SECURITIES AND EXCHANGE COMMISSION



WASHINGTON, D.C.  20549



Form 10-K



| |                                               | [X] ANNUAL REPORT PURSUANT TO SECTION 13 or 15 (d) OF  
| | --------------------------------------------- | -------------------------------------------------------
| | THE SECURITIES EXCHANGE ACT OF 1934          
| |                                              
| | For the Fiscal Year Ended:  December 31, 2000
| | 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 of incorporation)                 |  | (I.R.S. Employer Identification No.) | 
| |                                          |  |                                      | 
| | U. S. 52 South, Lafayette, IN            |  | 47909                                | 
| | (Address of principal executive offices) |  | (Zip Code)                           | 

Registrant's telephone number, including area code:  (765) 772-4000

Securities registered pursuant to Section 12(b) of the Act:  None
Securities registered pursuant to Section 12(g) of the Act:

| | $100,000,000 9-5/8% Senior Subordinated Notes due 2008              
| | --------------------------------------------------------------------
| | $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 ___ | 
| | ----- |  | ------ | 



Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (section 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [___]

State the aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was sold, or the average bid and ask price of such common equity, as of a specified date
within the past 60 days.  Not applicable.

At December 31, 2000 there were 9,117,000 shares of the Company's Common Stock issued and outstanding.



FAIRFIELD MANUFACTURING COMPANY, INC.
Annual Report on Form 10-K
December 31, 2000
Table of Contents

|Item Number |     |                                                                                          | Page Number
|----------- | --- | ---------------------------------------------------------------------------------------- | -----------
|            |     | PART I                                                                                   |            
|1           |     | Business                                                                                 | 1          
|2           |     | Properties                                                                               | 6          
|3           |     | Legal Proceedings                                                                        | 6          
|4           |     | Submission of Matters to a Vote of Security Holders                                      | 6          
|            |     |                                                                                          |            
|            |     | PART II                                                                                  |            
|5           |     | Market for the Registrant's Common Equity and Related Stockholder 
  Matters             | 7          
|6           |     | Selected Financial Data                                                                  | 8          
|7           |     | Management's Discussion and Analysis of Financial Condition and 
  Results of Operations | 9          
|7           | (a) | Quantitative and Qualitative Disclosures About Market Risk                               | 13         
|8           |     | Financial Statements and Supplementary Data                                              | 13         
|9           |     | Changes in and Disagreements with Accountants on Accounting and 
  Financial Disclosure  | 13         
|            |     |                                                                                          |            
|            |     | PART III                                                                                 |            
|10          |     | Directors and Executive Officers of the Registrant                                       | 14         
|11          |     | Executive Compensation                                                                   | 16         
|12          |     | Security Ownership of Certain Beneficial Owners and Management                           | 19         
|13          |     | Certain Relationships and Related Transactions                                           | 20         
|            |     |                                                                                          |            
|            |     | PART IV                                                                                  |            
|14          |     | Exhibits, Financial Statement Schedules, and Reports on Form 8-K                         | 22         
|            |     | Signatures                                                                               | 25         
|            |     | Index to Consolidated Financial Statements and Financial Statement 
  Schedule           | F-1        

FAIRFIELD MANUFACTURING COMPANY, INC.

Form 10-K

Fiscal Year Ended December 31, 2000

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 assemblies and planetary gear systems in North America.  In each of the North American
"custom products" and "planetary gear system" markets in which the Company participates, the Company estimates that its market share is twice that of any other independent manufacturer.  The majority of the Company's custom gears and assemblies and
planetary gear systems are used by original equipment manufacturers ("OEMs") as components in various kinds of heavy mobile equipment.  The Company's operations in North America are located in Lafayette, Indiana.

Custom gears and assemblies accounted for $76.9 million (or 47.7%) of the Company's 2000 net sales.  Custom gears are components of larger systems such as axles, drive differentials and transmission units and are generally produced by the Company for
large OEMs.  Custom assemblies are differentials, wheel drives, power transmissions and conveyer/tram drives that are generally produced as a complete unit.  The Company's custom gear and assembly customers consist primarily of OEMs of rail, mining,
agricultural, industrial, construction and materials-handling equipment.  The Company is a major independent supplier of selected gear products for many of these OEMs.

Planetary gear systems, which accounted for $84.2 million (or 52.3%) of the Company's 2000 net sales, are integrated, self-contained power transmission and torque conversion systems that provide propulsion, swing and/or rotation to wheels, 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-HubÒ
 name.  The Company believes that, as a result of the performance history and reputation for quality of the Company's Torque-HubÒ
 products, the Torque-HubÒ
 name has become closely identified with planetary gear systems.  Customers for the Company's Torque-HubÒ
 products include OEMs of access platform, road rehabilitation, construction, forestry, agricultural and marine equipment.

The Company has been granted "preferred supplier" status by a majority of its customers based on its ability to meet their business requirements.  The Company is also certified as meeting "ISO-9001" standards, which are increasingly being used by OEMs
in lieu of individual certification procedures.  In addition, the Company is certified as meeting "QS-9000" standards, which is the standard level of certification required by automotive OEMs.  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 in-house heat treating facilities, computer-aided design and manufacturing systems and computer numerically-controlled
machine tools and gear grinders, (iv) cost competitiveness, (v) experienced engineering staff, which together with the Company's sales force, work closely with customers in

1

designing and developing products to meet customers' needs, and (vi) 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's management team,
has an average of over 20 years of experience in general manufacturing.

On October 3, 2000, the Company acquired 75.77% of Atlas Gears Limited ("Atlas") for $4.5 million.  Atlas manufactures custom gears primarily for the agricultural, off-road, and light commercial vehicle markets in India.  Atlas is headquartered in
Mumbai, India and has its manufacturing facilities near Belgaum, India.  The Company acquired Atlas to gain a low cost manufacturing and procurement base.  Atlas is ISO-9002 certified and pursuing its QS-9000 certification.  Atlas changed its name to
Fairfield Atlas Limited in the first quarter of 2001.

The Company was founded in 1919 as a manufacturer of custom gear products and has been wholly-owned by Lancer Industries Inc. ("Lancer") since 1989.  The Company's principal executive offices are located at U.S. 52 South, Lafayette, Indiana 47909.
The Company's telephone number is (765) 772-4000.

Products

Custom Products.  Custom gears and assemblies accounted for approximately $76.9, $104.6 and $118.5 million of the Company's net sales in 2000, 1999 and 1998, respectively.  The Company manufactures a wide variety of custom gears, ranging in
type (e.g. helical, spiral bevel, spur and HYPOIDÒ
) and size (from one inch to five feet in diameter), and has manufacturing capabilities which the Company believes are the broadest in the custom gear business.  The Company manufactures custom gears and assemblies to customers' specifications, which are
often developed by or with the assistance of the Company.  Custom gears and assemblies are used in a wide variety of applications and markets, ranging from off-highway heavy equipment to high speed precision gears for industrial purposes.

Historically, the Company has focused on severe application custom business.  These custom products, which are design and engineering intensive, are used in rail, mining, agricultural, construction, 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, the trend
among OEMs to focus on their core competencies (final assembly and system integration) rather than produce gears and gear related assemblies in-house appears to be continuing.

Planetary Gear Systems.  The Company markets its planetary gear systems under the Torque-HubÒ

The Company has introduced a number of new Torque-HubÒ
 products in recent years, including two-speed drives (Torque IIÒ
 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

2

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 almost exclusively OEMs and include many industry leaders with whom the Company has had relationships of 20 years or more.  Sales to three customers accounted for approximately 12.6%, 10.1% and 10.0% of the Company's net
sales in 2000.  Sales to two customers accounted for approximately 13.6% and 10.8% of the Company's net sales in 1999.  Sales to one customer accounted for approximately 10.6% of the Company's net sales in 1998.

The Company has been granted "preferred supplier" status by a majority of its customers based on its ability to meet their business requirements.  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 has become the level of certification required by automotive OEMs.  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
primarily of sales engineers, who have an average of over 11 years of experience with the Company and many 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 74% of its Torque-HubÒ
 products are sold directly to OEMs.  Since Torque-HubÒ
 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 26% of its Torque-HubÒ
 line through a network of approximately 40 distributors located in the United States and abroad.

International sales, principally Canada, accounted for approximately $8.8, $11.9 and $16.2 million of the Company's net sales in 2000, 1999 and 1998, respectively.

Design and Manufacturing

The Company believes that its state-of-the-art technology and experienced engineering staff provide it with a competitive advantage.

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 270 computer numerically controlled (CNC) lathes, machine tools and gear grinders.

3



The Company's engineering department consists of over 80 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 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.

The Company's engineers and designers are skilled in the use of, and have available, certain of the latest tools and techniques to create cost efficient designs.  Procedures such as finite element analysis are routinely used by the Company's engineers
and designers to optimize material content and ensure functional reliability of components designed.  This type of analysis and simulation 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 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.

Materials and Supply Arrangements

The Company generally manufactures its custom and Torque-HubÒ
 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.  Raw material purchases from one supplier represented approximately 10.5% of raw material purchases in 2000, 14.2% in 1999 and 13.9% in 1998.  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.

4



Employees

At December 31, 2000, the Company had 1,412 employees, 1,038 and 374 at its Lafayette and Belgaum, India facilities, respectively.  Approximately 88% were employed in manufacturing.  The Company's North American production and maintenance employees,
representing approximately 79% of the Company's North American employees, became members of the United Auto Workers (UAW) union in October 1994.  In October 1998 a new three labor year agreement was ratified by the Company's union employees.  The Company
considers its relations with its employees to be satisfactory.

Backlog

The Company had total order backlog of approximately $63.4 and $70.4 million as of December 31, 2000 and 1999, respectively, for shipments due to be delivered by the Company for the six-month period following such dates.  The lower backlog at December
31, 2000 is due to reduced orders.  The Company has experienced pricing pressure due to a strong dollar in 2000 along with lower than expected custom orders as the rail, mining and agricultural markets remained flat to depressed.

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 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.

Susceptibility to General Economic Conditions

The Company's revenues and results of operations are subject to fluctuations based upon general economic conditions.  During economic downturns and recessions in the United States or certain other markets, the Company's customers generally reduce or
delay their demand for the Company's products.  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 names Torque-HubÒ

5



|Item 2. | PROPERTIES
|------- | ----------

The Company owns and operates a facility in Lafayette, Indiana consisting of 39 acres of land, approximately 540,000 square feet of manufacturing space and approximately 60,000 square feet of office space.  With the acquisition of Atlas, the Company
acquired additional manufacturing space of approximately 50,000 square feet, located near Belgaum, India.

In June 1999, the Company experienced a fire at its manufacturing plant in Lafayette, Indiana.  The fire damaged a portion of the facility and some of its equipment.  By January 2000, the Company had restored its physical capabilities to the same
level as before the fire.  The damages of the fire, including the costs of clean-up and business interruption, were covered by current insurance policies and, during the quarter ended June 30, 2000, the Company and its insurance carrier agreed to a final
settlement of the resulting claims.

Direct costs associated with the clean-up and repair portion of the claim were $8.9 million, all of which was reimbursed by the insurance carrier by the third quarter of 2000.  The business interruption portion of the claim was $16.5 million, all of
which was reimbursed by the insurance carrier by the third quarter of 2000.

Prior to final settlement with its insurance carrier, the Company had determined its minimum probable recovery for business interruption at the end of each quarter and had recorded those amounts as other income.  The amounts recorded by quarter are as
follows:  June 30, 1999 - $1.0 million, September 30, 1999 - $3.3 million, December 31, 1999 - $2.7 million and March 31, 2000 - $3.0 million.  The Company recognized $6.5 million of business interruption insurance recovery during the second quarter of
2000 in conjunction with the final settlement of business interruption losses.

|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 matters were submitted to a vote of the Company's security holders during the fourth quarter of the fiscal year ended December 31, 2000.

6



PART II



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



Market Information

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

Dividends

The Company did not declare or pay any dividends on its common stock in 2000 or 1999.  There are restrictions on the Company's ability to pay dividends under the loan agreement for the Company's Credit Facility, the Indenture for the Company's 9-5/8%
Senior Subordinated Notes due 2008 and the Certificate of Designation for the Company's 11-1/4% Series A Cumulative Exchangeable Preferred Stock.

Issuance of Common Stock

The Company issued 166,000, 120,000, 103,000, and 37,000 additional shares of its common stock on March 31, June 30, September 30, and December 31, 2000, respectively, to Lancer in consideration of certain capital contributions made by Lancer to the
Company pursuant to the Tax Sharing Agreement.

The Company issued 74,000, 58,000, 58,000 and 21,000 additional shares of its common stock on March 31, June 30, September 30, and December 31, 1999, respectively, to Lancer in consideration of certain capital contributions made by Lancer to the
Company pursuant to the Tax Sharing Agreement (see Item 13, "Certain Relationships and Related Transactions").

7





|Item 6. | SELECTED FINANCIAL DATA
|------- | -----------------------

The following selected financial data for the Company for the five years ended December 31, 2000 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 Item 7, "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 contained in
Item 8 to this Form 10-K.

|                                                     |                        
|---------------------------------------------------- | -----------------------
|($ in millions)                                      | Year Ended December 31,
|                                                     | 2000                   
|Income Statement Data:                               |                        
|Net sales                                            | $161.1                 
|Cost of sales                                        | 135.2                  
|Selling, general and administrative   expenses (1)   | 13.4                   
|Operating income                                     | 12.5                   
|Interest expense, net                                | 9.8                    
|Net income(2)                                        | 6.9                    
|Preferred stock dividends and discount accretion     | (5.8)                  
|Net income (loss) available to 
  common stockholder | 1.1                    
|                                                     |                        
|Balance Sheet Data:                                  |                        
|Working capital                                      | $ 30.7                 
|Total assets                                         | 182.7                  
|Total debt (3)                                       | 112.6                  
|Long-term obligations (4)                            | 161.0                  
|Stockholder's equity (deficit)                       | (36.2)                 
|                                                     |                        
|Other Data:                                          |                        
|EBITDA (5)                                           | $ 34.7                 
|Depreciation                                         | 11.1                   
|Amortization (6)                                     | 2.2                    
|Cash interest expense, net (7)                       | 9.3                    
|Capital expenditures, net (8)                        | 3.9                    
|                                                     |                        

1. Includes a $2.3 million non-cash charge related to the Incentive Plan for Senior Management in 1999 and a reversal in 2000 related to the Incentive Plan for Senior Management.
2. Includes pretax business interruption insurance income of $9.5 million in 2000, a net, pre-tax gain on the involuntary conversion of assets of $2.9 million and pre-tax business interruption insurance income of $7.0 million in 1999 related to the fire
described in Item 2, "Properties".  Also during 1999 and 1998, the Company recorded an extraordinary loss of $1.4 million and $0.4 million, respectively, net of tax, relating to the early extinguishment, of $67.1 million and  $17.9 million, respectively,
of 11-3/8% Senior Subordinated Notes due 2001.
3. Includes current maturities of $4.0 and $3.0 for 1997 and 1996, respectively.
4. Includes long-term portion of total debt and redeemable preferred stock.
5. 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.
6. Includes the amortization of both deferred financing costs and the excess of investment over net assets acquired.
7. Cash interest expense, net includes interest income, but excludes amortization of deferred financing costs of $0.6, $0.6, $0.7, $0.7 and $0.6 million for fiscal years 2000, 1999, 1998, 1997 and 1996, respectively.
8. Includes a net pre-tax gain on the involuntary conversion of assets of $2.9 million in 1999.

8



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

Management's discussion and analysis, as set forth below, of the Company's financial condition and results of operations should be read in conjunction with, and is qualified by reference to, the Company's audited consolidated financial statements and
related notes thereto and the description of the Company's business which are found under Items 8 and 1 of this Form 10-K, respectively.

Results of Operations

Fiscal Year 2000 Compared with Fiscal Year 1999

Net sales for 2000 decreased $47.8 million to $161.1 million compared to $208.9 million in 1999.  This 22.8% decrease was due to lower sales volume as the Company believes customers have remained cautious regarding the Company's restoration of its
physical operations to pre-fire capabilities (see Item 2, "Properties").  By the end of 1999, the Company had completely restored its plant and operations to pre-fire capabilities and continues to work with customers to regain their business as well as
identify new markets for growth.  In the second half of 2000, the Company's results were negatively impacted due to an economic downturn in several of its markets including mining, agriculture and rail.  The Company has also experienced pricing pressure
due to the depreciation of the Euro and other foreign currencies against the dollar.

Cost of sales for 2000 decreased $29.7 million to $135.2 million, or 83.9% of net sales, compared to $164.9 million, or 78.9% of net sales in 1999.  The decrease in cost of sales resulted primarily from the decrease in sales volume whereas the
increase in cost of sales as a percentage of sales resulted from production inefficiencies due to the lower sales volume, unfavorable product mix, and pricing pressure.

Selling, general and administrative expenses ("SG&A"), including goodwill amortization, decreased to $13.4 million in 2000, compared to $19.2 million in 1999.  The reduction in SG&A, reflects a lower employee incentive compensation provision
and a credit of $2.3 million related to the Incentive Plan for Senior Management recorded in 2000.

Operating income decreased 49.3%, to $12.5 million compared to $24.7 million in 1999 due to the reasons discussed above.

Interest expense, including amortization of deferred financing costs, was $9.8 million for 2000 compared to $11.3 million in 1999.  This decrease reflects lower average interest rates as a result of the May 19, 1999 refinancing of senior subordinated
notes (see "Liquidity and Capital Resources" below) and a higher level of short-term investments.

Other (income) expense includes $9.5 million from business interruption insurance income recorded in the first and second quarters of 2000 in final settlement of the insurance claim relating to the fire in the Company's facilities (see Item 2,
"Properties").  In 1999 the Company recorded $7.0 million related to business interruption insurance recovery and $2.9 million for the net gain on involuntary conversion of certain equipment destroyed in the June 12, 1999 fire.

The effective tax rates for 2000 and 1999 were 43.5% and 44.9% respectively.  See Note 10 to the Consolidated Financial Statements for a further discussion of income taxes.

The Company's net income decreased $4.5 million to $6.9 million for 2000 compared to $11.4 million for 1999 due to the reasons discussed above.

9

Net income available to common stockholder for 2000 decreased $4.5 million to $1.1 million compared to $5.6 million net income available to common stockholder for 1999.

Fiscal Year 1999 Compared with Fiscal Year 1998

Net sales for 1999 decreased $11.4 million to $208.9 million compared to $220.3 million in 1998.  This 5.2% decrease was due to lower sales volume because of the loss of key manufacturing equipment in the June, 1999 fire used to meet customer
requirements in the rail, mining and off highway industries.  Additionally, the company believes that customers remained cautious regarding the Company's restoration of its physical operations to pre-fire capabilities (see Item 2, "Properties"). By the
end of 1999, the Company's plant and equipment had been restored to pre-fire capabilities.  Net sales of the Company's Torque HubÒ
 products increased 2.5% to $104.3 million compared to 1998 primarily due to strong demand in the access platform and road rehabilitation markets.  Net sales of custom gears and assemblies decreased 11.7% to $104.6 million compared to 1998.

Cost of sales for 1999 decreased $14.0 million to $164.9 million, or 78.9% of net sales, compared to $178.9 million, or 81.2% of net sales in 1998.  Cost of sales decreased during 1999 in conjunction with the decrease in sales.  The 2.3% improvement
in cost of sales, as a percentage of net sales, was due to operating efficiencies gained from capital investments coupled with favorable pricing and sales mix.

Selling, general and administrative expenses ("SG&A"), including goodwill amortization, increased to $19.2 million in 1999, compared to $16.8 million in 1998.  SG&A expenses for 1999 included a non-cash charge of $2.3 million related to the
incentive plan for senior management (see Note 11 to the Consolidated Financial Statements).

Operating income increased 0.7%, to $24.7 million compared to $24.6 million in 1998 due to the reasons discussed above.

Interest expense, including amortization of deferred financing costs, was $11.3 million for 1999 compared to $12.7 million in 1998.  This decrease reflects lower debt, lower average interest rates and a higher level of short-term investments.

Other (income) expense, net includes $7.0 million from business interruption insurance income and $2.9 million for the net gain on involuntary conversion of certain equipment destroyed in the June 12, 1999 fire (see Item 2, "Properties").

The effective tax rates for 1999 and 1998 were 44.9%.  See Note 10 to the Consolidated Financial Statements for a further discussion of income taxes.

The Company recorded a loss on early extinguishment of debt, net of tax, of $1.4 million in 1999 related to the redemption of the Company's Senior Subordinated Notes due 2001 (see "Liquidity and Capital Resources" below and Note 12 to the Consolidated
Financial Statements).

The Company's net income increased $5.3 million to $11.4 million for 1999 compared to $6.1 million for 1998 due to the reasons discussed above.

Net income available to common stockholder for 1999 increased $5.3 million to $5.6 million compared to $0.3 million net income available to common stockholder for 1998.

Liquidity and Capital Resources

The Company uses funds provided by operations and short-term borrowings under its revolving credit facility (described below) to meet liquidity requirements.  Net cash provided by operations

10



decreased $16.8 million for the year ended December 31, 2000 compared to 1999.  Net cash provided by operations was $13.3, $30.1 and $15.4 million for the years ended December 31, 2000, 1999 and 1998, respectively.  This decrease reflects lower sales
volume, lower profitability, and lower inventory turnover due to the lower sales volume.  The lower inventory turnover is also attributed to an increase in the investment in work in process and finished goods inventory to capture short lead time
opportunities.

Working capital less cash at December 31, 2000 increased to $14.4 million from $10.2 million at December 31, 1999.  The increase in working capital from December 31, 1999 to December 31, 2000 is attributed to the increase in inventory offset by
additional amounts received in final settlement of the business interruption portion of the claim.

Net capital expenditures for various machine tools, equipment and building improvement items totaled $3.9, $11.7 and $10.5 million for the fiscal years ended December 31, 2000, 1999 and 1998, respectively, of which $0.8, $2.3, and $0.8 million was
funded by accounts payable at the respective period end in 2000, 1999 and 1998.  The $3.9 million of capital expenditures for 2000 have been primarily for replacement equipment.  The $11.7 million of capital expenditures in 1999 include a net gain of $2.9
million on the involuntary conversion of assets.

Net cash used by financing activities was $6.7, $7.5 and $5.1 million in 2000, 1999 and 1998, respectively. The net use in 2000 resulted primarily from cash dividends on preferred stock and the refinancing of Atlas' debt offset by capital
contributions in accordance with a tax sharing agreement.  The net use in 1999 resulted primarily from cash payment of dividends on the Company's outstanding preferred stock, redemption of the 11-3/8% Senior Subordinated Notes, and payment of outstanding
amounts under its Credit Facility.  The net use in 1998 resulted primarily from cash payment of dividends on the Company's outstanding preferred stock.

The Company and its affiliates, including Lancer, may from time to time, purchase in open-market transactions 9-5/8% Senior Subordinated Notes due 2008 and/or the 11-1/4% Cumulative Exchangeable Preferred Stock.

Under the Tax Sharing Agreement (as defined hereinafter), Lancer made capital contributions to the Company of $2.1, $3.9 and $2.7 million in 2000, 1999 and 1998, respectively.  See Note 10 to the Consolidated Financial Statements for a further
discussion of capital contributions made pursuant to the Tax Sharing Agreement.

Management expects to use cash flows from operations to fund the Company's planned capital requirements for 2001, including capital expenditures and interest.  The Company's Credit Facilities, as discussed below, may also be utilized to meet
additional liquidity needs.

Credit Facilities

The Company has a Credit Facility provided to it by General Electric Capital Corporation ("GE Capital").  Under the Credit Facility, the Company has $10.0 million of term loans outstanding at December 31, 2000.  In addition, the Credit Facility
provides for $20.0 million of revolving loans by the Company, including up to $2.0 million under a letter of credit subfacility, subject to borrowing base availability.  At December 31, 2000, the Company had $19.6 million of availability under the
revolver.  The Company has the option of increasing the revolver availability by up to $20.0 million, subject to the satisfaction of certain conditions.  Commitments under the revolver terminate on July 1, 2005.  The $10.0 million of term loans currently
outstanding are payable in a single principal payment on July 1, 2005.

In connection with the Atlas acquisition, the Company amended its credit agreement with General Electric Capital Corporation, among other things, to obtain its consent to the acquisition.  In addition, General Electric Capital Corporation guaranteed a
$7.0 million credit facility extended to

11

Atlas in India.  Pursuant to the amendment to the credit agreement, the Company is obligated to repay any amounts paid in respect of this guaranty.  As of December 31, 2000, Atlas has approximately $2.6 million of loans outstanding.

Indebtedness under the Credit Facility is secured by a pledge of the Company's common stock owned by Lancer and a lien on, and security interest in, substantially all of the Company's assets, including, without limitation, all capital stock of
subsidiaries, real estate, equipment, inventory, accounts receivable and cash.  The Credit Facility contains certain restrictive covenants limiting among other things, additional debt, additional liens, transactions with affiliates, mergers and
consolidations, liquidations and dissolutions, sales of assets, dividends, capital expenditures, sales and leaseback transactions, operating leases, investments, loans and advances, prepayment and modification of debt instruments, the taking or the
failure to take, certain actions with respect to the Tax Sharing Agreement and other matters customarily restricted in such agreements.  The Credit Facility also requires that the Company maintain compliance with certain specified financial ratios and
tests including ratios with respect to fixed charges, interest coverage and working capital.  In addition, the Credit Facility contains certain customary affirmative covenants and events of default.

Issuance of 9-5/8% Senior Subordinated Noes due 2008

On May 19, 1999, the Company issued $100 million of 9-5/8% Senior Subordinated Notes due 2008.  The proceeds of the offering were used by the Company as follows; 1) approximately $68.6 million was used to redeem the 11-3/8% Senior Subordinated
Notes due 2001; 2) approximately $27.7 million was used to reduce outstanding amounts under its Credit Facility and; 3) approximately $3.7 million was used to pay the fees and expenses of the offering.  During 1998, the Company repurchased $17.9 million
of its 11-3/8% Senior Subordinated Notes due 2001 in open market transactions.  The deferred financing costs associated with the 11-3/8% Senior Subordinated Notes due 2001 were written off as part of the loss on the early extinguishment of debt, which was
approximately $1.4 million net of tax in 1999 and $0.4 million net of tax in 1998.

Exchangeable Preferred Stock

On March 12, 1997 the Company issued 50,000 shares of 11-1/4% Cumulative Exchangeable Preferred Stock, liquidation preference $1,000 per share, representing an aggregate liquidation preference of $50.0 million.  The Exchangeable Preferred Stock is
exchangeable at the option of the Company, in whole but not in part, for 11-1/4% Subordinated Exchange Debentures Due 2009 (the "Exchange Debentures"), in aggregate principal amount equal to the liquidation preference of the Exchangeable Preferred Stock
following the redemption of the Existing Notes, subject to the satisfaction of certain conditions.

The Company is required, subject to certain conditions, to redeem all of the Exchangeable Preferred Stock outstanding on March 15, 2009 at a redemption price equal to 100% of the liquidation preference thereof plus, without duplication, accumulated
and unpaid dividends to the date of redemption.  The maturity date of the Exchange Debentures is March 15, 2009.

The Exchangeable Preferred Stock pays dividends at a rate equal to 11-1/4% per annum of the liquidation preference per share, payable semiannually on each March 15 and September 15 in cash, or, on or prior to March 15, 2002, in kind on each March 15
and September 15.  Interest on the Exchange Debentures is also 11-1/4% per annum.  The Company elected to pay the March 15, 2001 Exchangeable Preferred Stock dividend in kind and, in connection therewith, issued 2,812.5 shares of Exchangeable Preferred
Stock to the holders of record as of March 1, 2001.

12

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.

Information Concerning Forward-Looking Statements

This report contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933.  Statements that are not simply statements of historical fact (such as when the Company describes what it believes, expects or anticipates
will occur, and other similar statements), may not be correct, even though the Company currently believes they are reasonable.  The Company does not guarantee that the transactions and events described in this report will happen as described (or that they
will happen at all).  This report should be read completely and with the understanding that actual future results may be materially different from what the Company expects.  The Company will not update these forward-looking statements, even though its
situation will change in the future.  Whether actual results will conform with the Company's expectations and predictions is subject to a number of risks and uncertainties, including:

- the Company's outstanding indebtedness and leverage;
- restrictions imposed by the terms of the Company's indebtedness;
- the high degree of competition in the Company's business;
- the susceptibility of the Company's business to general economic conditions;
- the cyclical nature of the Company's business;
- future modifications of existing environmental laws and human health regulations;
- discovery of unknown contingent liabilities, including environmental contamination at the Company's facility;
- the Company's dependence on suppliers of raw materials and major customers;
- the Company's ability to manage and execute its strategy with regard to the Atlas acquisition,
- the control of Lancer, the Company's sole shareholder; and
- future capital requirements.

|Item 7 (a). | Quantitative and Qualitative Disclosures About Market Risk
|----------- | ----------------------------------------------------------

The Company does not own any interest in derivative financial or commodity instruments as of December 31, 2000.  The effect of reasonably possible market movements in interest rates is not expected to have a material impact on the Company's future
cash flows or earnings.

|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.

13





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, including their respective ages as of December 31, 2000.



|Name               | Age |  | Position                                                       
|------------------ | --- |  | ---------------------------------------------------------------
|                   |     |  |                                                                
|Paul S. Levy       | 53  |  | Chairman of the Board, Vice President and
  Assistant Secretary
|Peter A. Joseph    | 48  |  | Director, Vice President and Secretary                         
|Stephen K. Clough  | 47  |  | Director, President and Chief Executive Officer                
|Jess C. Ball       | 59  |  | Director                                                       
|W. B. Lechman      | 68  |  | Director                                                       
|Andrew R. Heyer    | 43  |  | Director                                                       
|Richard A. Bush    | 43  |  | Vice President and Chief Financial Officer                     
|James R. Dammon    | 57  |  | Vice President Engineering                                     
|Mark D. Gustus     | 41  |  | Vice President Operations                                      
|William V. Lewis   | 53  |  | Vice President Human Resources                                 
|Thomas C. Sorrells | 36  |  | Vice President Business Development                            
|Clement L. Strimel | 38  |  | Vice President International Business
  Development            

Mr. Levy was elected Chairman of the Board effective August 1998.  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 Hayes Lemmerz International, Inc., New World Pasta Company, AdvancePCS,
IASIS Healthcare, Motor Coach Industries International and Builders FirstSource, Inc.

Mr. Joseph has been Vice President, Director and Secretary 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 has been a principal of
Palladium Equity Partners, LLC since 1998.  Prior to that, he was a founding partner of Joseph Littlejohn & Levy.

Mr. Clough was appointed President and Chief Executive Officer and elected to the Board of Directors effective August 1998.  Prior to his appointment, Mr. Clough was employed by Kaydon Corporation where he served as the President and Chief Executive
Officer from June 1996 to June 1998 and the President and Chief Operating Officer from September 1989 to June 1996.

Mr. Ball has been a Director of the Company since 1991.  Mr. Ball was President and Chief Executive Officer of the Company from October 1994 to May 1996.

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

14

Mr. Heyer is Managing Director and co-head of the High Yield Group of CIBC World Markets.  Prior to joining the firm, Mr. Heyer was a founding partner and managing director of The Argosy Group L.P., which was acquired by CIBC World Markets (formerly
CIBC Wood Gundy) in August 1995.  Before Argosy, Mr. Heyer was a managing director in the Corporate Finance Department of Drexel Burnham Lambert Incorporated.  Mr. Heyer serves as a director of the Hain Celestial Food Group, Inc., Niagara Corporation,
Hayes Lemmerz International, Inc., Lancer, NSP Holdings, LLC, E-Link and Millennium Digital Media Capital, L.L.C.

Mr. Bush was appointed Vice President and Chief Financial Officer effective January 2000.  Mr. Bush was the 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 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. Lewis has been Vice President Human Resources since July 1999.  Prior to his present position, Mr. Lewis was Vice President, Human Resources, Manufacturing and Distribution for PolyGram from 1993 to June 1999.  From 1972 to 1992, Mr. Lewis was
with Aluminum Company of America (ALCOA) where he served in various human resource positions.

Mr. Sorrells has been Vice President Business Development since March 2000.  Prior to his present position, Mr. Sorrells was Vice President Business Development of Lancer Industries from November 1999 to February 2000.  Prior to that he was President
of Kaydon Fluid Power, a division of Kaydon Corporation from September 1995 to November 1999.

Mr. Strimel has been the Vice President International Business Development since November 2000.  Prior to his present position, Mr. Strimel was Vice President of Sales from March 1999 to October 2000.  Prior to that, Mr. Strimel was the Director of
Custom Sales from October 1996 to March 1999.  Prior to joining Fairfield, Mr. Strimel was with United Defense for nine years where he served as a Program Manager from 1991 to October 1996.

Compensation of Directors

Messrs. Ball and Lechman each receive an annual fee of $30,000 per year for services as a director.  Mr. Lechman entered into a consulting agreement with the Company (see Note 3 to the Consolidated Financial Statements and Item 11, "Employment and
Consulting Agreements") in August 1997.  No other directors receive any additional compensation for services performed as a director or for serving on committees of the Board of Directors of the Company or for meeting attendance.

15





|Item 11. | EXECUTIVE COMPENSATION
|-------- | ----------------------

The following table sets forth for each of the fiscal years ending December 31, 2000, 1999 and 1998, the compensation paid to or accrued by the Company for the Chief Executive Officer ("CEO") of the Company and each of the four most highly compensated
executive officers other than the CEO (the "Named Executive Officers").

Summary Compensation Table



|Name and                      | Annual Compensation | All Other
|----------------------------- | ------------------- | ---------
|Principal Position            | Year                | Salary   
|                              |                     |          
|Stephen K. Clough             | 2000                | $416,200 
|President and Chief Executive | 1999                | 406,862  
|Officer                       | 1998                | 154,872  
|                              |                     |          
|Richard A. Bush               | 2000                | $150,031 
|Vice President and Chief      | 1999                | 118,364  
|Financial Officer             | 1998                | 107,500  
|                              |                     |          
|James R. Dammon               | 2000                | $123,334 
|Vice President Engineering    | 1999                | 120,172  
|                              | 1998                | 118,560  
|                              |                     |          
|Mark D. Gustus                | 2000                | $118,226 
|Vice President Operations     | 1999                | 113,239  
|                              | 1998                | 110,000  
|                              |                     |          
|Thomas C. Sorrells            | 2000                | $175,031 
|Vice President Business       |                     |          
|Development                   |                     |          



|(1) | Amounts shown were earned under the Fairfield Manufacturing Company, Inc. Management Incentive Compensation Plan.                                                                                                                                                                                                                                                                                                                                                                     
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(2) | Amounts shown include contributions by the Company to The Savings Plan For Employees of Fairfield Manufacturing Company, Inc. ("Savings Plan") for the benefit of the Named Executive Officers, imputed income on life insurance
provided by the Company.  Included in the 1998 other compensation amount shown for Mr. Clough is $10,000 for moving expenses reimbursed.  Other compensation for Mr. Clough also includes the value of other fringe benefits provided by the Company.
|(3) | Amount shown represents compensation from March, 2000 through December, 2000.                                                                                                                                                                                                                                                                                                                                                                                                         

16





Incentive Plan for Senior Management

The Company has established an Incentive Plan for Senior Management (the "Plan") to provide incentive compensation for the Company's executive officers designated by the Board.  Under the Plan, the Board grants Performance Units, at its
discretion, to the Company's executive officers, and such Performance Units may vest in six equal annual installments on the last day of each of the six fiscal years of the Company beginning with the year ended December 31, 1998.  Under the Plan, the
holders of the Performance Units are entitled to share in the increase of the Company's equity value in the event the Performance Units vest.  The Plan terminates after redemption and satisfaction of all then outstanding Performance Units at December 31,
2003 or upon a change of control.  The non-cash provision under this Plan was ($2,300) in 2000 and $2,300 in 1999.

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 forYears of Benefit Service Indicated(2)
|------------------------------ | ------------------------------------------------------------------
|Average AnnualCompensation (1) | 5                                                                 
|$100,000                       | $6,636                                                            
|$125,000                       | 8,448                                                             
|$150,000                       | 10,261                                                            
|$170,000 and over              | 11,711                                                            

(1)	The preceding table illustrates the pension benefits provided by the Pension Plan, calculated on a straight life annuity basis, for an eligible employee retiring at age 65 in 2000.  Average annual compensation covered under the Pension Plan is
the highest average annual total compensation received from the Company for any 5 calendar years during the 10 years immediately preceding the participant's separation from service.  Annual total compensation for Pension Plan purposes includes the base
salary and bonus components of compensation as disclosed in the Summary Compensation Table.  In order to comply with the terms of the Pension Plan and the requirements of the Internal Revenue Code, the compensation used in calculating a participant's
pension is limited.  This limit was $170,000 for 2000.

(2)	At December 31, 2000 Messrs. Clough, Bush, Dammon, Gustus and Sorrells had 2, 6, 35, 19 and 1 years of credited service, respectively, for purposes of calculating their benefits under the Pension Plan.

17



Employment and Consulting Agreements

Effective July 31, 1997, W. B. Lechman resigned as Chairman of the Company's Board of Directors (the "Board") but continues as a member of the Board.

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.  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 Stephen K. Clough, effective August 12, 1998 in connection with his appointment as President and Chief Executive Officer of the Company.  The original agreement, which would have expired on August
12, 2001, was amended during 1999 extending the agreement to August 31, 2003.  The agreement provides for Mr. Clough to receive a base salary of $400,000 or such greater amount as may be determined by the Board of Directors of the Company upon periodic
review.  In addition, Mr. Clough is eligible to receive bonuses in each fiscal year covered by the agreement based on the achievement of target performance objectives for himself and the Company as established by the Board of Directors.  Mr. Clough is
eligible to participate in any other benefit plan that the Company provides to its executives and employees from time to time.

18



|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 as of December 31, 2000 by (i) each person known by the Company to beneficially own in excess of 5% of the outstanding shares of the
Company's common stock, (ii) each director of the Company and (iii) the directors and executive officers of the Company as a group, as listed in Item 10, "Directors and Executive Officers of the Registrant."





|Name                                                                                 | Shares of
CommonStock |     | Percent of Class
|------------------------------------------------------------------------------------ | --------------------- | --- | ----------------
|                                                                                     |                       |     |                 
|Lancer Industries Inc. (1)
450 Lexington Avenue, Suite 3350
New York, New York 10017 | 9,117,000             |     | 100%            
|Paul S. Levy                                                                         | --                    | (2) | --              
|Peter A. Joseph                                                                      | --                    | (2) | --              
|Andrew R. Heyer                                                                      | --                    | (2) | --              
|All directors and executive officers as a group (12 persons)                         | --                    | (2) | --              





|(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 collateral for the Company's obligations thereunder.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|(2) | Lancer has one class of common stock, Class B Common Stock, with a par value of $478.44 per share.  Lancer's common stock is held as follows: (i) Canadian Imperial Bank of Commerce ("CIBC"), through
affiliates, beneficially owns approximately 23% of Lancer's common stock, (ii) certain entities affiliated with Mutual Series Fund (the "Mutual Entities") own approximately 27% of Lancer's common stock, (iii) Mr. Paul S. Levy, the Chairman of the Board
and Chief Executive Officer of the Company, directly and through his participation in the Lancer Employee Stock Ownership Plan (the "ESOP") beneficially owns approximately 22% of Lancer's common stock, and through a proxy in his favor to vote the shares
of Lancer's common stock beneficially owned by CIBC and others, has the right to direct the voting of over 50% of Lancer's common stock, and (iv) Mr. Peter A. Joseph, a Vice President and a Director of the Company, directly, through a trust and through
his participation in the ESOP, beneficially owns and has the right to direct the voting of approximately 16% of Lancer's common stock.  Mr. Levy, the Mutual Entities and an affiliate of CIBC are parties to a stockholders' arrangement relating to the
composition of the Board of Directors of Lancer and certain other matters.  Mr. Levy is the Chairman of the Board and Chief Executive Officer of Lancer.  Mr. Joseph is the President and a Director of Lancer.  Mr. Heyer, a Director of the Company, is a
Director of Lancer and a Managing Director of an affiliate of CIBC.

19



|Item 13. | CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
|-------- | ----------------------------------------------

Control by Lancer Industries Inc.

The Company is wholly owned by Lancer, a Delaware corporation.  As a result, Lancer is able to direct and control the policies of the Company and its subsidiaries.  Certain stockholders of Lancer are Directors and officers of
the Company.  Certain stockholders of Lancer are parties to a stockholders' arrangement relating to the composition of the Board of Directors of Lancer and certain other matters.  See Item 12, "Security Ownership of Certain Beneficial Owners and
Management."  Circumstances could occur in which the interests of Lancer could be in conflict with the interests of the Company.  In addition, Lancer may have an interest in pursuing acquisitions, divestitures or other transactions that Lancer believes
would enhance its equity investment in the Company, even though such transactions might involve risks to the Company.

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 federal 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 a separate federal tax return
(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 Note 10 to the Consolidated Financial Statements for a further discussion of income taxes.

Management Services

Stephen Clough, the Company's President and Chief Executive Officer, and Tom Sorrells, its Vice President Business Development, have been providing management services for a company (the "Fund III Company") controlled and majority-owned  by Joseph
Littlejohn & Levy Fund III ("Fund III").  Messrs. Levy and  Joseph have an interest in Fund III.  An affiliate of  CIBC, in which Mr. Heyer is a general partner, has an equity interest in the Fund III Company.  See Item 10, "Directors and Executive
Officers of the Registrant" and Item 12, "Security Ownership of Certain Beneficial Owners and Management."

Messrs. Clough and Sorrels began rendering such management services in January 2001and will continue to do so until such time as the Fund III Company hires a president and chief executive officer.  Mr. Clough devotes most of his professional time to
the Company, and Mr. Sorrells allocates his time between the Company and the Fund III Company, at the direction of Mr. Clough.  The Fund III Company will reimburse the Company for all expenses related to such services, including the salaries of, and other
compensation to, Messrs. Clough and Sorrells (based on the portion of their time spent on the Fund III Company).  The disinterested directors of the Company have approved the provision of services by Messrs. Clough and Sorrells to the Fund III Company.

20

Other Arrangements with Lancer

From time to time, Lancer incurs legal, accounting and miscellaneous other expenses on behalf of the Company.  In fiscal 2000, 1999 and 1998, Lancer incurred reimbursable expenses on the Company's behalf of approximately $0.2, $0.4 and $0.8 million,
respectively.

21



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                                                                                                                                                                                                                                                                                                                                                                                                                       
|----------- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(3) (a)     | Restated Certificate of Incorporation of Fairfield Manufacturing Company, Inc. ("Fairfield or the Company"), 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 Registration Statement on Form S-4 (file no. 333-24823) of the Company, as filed with the Securities and Exchange Commission on April 9, 1997 (the "1997 Form S-4").
|(3) (b)     | By-Laws of Fairfield, incorporated by reference from Exhibit 3(c) to the Company'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 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) (b)     | Certificate of Designation, dated March 12, 1997, for the 11-1/4% Cumulative Exchangeable Preferred Stock, incorporated by reference from Exhibit 4(d) to the 1997 Form S-4.                                                                                                                                                                                                                                                      
|(4) (c)     | Indenture, dated as of May 1999, between Fairfield and First Union National Bank, a trustee, incorporated by reference from Exhibit 4.01 to the Registration Statement on Form S-4 (file no. 333-80431) of the Company filed with
the Commission on July 2, 1999.                                                                                                                                                                 
|(10) (a)    | The Amended and Restated Loan Agreement, dated as December 30, 1999, among Fairfield, as borrower, the financial institutions party thereto as lenders, and General Electric Capital Corporation ("GECC"), as agent.                                                                                                                                                                                                              
|(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 Company's Form 10-Q as filed with the Securities and Exchange
Commission on August 16, 1993 (the "1993 Second Quarter 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 1993 Second Quarter 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 1993 Second Quarter Form 10-Q.                                                                                                                                                                                                                                                  



22



|(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 1993 Second Quarter 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 1993 Second Quarter 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 1993 Second Quarter 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 1993 Second Quarter 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 1993 Second Quarter
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 1993 Second Quarter 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 1993 Second Quarter 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 1993 Second Quarter 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 1993 Second Quarter Form 10-Q.                                      
|(10) (n) | 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) (o) | 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) (p) | 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) (q) | The Tax Sharing Agreement, dated as of July 18, 1990, between Fairfield and Lancer, incorporated by reference from Exhibit 10(z) to the Company's Form 10-K as filed with the Securities and Exchange Commission on March 15,
1996 (the "1995 Form 10-K").



23



|(10) (r) | The Fairfield Manufacturing Company, Inc. (1992) Supplemental Executive Retirement Plan incorporated by reference from Exhibit 10(aa) to the 1995 Form 10-K.                                                                                                                                                                                                           
|-------- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(10) (s) | 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) (t) | 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 Company's From 10-K as filed with the Securities and Exchange Commission on February 25, 1997 (the "1996 Form 10-K").            
|(10) (u) | 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) (v) | Consulting Agreement, dated August 1, 1997, between Fairfield and Wolodymyr B. Lechman, incorporated by reference from Exhibit 10(hh) to the Company's Form 10-Q as filed with the Securities and Exchange Commission on
November 12, 1997.                                                                                                                            
|(10) (w) | Third Amendment to Mortgage Assignment of Leases, Rents and Profits, Security Agreement and Fixture Filing, dated as of October 12, 1998 between Fairfield and GECC, as agent, incorporated by reference from Exhibit 10(hh) to
the Company's Form 10-Q as filed with the Securities and Exchange Commission on November 13, 1998 (the "1998 Third Quarter Form 10-Q").
|(10) (x) | Employment Agreement dated as of August 4, 1998, between Fairfield and S. K. Clough, incorporated by reference from Exhibit 10(ii) to the 1998 Third Quarter Form 10-Q.                                                                                                                                                                                                
|(10) (y) | Fairfield Manufacturing Company, Inc. Incentive Plan for Senior Management,  incorporated by reference from Exhibit 10 (y) to the 1999 Form 10-K.                                                                                                                                                                                                                      
|(10) (z) | First Amendment,  dated as of October 6, 2000, an Amended and Restated Loan Agreement, dated as of December 30, 1999, between Fairfield Manufacturing Company, Inc., the financial institutions party as lenders and General
Electric Capital Corporation as administrative agent, incorporated by reference from Exhibit 10.1 to the 2000 Third Quarter 10-Q.         
|(21)     | Subsidiaries of Fairfield Manufacturing Company, Inc.
T-H Licensing, Inc.
Fairfield Atlas Limited                                                                                                                                                                                                                                                                      

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



24



SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized on March 21, 2001.

FAIRFIELD MANUFACTURING COMPANY, INC.





| | By | /s/ Richard A. Bush                                                                                    
| | -- | -------------------------------------------------------------------------------------------------------
| |    | Richard A. Bush
Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer)



Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities indicated on  March 21, 2001.

|/s/ Paul S. Levy                                                            |  | /s/ Stephen K. Clough                                            
|--------------------------------------------------------------------------- |  | -----------------------------------------------------------------
|Paul S. Levy
Chairman of the Board, 
Vice President and Assistant Secretary |  | Stephen K. Clough
Director, President and
Chief Executive Officer
|                                                                            |  |                                                                  
|/s/ W. B. Lechman                                                           |  | /s/ Andrew R. Heyer                                              
|W. B. Lechman
Director                                                      |  | Andrew R. Heyer
Director                                         
|                                                                            |  |                                                                  
|/s/ Jess C. Ball                                                            |  |                                                                  
|Jess C. Ball
Director                                                       |  |                                                                  
|                                                                            |  |                                                                  

25

FAIRFIELD MANUFACTURING COMPANY, INC.

|                                                              |  | Page  
|------------------------------------------------------------- |  | ------
|                                                              |  |       
|Report of Independent Accountants                             |  | F - 2 
|                                                              |  |       
|Consolidated Balance Sheets, December 31, 2000 and 1999       |  | F - 3 
|                                                              |  |       
|Consolidated Statements of Operations for the three years     |  |       
|ended December 31, 2000                                       |  | F - 4 
|                                                              |  |       
|Consolidated Statements of Stockholder's Equity (Deficit) for |  |       
|the three years ended December 31, 2000                       |  | F - 5 
|                                                              |  |       
|Consolidated Statements of Cash Flows for the three years     |  |       
|ended December 31, 2000                                       |  | F - 6 
|                                                              |  |       
|Notes to Consolidated Financial Statements                    |  | F - 7 
|                                                              |  |       
|Financial Statement Schedule:                                 |  |       
|                                                              |  |       
|Schedule II - Valuation and Qualifying Accounts and Reserves, |  |       
|for the three years ended December 31, 2000                   |  | F - 20







F - 1





Report of Independent Accountants



Tothe Board of Directors and Stockholder

of Fairfield Manufacturing Company, Inc.



In our opinion, the consolidated financial statements listed in the accompanying index on page F-1, present fairly, in all material respects, the financial position of Fairfield Manufacturing Company, Inc. and its subsidiaries at December 31, 2000 and
1999, and the results of their operations and cash flows for each of the three years in the period ended December 31, 2000 in conformity with accounting principles generally accepted in the United States of America.  In addition, in our opinion, the
financial statement schedule listed in the accompanying index presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements.  These financial statements and
financial statement schedule are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audits.  We conducted our audits of these statements
in accordance with auditing standards generally accepted in the United States of America, which 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, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement
presentation.  We believe that our audits provide a reasonable basis for the opinion expressed above.



/s/ PricewaterhouseCoopers LLP



Indianapolis, Indiana
January 31, 2001, except as to
Note 17, which is as of
March 15, 2001

F - 2

FAIRFIELD MANUFACTURING COMPANY, INC.

CONSOLIDATED BALANCE SHEETS
December 31, 2000 and 1999

|                                                                                                                                                                |          |         
|--------------------------------------------------------------------------------------------------------------------------------------------------------------- | -------- | --------
|                                                                                                                                                                | 2000     | 1999    
|ASSETS                                                                                                                                                          |          |         
|Current assets:                                                                                                                                                 |          |         
|Cash and cash equivalents                                                                                                                                       | $16,378  | $13,639 
|Trade receivables, less allowance of $1,176
    and $700 in 2000 and 1999, respectively                                                                         | 18,214   | 19,664  
|Inventory                                                                                                                                                       | 29,518   | 22,507  
|Other current assets                                                                                                                                            | 32       | 3,348   
|Total current assets                                                                                                                                            | 64,142   | 59,158  
|                                                                                                                                                                |          |         
|Property, plant and equipment, net                                                                                                                              | 67,831   | 70,426  
|                                                                                                                                                                |          |         
|Other assets:                                                                                                                                                   |          |         
|Excess of investment over net assets acquired, less
      accumulated amortization of $18,323 and $16,689 in
      2000 and 1999, respectively                  | 48,166   | 47,670  
|                                                                                                                                                                |          |         
|Deferred financing costs, less accumulated amortization
      of $970 and $1,226 in 2000 and 1999, respectively                                                 | 2,550    | 3,024   
|Total other assets                                                                                                                                              | 50,716   | 50,694  
|                                                                                                                                                                |          |         
|Total assets                                                                                                                                                    | $182,689 | $180,278
|                                                                                                                                                                |          |         
|LIABILITIES AND STOCKHOLDER'S EQUITY (DEFICIT)                                                                                                                  |          |         
|Current liabilities:                                                                                                                                            |          |         
|Accounts payable                                                                                                                                                | $8,906   | $8,801  
|Due to parent                                                                                                                                                   | 708      | 750     
|Accrued liabilities                                                                                                                                             | 21,769   | 24,384  
|Deferred income taxes                                                                                                                                           | 2,013    | 1,367   
|Total current liabilities                                                                                                                                       | 33,396   | 35,302  
|                                                                                                                                                                |          |         
|Accrued retirement costs                                                                                                                                        | 17,032   | 16,526  
|Deferred income taxes                                                                                                                                           | 6,823    | 7,393   
|Other long-term liabilities                                                                                                                                     | --       | 2,300   
|Long-term debt                                                                                                                                                  | 112,575  | 110,000 
|Minority interest                                                                                                                                               | 733      | --      
|Commitments and contingencies (Note 16)                                                                                                                         |          |         
|                                                                                                                                                                |          |         
|11-1/4% Cumulative exchangeable preferred stock                                                                                                                 | 48,426   | 48,234  
|                                                                                                                                                                |          |         
|Stockholder's equity (deficit):                                                                                                                                 |          |         
|Common stock: par value $.01 per share, 10,000,000
      shares authorized, 9,117,000 and 8,691,000 issued and
      outstanding in 2000 and 1999, respectively | 91       | 87      
|Additional paid-in capital                                                                                                                                      | 48,386   | 46,250  
|Accumulated deficit                                                                                                                                             | (84,716) | (85,814)
|Cumulative translation adjustment                                                                                                                               | (57)     | --      
|Total stockholder's deficit                                                                                                                                     | (36,296) | (39,477)
|                                                                                                                                                                |          |         
|Total liabilities and stockholder's deficit                                                                                                                     | $182,689 | $180,278



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



F - 3



FAIRFIELD MANUFACTURING COMPANY, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS
For the Three Years Ended December 31, 2000

|                                                              |          |          |         
|------------------------------------------------------------- | -------- | -------- | --------
|                                                              | 2000     | 1999     | 1998    
|                                                              |          |          |         
|Net sales                                                     | $161,159 | $208,852 | $220,316
|Cost of sales                                                 | 135,204  | 164,877  | 178,933 
|Selling, general and administrative expenses                  | 13,412   | 19,245   | 16,816  
|                                                              |          |          |         
|Operating income                                              | 12,543   | 24,730   | 24,567  
|                                                              |          |          |         
|Interest expense, net                                         | 9,833    | 11,317   | 12,697  
|Other (income) expense, net (Note 15)                         | (9,487)  | (9,880)  | 70      
|                                                              |          |          |         
|Income before income taxes and minority interest              | 12,197   | 23,293   | 11,800  
|                                                              |          |          |         
|Provision for income taxes                                    | 5,307    | 10,462   | 5,300   
|                                                              |          |          |         
|                                                              | 6,890    | 12,831   | 6,500   
|                                                              |          |          |         
|Minority interest in net income of
   consolidated subsidiary | 25       | --       | --      
|                                                              |          |          |         
|Net income before extraordinary item                          | 6,915    | 12,831   | 6,500   
|                                                              |          |          |         
|Loss on early extinguishment of debt, net of tax              | --       | (1,401)  | (426)   
|                                                              |          |          |         
|Net income                                                    | $6,915   | $11,430  | $6,074  
|                                                              |          |          |         
|Preferred stock dividends and discount accretion              | (5,817)  | (5,817)  | (5,817) 
|                                                              |          |          |         
|Net income available to common stockholder                    | $1,098   | $5,613   | $257    
|                                                              |          |          |         



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



F - 4





FAIRFIELD MANUFACTURING COMPANY, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY (DEFICIT)
For the Three Years Ended December 31, 2000

|                                   |        |            |             | Accumulated   |                 
|---------------------------------- | ------ | ---------- | ----------- | ------------- | ----------------
|                                   |        | Additional |             | Other         | Stock-          
|                                   | Common | Paid-in    | Accumulated | Comprehensive | Holder's        
|                                   | Stock  | Capital    | Deficit     | Income        | Equity (Deficit)
|                                   |        |            |             |               |                 
|Balance, January 1, 1998           |        |            |             |               |                 
|                                   | $82    | $39,414    | $(91,684)   | $  --         | $(52,188)       
|Capital contribution               | $ 3    | $ 2,908    | $       --  | $  --         | $  2,911        
|Preferred stock dividends          | --     | --         | (5,625)     | --            | (5,625)         
|Preferred stock discount accretion | --     | --         | (192)       | --            | (192)           
|Net income                         | --     | --         | 6,074       | --            | 6,074           
|Balance, December 31, 1998         | $85    | $42,322    | $(91,427)   | $  --         | $(49,020)       
|                                   |        |            |             |               |                 
|Capital contribution               | $ 2    | $ 3,928    | $      --   | $  --         | $3,930          
|Preferred stock dividends          | --     | --         | (5,625)     | --            | (5,625)         
|Preferred stock discount accretion | --     | --         | (192)       | --            | (192)           
|Net income                         | --     | --         | 11,430      | --            | 11,430          
|Balance, December 31, 1999         | $87    | $46,250    | $(85,814)   | $  --         | $(39,477)       
|                                   |        |            |             |               |                 
|Capital contribution               | $ 4    | $ 2,136    | $     --    | $  --         | $2,140          
|Preferred stock dividends          | --     | --         | (5,625)     | --            | (5,625)         
|Preferred stock discount accretion | --     | --         | (192)       | --            | (192)           
|Comprehensive income:              |        |            |             |               |                 
|Net income                         | --     | --         | 6,915       | --            | 6,915           
|Foreign currency translation       | --     | --         | --          | (57)          | (57)            
|Total comprehensive income         | --     | --         | --          | --            | 6,858           
|Balance, December 31, 2000         | $91    | $48,386    | $(84,716)   | $(57)         | $(36,296)       

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

F - 5



FAIRFIELD MANUFACTURING COMPANY, INC.

|                                                                                                 |         |           |         
|------------------------------------------------------------------------------------------------ | ------- | --------- | --------
|                                                                                                 | 2000    | 1999      | 1998    
|Operating Activities:                                                                            |         |           |         
|Net income                                                                                       | $6,915  | $11,430   | $6,074  
|Adjustments to reconcile net income to net cash provided by
  operating activities:              |         |           |         
|Depreciation and amortization                                                                    | 13,288  | 13,252    | 13,267  
|Minority interest                                                                                | (25)    | --        | --      
|Deferred income taxes                                                                            | 76      | (747)     | (2,097) 
|Increase in accrued retirement costs                                                             | 506     | 248       | 687     
|(Decrease)increase in other long-term liabilities                                                | (2,300) | 2,300     | --      
|Loss on early extinguishment of debt                                                             | --      | 1,401     | 426     
|Changes in working capital:                                                                      |         |           |         
|Trade receivables                                                                                | 1,517   | 7,704     | (5,085) 
|Inventory                                                                                        | (6,065) | 3,012     | (1,644) 
|Prepaid expenses                                                                                 | 3,494   | (2,979)   | 679     
|Accounts payable                                                                                 | (28)    | (6,640)   | 3,595   
|Due to parent                                                                                    | (42)    | 268       | (1,726) 
|Accrued liabilities                                                                              | (4,069) | 803       | 1,188   
|                                                                                                 |         |           |         
|Net cash provided by operating activities                                                        | 13,267  | 30,052    | 15,364  
|                                                                                                 |         |           |         
|Investing Activities:                                                                            |         |           |         
|Additions to property, plant and equipment                                                       | (3,908) | (8,810)   | (10,536)
|Proceeds from involuntary conversion                                                             | --      | (2,903)   | --      
|Acquisition Atlas Gears Limited                                                                  | 123     | --        | --      
|                                                                                                 |         |           |         
|Net cash used by investing activities                                                            | (3,785) | (11,713)  | (10,536)
|                                                                                                 |         |           |         
|Financing Activities:                                                                            |         |           |         
|Capital contributions, principally under tax sharing agreement                                   | 2,140   | 3,930     | 2,911   
|Proceeds from issuance of long-term debt                                                         | 2,457   | 97,750    | 19,000  
|Repayment of long-term debt                                                                      | (5,604) | (101,150) | (20,218)
|Net change in revolving credit facility                                                          | --      | (1,000)   | (1,000) 
|Payment of debt issuance costs/amendment fees                                                    | (70)    | --        | (133)   
|Premium paid on early retirement of bonds                                                        | --      | (1,427)   | --      
|Payment of preferred stock dividends                                                             | (5,625) | (5,625)   | (5,625) 
|                                                                                                 |         |           |         
|Net cash used by financing activities                                                            | (6,702) | (7,522)   | (5,065) 
|                                                                                                 |         |           |         
|Effect of changes in exchange rates                                                              | (41)    | --        | --      
|                                                                                                 |         |           |         
|Cash and Cash Equivalents:                                                                       |         |           |         
|Increase (decrease) in cash and cash equivalents                                                 | 2,739   | 10,817    | (237)   
|Beginning of year                                                                                | 13,639  | 2,822     | 3,059   
|                                                                                                 |         |           |         
|End of year                                                                                      | $16,378 | $13,639   | $2,822  
|                                                                                                 |         |           |         
|Supplemental Disclosures:                                                                        |         |           |         
|Cash paid for:                                                                                   |         |           |         
|Interest                                                                                         | $10,377 | $13,560   | $13,442 
|Federal taxes to parent under tax sharing agreement (Note 10)                                    | 5,190   | 8,482     | 7,710   
|State taxes                                                                                      | 933     | 1,304     | 1,550   
|                                                                                                 |         |           |         
|Non-cash investing and financing activities:                                                     |         |           |         
|Additions to property, plant and equipment included in
        accounts payable at end of period | $812    | $2,319    | $845    
|Preferred stock dividends accrued                                                                | 1,677   | 1,677     | 1,677   

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

F - 6



1.	Summary of Significant Accounting Policies

Organization

Fairfield Manufacturing Company, Inc. ("Fairfield") is wholly owned by Lancer Industries Inc. ("Lancer").  Fairfield has one wholly owned subsidiary, T-H Licensing, Inc. ("T-H Licensing").  Through its ownership in T-H Licensing, Fairfield
acquired a 75.77% majority interest in Atlas Gears Limited.  Fairfield, T-H Licensing and Lancer are all Delaware corporations, while Atlas Gears Limited is organized and operated as a corporation under the laws of India.

Fairfield manufactures high precision custom gears and assemblies and planetary gear systems at its Lafayette, Indiana and Belgaum, India facilities.  Customers consist of original equipment manufacturers serving diverse markets which include rail,
industrial, construction, road rehabilitation, mining, materials handling, forestry, and agricultural.  T-H Licensing owns certain intangible assets including various patents and trademarks.

Principles of Consolidation

These consolidated financial statements include the accounts of Fairfield, T-H Licensing and Atlas Gears Limited (collectively the "Company").  All significant intercompany accounts and transactions have been eliminated.

Revenue

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 and on a first-in, first out (FIFO) basis for domestic and foreign operations, respectively.

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 range from 15 to 30 years for land improvements, 5 to
40 years for buildings and improvements, and 3 to 20 years for machinery and equipment. Generally, when property is retired from service or otherwise disposed of, the cost and related amount of depreciation or amortization are eliminated from the asset
and reserve accounts, respectively.  The difference, if any, between the net asset value and the proceeds is charged or credited to income.

Income Taxes

Income taxes are provided based on the liability method of accounting.  The liability method 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, while excess of investment cost over net assets acquired is amortized using the straight-line method over 20 years with regard to the
Atlas acquisition .  The Company's criteria for



F - 7

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 the assigned lives.

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.

Translation of Foreign Currencies

The financial statements of the Company's India operation are measured in its local currency and then translated into U.S. dollars.  All balance sheet accounts have been translated using the current rate of exchange at the balance sheet date.
Results of operations have been translated using the average rates prevailing from the date of acquisition.  Translation gains or losses resulting from the changes in the exchange rates from year-to-year are accumulated in a separate component of
stockholder's equity.

Comprehensive Income

In 1997, the Company adopted SFAS No. 130, Reporting Comprehensive Income.  This statement establishes rules for the reporting of comprehensive income and its components.  Comprehensive income consists of net income and foreign currency
translation adjustments and is presented in the Consolidated Statements of Stockholder's Equity.

Recent Accounting Pronouncements

Staff Accounting Bulletin (SAB) No. 101, "Revenue Recognition in Financial Statements," was issued by the Securities and Exchange Commission (SEC) staff in December 1999.  The Company has determined that it is in compliance with the revenue
recognition provisions and criteria set forth in SAB No. 101 and that no modifications are necessary to the Company's current revenue recognition policies and procedures.

In June 1998, the Financial Accounting Standards Board issued Statement No. 133, "Accounting for Derivative Investments and Hedging Activities," which requires that a Company record all derivatives at their fair value.  The statement also requires
that changes in the derivative instruments fair value be recognized currently in earnings unless specific hedge accounting criteria are met.  The Company does not currently engage in any hedging strategies nor does it have any embedded derivatives within
its external agreements.

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.

F - 8

Fair Value of Financial Instruments

The fair value of financial assets held by the Company approximate their carrying value.  The fair value of financial liabilities, other than Senior Subordinated Notes ("Notes") and Cumulative Exchangeable Preferred Stock, also approximate their
carrying value.  The estimated fair values of the Notes and Cumulative Exchangeable Preferred Stock at December 31, 2000 were approximately 77.0% and 69.0% of their carrying value, respectively, based on quoted market prices and recent trades of similar
issues.

Reclassifications

Certain prior year amounts have been reclassified to conform with the current presentation.

2.	Concentrations of Risk

The Company grants credit without collateral to most of its customers.  Sales to three customers accounted for approximately 12.6%, 10.1% and 10.0% of the Company's net sales in 2000.  Sales to two customers accounted for approximately 13.6% and
10.8% of the Company's net sales in 1999.  Sales to one customer accounted for approximately 10.6% of the Company's net sales in 1998.

3.	Related Party Transactions

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.  Due to the provisions of the Agreement, the Company recognized the entire $1.0 million as expense in 1997.

4.	Acquisition

On October 3, 2000, the Company, through its wholly owned subsidiary T-H Licensing, acquired newly issued shares representing 75.77% of Atlas Gears Limited for $4.5 million.  Atlas, headquartered in Mumbai, India with manufacturing facilities
located near Belgaum, India, manufactures customer gears primarily for the agricultural, off-road, and light commercial vehicle markets in India.  The Company acquired Atlas to gain a low cost manufacturing and procurement base.  Atlas Gears Limited
changed its name to Fairfield Atlas Limited in the first quarter of 2001.

The acquisition has been accounted for as a purchase and the results of the operations of the acquired business have been included in the consolidated financial statements since the date of acquisition on a one month lag.  The excess of the purchase
price over the fair value of net assets acquired was approximately $2.1 million and has been recorded as goodwill, which is being amortized on a straight-line basis over 20 years.

F - 9



1. Operations by Geographic Area

Revenues, income from operations and total assets by domestic and foreign operations are as follows:



|                   |          | Income from |         
|------------------ | -------- | ----------- | --------
|                   | Sales    | Operations  | Assets  
|                   |          |             |         
|U.S. operations    | $160,077 | $12,470     | $174,562
|Foreign operations | 1,082    | 73          | 8,127   
|                   |          |             |         
|Consolidated total | $161,159 | $12,543     | $182,689

International sales, as determined by ship to location, accounted for $8,752, $11,879 and $16,195 of the Company's net sales in 2000, 1999 and 1998, respectively, and were primarily to Canada.

Custom gears and assemblies accounted for approximately $76,900, $104,600 and $118,500 of the Company's 2000, 1999 and 1998 net sales, respectively.  Planetary gear systems accounted for approximately $84,200, $104,300 and $101,800 of the Company's
2000, 1999 and 1998 net sales, respectively.

6.	Inventory

Inventory at December 31, consists of:



|                                          |  | 2000     |  | 1999   
|----------------------------------------- |  | -------- |  | -------
|                                          |  |          |  |        
|Raw materials                             |  | $  3,751 |  | $ 2,421
|Work in process                           |  | 12,478   |  | 9,102  
|Finished products                         |  | 13,337   |  | 10,984 
|                                          |  |          |  |        
|                                          |  | 29,566   |  | 22,507 
|Less:  Excess of FIFO cost over LIFO cost |  | (48)     |  | --     
|                                          |  |          |  |        
|                                          |  | $29,518  |  | $22,507

F - 10

7.	Property, Plant and Equipment, Net

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



|                                |  | 2000      |  | 1999     
|------------------------------- |  | --------- |  | ---------
|                                |  |           |  |          
|Land and improvements           |  | $   1,765 |  | $   1,346
|Buildings and improvements      |  | 23,071    |  | 23,868   
|Machinery and equipment         |  | 153,942   |  | 148,774  
|                                |  | 178,778   |  | 173,988  
|Less:  Accumulated depreciation |  | (110,947) |  | (103,562)
|                                |  |           |  |          
|                                |  | $  67,831 |  | $ 70,426 

Depreciation expense was approximately $11,109 for the year ended December 31, 2000, and $11,000 for 1999 and 1998, respectively.

8.	Accrued Liabilities

Accrued liabilities at December 31, are as follows:



|                                       |  | 2000    |  | 1999   
|-------------------------------------- |  | ------- |  | -------
|                                       |  |         |  |        
|Compensation and employee benefits     |  | $ 5,982 |  | $ 7,738
|Accrued retirement and post-employment |  | 3,671   |  | 3,667  
|Interest payable                       |  | 2,163   |  | 2,097  
|Accrued warranties                     |  | 1,565   |  | 1,809  
|Other                                  |  | 8,388   |  | 9,073  
|                                       |  |         |  |        
|                                       |  | $21,769 |  | $24,384

F - 11





9.	Employee Benefit Plans

The following table presents information in regard to the Company's domestic defined benefit plans.

|                                                  | Pension Benefits | Other Postretirement
Benefits
|------------------------------------------------- | ---------------- | -----------------------------
|                                                  | 2000             | 1999                         
|Change in benefit obligation                      |                  |                              
|Benefit obligation at beginning of year           | $49,736          | $51,009                      
|Service cost                                      | 2,062            | 2,024                        
|Interest cost                                     | 3,656            | 3,261                        
|Participant contributions                         | --               | --                           
|Amendments                                        | 512              | --                           
|Actuarial loss (gain)                             | (3,517)          | (4,867)                      
|Benefits paid                                     | (2,053)          | (1,691)                      
|                                                  |                  |                              
|Benefit obligation at end of year                 | 50,396           | 49,736                       
|                                                  |                  |                              
|Change in plan assets                             |                  |                              
|Fair value of plan assets at 
  beginning of year | 38,615           | 36,583                       
|Actual return on plan assets                      | 6,285            | 1,836                        
|Company contribution                              | 2,496            | 1,887                        
|Participant contributions                         | --               | --                           
|Benefits paid                                     | (2,053)          | (1,691)                      
|                                                  |                  |                              
|Fair value of plan assets at end of year          | 45,343           | 38,615                       
|                                                  |                  |                              
|Funded status                                     | (5,053)          | (11,121)                     
|Unrecognized actuarial loss (gain)                | (7,536)          | (1,354)                      
|Unrecognized prior service cost (benefit)         | 2,290            | 2,058                        
|Accrued benefit                                   | $(10,299)        | $(10,417)                    
|                                                  |                  |                              
|Weighted average assumptions
  as of December 31: |                  |                              
|Discount rate                                     | 7.75%            | 7.50%                        
|Expected return on plan assets                    | 9.00%            | 9.00%                        

Other postretirement benefits provided by the Company include limited health care and life insurance benefits for certain retired employees.  The health care cost trend rate is not a factor in the calculation of the other postretirement benefit
obligation as the plan limits per capita benefits to a fixed level.  Claims in excess of this amount are the responsibility of the retiree.

F - 12





|                                             | Pension Benefits | Other Postretirement
Benefits
|-------------------------------------------- | ---------------- | -----------------------------
|Components of net periodic benefit cost:     | 2000             | 1999                         
|Service cost                                 | $2,062           | $2,024                       
|Interest cost                                | 3,656            | 3,261                        
|Expected return on plan assets               | (3,620)          | (3,309)                      
|Recognized actuarial loss                    | --               | --                           
|Amortization of prior service cost (benefit) | 280              | 243                          
|                                             |                  |                              
|Net periodic benefit cost                    | $2,378           | $2,219                       

As discussed above, healthcare benefits provided by the Company are set at a fixed per capita amount.  Consequently, changes in health care rates have no effect on the other postretirement benefit obligation, service cost or interest cost.

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, 2000, 1999 and 1998 was $1,417, $1,529 and $1,510, respectively.

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:



|                                    | 2000 |  | 1999 |  | 1998
|----------------------------------- | ---- |  | ---- |  | ----
|                                    |      |  |      |  |     
|Service cost                        | $153 |  | $168 |  | $153
|Interest cost                       | 195  |  | 184  |  | 185 
|Amortization of unrecognized losses | 17   |  | 24   |  | 19  
|                                    |      |  |      |  |     
|                                    | $365 |  | $376 |  | $357

The recorded liabilities for these postemployment benefits, none of which have been funded, are $2,279 and $2,026 at December 31, 2000 and 1999, respectively.

The Company maintains a separate plan for its foreign operations.  The costs associated with maintaining the foreign plan were insignificant for the year ended December 2000.

10.	Income Taxes

The Company files separate state income tax returns and is included in the domestic consolidated federal income tax return of its parent company, Lancer.  The Company will file a separate stand-alone income tax return for its India operations and as
such is excluded from the Tax Sharing

F - 13

Agreement.  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.

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



|                                  | 2000    | 1999    | 1998   
|--------------------------------- | ------- | ------- | -------
|                                  |         |         |        
|Current, principally federal      | $5,231  | $11,209 | $7,397 
|Deferred, principally federal     | 76      | (747)   | (2,097)
|Provision for income taxes        | $5,307  | $10,462 | $5,300 
|                                  |         |         |        
|Tax benefit of extraordinary loss | $    -- | $(931)  | $(277) 

The expense equivalent to provision for income taxes for 2000, 1999 and 1998 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:



|                                                                              | 2000   | 1999    | 1998  
|----------------------------------------------------------------------------- | ------ | ------- | ------
|                                                                              |        |         |       
|Tax provision at 35% statutory rate                                           | $4,314 | $8,153  | $4,130
|State taxes, net of federal                                                   | 323    | 1,106   | 519   
|Non-deductible amortization of excess 
of investment over net assets acquired | 563    | 555     | 555   
|Provision for tax contingencies                                               | 87     | 683     | 48    
|Other, net                                                                    | 20     | (35)    | 48    
|                                                                              |        |         |       
|Provision for income taxes                                                    | $5,307 | $10,462 | $5,300
|                                                                              |        |         |       
|Effective Rate                                                                | 43.5%  | 44.9%   | 44.9% 

Deferred income taxes applicable to temporary differences at December 31, 2000 and 1999 are as follows:



|                                               | 2000     | 1999    
|---------------------------------------------- | -------- | --------
|Assets:                                        |          |         
|Employee benefits                              | $9,958   | $9,895  
|Long-term incentive compensation benefits      | --       | 929     
|Gross deferred tax assets                      | 9,958    | 10,824  
|                                               |          |         
|Liabilities:                                   |          |         
|Inventory basis difference                     | (4,597)  | (4,387) 
|Property, plant and equipment basis difference | (12,846) | (14,313)
|Other, net                                     | (1,351)  | (884)   
|Gross deferred tax liabilities                 | (18,794) | (19,584)
|                                               |          |         
|Net deferred tax liability                     | $(8,836) | $(8,760)

F - 14

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.  The Company does not consider the
beneficial effect of operating losses originating in previous years in the determination of its obligations to Lancer under the Tax Sharing Agreement.

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 $2,140, $3,930, and $2,710 during 2000, 1999 and 1998, respectively.  The Company issued common stock to Lancer in recognition of these capital contributions (see Note 14).

The Company has certain federal net operating loss carryforwards of approximately $165,000 and $177,000 at December 31, 2000 and 1999, respectively, from its merger with First Colony Farms, Inc. which begin expiring in 2001.  These carryforwards are
subject to limitations imposed by the Internal Revenue Code.  At December 31, 2000 and 1999, these carryforwards have been fully reduced by a valuation allowance.

11.	Incentive Plan for Senior Management

The Company has established an Incentive Plan for Senior Management (the "Plan") to provide incentive compensation for the Company's executive officers designated by the Board.  Under the Plan, the Board grants Performance Units, at its
discretion, to the Company's executive officers, and such Performance Units may vest in six equal annual installments on the last day of each of the six fiscal years of the Company beginning with the year ended December 31, 1998.  Under the Plan, the
holders of the Performance Units are entitled to share in the increase of the Company's equity value in the event the Performance Units vest.  The Plan terminates after redemption and satisfaction of all then outstanding Performance Units at December 31,
2003 or upon a change of control.  The non-cash provision under this Plan was ($2,300) and $2,300 in 2000 and 1999, respectively.

12.	Long-Term Debt

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



|                                                                                         | 2000     | 1999    
|---------------------------------------------------------------------------------------- | -------- | --------
|Atlas Gears Ltd Senior Term Loan, due June 30, 2005
  Rates at December 31, 2000: 13.75% | $ 2,575  | $     --
|                                                                                         |          |         
|Senior Term Loan, due July 1, 2005
  Rates at December 31, 2000: 7.95%                   | 10,000   | 10,000  
|                                                                                         |          |         
|Senior Subordinated Notes, 9.625%,
  Due October 15, 2008                                | 100,000  | 100,000 
|Total debt                                                                               | 112,575  | 110,000 
|                                                                                         |          |         
|Less:  Current maturities                                                                | --       | --      
|                                                                                         |          |         
|Total long-term debt                                                                     | $112,575 | $110,000

F - 15

Credit Facilities

The Company has a Credit Facility provided to it by General Electric Capital Corporation ("GE Capital").  Under the Credit Facility, the Company has $10,000 of term loans outstanding at December 31, 2000.  In addition, the Credit Facility provides
for $20,000 of revolving loans by the Company, including up to $2,000 under a letter of credit subfacility, subject to borrowing base availability.  At December 31, 2000, the Company had $19,633 of availability under the revolver.  The Company has the
option of increasing the revolver availability by up to $20,000, subject to the satisfaction of certain conditions.  Commitments under the revolver terminate on July 1, 2005.  The $10,000 of term loans currently outstanding are payable in a single
principal payment on July 1, 2005.

In connection with the Atlas acquisition, the Company amended its credit agreement with General Electric Capital Corporation, among other things, to obtain its consent to the acquisition.  In addition, General Electric Capital Corporation guaranteed a
$7.0 million credit facility extended to Atlas in India.  Pursuant to the amendment to the credit agreement, the Company is obligated to repay any amounts paid in respect of this guaranty.  As of December 31, 2000, Atlas has approximately $2.6 million of
loans outstanding.

Indebtedness under the Credit Facility is secured by a pledge of the Company's common stock owned by Lancer and a lien on, and security interest in, substantially all of the Company's assets, including, without limitation, all capital stock of
subsidiaries, real estate, equipment, inventory, accounts receivable and cash.  The Credit Facility contains certain restrictive covenants limiting among other things, additional debt, additional liens, transactions with affiliates, mergers and
consolidations, liquidations and dissolution, sales of assets, dividends, capital expenditures, sales and leaseback transactions, operating leases, investments, loans and advances, prepayment and modification of debt instruments, the taking or the failure
to take, certain actions with respect to the Tax Sharing Agreement and other matters customarily restricted in such agreements.  The Credit Facility also requires that the Company maintain compliance with certain specified financial ratios and tests
including ratios with respect to fixed charges, interest coverage and working capital.  In addition, the Credit Facility contains certain customary affirmative covenants and events of default.

Issuance of 9-5/8% Senior Subordinated Noes due 2008

On May 19, 1999, the Company issued $100,000 of 9-5/8% Senior Subordinated Notes due 2008.  The proceeds of the offering were used by the Company as follows; 1) approximately $68,600 was used to redeem the 11-3/8% Senior Subordinated Notes due
2001; 2) approximately $27,700 was used to reduce outstanding amounts under its Credit Facility and; 3) approximately $3,700 was used to pay the fees and expenses of the offering.  During 1998, the Company repurchased $17,850 of its 11-3/8% Senior
Subordinated Notes due 2001 in open market transactions.  The deferred financing costs associated with the 11-3/8% Senior Subordinated Notes due 2001 were written off as part of the loss on the early extinguishment of debt, which was approximately $1,400
net of tax in 1999 and $400 net of tax in 1998.  The tax benefit was $931 and $277 in 1999 and 1998, respectively.

F - 16

The future maturities of long-term debt at December 31, 2000 are as follows:



|2001       |  | $       --
|---------- |  | ----------
|2002       |  | --        
|2003       |  | --        
|2004       |  | --        
|2005       |  | 12,575    
|Thereafter |  | 100,000   
|           |  |           
|           |  | $112,575  

13.	Redeemable Exchangeable Preferred Stock

Exchangeable Preferred Stock

On March 12, 1997 the Company issued 50,000 shares of 11-1/4% Cumulative Exchangeable Preferred Stock, liquidation preference $1,000 per share, representing an aggregate liquidation preference of $50,000.  The Exchangeable Preferred Stock is
exchangeable at the option of the Company, in whole but not in part, for 11-1/4% Subordinated Exchange Debentures Due 2009 (the "Exchange Debentures"), in aggregate principal amount equal to the liquidation preference of the Exchangeable Preferred Stock
following the redemption of the Existing Notes, subject to the satisfaction of certain conditions.

The Company is required, subject to certain conditions, to redeem all of the Exchangeable Preferred Stock outstanding on March 15, 2009 at a redemption price equal to 100% of the liquidation preference thereof plus, without duplication, accumulated
and unpaid dividends to the date of redemption.  The maturity date of the Exchange Debentures is March 15, 2009.

The Exchangeable Preferred Stock pays dividends at a rate equal to 11-1/4% per annum of the liquidation preference per share, payable semiannually on each March 15 and September 15 in cash, or, on or prior to March 15, 2002, in kind on each March 15
and September 15.  Interest on the Exchange Debentures is also 11-1/4% per annum.

14.	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 166,000, 120,000, 103,000, and 37,000 additional shares of its common stock on March 31, June 30, September 30, and December 31, 2000, respectively, to Lancer in

F - 17

consideration of certain capital contributions made by Lancer to the Company pursuant to the Tax Sharing Agreement.

The Company issued 74,000, 58,000, 58,000 and 21,000 additional shares of its common stock on March 31, June 30, September 30, and December 31, 1999, respectively, to Lancer in consideration of certain capital contributions made by Lancer to the
Company pursuant to the Tax Sharing Agreement.

1. Other Income Non-recurring Item

In June 1999, the Company experienced a fire at its manufacturing plant in Lafayette, Indiana.  The fire damaged a portion of the facility and some of its equipment.  By January 2000, the Company had restored its physical capabilities to the same
level as before the fire.  The damages of the fire, including the costs of clean-up and business interruption, were covered by current insurance policies and, during the quarter ended June 30, 2000, the Company and its insurance carrier agreed to a final
settlement of the resulting claims.

Direct costs associated with the clean-up and repair portion of the claim were $8.9 million, all of which was reimbursed by the insurance carrier by the third quarter of 2000.  The business interruption portion of the claim was $16.5 million, all of
which was reimbursed by the insurance carrier by the third quarter of 2000.

Prior to final settlement with its insurance carrier, the Company had determined its minimum probable recovery for business interruption at the end of each quarter and had recorded those amounts as other income.  The amounts recorded by quarter are as
follows:  June 30, 1999 - $1.0 million, September 30, 1999 - $3.3 million, December 31, 1999 - $2.7 million and March 31, 2000 - $3.0 million.  The Company recognized $6.5 million of business interruption insurance recovery during the second quarter of
2000 in conjunction with the final settlement of business interruption losses.

16.	Commitments and Contingencies

Operating Leases

The Company is obligated to make payments under noncancellable operating leases expiring at various dates through 2005.

Future minimum payments by year under operating leases consist of the following at

December 31, 2000:



|Year |  | Minimum Rental
|---- |  | --------------
|     |  |               
|2001 |  | $1,485        
|2002 |  | 1,409         
|2003 |  | 292           
|2004 |  | 274           
|2005 |  | 242           
|     |  |               
|     |  | $3,702        

Rental expense for the years ended December 31, 2000, 1999 and 1998 was $971, $543, and $506, respectively.

Equity Participation Plan

The Company maintained an Equity Participation Plan (the "Plan") which provided for the award of up to an aggregate of 180,000 Equity Participation Rights ("Rights") to certain current and past



F - 18

officers and key employees.  At December 31, 1998, all 180,000 rights were granted and vested and 117,000 rights were outstanding.  During 1999, the Company redeemed the remaining 117,000 rights for $46.  In 1997, the Company paid $25 to redeem 63,000
rights.  No additional compensation was charged to earnings for this plan during 2000, 1999 or 1998.

17.	Subsequent Events

The Company elected to pay the March 15, 2001 Exchangeable Preferred Stock dividend in kind and, in connection therewith, issued 2,812.5 shares of Exchangeable Preferred Stock to the holders of record as of March 1, 2001.

F - 19



FAIRFIELD MANUFACTURING COMPANY, INC.



|Description                     | Balance at
Beginningof Period | Charged to
Costs andExpenses | Charged to
otherAccounts |     | Deductions | Balance atEnd of Period
|------------------------------- | ----------------------------- | ---------------------------- | ------------------------ | --- | ---------- | -----------------------
|                                |                               |                              |                          |     |            |                        
|2000                            |                               |                              |                          |     |            |                        
|Allowance for doubtful accounts | $700                          | $100                         | $376                     | (1) | $   --     | $1,176                 
|                                |                               |                              |                          |     |            |                        
|1999                            |                               |                              |                          |     |            |                        
|Allowance for doubtful accounts | $700                          | $232                         | $  --                    |     | $(232)     | $  700                 
|                                |                               |                              |                          |     |            |                        
|1998                            |                               |                              |                          |     |            |                        
|Allowance for doubtful accounts | $600                          | $100                         | $  --                    |     | $  --      | $  700                 
|                                |                               |                              |                          |     |            |                        



(1)  Fairfield Atlas acquisition





F - 20