of
     the liquidation preference.  Dividends are payable semi-annually at an
     annual rate of 11-1/4%, and may (prior to March 15, 2002) be paid, at the
     Company's option, either in cash or in additional shares of Preferred
     Stock.

     The net proceeds from this offering ($47,700) were used to fund a dividend
     to Lancer, and used by Lancer to redeem approximately $47,700 of its Series
     C Preferred Stock.

10.  Stockholder's Equity

     Merger

     On March 27, 1997, First Colony Farms, Inc., a Delaware corporation and
     wholly-owned subsidiary of Lancer ("First Colony"), merged with and into
     the Company, with the Company being the surviving corporation of the
     merger.  Immediately prior to the merger, First Colony had (i) no known
     liabilities (including contingent liabilities) and (ii) assets consisting
     of approximately $10 in cash and certain net operating loss carryforwards.

     Issuance of Common Stock

     The Company issued 52,000 additional shares of its common stock on March
     31, 1997, 53,000 shares on June 30, 1997 and 280,000 shares on December 31,
     1997, to Lancer in consideration of certain capital contributions made by
     Lancer to the Company pursuant to the Tax Sharing Agreement and other
     capital contributions.

     Dividend

     During February 1997, the Company declared a dividend of $3,070 To Lancer.

     On March 12, 1997, the Company, with the approval of its senior lender,
     declared and paid a dividend of $47,700 to Lancer.

<PAGE>

11.  Other Financial Data

     Operating Leases

     The Company is obligated to make payments under noncancellable operating
     leases expiring at various dates through 2002.

     Future minimum payments by year, and in the aggregate, under operating
     leases consist of the following at December 31, 1997:

                  Year                Minimum Rental
                                                    
                  1998                          $405
                  1999                           344
                  2000                           265
                  2001                            15
                  2002                             3
                                                    
                                              $1,032

     Rental expense for the years ended December 31, 1997, 1996 and 1995 was
     $447, $446, and $698 respectively.

     Equity Participation Plan

     The Company maintains an Equity Participation Plan (the "Plan") which
     provides for the award of up to an aggregate of 180,000 Equity
     Participation Rights ("Rights") to certain current and past officers and
     key employees.  At December 31, 1997, all 180,000 rights were granted and
     have vested and 117,000 rights were outstanding.

     Under the Plan, each participant is entitled to receive, upon the
     occurrence of a Trigger Event, (as defined below) and exercise of a Right,
     an amount in cash equal to the difference between the fair market value of
     a share of the Company's common stock on the date the Trigger Event occurs
     and the initial value assigned to each Right.  A Trigger Event means (a)
     any of the following transactions which results in a change in control:
     (i) a merger or consolidation of the Company with or into another
     corporation; (ii) the sale or exchange for cash, securities or other
     consideration of all or substantially all of the assets of the corporation;
     or (iii) the sale or exchange for cash, securities or any other
     consideration of all or substantially all of the outstanding common equity
     of the Company or (b) the later of the fifth anniversary of the date the
     Right was granted or the date the participant retires from the Company at
     or after age 60.

     Payments under the Plan may not exceed $1,320 in any fiscal year and $5,280
     in the aggregate.

     During the period that a stock appreciation right (or Right) is
     outstanding, the ultimate amount of compensation inherent in the Right is
     indeterminate.  APB Opinion No. 25 and FASB Interpretation No. 28 require
     interim calculations of the amount of compensation inherent in the stock
     appreciation right.  This amount is generally equal to the increase in the
     fair market value since date of grant or award

<PAGE>

     multiplied by the total number of share or rights outstanding, regardless 
     of the exercisable status of the rights.

     At December 31, 1997, 1996 and 1995 the exercise price exceeds estimated
     fair market value of the Company's common stock.  During 1997, the Company
     paid $25 to redeem 63,000 rights.  No additional compensation was charged
     to earnings for this plan during 1997, 1996 and 1995.

12.  Related Party

     Effective August 1, 1997, Mr. Lechman, former Chairman of the Board, and
     Director, entered into a consulting agreement (the "Agreement") with the
     Company.  In consideration for services to be rendered under the Agreement,
     Mr. Lechman will receive quarterly payments through July 31, 2001 ("the
     consulting period") totaling $1.0 million.  In the event that Mr. Lechman
     dies prior to the end of the consulting period or is unable to perform the
     services requested due to mental or physical disabilities, the Company
     shall pay to his legal representatives or beneficiaries the remaining
     unpaid balance under the Agreement which would have been due under the
     agreement had Mr. Lechman continued to provide such services for the term
     of the Agreement.  Due to the provisions of the agreement, the Company has
     recognized the entire $1.0 million as expense in 1997.

<PAGE>

                        REPORT OF INDEPENDENT ACCOUNTANTS



Board of Directors and Stockholder of
Fairfield Manufacturing Company, Inc.



Our report on the consolidated financial statements of Fairfield Manufacturing
Company, Inc. is included on page F-2 of this Form 10-K.  In connection with our
audits of such financial statements, we have also audited the related financial
statement schedule listed in the index on page F-1 of this Form 10-K.

In our opinion, the financial statement schedule referred to above, when
considered in relation to the basic financial statements taken as a whole,
presents fairly, in all material respects, the information required to be
included therein.


Coopers & Lybrand L.L.P.



Indianapolis, Indiana
January 30, 1998

<PAGE>

                      FAIRFIELD MANUFACTURING COMPANY, INC.
                                        
          SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
                   for the three years ended December 31, 1997
                                 (in thousands)
                                        
                                        
                       Balance   Charged  Charged              Balance at
       Description       at         to       to     Deductions   End of
                      Beginning   Costs    other                 Period
                      of Period    and    Accounts
                                 Expenses  
                                                                          
     1997                                                                 
     Allowance for         $600       $32       --      $(32)         $600
     doubtful
     accounts
                                                                          
     1996                                                                 
     Allowance for         $600      $520       --     $(520)         $600
     doubtful
     accounts
                                                                          
     1995                                                                 
     Allowance for         $500      $197       --      $(97)         $600
     doubtful
     accounts