<PAGE>
 
                                               ECHLIN INC. 1997 ANNUAL REPORT  9
                                               =================================


REVIEW OF OPERATIONS AND FINANCIAL CONDITION


In fiscal 1997, Echlin's sales rose 14.1%, from $3.13 to $3.57 billion.
Comparable operations brought 2.0% of the gain. This consisted of price
increases (1.0%) and new products (2.8%), offset by a decline in unit volume
(1.4%) and unfavorable currency translations (0.4%). The balance, 12.1%, came
from acquisitions, net of two divisions we sold, Sensor Engineering and
Preferred Plastic Sheet.

  We purchased five major companies this year: Long Manufacturing, Nobel
Plastiques, Brosol, Iroquois Tool Systems and the North American Aftermarket
division of ITT Automotive. Our sales also included 12 months of revenue from
the Automotive Segment of Handy & Harman, a company we bought in December 1995.

  Last year, sales climbed 15.1%. Existing businesses added 4.1% of the growth,
while acquired businesses accounted for the remainder. Unit volume was flat, but
new products and new prices contributed 3.4% and 1.6%, respectively.

Domestic Business Up 2.6%

U.S. operations, excluding acquisitions, advanced 2.6%. The products we
introduced boosted sales 3.0%, plus prices rose 0.9%; at the same time, unit
volume declined 1.3%.

  Several industry factors caused business to slump. To begin with, the demand
for aftermarket components, especially under-the-hood items, softened. New
builds of heavy-duty trucks were down as well. Further, goods were returned at
above-normal rates, as customers trimmed their inventories in response to
sluggish sales.

  In 1996, domestic business improved 3.7%. Growth from product introductions
(3.8%), coupled with price raises (1.3%), countered a 1.4% drop in unit volume,
as sales fell in all areas except our automotive brake and original equipment
lines. Heavy-duty parts suffered the most, due to a 25% cutback in the North
American production of tractors and trailers.

Offshore Operations Flat

Without acquisitions, the company's foreign revenues inched up 0.4%. We posted
gains from the roll out of new products (2.2%) and new prices (1.1%), which were
offset by a 1.7% decrease in unit volume. Currency fluctuations also lowered
sales, by 1.2%.

  Throughout 1997, Echlin's automotive companies in Europe and Mexico performed
well. Business was depressed, however, in our European divisions that supply
heavy-duty parts, and in other aftermarket operations around the world. Changes
in translation rates dampened sales, as during the year, the dollar weakened
against all currencies except the British pound. This had the greatest impact on
our German subsidiaries.

  Last year, international operations grew 5.1%. Increases from unit volume
(3.2%), prices (2.3%), and new products (2.5%) all outweighed declines (2.9%)
due to unfavorable changes in currency exchange rates.
<PAGE>
 
10  ECHLIN INC. 1997 ANNUAL REPORT
==================================




Gross Margin Down 2.1 Points

In 1997, our gross profit margin edged down 2.1 percentage points, from 26.2% to
24.1%. There were many reasons for this drop. A high number of returned goods,
along with changes in our customer and product mix, played key roles. We also
absorbed less manufacturing expense than planned, as we scaled back production
to accommodate slower demand. In addition, several of the acquisitions we made
are OE producers, which realize, in general, lower gross margins than
aftermarket suppliers.

  These same factors affected last year's margin. Echlin's 1996 level was 2.7
percentage points below fiscal 1995's.

Sales Outpaced Expenses

Selling and administrative expenses moved up 11.4% in 1997. Part of the increase
stemmed from research and development activities, which we expanded to design
new products for future vehicles.

  Although operating expenses rose, they fell -- for the seventh year in a 
row -- as a percentage of sales, trending down from 19.5% in 1995, to 18.4% in
1996, and 17.9% in 1997. This reflects our success in cutting costs. It also
points to the impact of our OE businesses, which tend to have lower expense-to-
sales ratios than replacement parts providers.

Interest Expense Advanced 20.4%

Interest expense climbed 20.4% in fiscal 1997. Borrowing rates remained the same
as last year's; nevertheless, the company incurred more debt, mainly to fund
acquisitions. Interest income went up as well, due to higher yields on our
investment portfolio in Puerto Rico.

  In fiscal 1996, interest rates were down, but greater debt levels drove
interest expense up 11.8%.

Repositioning Charge Reported

This year, Echlin took steps to reposition the company and build future
shareowner value. We recorded a pre-tax charge of $254.1 million to cover,
first, the write-off of impaired or idle assets; second, the costs of closing
and consolidating plants; and third, the selling of non-core and low-profit
divisions.

  We also divested two businesses in fiscal 1997, Sensor Engineering and
Preferred Plastic Sheet. Together, they provided a pre-tax gain of $28.7
million.

  All told, these actions reduced net income by $164.3 million and earnings per
share by $2.63.

Cash Flow Down

Cash flow from operations totaled $183.3 million in 1997. This was $43.7 million
less than last year's $227.0 million, due to the timing of our liability
payments, which offset the gains we achieved from receivable collections.

  In 1996, the company's cash flow benefited from its efforts to thin inventory.
Our scheduling of liability payments had a positive influence as well.
<PAGE>
 
                                              ECHLIN INC. 1997 ANNUAL REPORT  11
                                              ==================================


Financial Condition Changed

By year-end, Echlin had assumed additional debt of $262.0 million, prompting our
debt-to-capital ratio to go up 12.3 points, from 33.0% to 45.3%. The money we
borrowed helped finance acquisitions.

  In fiscal 1996, we sold $75 million of accounts receivable, then used the
proceeds to pay down debt.

  Changes in currency translation rates eroded the value of our net assets in
Mexico, Germany and Great Britain. As a result, shareholder's equity was
diminished $20.8 million this year and $17.1 million last year.

Market Risks Disclosed

Echlin conducts most of its global business in local markets with local
currencies. When we do sell across borders, we help guard against currency
swings through  "short-term, forward foreign exchange" contracts. At the close
of fiscal 1997, we had no material contracts outstanding.

  Our investment portfolio, commercial paper and fixed-rate debt also carry
risk, which is related to shifts in interest rates. There is, however, no hedge
against this. If rates go up, Echlin pays more interest on paper and debt, but
could earn more on its portfolio; if rates go down, the reverse happens.

  Based upon our current financial position, a 10% movement of foreign exchange
or interest rates would not have a material affect on the company's fair value,
cash flows or operating results.

Capital Expenditures Rose

Our outlay of capital, $149.2 million, topped last year's amount by $44.8
million. Capital spent by recent acquisitions represented some of the increase.
Also, we equipped a new factory in Mexico, and purchased a building we formerly
leased in Great Britain.

  In 1997, we invested primarily in machinery and tooling. As in years past,
this allowed us to manufacture new parts, and enhance the productivity and
efficiency of our plants worldwide.


   Bar graph showing Percentage Change in Reported and
   Comparable Operations Net Sales for fiscal years 1991-1997.

   Bar graph showing Inventory Turns for fiscal years 1991-1997.

   Bar graph showing Working Capital to Sales Percentages for 
   fiscal years 1991-1997.
<PAGE>
 
                                             ECHLIN INC. 1997 ANNUAL REPORT  33
                                             ================================== 

MANAGEMENT'S RESPONSIBILITY FOR FINANCIAL STATEMENTS


Management is responsible for the fairness, integrity and objectivity of Echlin
Inc.'s financial statements including all related information presented in this
annual report. These statements have been prepared in accordance with generally
accepted accounting principles and include amounts based on management's best
estimates and judgements.

     Management maintains and relies on a system of internal controls which
provides reasonable assurance that assets are safeguarded and transactions are
properly recorded. The system includes written policies and procedures and an
organizational structure that provides for segregation of responsibilities and
the selection and training of qualified personnel. In addition, the company has
an internal audit function which evaluates existing controls and recommends
changes and improvements whenever deemed necessary.

     The Audit Committee of the Board of Directors, which is composed of non-
management directors, meets several times a year with management, the
independent accountants and the internal auditors. They review significant
financial transactions, the scope and major findings of the independent
accountants' and internal auditors' examinations and the adequacy of the system
of internal controls.

     Management believes that Echlin's policies, procedures, internal control
system, and the activities of the internal auditors, the independent accountants
and the Audit Committee, provide you, the shareholder, with reasonable assurance
as to the integrity of the financial statements.

/s/ Larry McCurdy
-------------------------------------
Larry W. McCurdy
President and Chief Executive Officer


/s/ Joseph A. Onorato
-------------------------------------
Joseph A. Onorato
Vice President and Chief Financial Officer


REPORT OF INDEPENDENT ACCOUNTANTS

[LOGO OF PRICE WATERHOUSE APPEARS HERE]

To the Shareholders and Board of Directors of Echlin Inc.:

In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of income, of cash flows and of changes in shareholders'
equity present fairly, in all material respects, the financial position of
Echlin Inc. and its subsidiaries at August 31, 1997 and 1996, and the results of
their operations and their cash flows for each of the three years in the period
ended August 31, 1997, in conformity with generally accepted accounting
principles. These financial statements are the responsibility of the company's
management; our responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of these statements in
accordance with generally accepted auditing standards 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/ Price Waterhouse LLP

Stamford, Connecticut
October 3, 1997
<PAGE>
 
34  ECHLIN INC. 1997 ANNUAL REPORT
==================================


CONSOLIDATED FINANCIAL STATEMENTS


Consolidated Statements of Income
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
 
 
                                                  Year ended August 31,
(In thousands, except per share data)       1997          1996         1995
--------------------------------------------------------------------------------
<S>                                     <C>           <C>           <C>
Net sales                                $3,568,572    $3,128,728   $2,717,866
Cost of goods sold                        2,707,081     2,309,037    1,932,461
--------------------------------------------------------------------------------
 Gross profit on sales                      861,491       819,691      785,405
Selling and administrative expenses         640,108       574,592      531,286
Repositioning and other special
 charges                                    254,115            --           --
Gain on sales of businesses                 (28,652)           --           --
--------------------------------------------------------------------------------
 Income (loss) from operations               (4,080)      245,099      254,119
--------------------------------------------------------------------------------
Interest expense                             52,914        43,933       39,313
Interest income                             (12,246)      (10,990)     (15,674)
--------------------------------------------------------------------------------
 Interest expense, net                       40,668        32,943       23,639
--------------------------------------------------------------------------------
 Income (loss) before taxes                 (44,748)      212,156      230,480
Provision for taxes                           2,158        69,946       76,058
--------------------------------------------------------------------------------
 Net income (loss)                       $  (46,906)   $  142,210   $  154,422
================================================================================
Average shares outstanding                   62,601        61,919       59,476
================================================================================
Earnings (loss) per share                    $(0.75)        $2.30        $2.60
================================================================================
</TABLE>

See notes to consolidated financial statements.

                        [PIE CHART APPEARS AS FOLLOWS]

          1997 Sales by Product Groups:
          Brake System Parts                        38%
          Engine System Parts                       33%
          Power Transmission System Parts           10%
          Steering and Suspension Systems
            Components                               7%
          Other Motor Vehicle Parts                  7%
          Additional Products                        5%



                        [PIE CHART APPEARS AS FOLLOWS]

          1997 Sales by Channels of Distribution:
          Warehouse Distributors                    45%
          Vehicle Manufacturers                     32%
          Other Manufacturers                       12%
          Retailers                                  7%
          Non-Vehicle                                4%
<PAGE>
 
                                              ECHLIN INC. 1997 ANNUAL REPORT  35
                                              ==================================
Consolidated Balance Sheets
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
                                                              August 31,
(In thousands, except share and per share data)           1997         1996
--------------------------------------------------------------------------------
<S>                                                   <C>            <C>
Assets
Current assets:
Cash and cash equivalents                             $   22,239    $   16,106
Accounts receivable, less allowance for doubtful
 accounts of $4,505 and $5,621                           438,558       370,837
Inventories:
 Raw materials and component parts                       179,599       167,215
 Work in process                                          92,389        87,140
 Finished goods                                          422,650       425,027
--------------------------------------------------------------------------------
  Total inventories                                      694,638       679,382
Other current assets                                      54,134        42,687
--------------------------------------------------------------------------------
 Total current assets                                  1,209,569     1,109,012
--------------------------------------------------------------------------------
Property, plant and equipment:
Land                                                      39,216        36,881
Buildings                                                235,028       218,086
Machinery and equipment                                1,084,004       900,528
--------------------------------------------------------------------------------
 Property, plant and equipment, at cost                1,358,248     1,155,495
Accumulated depreciation                                (635,717)     (534,186)
--------------------------------------------------------------------------------
 Property, plant and equipment, net                      722,531       621,309
--------------------------------------------------------------------------------
Marketable securities                                     82,418        83,578
--------------------------------------------------------------------------------
Intangible assets                                        323,060       226,292
--------------------------------------------------------------------------------
Other assets                                              36,625        90,563
--------------------------------------------------------------------------------
 Total assets                                         $2,374,203    $2,130,754
================================================================================
Liabilities and Shareholders' Equity
Current liabilities:
Notes payable to banks                                $   42,746    $   21,596
Current portion of long-term debt                          4,693         6,286
Accounts payable                                         296,123       264,532
Accrued taxes on income                                   13,097        33,985
Accrued compensation                                      84,712        67,265
Other accrued liabilities                                232,652       130,563
--------------------------------------------------------------------------------
 Total current liabilities                               674,023       524,227
--------------------------------------------------------------------------------
Long-term debt                                           710,422       468,013
--------------------------------------------------------------------------------
Deferred income taxes                                     76,057       129,640
--------------------------------------------------------------------------------
Shareholders' equity:
Preferred stock, without par value:
 Authorized 1,000,000 shares, issued none                     --            --
Common stock, $1 par value:
 Authorized 150,000,000 shares, issued 63,373,683
  and 62,242,279                                          63,374        62,242
Capital in excess of par value                           372,197       350,935
Retained earnings                                        557,153       658,235
Foreign currency translation adjustments                 (82,725)      (61,953)
Net unrealized investment gains                            6,697         2,410
Treasury stock, at cost, 270,264 shares                   (2,995)       (2,995)
--------------------------------------------------------------------------------
 Total shareholders' equity                              913,701     1,008,874
--------------------------------------------------------------------------------
 Total liabilities and shareholders' equity           $2,374,203    $2,130,754
================================================================================
</TABLE>
See notes to consolidated financial statements.
<PAGE>
 
36  ECHLIN INC. 1997 ANNUAL REPORT
==================================

Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------
                                                     Year ended August 31,
(In thousands)                                   1997        1996         1995
--------------------------------------------------------------------------------
<S>                                           <C>         <C>          <C>
Cash flows from operating activities:
Net income (loss)                             $ (46,906)   $ 142,210   $ 154,422
Adjustments to reconcile net income (loss)
 to net cash provided by
 operating activities:
 Depreciation and amortization                  113,938       90,875      76,609
 Repositioning and other special charges        252,041           --          --
 Gain on sales of businesses                    (28,652)          --          --
Changes in assets and liabilities,
 excluding acquisitions' balance sheets:
 Accounts receivable                            (11,056)     (83,286)     (9,448)
 Inventories                                     (8,512)      24,427     (94,133)
 Other current assets                            (5,146)     (11,892)     (5,314)
 Accounts payable                                 4,590       44,486         576
 Accrued taxes on income                        (23,252)      (6,660)     (4,173)
 Deferred income taxes                          (54,847)      42,797      22,869
 Accrued liabilities                             (3,035)     (12,948)    (11,762)
 Other                                           (5,907)      (3,001)    (22,602)
--------------------------------------------------------------------------------
  Cash provided by operating activities         183,256      227,008     107,044
--------------------------------------------------------------------------------
Cash flows from financing activities:
Long-term and short-term borrowings             917,172      615,532     721,232
Long-term and short-term repayments            (690,454)    (647,626)   (524,664)
Sales of accounts receivable                         --       75,000          --
Proceeds from common stock issuances              4,560        2,770       5,200
Dividends paid                                  (55,623)     (51,806)    (46,987)
--------------------------------------------------------------------------------
  Cash provided by (used for) financing
   activities                                   175,655       (6,130)    154,781
--------------------------------------------------------------------------------
Cash flows from investing activities:
Capital expenditures                           (149,195)    (104,384)   (103,894)
Net book value of property, plant and
 equipment disposals                              8,454        3,143       1,515
Proceeds from sales of marketable securities      9,823       22,592      13,087
Proceeds from sales of businesses                73,253           --          --
Purchases of businesses:
 Net working capital items                      (80,021)     (93,232)    (25,382)
 Property, plant and equipment and
  intangibles                                  (252,099)     (57,305)   (176,830)
 Debt assumed                                    38,877        1,013          --
--------------------------------------------------------------------------------
  Cash used for investing activities           (350,908)    (228,173)   (291,504)
--------------------------------------------------------------------------------
Impact of foreign currency changes on cash       (1,870)      (4,299)      3,563
--------------------------------------------------------------------------------
 Increase (decrease) in cash and cash
  equivalents                                     6,133      (11,594)    (26,116)
Cash and cash equivalents at beginning of
 year                                            16,106       27,700      53,816
--------------------------------------------------------------------------------
 Cash and cash equivalents at end of year     $  22,239    $  16,106   $  27,700
================================================================================
</TABLE> 
See notes to consolidated financial statements.
<PAGE>
 
                                              ECHLIN INC. 1997 ANNUAL REPORT  37
                                              ==================================

<TABLE> 
<CAPTION> 

Consolidated Statements of Changes in Shareholders' Equity

---------------------------------------------------------------------------------------------------------------
                                       Capital                Foreign         Net
                                      in Excess               Currency     Unrealized                 Total
(In thousands, except        Common    of Par    Retained    Translation   Investment  Treasury   Shareholders'
per share data)              Stock      Value    Earnings    Adjustments     Gains       Stock        Equity
---------------------------------------------------------------------------------------------------------------
<S>                         <C>       <C>        <C>         <C>           <C>         <C>        <C> 
Balance at August 31, 1994  $ 59,354  $329,521    $452,550     $(39,459)    $     --   $(2,995)     $  798,971 
Net income                        --        --     154,422           --           --        --         154,422
Cash dividends paid                                           
 ($0.79 per share)                --        --     (46,987)          --           --        --         (46,987)
Shares issued under                                           
 stock option plans              323     4,877          --           --           --        --           5,200
Foreign currency                                              
 translation adjustments          --        --          --       (5,388)          --        --          (5,388)
Shares issued for 
 acquisition                     217      (207)      3,039           --           --        --           3,049
---------------------------------------------------------------------------------------------------------------
Balance at August 31, 1995    59,894   334,191     563,024      (44,847)          --    (2,995)        909,267
Net income                        --        --     142,210           --           --        --         142,210
Cash dividends paid                                           
 ($0.85 per share)                --        --     (51,806)          --           --        --         (51,806)
Shares issued under                                            
 stock option plans              135     2,635          --           --           --        --           2,770
Foreign currency                                              
 translation adjustments          --        --          --      (17,106)          --        --         (17,106)
Net unrealized                                                
 investment gains                 --        --          --           --        2,410        --           2,410
Shares issued for 
 acquisitions                  2,213    14,109       4,807           --           --        --          21,129
---------------------------------------------------------------------------------------------------------------
Balance at August 31, 1996    62,242   350,935     658,235      (61,953)       2,410    (2,995)      1,008,874
Net loss                          --        --     (46,906)          --           --        --         (46,906)
Cash dividends paid                                           
 ($0.89 per share)                --        --     (55,623)          --           --        --         (55,623)
Shares issued under                                           
 stock option plans              273     4,293          --           --           --        --           4,566
Foreign currency                                              
 translation adjustments          --        --          --      (20,772)          --        --         (20,772)
Net unrealized investments                                    
 gains                            --        --          --           --        4,287        --           4,287        
Shares issued for 
 acquisitions                    859    16,969       1,447           --           --        --          19,275
---------------------------------------------------------------------------------------------------------------
 Balance at August 31, 1997  $63,374  $372,197    $557,153     $(82,725)     $ 6,697  $ (2,995)       $913,701
===============================================================================================================
</TABLE>

See notes to consolidated financial statements.

                        1997 Sales by Geographic Areas

   [PIE CHART APPEARS AS FOLLOWS]
<TABLE> 
<S>                               <C> 
1997 Sales by Geographic Areas:
United States and Canada          75%
Europe                            18%
Central and South America          3%
Other                              4%
</TABLE> 
<PAGE>
 
38  ECHLIN INC. 1997 ANNUAL REPORT
==================================

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


1 Summary of Accounting Policies
================================

Principles of Consolidation--The consolidated financial statements include the
accounts of Echlin and all majority-owned subsidiaries. All significant
intercompany accounts and transactions have been eliminated.

Translation of Foreign Currencies--Balance sheets and monthly income statements
of most foreign subsidiaries have been translated into U.S. dollars at the
current exchange rate with any resulting adjustment being charged or credited to
shareholders' equity. In countries with highly inflationary economies, balance
sheet accounts (principally inventory and fixed assets) and the related income
statement accounts (cost of sales and depreciation) have been translated at
historical exchange rates, and all translation adjustments have been included in
the determination of net income.

Cash and Cash Equivalents--Cash and cash equivalents include short-term interest
bearing securities with maturities of three months or less. Cash equivalents
were $3,231,000 and $771,000 at August 31, 1997 and 1996, respectively. These
securities are carried at cost which approximates market.

Accounts Receivable--The company has an agreement with a financial institution,
under which it may sell without recourse, undivided fractional interests in
designated pools of trade receivables up to $200,000,000 through March 1999.
Accounts receivable at August 31, 1997 and 1996 were net of $200,000,000,
representing receivables sold.

Inventories--Inventories are stated at the lower of cost (first-in, first-out)
or market.

Property, Plant and Equipment and Depreciation--Property, plant and equipment
are stated at cost. At the time property, plant and equipment are sold or
otherwise disposed of, the accounts are relieved of the cost of the assets and
the related accumulated depreciation, and any resulting profit or loss is
credited or charged to income. Depreciation is computed principally on the
straight-line method over the estimated useful lives of the assets.

Intangible Assets--Intangible assets principally consist of the excess of cost
over fair value of the net assets of businesses acquired, and are amortized
using the straight-line method over periods expected to be benefited (currently
up to forty years). Costs of acquired patents and trademarks are amortized using
the straight-line method over the shorter of their estimated useful lives or
thirty years. The company periodically evaluates whether the remaining net book
value of intangible assets is recoverable using estimates of cash flows over the
remaining life of the assets.

Marketable Securities--Marketable securities consist principally of investments
in mortgage-backed securities held by Echlin's subsidiary in Puerto Rico. The
aggregate market value of securities held at August 31, 1997 and 1996 was
$82,418,000 and $83,578,000, respectively. These investments are classified as
available for sale and had, at August 31, 1997 and 1996, a historical cost of
$72,114,000 and $79,870,000, respectively. As a result, unrealized investment
gains of $4,287,000 and $2,410,000, which are net of applicable income taxes,
are included as a component of shareholders' equity at August 31, 1997 and 1996,
respectively.

Revenue Recognition--The company recognizes revenues from product sales upon
shipment to its customers.

Research and Development Costs--Research and development costs are charged to
income as incurred and aggregated $51,844,000, $44,711,000 and $34,652,000 for
the years ended August 31, 1997, 1996 and 1995, respectively.
<PAGE>
 
                                              ECHLIN INC. 1997 ANNUAL REPORT  39
                                              ==================================

Income Taxes--Deferred income taxes have been provided due to temporary
differences in the reporting of certain items for financial accounting and
income tax purposes. As it is the company's intention to reinvest the
undistributed earnings of its foreign subsidiaries, federal income taxes have
not been provided thereon. Any additional federal income taxes payable upon the
remittance of these undistributed earnings would not be material, after
utilization of available foreign tax credits.

Earnings Per Share--Earnings per share are calculated by dividing net income by
the average number of shares of common stock outstanding. Employee stock options
have been excluded from the calculations as their dilutive effect is not
significant.

  The Financial Accounting Standards Board has implemented Statement of
Financial Accounting Standards No. 128, "Earnings Per Share", which requires
companies to disclose basic and diluted earnings per share. Basic earnings per
share is calculated by dividing net income by the weighted average number of
common shares outstanding, which is equal to what has been historically
reported. Diluted earnings per share is arrived at by dividing net income by the
weighted average number of common shares outstanding plus the number of shares
which would be issued assuming the exercise of outstanding employee stock
options. For the twelve months ended August 31, 1997, the proforma diluted loss
per share would have been less than the reported loss per share.

Use of Estimates--The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the amounts reported in the financial statements and
accompanying notes. Changes in such estimates may affect amounts reported in
future periods.



2 Business Combinations
=======================

In June 1997, the company acquired the North American Aftermarket division of
ITT Automotive (ITT), a unit of ITT Industries, Inc. for $89,400,000. The
business manufactures and distributes motor vehicle brake system parts. In May
1997, Echlin purchased the Brazilian engine-components business of Industria e
Commercio Brosol (Brosol) Ltda. by issuing $17,500,000 of Echlin common stock
(531,108 shares). Brosol produces motor-vehicle fuel system parts. Both the ITT
and Brosol transactions were accounted for using the purchase method of
accounting.

  During December 1996, the company acquired the outstanding common stock of
Iroquois Tool Systems, Inc. (Iroquois), a brake rotor manufacturer, located in
North East, Pennsylvania by issuing 335,474 shares of common stock. As of the
date of this acquisition, net current assets were $934,000, property, plant and
equipment was $3,258,000, and debt assumed was $2,411,000. This transaction was
accounted for as a pooling of interests and as a result, the financial
statements for the year ended August 31, 1997 include Iroquois' results of
operations. Since the acquisition did not have a material impact on the company,
prior years' results were not restated.
<PAGE>
 
40  ECHLIN INC. 1997 ANNUAL REPORT
==================================

  In October 1996, the company acquired Nobel Plastiques SA (Nobel), located in
France and Spain, for $16,880,000. Nobel manufactures fluid, hydraulic and
pneumatic servo control lines. During September 1996, the company acquired Long
Manufacturing, Ltd. (Long), headquartered in Oakville, Ontario, Canada, for
$172,986,000. Long manufactures and distributes motor vehicle heat exchange
products and air-conditioning evaporators. Both the Long and Nobel acquisitions
were accounted for using the purchase method of accounting.

  During August 1996, Echlin acquired the outstanding common stock of Moto
Mirror Inc., located in Texas, by issuing 511,001 shares of common stock. Moto
Mirror manufactures remote-control mirrors for medium- and heavy-duty trucks. In
January 1996, the company acquired the outstanding common stock of Plains
Plastics, Inc., a custom plastic extruder located in Kansas, by issuing 229,450
shares of common stock. During December 1995, the company acquired the
outstanding common stock of American Electronic Components, Inc., an Indiana-
based designer, manufacturer and marketer of motor vehicle electronic
components, by issuing 1,459,187 shares of common stock. All three transactions
were accounted for as poolings of interests and as a result the financial
statements for the twelve months ended August 31, 1996 include their results of
operations. As of the date of these acquisitions, net current assets were
$4,647,000, property, plant and equipment was $31,044,000 and long-term debt
assumed was $14,957,000. Since the acquisitions did not have a material impact
on the company, prior years' results were not restated.

  During December 1995, the company acquired Handy & Harman's Automotive
Segment, based in Michigan, for approximately $65,000,000. The purchased
business manufactures fuel-delivery system components for motor vehicles. The
acquisition was accounted for using the purchase method.

  In December 1994, Echlin purchased the common stock of Preferred Technical
Group International, Inc. (PTG), based in Michigan, for $198,345,000. PTG
manufactures coupled hose assemblies for motor vehicle brake, power steering,
air conditioning and heating systems, and extruded plastic products for truck
and industrial applications. The acquisition was accounted for by the purchase
method.

  In October 1994, the company acquired the outstanding common stock of the
Theodore Bargman Company (Bargman), an Indiana-based manufacturer of lighting
products, electrical connectors and hardware for recreational vehicles and
mobile homes, by issuing 230,795 shares of common stock. The transaction was
accounted for as a pooling of interests, and therefore the financial statements
for the twelve months ended August 31, 1995 include Bargman's results of
operations. As of the date of the acquisition, Bargman had net current assets of
$1,756,000 and property, plant and equipment of $1,718,000. Since the
acquisition did not have a material impact on the company, prior years' results
were not restated.


3 Sales of Businesses
=====================

In August 1997, the company sold its Preferred Plastic Sheet Division, a
manufacturer of extruded plastic sheets, for approximately $64,500,000. This
resulted in a pre-tax gain of $21,292,000, or $0.21 per share.

  During October 1996, the company sold certain assets of Sensor Engineering, a
division that manufactured cards and readers for access control systems, for
$11,400,000. This resulted in a pre-tax gain of $7,360,000, or $0.07 per share.
<PAGE>
 
                                              ECHLIN INC. 1997 ANNUAL REPORT  41
                                              ==================================

4 Repositioning and Other Special Charges
=========================================

During the fourth quarter of fiscal 1997, the company recorded repositioning and
other special charges of $254,115,000, pre-tax, which is intended to enhance the
company's competitiveness and productivity. Repositioning actions are generally
expected to be completed in twelve months.

  The repositioning charge included expenses related to facility realignments
and rationalizations, and the write-down to net realizable value of businesses
to be disposed ($101,154,000) including severance costs of $14,507,000. In
addition, goodwill associated with brand names no longer in use was written off
($27,164,000), inventory related to discontinued and rationalized product lines
was written down ($43,606,000), property, plant and equipment idled by facility
closures and product line rationalizations were reduced ($21,868,000), and other
investments and deferred customer acquisition costs were written off
($60,323,000).

  Cash expenditures in fiscal 1997 for repositioning actions totaled $2,074,000,
primarily for employee severance costs.


5 Borrowing Arrangements
========================

Notes payable to banks of $42,746,000 and $21,596,000 at August 31, 1997 and
1996, respectively, were comprised of local borrowings by Echlin's foreign
subsidiaries, due within ninety days. Weighted average interest rates were 8.16%
and 7.70% at August 31, 1997 and 1996, respectively.

  Long-term debt was comprised of the following:

<TABLE>
<CAPTION>
--------------------------------------------------------------------------------
                                                                   August 31,
(In thousands)                                                  1997      1996
--------------------------------------------------------------------------------
<S>                                                           <C>       <C>
Commercial paper                                              $324,940  $289,000
Domestic notes                                                 329,000   125,000
9.22% Senior Note                                                   --    30,000
3.50% Note                                                          --       569
3.519% and 3.675% Notes                                         13,695    18,760
3.60%-8.75% Foreign obligations, repayable in varying
  installments to 2002                                          27,776     5,503
3.40% Obligation under terms of a lease agreement with a
  municipality, repayable at maturity in 2022                    3,700     3,700
3.65% Obligation under terms of a lease agreement with a
  municipality, repayable at $400 per year from 1998 
  through 2002 and at $300 per year from 2003 through 2007       3,500        --
7.00%-17.30% Capitalized lease obligations, net of 
  interest of $4,717 and $560, repayable in varying 
  installments to 2006                                          12,504     1,767
--------------------------------------------------------------------------------
  Total                                                        715,115   474,299
Less-current portion                                             4,693     6,286
--------------------------------------------------------------------------------
  Total long-term debt                                        $710,422  $468,013
================================================================================
</TABLE>

  At August 31, 1997 and 1996, the weighted average interest rates on commercial
paper were 5.62% and 5.40%, respectively. The domestic notes at August 31, 1997
and 1996 represent unsecured obligations with U.S. banks with weighted average
interest rates at 5.74% and 5.36%, respectively. A majority of the commercial
paper and the domestic notes mature within sixty days of year-end. The
commercial paper and domestic notes have been classified as long term because of
the company's intent to refinance these obligations on a long-term basis and the
availability of such financing under the terms of the revolving credit agreement
(RCA).
<PAGE>
 
42  ECHLIN INC. 1997 ANNUAL REPORT
==================================


  The company's senior note matured on March 1, 1997 and the 3.50% note matured
in September 1996.

  Under a credit agreement with a United Kingdom bank, there were 3.519% and
3.675% notes outstanding at August 31, 1997 and 1996, respectively. The 3.519%
note matured in September 1997. The credit agreement enables the company to
borrow up to $20,000,000 through March 1, 1998. This debt has been classified as
long term because of the company's intent to refinance it on a long-term basis
and the availability of such financing under the terms of the RCA.

  Minimum annual principal repayments of long-term debt, excluding commercial
paper, the domestic notes, and the 3.519% note, in each of the next five fiscal
years are as follows: 1998 - $4,693,000; 1999 - $3,125,000; 2000 - $2,905,000;
2001 - $1,648,000; and 2002 - $26,773,000.

  For the years ended August 31, 1997, 1996 and 1995, interest paid was
$53,788,000, $45,579,000 and $40,638,000, respectively.

  Under the terms of an RCA with eleven banking institutions, the company has
available, through September 1, 2001, maximum borrowings of $700,000,000. At
August 31, 1997 and 1996, there were no borrowings under the RCA.

  The company also had available, from several international banks, credit lines
which provided the availability of maximum borrowings of $122,437,000 and
$66,488,000 at August 31, 1997 and 1996, respectively. Any borrowings under
these lines bear interest at the local equivalent of the prime rate.

  Several of the company's long-term debt agreements contain restrictive
covenants regarding the payment of cash dividends, the maintenance of working
capital and shareholders' equity, and the issuance of new debt. The company is
in compliance with all covenants of these agreements.

  Both the RCA and United Kingdom agreements require nominal commitment fees to
be paid on the unused portion of the credit.

6 Shareholder Rights Plan
=========================

Under the terms of a Shareholder Rights Plan approved by the Board of Directors
in June 1989, a Preferred Share Right (Right) is attached to and automatically
trades with each outstanding share of our common stock.

  The Rights, which are redeemable, will become exercisable only in the event
that any person or group becomes a holder of 20% or more of the company's common
stock, or commences a tender or exchange offer which, if consummated, would
result in that person or group owning at least 20% of the common stock. Once the
Rights become exercisable they entitle all other shareholders to purchase, by
payment of a $65.00 exercise price, common stock (or, in certain circumstances,
other consideration) with a value of twice the exercise price. In addition, at
any time after a 20% position is acquired, the Board of Directors may, at its
option, require each outstanding Right (other than Rights held by the acquiring
person or group) to be exchanged for one share of common stock or its
equivalent. The Rights will expire on June 30, 1999 unless redeemed or exchanged
earlier.
<PAGE>
 
                                              ECHLIN INC. 1997 ANNUAL REPORT  43
                                              ==================================

7 Stock Option Plans
====================

Under the 1992 Echlin Inc. Stock Option Plan, options may be granted to officers
and key employees in the form of incentive stock options or nonqualified stock
options. Options may be accompanied by stock appreciation rights which entitle a
holder to surrender an unexercised option and to receive in exchange a payment
equal to the difference between the option and the market price on the surrender
date. Options are granted at 100% of the fair market value on the date of grant.
They are exercisable one year from the date of grant and expire ten years after
the date of grant, except in the event of the retirement or death of the
employee. Upon the exercise of stock options, payment may be made using cash,
shares of the company's common stock or any combination thereof.

  Information regarding this plan is as follows:

<TABLE>
<CAPTION>
 
------------------------------------------------------------------------------- 
                                               Number of       Weighted-Average
                                                Shares              Price
------------------------------------------------------------------------------- 
<S>                                            <C>             <C>
Outstanding at August 31, 1994                 1,882,960             $18.85
Granted                                          292,375             $30.75
Exercised                                       (322,335)            $16.17
Terminated                                       (20,375)            $19.08
---------------------------------------------------------
 Outstanding at August 31, 1995                1,832,625             $21.22
Granted                                          231,125             $37.25
Exercised                                       (137,775)            $19.96
Terminated                                       (22,815)            $27.51
---------------------------------------------------------
 Outstanding at August 31, 1996                1,903,160             $23.23
Granted                                          441,934             $32.62
Exercised                                       (340,695)            $19.93
Terminated                                       (39,265)            $29.98
---------------------------------------------------------
 Outstanding at August 31, 1997                1,965,134             $26.02
===============================================================================
</TABLE>

  The following table summarizes information about employee stock options
outstanding and exercisable at August 31, 1997:

<TABLE>
<CAPTION>
--------------------------------------------------------------------------------
                         Options Outstanding                Options Exercisable
                 -------------------------------------    ----------------------
                                 Weighted                  
                                  Average     Weighted                  Weighted
   Range of                      Remaining     Average                  Average
   Exercise         Number      Contractual   Exercise       Number     Exercise
    Prices        Outstanding   Life (years)    Price      Exercisable   Price
------------------------------------------------------------------------------- 
<S>              <C>           <C>            <C>         <C>          <C>
$10.25-$19.75        779,450         3.5       $14.82        779,450     $14.82
$30.75-$37.25      1,185,684         8.0       $32.93        743,750     $33.28
                 -----------                               ---------       
$10.25-$37.25      1,965,134         6.3       $26.02      1,523,200     $23.90
===============================================================================
</TABLE>

  Shares available for future grants at August 31, 1997 and 1996 were 1,656,249
and 2,187,842, respectively. There were no options outstanding with stock
appreciation rights at August 31, 1997 and 1996.
<PAGE>
 
44  ECHLIN INC. 1997 ANNUAL REPORT
==================================



  At the annual meeting held on December 18, 1996, shareholders approved the
1996 Non-Executive Director Stock Option Plan under which 250,000 shares of
Echlin common stock were authorized for issuance to members of the Board of
Directors who are not current employees of Echlin Inc. Options are granted at
100% of the fair market value on the date of grant. They are exercisable one
year from the date of grant and expire ten years after the date of grant, except
in the event of the retirement or death of the non-executive director. Upon the
exercise of stock options, payment may be made using cash, shares of the
company's common stock or any combination thereof. During fiscal 1997, 79,150
options were granted at a weighted-average price per share of $31.125. No
exercises or terminations of these stock options were made during fiscal 1997.

  In October 1995, Statement of Financial Accounting Standards No. 123 relating
to "Accounting for Stock Based Compensation" was issued. This pronouncement
establishes a fair value based method of accounting for stock option plans, the
impact of which may be included in net income or disclosed on a proforma basis
in the notes to the financial statements. The company adopted Statement No. 123
during fiscal 1997. The Black-Scholes option pricing model was used to estimate
the fair value of these options on the date of grant. The weighted-average
assumptions used in the model for 1997 and 1996, respectively, are as follows:
expected life of the option 3.8 to 5.5 years, 6.2 years; risk-free interest rate
6.13% to 6.50%, 5.73%; expected volatility 20.5%, 24.3%; and dividend yields
2.5%, 2.8%. The weighted average fair value of options granted during 1997 and
1996 are $7.66 and $9.61, respectively. Proforma net income (loss) would have
been ($48,864,000) and $141,188,000, while proforma earnings (loss) per share
would have been ($0.78) and $2.28 for the years ended August 31, 1997 and 1996,
respectively.


8 Retirement Plans
==================

Echlin sponsors several noncontributory defined benefit pension plans covering a
majority of its domestic employees. A major portion of the employees is covered
by a plan which provides pension benefits based upon years of service and the
employee's compensation during the five highest consecutive years of the ten-
year period prior to retirement. Benefits under the plans covering other
employees are based upon a stated amount for each year of service. It is the
company's normal policy to fund the maximum amount that can be deducted for
federal income tax purposes. The company also contributes to multi-employer
pension plans covering certain domestic employees and to pension plans for
employees of certain foreign subsidiaries.

  A majority of domestic employees is eligible to make contributions to the
company's 401(k) retirement savings plan. The company matches a portion of the
employee's annual contributions based upon the company's return on assets.
Company contributions were $972,000, $2,133,000 and $2,002,000 during the years
ended August 31, 1997, 1996 and 1995, respectively.
<PAGE>
 
                                            ECHLIN INC. 1997 ANNUAL REPORT    45
                                            ====================================

   Net pension cost for all pension plans was $10,602,000, $10,781,000 and
$10,124,000 for the years ended August 31, 1997, 1996 and 1995, respectively.
Net pension cost included the following components:

<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------
                                                        Year ended August 31,
                                          1997                  1996                  1995
                                  -------------------   -------------------   ------------------
(In thousands)                    Domestic    Foreign   Domestic    Foreign   Domestic   Foreign
------------------------------------------------------------------------------------------------
<S>                               <C>        <C>        <C>        <C>        <C>        <C>
Service cost-benefits earned
 during the period                $  6,951   $  5,883   $  6,809   $  5,100   $  5,697   $ 4,777
Interest on projected benefit
 obligation                          9,104      9,457      8,424      7,990      7,678     7,578
Actual return on plan assets       (21,114)   (18,412)   (15,095)   (11,615)   (10,869)   (4,848)
Net amortization and deferrals       9,870      8,733      5,149      3,905      2,321    (2,600)
Multi-employer plans                   130         --        114         --        390        --
------------------------------------------------------------------------------------------------
 Net pension cost                 $  4,941   $  5,661   $  5,401   $  5,380   $  5,217   $ 4,907
================================================================================================
</TABLE>

   The following table sets forth the funded status of the various company
pension plans:
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
                                                   August 31,
                                          1997                    1996
                                 --------------------     --------------------
(In thousands)                   Domestic     Foreign     Domestic     Foreign
------------------------------------------------------------------------------------------------
<S>                              <C>        <C>           <C>        <C>
Actuarial present value of:
 Vested benefit obligation       $106,422      $104,772   $ 91,708      $ 89,088
 Accumulated benefit obligation  $110,579      $109,657   $ 95,056      $ 93,323
================================================================================================
Plan assets at fair value        $148,623      $116,678   $125,143      $ 93,095
Projected benefit obligation      127,250       131,943    109,561       112,384
------------------------------------------------------------------------------------------------
 Plan assets in excess of                                               
  (less than)                                                           
  projected benefit obligation     21,373       (15,265)    15,582       (19,289)
Unrecognized net loss               2,414            49      5,808            11
Unrecognized prior service cost     4,422         2,684      3,834         2,612
Unrecognized net assets              (978)       (5,670)    (1,882)       (6,256)
Adjustment to minimum liability      (741)         (157)      (141)         (233)
------------------------------------------------------------------------------------------------
 Prepaid (accrued) pension cost  $ 26,490      $(18,359)  $ 23,201      $(23,155)
================================================================================================
Actuarial assumptions:
 Discount rate                       8.00%   6.50%-8.50%      8.25%   7.00%-8.75%
 Rate of increase in
  compensation levels                4.31%   2.50%-5.50%      4.31%   3.00%-6.50%
 Expected long-term rate of
  return on
  plan assets                       10.00%         8.50%     10.00%   8.50%-9.50%
================================================================================================
</TABLE>


   The company also has a Supplemental Executive Retirement Plan which provides
certain key employees with pension benefits they would have received under the
normal company plan had there not been limitations imposed by the Internal
Revenue Code of 1986. The company also provides a Supplemental Senior Executive
Retirement Plan covering selected senior executives. An unfunded projected
benefit obligation for both plans of $4,838,000 and $2,434,000 at August 31,
1997 and 1996, respectively, is included under domestic in the table above.

   Pension plans in certain foreign countries are not funded. At August 31, 1997
and 1996, the company had recorded an accrued liability of $20,714,000 and
$23,880,000, respectively, relating to such plans which are included in the
table above.

   The majority of domestic pension plan assets are invested in common stock,
including 50,000 shares of Echlin Inc. common stock. The balance is primarily
invested in short-term investments, preferred stocks, mutual funds and limited
partnership interests.
<PAGE>
 
46  ECHLIN INC. 1997 ANNUAL REPORT
==================================

9 Income Taxes
==============

The provision for taxes was comprised of the following:
<TABLE>
<CAPTION>

-----------------------------------------------------------------------------
                                                   Year ended August 31,   
(In thousands)                                    1997      1996     1995  
-----------------------------------------------------------------------------
<S>                                             <C>        <C>      <C>    
Current:                                                                   
 Federal                                        $ 20,142   $ 7,563  $12,537
 State                                             4,753     7,700    9,500
 Foreign                                          55,553     8,857   31,439
-----------------------------------------------------------------------------
  Total current provision                         80,448    24,120   53,476
-----------------------------------------------------------------------------
Deferred:                                                                  
 Federal and state                               (54,712)   19,400   17,348
 Foreign                                         (23,578)   26,426    5,234
-----------------------------------------------------------------------------
  Total deferred provision                       (78,290)   45,826   22,582
-----------------------------------------------------------------------------
 Total provision                                $  2,158   $69,946  $76,058
=============================================================================
</TABLE>

  The tax effect of major temporary differences is summarized below:
-----------------------------------------------------------------------------
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------
                                                    Year ended August 31,  
(In thousands)                                    1997       1996      1995 
-----------------------------------------------------------------------------
<S>                                             <C>        <C>       <C>    
Depreciation                                    $(47,267)  $32,249   $21,433
Valuation of inventories                         (16,277)   (1,522)   (4,202)
All other, net                                   (14,746)   15,099     5,351
-----------------------------------------------------------------------------
 Total deferred provision                       $(78,290)  $45,826   $22,582
=============================================================================
</TABLE>

  A reconciliation setting forth the differences between Echlin's effective 
tax rate and the U.S. statutory federal tax rate is as follows:

<TABLE>
<CAPTION>
-----------------------------------------------------------------------------
                                                   Year ended August 31,  
                                                  1997      1996    1995  
-----------------------------------------------------------------------------
<S>                                             <C>        <C>     <C>        
Statutory federal tax rate                         35.0%    35.0%   35.0%     
Earnings in Puerto Rico not                                                   
 subject to U.S. taxes                             10.6     (3.2)   (2.9)     
Net tax effect relating to                                                    
 foreign operations                               (29.8)     0.2     1.5      
State taxes                                         2.4      2.4     2.7      
Asset write-offs                                  (38.6)      --      --      
Other                                              15.6     (1.4)   (3.3)     
-----------------------------------------------------------------------------
 Effective tax rate                                (4.8%)   33.0%   33.0%     
=============================================================================
</TABLE>

  The company has a subsidiary operating in Puerto Rico under a tax exemption
grant which expires in 2009. 

  For the years ended August 31, 1997, 1996 and 1995, taxes paid were
$78,938,000, $35,262,000 and $52,752,000, respectively.

<PAGE>
 
                                              ECHLIN INC. 1997 ANNUAL REPORT  47
                                              ==================================

  Deferred income taxes reflect the net tax effects of temporary differences
between the amounts of assets and liabilities for financial reporting purposes
and the amounts used for income tax purposes. The following is a summary of the
significant components of the company's deferred tax assets and liabilities:

<TABLE>
<CAPTION>
--------------------------------------------------------------------------------
                                     August 31,
(In thousands)                    1997      1996
--------------------------------------------------------------------------------
<S>                             <C>      <C>
Assets:
 Inventories                    $23,177  $  6,900
 Accrued expenses                25,753     5,341
 Other employee benefits          6,346     5,290
 Other                           20,196     6,727
--------------------------------------------------------------------------------
  Gross deferred assets          75,472    24,258
--------------------------------------------------------------------------------
Liabilities:
 Depreciation                    55,998   103,265
 Pension                         15,180    13,654
 Other                            4,495    25,444
--------------------------------------------------------------------------------
  Gross deferred liabilities     75,673   142,363
--------------------------------------------------------------------------------
 Net deferred liabilities       $   201  $118,105
================================================================================
</TABLE>

10 Rental Commitments
=====================

Total rental expense for the years ended August 31, 1997, 1996 and 1995 was
$46,122,000, $42,635,000 and $35,274,000, respectively.
  Minimum rental commitments under noncapitalized, noncancelable lease
agreements are as follows:

<TABLE>
<CAPTION>
--------------------------------------------------------------------------------
Year ending August 31,     Real                All
(In thousands)            Estate   Computers  Others    Total
--------------------------------------------------------------------------------
<S>                       <C>      <C>        <C>      <C>
1998                      $26,584    $ 5,507  $ 7,236  $ 39,327
1999                       17,237      4,636    5,264    27,137
2000                       14,356      1,924    3,074    19,354
2001                       10,329        122      545    10,996
2002                        8,281         80      216     8,577
2003 and thereafter        16,506         --       52    16,558
--------------------------------------------------------------------------------
 Total commitments        $93,293    $12,269  $16,387  $121,949
================================================================================
</TABLE>
<PAGE>
 
48  ECHLIN INC. 1997 ANNUAL REPORT
==================================


11 Business Segment Information
===============================

Echlin, as a worldwide supplier of parts and supplies for motor vehicles, is
engaged in only one business segment. 

  An analysis of the company's operations by geographic area is as follows:

<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------
Year ended August 31,                     United
(In thousands)                            States       Europe   All Other  Eliminations   Consolidated
------------------------------------------------------------------------------------------------------
<S>                                     <C>           <C>       <C>        <C>            <C>
1997
Net sales to unaffiliated customers      $2,414,486   $750,429   $403,657            --     $3,568,572
Net sales between geographic areas           55,273     19,427    111,921     $(186,621)            --
------------------------------------------------------------------------------------------------------
 Total net sales                         $2,469,759   $769,856   $515,578     $(186,621)    $3,568,572
======================================================================================================
Income (loss) before taxes               $ (100,787)   $38,689    $17,350            --       $(44,748)
======================================================================================================
Identifiable assets                      $1,287,204   $658,831   $376,073            --     $2,322,108
=========================================================================================
Corporate assets                                                                                52,095
------------------------------------------------------------------------------------------------------
  Total assets                                                                              $2,374,203
======================================================================================================
1996
Net sales to unaffiliated customers      $2,158,405   $675,014   $295,309            --     $3,128,728
Net sales between geographic areas           44,847      9,353     73,074     $(127,274)            --
------------------------------------------------------------------------------------------------------
 Total net sales                         $2,203,252   $684,367   $368,383     $(127,274)    $3,128,728
======================================================================================================
Income before taxes                        $111,997    $69,864    $30,295            --       $212,156
=========================================================================================
Identifiable assets                      $1,183,809   $552,689   $330,837            --     $2,067,335
======================================================================================================
Corporate assets                                                                                63,419
------------------------------------------------------------------------------------------------------
Total assets                                                                                $2,130,754
======================================================================================================
1995
Net sales to unaffiliated customers      $1,838,059   $589,181   $290,626            --     $2,717,866
Net sales between geographic areas           48,608      8,832     79,618     $(137,058)            --
------------------------------------------------------------------------------------------------------
 Total net sales                         $1,886,667   $598,013   $370,244     $(137,058)    $2,717,866
======================================================================================================
Income before taxes                        $135,492    $60,604    $34,384            --       $230,480
======================================================================================================
Identifiable assets                      $1,063,413   $529,508   $319,701            --     $1,912,622
=========================================================================================
Corporate assets                                                                                48,386
------------------------------------------------------------------------------------------------------
Total assets                                                                                $1,961,008
======================================================================================================
</TABLE>

  Net sales between geographic areas are made at prices which approximate market
value. Income before taxes included realized and unrealized foreign currency
transaction gains (losses) for the years ended August 31, 1997, 1996 and 1995 of
$4,746,000, $428,000 and $(354,000), respectively, and translation losses of
$615,000, $54,000 and $717,000, respectively. The company's foreign operations
had income before taxes of $56,039,000, $100,159,000 and $94,988,000 for the
years ended August 31, 1997, 1996 and 1995, respectively.
  The company does not have any one customer or group of customers comprising
more than 10% of reported net sales.
<PAGE>
 
                                             ECHLIN INC. 1997 ANNUAL REPORT   49
                                             ===================================




12 Quarterly Financial Data (unaudited)
======================================

<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------------
                                                                             Income         Net         Earnings
Year ended August 31,                              Net         Gross      (Loss) From      Income        (Loss)
(In thousands, except per share data)             Sales        Profit      Operations      (Loss)       Per Share
-----------------------------------------------------------------------------------------------------------------
<S>                                           <C>           <C>            <C>           <C>           <C>         
1997                                                                                               
First quarter                                 $  850,908     $ 215,889     $  66,685     $  38,117        $ 0.61
Second quarter                                   842,219       196,844        44,986        23,601          0.38
Third quarter                                    931,177       223,641        62,790        33,481          0.53
Fourth quarter                                   944,268       225,117      (178,541)     (142,105)        (2.27)
-----------------------------------------------------------------------------------------------------------------
       Total                                  $3,568,572     $ 861,491     $  (4,080)    $ (46,906)       $(0.75)
=================================================================================================================
1996                                                                                               
First quarter                                 $  713,767     $ 193,102     $  59,236     $  33,673        $ 0.54   
Second quarter                                   735,902       186,849        44,986        23,554          0.38 
Third quarter                                    843,018       221,730        73,846        43,360          0.70
Fourth quarter                                   836,041       218,010        67,031        41,623          0.68
-----------------------------------------------------------------------------------------------------------------
       Total                                  $3,128,728     $ 819,691     $ 245,099     $ 142,210        $ 2.30
=================================================================================================================
1995                                                                                               
First quarter                                 $  600,615     $ 176,059     $  49,761     $  31,796        $ 0.54
Second quarter                                   648,132       186,101        50,689        28,989          0.48
Third quarter                                    745,064       212,707        78,237        47,768          0.81
Fourth quarter                                   724,055       210,538        75,432        45,869          0.77
-----------------------------------------------------------------------------------------------------------------
       Total                                  $2,717,866     $ 785,405     $ 254,119     $ 154,422        $ 2.60
=================================================================================================================
</TABLE>

  Income from operations for the first quarter of 1997 includes a gain from the
sale of Sensor Engineering of $7,283,000, or $0.07 per share. During the second
quarter the gain was increased by $77,000.

  In the fourth quarter of 1997, a gain of $21,292,000 was included in income
from operations due to the sale of Preferred Plastic Sheet. As a result,
earnings per share were increased by $0.21. In addition, income from operations
and earnings per share were reduced by $254,115,000 and $2.91, respectively,
from repositioning and other special charges.
<PAGE>
 
50   ECHLIN INC. 1997 ANNUAL REPORT
===================================

HISTORICAL DATA

<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------------------------------
                                                      10-year       Growth                                     
                                                     Compound        1997                                      
(In thousands, except per share data)                 Growth       vs. 1996          1997           1996           1995
--------------------------------------------------------------------------------------------------------------------------
<S>                                                  <C>          <C>             <C>            <C>            <C>
Operations:                                                                                            
Net sales                                              12.5%          14.1%       $3,568,572     $3,128,728     $2,717,866
Cost of goods sold                                     13.1           17.2         2,707,081      2,309,037      1,932,461
                                                                                  ----------------------------------------
 Gross profit on sales                                 10.8            5.1           861,491        819,691        785,405
Selling and administrative expenses                    10.6           11.4           640,108        574,592        531,286
Repositioning and other special charges                  --             --           254,115             --             --
Gain on sales of businesses                              --             --           (28,652)            --             --
                                                                                  ----------------------------------------
 Income (loss) from operations                           --             --            (4,080)       245,099        254,119
                                                                                  ----------------------------------------
Interest expense                                       16.3           20.4            52,914         43,933         39,313
Interest income                                         2.7           11.4           (12,246)       (10,990)       (15,674)
                                                                                  ----------------------------------------
 Interest expense, net                                 33.4           23.4            40,668         32,943         23,639
                                                                                  ----------------------------------------
 Income (loss) before taxes                              --             --           (44,748)       212,156        230,480
Provision for taxes                                   (22.4)         (96.9)            2,158         69,946         76,058
                                                                                  ----------------------------------------
 Income (loss) before cumulative effect                                                                
  of accounting change                                   --             --           (46,906)       142,210        154,422
Cumulative effect of accounting change                   --             --                --             --             --
                                                                                  ----------------------------------------
 Net income (loss)                                       --             --        $  (46,906)    $  142,210     $  154,422
                                                                                  ========================================
Average shares outstanding                              1.9            1.1            62,601         61,919         59,476

Earnings (loss) per share                                --             --        $    (0.75)    $     2.30     $     2.60
Dividends per share                                     5.3            4.7        $     0.89     $     0.85     $     0.79

Financial Position at Year-end:                                                                        
Working capital                                         4.1           (8.4)       $  535,546     $  584,785     $  590,726
Current ratio                                            --             --             1.8/1          2.1/1          2.2/1
Working capital to sales                                 --             --              15.0%          18.7%          21.7%
Property, plant and equipment, net                     13.3           16.3        $  722,531     $  621,309     $  525,528
Total assets                                           10.6           11.4        $2,374,203     $2,130,754     $1,961,008
Total debt                                             23.5           52.8        $  757,861     $  495,895     $  507,125
Shareholders' equity                                    4.2           (9.4)       $  913,701     $1,008,874     $  909,267
 --per share                                            2.9          (11.1)       $    14.48     $    16.28     $    15.25
Total debt to capitalization                             --             --              45.3%          33.0%          35.8%

Additional Data:                                                                                       
Capital expenditures, net of disposals                 14.0           39.0        $  140,741     $  101,241     $  102,379
Depreciation and amortization                          14.6           25.4        $  113,938     $   90,875     $   76,609
Effective tax rate*                                      --             --              35.0%          33.0%          33.0%
Income from operations as a percent of net sales*        --             --               6.2%           7.8%           9.3%
Net income as a percent of:*                                                                           
 Net sales                                               --             --               3.3%           4.5%           5.7%
 Beginning shareholders' equity                          --             --              11.6%          15.6%          19.3%
Average number of employees                             8.4           13.9              30.3           26.6           23.6
==========================================================================================================================
</TABLE>

* Note: 1997 computations are before non-recurring items totaling $225,463 pre-
  tax, or $164,303 after-tax ($2.63 per share).
<PAGE>
 
                                             ECHLIN INC. 1997 ANNUAL REPORT   51
                                             ===================================

<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------------------------
                                                                          Year ended August 31,         
(In thousands, except per share data)                       1994             1993            1992            1991     
--------------------------------------------------------------------------------------------------------------------
Operations:                                                                                                           
<S>                                                       <C>            <C>             <C>             <C>          
Net sales                                                 $2,229,474      $1,944,463      $1,783,362      $1,685,876  
Cost of goods sold                                         1,571,256       1,377,954       1,287,041       1,232,726  
--------------------------------------------------------------------------------------------------------------------
 Gross profit on sales                                       658,218         566,509         496,321         453,150  
Selling and administrative expenses                          468,511         420,460         389,470         371,980  
Repositioning and other special charges                           --              --              --              --  
Gain on sales of businesses                                       --              --              --              --  
--------------------------------------------------------------------------------------------------------------------
 Income (loss) from operations                               189,707         146,049         106,851          81,170  
--------------------------------------------------------------------------------------------------------------------
Interest expense                                              23,504          19,403          22,127          29,009  
Interest income                                              (11,843)        (10,930)         (9,768)         (9,049) 
--------------------------------------------------------------------------------------------------------------------
 Interest expense, net                                        11,661           8,473          12,359          19,960  
--------------------------------------------------------------------------------------------------------------------
 Income (loss) before taxes                                  178,046         137,576          94,492          61,210  
Provision for taxes                                           56,975          44,025          30,237          19,557  
--------------------------------------------------------------------------------------------------------------------
 Income (loss) before cumulative effect                                                                               
  of accounting change                                       121,071          93,551          64,255          41,653  
Cumulative effect of accounting change                         2,583              --              --              --  
--------------------------------------------------------------------------------------------------------------------
 Net income (loss)                                        $  123,654      $   93,551      $   64,255      $   41,653  
====================================================================================================================
Average shares outstanding                                    58,996          58,560          55,976          55,835  

Earnings (loss) per share                                 $     2.10      $     1.60      $     1.15      $     0.75  
Dividends per share                                       $     0.73      $     0.70      $     0.70      $     0.70  

Financial Position at Year-end:                                                                                       
Working capital                                           $  487,548      $  381,989      $  417,407      $  479,174  
Current ratio                                                  2.1/1           2.1/1           2.3/1           2.9/1  
Working capital to sales                                        21.9%           19.6%           23.4%           28.4% 
Property, plant and equipment, net                        $  444,166      $  329,381      $  325,312      $  311,047  
Total assets                                              $1,577,406      $1,263,261      $1,241,193      $1,191,793  
Total debt                                                $  308,304      $  164,232      $  210,948      $  261,822  
Shareholders' equity                                      $  798,971      $  713,822      $  693,948      $  649,416  
 --per share                                              $    13.52      $    12.13      $    12.34      $    11.63  
Total debt to capitalization                                    27.8%           18.7%           23.3%           28.7% 

Additional Data:                                                                                                      
Capital expenditures, net of disposals                    $   73,803      $   41,528      $   48,255      $   56,166  
Depreciation and amortization                             $   64,174      $   59,671      $   55,896      $   56,489  
Effective tax rate*                                             32.0%           32.0%           32.0%           32.0% 
Income from operations as a percent of net sales*                8.5%            7.5%            6.0%            4.8% 
Net income as a percent of:*                                                                                          
 Net sales                                                       5.5%            4.8%            3.6%            2.5% 
 Beginning shareholders' equity                                 17.3%           13.5%            9.9%            6.3% 
Average number of employees                                     20.6            18.6            17.9            17.8  
--------------------------------------------------------------------------------------------------------------------
<CAPTION>                                                                                            

--------------------------------------------------------------------------------------------------------------------
                                                                             Year ended August 31,      
(In thousands, except per share data)                           1990           1989            1988            1987
--------------------------------------------------------------------------------------------------------------------
<S>                                                        <C>            <C>             <C>             <C> 
Operations:                                                                                          
Net sales                                                 $1,601,254      $1,454,492      $1,294,297      $1,099,703
Cost of goods sold                                         1,147,940       1,054,650         935,531         790,152
--------------------------------------------------------------------------------------------------------------------
 Gross profit on sales                                       453,314         399,842         358,766         309,551
Selling and administrative expenses                          368,380         326,221         263,605         234,255
Repositioning and other special charges                           --              --              --              --
Gain on sales of businesses                                       --              --              --              --
--------------------------------------------------------------------------------------------------------------------
 Income (loss) from operations                                84,934          73,621          95,161          75,296
--------------------------------------------------------------------------------------------------------------------
Interest expense                                              21,886          24,594          13,229          11,676
Interest income                                               (5,903)        (13,677)        (11,368)         (9,395)
--------------------------------------------------------------------------------------------------------------------
 Interest expense, net                                        15,983          10,917           1,861           2,281
--------------------------------------------------------------------------------------------------------------------
 Income (loss) before taxes                                   68,951          62,704          93,300          73,015
Provision for taxes                                           21,746          18,285          31,228          27,381
--------------------------------------------------------------------------------------------------------------------
 Income (loss) before cumulative effect                                                                 
  of accounting change                                        47,205          44,419          62,072          45,634
Cumulative effect of accounting change                            --              --              --              --
--------------------------------------------------------------------------------------------------------------------
 Net income (loss)                                        $   47,205      $   44,419      $   62,072      $   45,634
====================================================================================================================
Average shares outstanding                                    55,797          55,733          55,613          52,098

Earnings (loss) per share                                 $     0.85      $     0.80      $     1.12      $     0.88
Dividends per share                                       $     0.70      $     0.66      $     0.59      $     0.53

Financial Position at Year-end:                                                                         
Working capital                                           $  509,260      $  436,972      $  347,500      $  359,320
Current ratio                                                  3.0/1           2.8/1           2.2/1           3.1/1
Working capital to sales                                        31.8%           30.0%           26.8%           32.7%
Property, plant and equipment, net                        $  310,381      $  264,734      $  242,169      $  207,030
Total assets                                              $1,192,496      $1,034,254      $1,086,568      $  869,065
Total debt                                                $  262,069      $  128,938      $  130,651      $   91,825
Shareholders' equity                                      $  662,430      $  640,623      $  634,267      $  603,469
 --per share                                              $    11.87      $    11.48      $    11.39      $    10.88
Total debt to capitalization                                    28.3%           16.8%           17.1%           13.2%

Additional Data:                                                                                        
Capital expenditures, net of disposals                    $   63,170      $   56,780      $   55,871      $   37,890
Depreciation and amortization                             $   47,282      $   40,639      $   35,230      $   29,176
Effective tax rate*                                             31.5%           29.2%           33.5%           37.5%
Income from operations as a percent of net sales*                5.3%            5.1%            7.4%            6.8%
Net income as a percent of:*                                                                            
 Net sales                                                       2.9%            3.1%            4.8%            4.1%
 Beginning shareholders' equity                                  7.4%            7.0%           10.3%           10.8%
Average number of employees                                     17.3            16.2            14.7            13.5
--------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
 
52  ECHLIN INC. 1997 ANNUAL REPORT
==================================

QUARTERLY DATA


<TABLE> 
<CAPTION> 
--------------------------------------------------------------------------------
                         Dividends    Market Price Per Share       Price to
Year ended August 31,    Per Share   High      Low      Close  Earnings Ratio/1/
---------------------   --------------------------------------------------------
<S>                      <C>        <C>       <C>      <C>     <C> 
1995                       
First quarter              $0.19    $31 3/4   $27      $30 1/4         13.8
Second quarter              0.19     35 3/8    26 3/4   34 5/8         15.1
Third quarter               0.205    38 3/4    32 7/8   36             14.7
Fourth quarter              0.205    39 5/8    34       34 1/2         13.3
                           ------
  Total fiscal year        $0.79    $39 5/8   $26 3/4  $34 1/2         13.3

1996
First quarter              $0.205   $39 1/2   $33 7/8  $36 1/2         14.0
Second quarter              0.205    38 3/4    33 5/8   33 7/8         13.6
Third quarter               0.22     36 7/8    32 5/8   34 3/8         14.4
Fourth quarter              0.22     37 7/8    30       30 1/2         13.3
                           ------
  Total fiscal year        $0.85    $39 1/2   $30      $30 1/2         13.3

1997
First quarter              $0.22    $34 1/4   $29 3/4  $33 5/8         14.6
Second quarter              0.22     35 1/4    29 1/2   34 5/8         15.1
Third quarter               0.225    35        31 1/8   33 3/8         15.7
Fourth quarter              0.225    38 9/16   32       37 1/16        19.7
                           ------
  Total fiscal year        $0.89    $38 9/16  $29 1/2  $37 1/16        19.7
================================================================================
</TABLE> 
/1/ Computed using closing price and most recent 4 quarters' earnings per share,
    excluding non-recurring charges.

Echlin Inc.'s Quarterly Dividends Per Share bar graph for fiscal years 1977, 
1982, 1987, 1992, 1997.



                           [BAR GRAPH APPEARS HERE]