SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                    FORM 10-K

[X] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act
of 1934 [Fee Required] For the fiscal year ended December 31, 1999

                                       or

[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 [No Fee Required]

For the transition period from                       to
                               ---------------------    ---------------------

Commission file number              0-19703
                       ------------------------------------------------------

                               FARREL CORPORATION
--------------------------------------------------------------------------------
             (Exact name of registrant as specified in its charter)

           DELAWARE                                      22-2689245
--------------------------------------------------------------------------------
(State or other jurisdiction of             (I.R.S. employer identification no.)
incorporation or organization)


    25 Main Street, Ansonia, Connecticut                      06401
--------------------------------------------------------------------------------
  (Address of principal executive offices)                 (Zip code)

(Registrant's telephone number, including area code) (203) 736-5500
                                                     ---------------------------
Securities registered pursuant to Section 12(b) of the Act:

      Title of each class              Name of each exchange on which registered
Securities registered pursuant
 to Section 12(g) of the Act:

 Common Stock $.01 Par Value                            NASDAQ
--------------------------------------------------------------------------------
                                (Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the  preceding 12 months (or for such  shorter  period that the  registrant  was
required  to file  such  reports),  and  (2) has  been  subject  to such  filing
requirements for the past 90 days. Yes X   No   .
                                      ---    ---

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

The  aggregate  market value of the voting stock held by  non-affiliates  of the
registrant as of March 17, 2000

Was $4,707,706.

The number of shares  outstanding of the  registrant's  common stock as of March
17, 2000 was 5,250,061 shares.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the definitive  Proxy  Statement to be delivered to  stockholders in
connection  with the Annual Meeting of  Stockholders to be held on June 14, 2000
are incorporated by reference into Part III.

                     Exhibit Index Appears on Pages 42 - 43




                                  Page 1 of 49
<PAGE>




                                     PART I

ITEM 1 - BUSINESS

GENERAL

         Farrel  Corporation (the "Company")  designs,  manufactures,  sells and
services  machinery  and  associated  equipment  for  the  rubber  and  plastics
industries worldwide.  The Company's principal products are batch and continuous
mixers, single and twin-screw extruders,  pelletizers, gear pumps, calenders and
mills.  In conjunction  with sales of capital  equipment,  the Company  provides
process engineering, process design and related services for rubber and plastics
processing installations. The Company's aftermarket business consists of repair,
refurbishment  and  equipment  upgrade  services,  spare  parts  sales and field
services.  The Company also  provides  laboratory  services and  facilities  for
product  demonstrations  and for the  development  and  testing  of  rubber  and
plastics equipment and processes.

         The Company's  rubber  processing  equipment is primarily  sold to tire
manufacturers,  custom  compounders and  manufacturers of rubber goods,  such as
sheet products, molded products, automotive components, footwear, wire and cable
and hoses.  In the plastics  processing  industry,  the  Company's  equipment is
primarily  sold to large plastic resins  producers and  compounders of plastics.
The Company markets its products through its strategically  located domestic and
international sales and service organization.

COMPANY STRATEGY

         The  Company's  business  objectives  are to increase  market  share in
relatively  slow-growth  markets by broadening  its product  range,  to continue
strengthening  its  market  position,  particularly  in  Asia,  and  competitive
displacement.  The Company continues to pursue  manufacturing cost reductions by
continually  reevaluating  its current  operating  practices and by  purchasing,
rather than  manufacturing,  a significant  number of equipment  components  and
maintaining  overhead  and  manpower  levels  in line with  prevailing  economic
conditions.  The Company has taken  measures in the recent past to achieve these
objectives by transferring U.S. parts manufacturing from Connecticut to its U.K.
subsidiary and moving U.S. assembly operations from its Derby, Connecticut plant
to its Ansonia,  Connecticut  facility.  (As a result, the Derby facility became
surplus and was sold in January 1999.)

         In line with this strategy,  in December 1997, the Company acquired the
assets of the Francis Shaw Rubber Machinery ("Shaw") business in England for the
production of INTERMIX(R)  internal mixers with intermeshing  rotors,  extruders
and related equipment. The products serve principally the technical rubber goods
manufacturers  and the tire industry.  The internal  mixers produced by Shaw are
essentially similar to the Company's BANBURY(R) internal mixers,  differing only
in the configuration of the mixing rotors.  The combined  complimentary  product
lines   provide  the  Company  with  global   access  to  all  rubber   products
manufacturers,  thereby  increasing  markets  served.  The Shaw  operations were
transferred  to the Farrel  Limited  facility  beginning in the fall of 1998 and
were totally integrated by the end of the second quarter of 1999.

INDUSTRY OVERVIEW

         The Company's  products are used primarily by  manufacturers  of rubber
and  plastic  materials  and  products.   The  rubber  and  plastics  processing
industries are global in nature and intensely  competitive.  Both industries are
cyclical in nature, with capital equipment purchases  characterized by long lead
times between orders and shipments.

         In the rubber industry,  the major users of the Company's machinery are
tire manufacturers, custom compounders and manufacturers of rubber goods such as
sheet products,  molded products,  automotive components,  footwear and wire and
cable.  The Company  considers the non-tire sector its primary market for growth
opportunities.  There are approximately 50 tire  manufacturers in the world, six
of which account for a majority of total  worldwide tire  production.  Demand in
the tire and rubber  industry is  influenced  by,  among other  things,  general
economic  conditions  and growth in sales of  automobiles  and trucks as well as
overall  truck  tonnage  and  mileage  driven.  The  industry  trend is to shift
production  capacities into low cost and emerging  regions,  creating  potential
opportunities in the future.




                                  Page 2 of 49
<PAGE>




         In the  plastics  industry,  the Company  serves two primary  groups of
customers:   commodity   plastics  producers   (typically  large   petrochemical
companies)  and  value-added  compounders  of plastics.  The commodity  plastics
processed by machinery  manufactured by the Company are primarily  polyethylene,
polypropylene, polyvinyl chloride and polystyrene. A large portion of the market
is controlled by a few major  producers who license their  technologies to other
producers  worldwide.  These licensees are potential customers for the Company's
products  and  services.  The  plastics  compounding  market  consists  of those
companies  that mix large  volumes of plastics in a  relatively  small number of
formulations,  companies which perform  specialty  mixing for end users, and end
users that mix largely for their internal use.

         Many  manufacturers  in  the  industries  and  markets  served  by  the
Company's  products and services  are impacted by local  political  and economic
events.  In  particular,  in the  Asia  Pacific  Region,  many of the  Company's
customers  have suspended  projects for increased  capacity and growth until the
region  resumes  a level of  financial  stability.  Other  areas of the Far East
continue to experience growth, however,  business is extremely competitive.  The
Company's   equipment  is  supplied  to  manufacturers  and  represents  capital
commitments  for  new  plants,  expansion  or  modernization.  New  capital  and
marketing  expenditures in the Company's  markets  depend,  in large part, on an
increase in market demand, which may require the need for additional capacity.

         Overall the Company is part of the capital goods industry.  The capital
goods  industry  in which the  Company  operates  is  cyclical  in nature and is
subject to significant changes in demand.  Capital goods demand is influenced by
many factors, including but not limited to, general economic conditions, factory
capacity utilization and availability of financing.  The Company can not predict
when cyclical changes will occur or the extent that demand for its products will
change as a result of cyclical changes.

PRODUCTS AND SERVICES

         The Company's  products are used to mix and process materials  produced
by  the  Company's  rubber  and  plastics  producing  customers.  The  Company's
principal  capital  equipment  product  lines are batch and  continuous  mixers,
single and twin-screw extruders,  pelletizers,  gear pumps, calenders and mills.
The Company also provides process  engineering,  installation and  commissioning
services for its equipment.  The Company's  customer service  division  repairs,
refurbishes  and provides  upgrade  services  and spare parts for the  Company's
installed base of machines worldwide.

         The  following  table  illustrates  the  percentage  breakdown  of  the
Company's sales between new  machines/related  services and aftermarket business
(spare parts, repairs and rebuild) in the last three fiscal years:

                                             Year          Year           Year
                                             ended         ended          ended
                                           12/31/99      12/31/98       12/31/97
                                           --------      --------       --------

New Machines/Related Services........        44.8%         56.9%           57.1%
Aftermarket..........................        55.2%         43.1%           42.9%
                                             -----         -----           -----
Total................................       100.0%        100.0%          100.0%
                                            ======        ======          ======

         The  Company  does not publish a standard  price  list.  Prices for the
Company's  new  equipment  are based  upon a  customer's  specifications  and/or
production  requirements.  Unit prices for the Company's new equipment  products
range from approximately $50,000 to more than $4 million.

CUSTOMERS AND MARKETING

         The   Company's   principal   customers   are   domestic   and  foreign
manufacturers  of rubber and plastic  materials.  The Company's  customers often
purchase  significant  equipment  for  new  plants,  plant  expansion  or  plant
modernization.  Purchases by any single  customer  typically vary  significantly
from year to year according to each  customer's  capital  equipment  needs. As a
result, the composition of the Company's customers may vary from one year to the
next.  The Company  considers its  operations to be one operating  segment.  The
sales, manufacturing, assembly and distribution are




                                  Page 3 of 49
<PAGE>




essentially the same. Segment  information for new equipment sales,  aftermarket
sales, geographic sales and operating results for fiscal 1999, 1998 and 1997 are
reported in Note 16 to the Consolidated Financial Statements.

         The  Company's  products  are sold  primarily  by its direct  sales and
support staff  augmented by agents in certain  countries.  The  Company's  sales
organization is headquartered  in Ansonia,  Connecticut;  Rochdale,  England and
Singapore.  The Company has additional  sales and service offices  strategically
located in the United States,  Europe and Taiwan.  In certain  geographic  areas
outside the United States, sales are facilitated by independent  representatives
who assist employees of the Company.

PROCESS LABORATORY SERVICES

         The Company maintains two process laboratories in Ansonia,  Connecticut
and one laboratory in Rochdale,  England. In addition,  the Company entered into
an agreement with a research and  development  organization in Taiwan to use and
demonstrate the Company's technology.  This contractual arrangement provides the
Company  with  laboratory  facilities  in Asia to  complement  the U.S. and U.K.
laboratories in that important market area. The Company uses its laboratories to
demonstrate  the  capabilities  of  its  processing  equipment  and  to  provide
customers  with  production-sized  equipment  in  order to  experiment  with new
processing  techniques  and  formulations.  The  Company  considers  its process
laboratories to be vital contributors to its continuing  technology  development
and marketing  efforts and routinely  modernizes  its process  laboratories  and
related  equipment.  The Company has  experienced an increased trend to test its
plastics  processing  machinery,  such as the continuous  mixer,  twin screw and
large pelletizing  systems, as more new materials are developed by the Company's
customers which require testing to determine  processing  procedures and machine
design parameters.

         In 1998,  demonstration and laboratory  capabilities were enhanced with
the  installation  of the Farrel  Twin Screw  Extruder  (FTX) in two  University
laboratories: Akron University, Akron, Ohio, USA and the German Rubber Institute
in Hanover,  Germany.  The Company expects to benefit from the  installation and
operation  of these  machines  by  providing  exposure of Farrel  machinery  and
technology to new graduates and access to process application development.

COMPETITION

         The  Company's  products  are  sold  in  highly  competitive  worldwide
markets.  A number of companies  compete  directly  with the Company in both the
rubber and plastics  processing markets.  Numerous  competitors of varying sizes
compete  with the Company in one or more of its product  lines.  A number of the
Company's  competitors  are  former  licensees  of  the  Company,  divisions  or
subsidiaries of larger companies with financial and other resources greater than
those of the Company or copycats who mimic the Company's technology and designs.
The Company has  historically  faced,  and will  continue to face,  considerable
competitive   pressures,    particularly   predatory   price   competition   and
nationalistic  preferences.  The Company believes that the principal competitive
factors affecting its business are price,  performance,  technology,  breadth of
product line, product availability, reputation and customer service.

         The Company also faces strong  competition in the markets for its spare
parts and repair,  refurbishment  and equipment  upgrade  services from regional
service  firms  that take  advantage  of low  barriers  to entry and  geographic
proximity to certain of the Company's customers in order to compete on the basis
of price and service.  The Company  believes that it generally has a competitive
advantage  in these  markets due to the  superior  quality of its  products  and
services.

BACKLOG

         The  Company's  backlog  of orders  considered  firm by  management  at
December 31, 1999, 1998 and 1997 was approximately $29 million,  $33 million and
$47  million,  respectively.  Substantially  all of the orders  included  in the
December  31, 1999  backlog have  contractual  ship dates in fiscal  2000.  Firm
backlog at March 17, 2000 and March 19,  1999 was $33  million and $38  million,
respectively.




                                  Page 4 of 49
<PAGE>




MANUFACTURING

         The Company's manufacturing facility in Rochdale,  England provides the
Company  with fully  integrated  manufacturing  capability  including a complete
range  of  machining  and  fabrication  equipment  used to  produce  proprietary
components.  Final assembly,  product testing and quality control activities are
performed by Company  personnel in both the U.S. and U.K..  The Company also has
repair and rebuild  operations in Ansonia,  Connecticut;  Deer Park,  Texas; and
Rochdale, England and contracts for such services in Australia and Singapore.

         The  Company's  consolidation  of its  Derby and  Ansonia,  Connecticut
assembly, repair and spare parts operations, into available space in Ansonia was
completed in 1998 and yielded  significant  reductions in operating  costs.  The
Derby, Connecticut facility was sold in January 1999.

         The production equipment acquired in the 1997 Shaw acquisition, located
in Manchester,  England,  was transferred to Farrel Limited's facility in nearby
Rochdale,  England.  The facility  integration  was completed  during the second
quarter of 1999 and has generated  substantial  cost  reductions  and production
efficiencies.

         The Company  believes the Ansonia  Connecticut,  and Rochdale,  England
facilities  provide  the  Company  with  the  cost  structure  to  maintain  its
competitive position.

COMPONENTS AND RAW MATERIALS

         The Company  purchases  most of the  components  used in producing  its
machines  from  reliable  domestic and  international  suppliers.  The basic raw
materials  used by the Company are steel plates,  bars,  castings,  forgings and
hard-surfacing alloys. Principal components and raw materials are available from
a number of sources. The Company is not dependent on any supplier that cannot be
replaced in the normal course of business.  The Company's  U.K.  subsidiary is a
major source of large-scale components of proprietary designs.

RESEARCH AND DEVELOPMENT AND ENGINEERING

         The  Company's  research and  development  and  engineering  staffs are
located in Ansonia,  Connecticut and Rochdale,  England.  Their major activities
are:  application  engineering for specific customer orders;  standardization of
existing machinery as part of the Company's ongoing cost reduction measures; and
development  of new  products and product  features.  The  Company's  twin screw
rubber  sheeter is an example of the  collaborative  success of the research and
development and product  engineering  staffs to produce a new product as well as
the recent  development  of a new very  large-scale  pelletizing  system for the
petrochemical  industry.  Current development activities are in the batch mixing
process.  The acquisition of the INTERMIX(R)  intermeshing  technology and rotor
design development provides  opportunities to strengthen our business with batch
mixer  customers.   A  summary  of  research  and  development  and  engineering
expenditures incurred during the last three fiscal years is as follows:


                                               Year         Year          Year
                                               ended        ended         ended
                                             12/31/99     12/31/98      12/31/97
                                             --------     --------      --------
                                                   (Dollars in thousands)
Research and development expense
pertaining to new products or significant
improvements to existing products              $1,570       $1,485       $1,567

All other product development and
engineering expenditures related to
ongoing refinements, improvements
of existing products, and custom
engineering                                     3,580        3,700        2,874
                                                -----        -----      -------

Total                                          $5,150       $5,185       $4,441
                                               ======       ======       ======

Percent of net sales                             6.9%          5.3%         5.2%




                                  Page 5 of 49
<PAGE>




PATENTS AND TRADEMARKS

         The Company  possesses  rights  under a number of domestic  and foreign
patents and trademarks relating to its products and business.  The Company holds
approximately  200 patents which cover  technology  utilized in its products and
currently  has  approximately  20 patent  applications  pending.  The  Company's
patents have  expiration  dates  ranging from 2000  through  2015.  Although the
Company  believes  that its patents  provide  some  competitive  advantage,  the
Company also depends upon trade  secrets,  unpatented  proprietary  know-how and
continuing  technological  innovation  to develop and maintain  its  competitive
advantage.

         The Company  considers the  following  trademarks to be material to its
business: FARREL(R); BANBURY(R); INTERMIX(R); ST(TM); MVX(TM); CP-SERIES II(TM);
FTX(TM); and TSS(TM).

ENVIRONMENTAL

         The Company's operations are subject to normal environmental protection
regulations. Compliance with federal, state and local provisions which have been
enacted or adopted  regulating the discharge of materials into the  environment,
or otherwise  relating to the protection of the environment,  is not expected to
have  a  material  effect  upon  the  capital  expenditures,   earnings  or  the
competitive  position of the Company.  However,  environmental  requirements are
constantly  changing,  and it is  difficult  to  predict  the  effect  of future
requirements on the Company.

         As described in Part I, Item 3, Legal Proceedings,  the Company and The
Black & Decker Corporation entered into a Settlement Agreement pursuant to which
Black & Decker agreed to assume full  responsibility  for the  investigation and
remediation of any pre-May 12, 1986 environmental contamination at the Company's
Ansonia  and Derby  facilities  as  required by the  Connecticut  Department  of
Environmental Protection ("DEP"). A preliminary  environmental assessment of the
Company's properties in Ansonia and Derby, Connecticut has been conducted by The
Black & Decker Corporation. Although this assessment is still being evaluated by
the DEP, on the basis of the  preliminary  data available  there is no reason to
believe that any activities  which might be required as a result of the findings
of the  assessment  will have a material  effect upon the capital  expenditures,
results of operations,  financial  position or the  competitive  position of the
Company.

         During  January 1999,  the Company sold all of its Derby,  Connecticut,
real estate and facilities.  By the terms of that sale, the purchaser  committed
to cooperate  with Black & Decker in any additional  investigation  of the Derby
property and any remediation of that property that might be required by the DEP,
in furtherance of which the Company assigned to the purchaser, and the purchaser
assumed  the rights and  obligations,  respectively,  of the  Company  under the
Settlement Agreement insofar as they relate to the Derby property.  In addition,
the Company has been named an additional  insured on a $5 million  environmental
policy  obtained by the  purchaser  and the  purchaser  is obligated to name the
Company  an  additional  insured  on any and all other  environmental  insurance
policies obtained by the purchaser related to the Derby property.  The Company's
potential exposure has not changed by this transaction.

EMPLOYEES

         As of December 31, 1999, the Company had 432 employees  compared to 498
employees at December 31, 1998. The workforce reduction is primarily a result of
the  consolidation  of the  operations  in the United  Kingdom.  The Company has
collective   bargaining  agreements  in  the  U.S.  and  the  U.K.  which  cover
approximately  125 employees.  The U.S.  agreement expires on June 15, 2000. The
agreement in the U.K. expires April 1, 2000.




                                  Page 6 of 49
<PAGE>





ITEM 2 - PROPERTIES

         The  following  table sets forth  certain  information  concerning  the
Company's principal facilities, all of which are owned by the Company.

<TABLE>
<CAPTION>

         Location                      Principal Use                       Approx. Sq. Ft.
------------------------------------------------------------------------------------------
<S>                                    <C>                                         <C>
Ansonia, Connecticut...........        Office, research, laboratory,               520,000
                                       repair, rebuild, assembly and
                                       storage

Deer Park, Texas...............        Repair and rebuild                           22,000
Rochdale, England..............        Office, research, laboratory,               210,000
                                       manufacturing, repair and rebuild,
                                       and storage
</TABLE>


         The Company  believes that the facilities used in its operations are in
satisfactory  condition  and  adequate  for its present and  anticipated  future
operations. In addition to the facilities listed above, the Company leases space
in various  domestic and  international  locations,  primarily  for use as sales
offices.

ITEM 3 - LEGAL PROCEEDINGS

         As  previously  described  in Part I,  in  Item  1,  Environmental,  in
February 1995, the Company and The Black & Decker Corporation settled litigation
as to the  environmental  conditions at the Ansonia and Derby  facilities at the
time  of the  Company's  purchase  of them  from  USM in May,  1986.  Under  the
Settlement  Agreement,  Black & Decker has assumed full  responsibility  for all
investigation  and any  remediation  of pre-May  12, 1986  contamination  at the
Company's  Ansonia and Derby  facilities  in  accordance  with a Consent  Decree
entered  into  between  Black  &  Decker  and  the  Connecticut   Department  of
Environmental  Protection.  In  accordance  with  the  Settlement  Agreement,  a
Withdrawal and Joint  Stipulation of and Motion for Dismissal was filed with the
Court.  The Court who originally  heard this matter has continuing  jurisdiction
over it, but no issues are now pending with the court.

         As of the date hereof,  the Company is not aware of any  contamination,
other than any pre-May 12, 1986  contamination,  at any of its facilities  which
would require material remediation costs.

         The Company is a defendant in certain  lawsuits arising in the ordinary
course of business,  primarily  related to product  liability  claims  involving
machinery  manufactured by the Company or by companies that manufactured similar
machinery  prior to the Company's  acquiring the right to  manufacture  and sell
that  equipment in May 1986.  The previous  owner of the  technology,  which the
Company  acquired in May, 1986, is obligated to defend and indemnify the Company
for any claims or liabilities arising out of pre-May 12, 1986, activities. While
the  outcome of  lawsuits or other  proceedings  against  the Company  cannot be
predicted  with any  certainty,  the Company does not expect that these  matters
will have a material  adverse  effect on the  Company's  financial  position  or
results of operations.




                                  Page 7 of 49
<PAGE>





ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

              None.




                                  Page 8 of 49
<PAGE>





                                     PART II

ITEM 5 - MARKET  FOR THE  REGISTRANT'S  COMMON  STOCK  AND  RELATED  STOCKHOLDER
MATTERS.

        (a) Price Range of Common Stock and Dividends

         The Company's Common Stock is traded over the counter and quoted on the
NASDAQ Small Cap Market System under the symbol "FARL". The following chart sets
forth the high and low prices for the Common  Stock and  dividends  declared for
the last two fiscal years:


Fiscal 1999                                High         Low             Dividend
-----------                                ----         ---             --------
First Quarter                              $3.25        $1.88           $0.16
Second Quarter                             $2.88        $2.00           -
Third Quarter                              $2.25        $1.63           $0.04
Fourth Quarter                             $2.31        $1.31           $0.04

Fiscal 1998                                High         Low             Dividend
-----------                                ----         ---             --------
First Quarter                              $6.50        $4.38           -
Second Quarter                             $6.13        $3.25           $0.04
Third Quarter                              $3.78        $1.88           $0.04
Fourth Quarter                             $2.94        $2.00           -


        (b) As of March 17, 2000 the approximate number of record holders of the
Company's common stock was 1029.

        (c) Dividends

         The Company intends to pay quarterly cash dividends on its Common Stock
as  its  Board  of  Directors  deems  appropriate,  after  consideration  of the
Company's operating results,  financial  condition,  cash requirements,  general
business  conditions,  compliance  with  covenants in the credit  facility  (see
Management's  Discussion  and Analysis of Liquidity and Capital  Resources)  and
such other factors as the Board of Directors deems relevant.

        (d) There were  no sales or issuance's  of the  Company's  equity shares
            that were not registered under the Securities Act.




                                  Page 9 of 49
<PAGE>





ITEM 6 - SELECTED CONSOLIDATED FINANCIAL DATA

<TABLE>
<CAPTION>
                                                                     Year        Year         Year        Year         Year
                                                                    Ended       Ended        ended       ended        ended
                                                                   12/31/99    12/31/98     12/31/97    12/31/96     12/31/95
                                                                   --------    --------     --------    --------     --------
Statement of Operations Data:                                                (In thousands, except per share data)

<S>                                                                <C>         <C>          <C>         <C>          <C>
Net Sales                                                          $ 74,054    $ 98,036     $ 85,382    $ 75,836     $ 80,067
                                                                   ========    ========     ========    ========     ========
Gross margin                                                       $ 18,156    $ 22,772     $ 17,711    $ 18,123     $ 19,760
                                                                   ========    ========     ========    ========     ========
   As a percent of net sales                                           24.5%       23.2%        20.7%       23.9%        24.7%
                                                                   ========    ========     ========    ========     ========
Operating income                                                   $  1,287    $  4,622     $  1,635    $    654     $  1,591
   Other income (expense), net (2)                                    1,588        (799)         449        (174)        (135)
                                                                   --------    --------     --------    --------     --------
Income before income taxes                                            2,875       3,823        2,084         480        1,456
Provision for income taxes                                            1,115       1,546          727         154          554
                                                                   --------    --------     --------    --------     --------
Net income                                                         $  1,760    $  2,277     $  1,357    $    326     $    902
                                                                   ========    ========     ========    ========     ========
Net income per share - Basic and diluted (1)                       $   0.32    $   0.38     $   0.23    $   0.05     $   0.15
                                                                   ========    ========     ========    ========     ========
Dividends per share of Common Stock                                $   0.24    $   0.08     $   0.64    $   0.06     $   0.20
                                                                   ========    ========     ========    ========     ========
Weighted  Average Shares Outstanding - Basic (000's) (1)              5,448       5,942        5,950       5,970        6,027
                                                                   ========    ========     ========    ========     ========
Weighted Average Shares outstanding - Diluted (000's) (1)             5,454       5,966        5,951       5,972        6,030
                                                                   ========    ========     ========    ========     ========

Balance Sheet Data:

   Current Assets                                                  $ 34,445    $ 48,273     $ 37,104    $ 40,187     $ 41,991
   Current Liabilities                                             $ 16,930    $ 28,893     $ 23,286    $ 19,841     $ 22,878
   Working Capital Ratio                                                2.0         1.7          1.6         2.0          1.8
   Total assets                                                    $ 48,862    $ 63,265     $ 56,381    $ 50,731     $ 53,412
   Long-term debt                                                  $  2,584    $  3,983     $  5,283    $    214     $    388
   Stockholders' equity                                            $ 25,864    $ 26,301     $ 25,782    $ 28,553     $ 27,814

Other Data:

   Backlog                                                         $ 28,929    $ 33,269     $ 46,554    $ 50,225     $ 29,745
</TABLE>


(1)  Restated  to  reflect  the  adoption of  statement of Financial  Accounting
     Standards No. 128, "Earnings per Share".
(2)  1999  Other  Income  includes  $1.9  million  gain  from  the sale of  real
     estate.




                                 Page 10 of 49
<PAGE>




ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
         OF OPERATIONS

SAFE HARBOR STATEMENTS UNDER PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995

         Certain  statements   contained  in  the  Company's  public  documents,
included in this report and in particular in this  "Management's  Discussion and
Analysis  of  Financial  Condition  and  Results of  Operations"  may be forward
looking  and may be  subject to a variety  of risks and  uncertainties.  Various
factors could cause actual results to differ  materially from these  statements.
These factors include, but are not limited to pricing pressures from competitors
and/or customers; continued economic and political uncertainty in certain of the
Company's  markets;  the Company's ability to maintain and increase gross margin
levels;  the Company's  ability to generate  positive cash;  changes in business
conditions,  in general, and, in particular,  in the businesses of the Company's
customers and  competitors  and other factors which might be described from time
to time in the Company's filings with the Securities and Exchange Commission.

FISCAL 1999 COMPARED TO FISCAL 1998

         Net  sales in 1999 and 1998  were  $74.0  million  and  $98.0  million,
respectively,  a decrease of $24.0 million.  The decrease in net sales is due in
part to lower sales of new machines in the European markets  resulting from weak
market  demand.  The timing of the Company's  sales,  particularly  sales of new
machines,  is  highly  dependent  on when an order is  received,  the  amount of
lead-time from receipt of order to delivery and specific customer  requirements.
The Company  operates in markets that are  extremely  competitive  with cyclical
demand. Many of our customers and markets operate at less than full capacity and
certain  markets  remain  particularly  competitive  and are  subject  to  local
economic conditions.

         The Company  received $70.0 million in orders in 1999 compared to $84.7
for 1998. The decrease is primarily due to lower orders received in the European
and Asian  markets for both new machine and after market  sales.  The  Company's
products  are  primarily   supplied  to  manufacturers   and  represent  capital
commitments  for new plants,  expansion or  modernization.  In the case of major
equipment  orders,  up to 12 months are required to complete  the  manufacturing
process.  Accordingly,  revenues  reported in the  statement of  operations  are
normally recognized in a later accounting period than the one in which the order
was received.  The Company's  ability to maintain and increase net sales depends
in  large  measures  upon  a  strengthening   and  stability  in  the  Company's
traditional  markets.  In addition,  current  market  conditions  have increased
competition  which is  resulting  in  customer  orders with lower  margins.  The
Company believes these problems are industry wide.

         Gross margin in 1999 was $18.2  million  compared to $22.8  million for
1998, a decrease of $4.6 million.  The margin percentage increased to 24.5% from
23.2%.  The  increase  in  comparative  periods  margin as a percent of sales is
primarily  attributed  to  lower  manufacturing  overheads  resulting  from  the
consolidation  of the U.K.  operations  from two  facilities  to one,  which was
completed  in the first six  months of 1999,  and to  changes  in  product  mix.
Shipments for 1999  compared to 1998  shipments  include a higher  proportion of
aftermarket  and spare parts,  rebuild and repair sales,  which generate  higher
margins than new machine sales.

         Operating expenses in 1999 were $16.9 million compared to $18.1 million
in 1998, a decrease of $1.2 million.  Selling  expense  decreased  approximately
$1.1 due to lower trade show and exhibition  expenses and employee  compensation
and  related  benefit  costs.  General  and  administrative  expenses  decreased
approximately  $0.3 million  primarily due to lower  employee  compensation  and
related benefit costs.

         Interest expense for 1999 was $0.4 million compared to $1.1 million for
1998. The decrease is due to lower average borrowings.

         Net other  expense in 1999 was $226,000  compared to $203,000 for 1998.
The gain from the sale of real estate was excess property in Derby CT, which was
disposed of in January 1999.

         The Company provides for income taxes in the  jurisdictions in which it
pays  income  taxes at the  statutory  rates  in  effect  in each  jurisdiction,
adjusted  for  differences  in  providing  for income  taxes  between  financial
reporting  and  income  tax  purposes.  The  effective  income  tax  rate,  as a
percentage of income before income taxes was 38.8% for 1999,




                                 Page 11 of 49
<PAGE>




compared to 40.4% for 1998.  The decline in the  effective  income tax rate is a
result of changes in the percent of income generated in the U.S. versus the U.K.

FISCAL 1998 COMPARED TO FISCAL 1997:

         Net  sales in 1998 and 1997  were  $98.0  million  and  $85.4  million,
respectively.  The 1998 amount includes net sales of approximately $13.2 million
by Farrel Shaw Limited  ("Shaw")  which was  acquired on December 19, 1997.  The
timing of the Company's sales are highly dependent on when an order is received,
lead time and the  customers  requirements.  The 1998  shipments  in the  fourth
quarter  were $35.5  million,  or 36.2% of the  shipments  for the full year.  A
substantial portion of the 1997 shipments  reflected several  individually large
orders  received in 1996.  Management  believes the Company  operates in markets
which are extremely  competitive.  Many of our customers and markets  operate at
less than full capacity and certain markets, in particular, the Far East, remain
especially competitive and are subject to local economic events.

         The Company  received $84.7 million in orders  including  approximately
$13.7  million by the newly  acquired  Shaw  operations  during 1998 compared to
$77.0  million  during  the same  period of 1997.  The  Company's  products  are
primarily  supplied to manufacturers and represent  capital  commitments for new
plants, expansion or modernization. In the case of major equipment orders, up to
12 months are  required  to complete  the  manufacturing  process.  Accordingly,
revenues reported in the statement of operations might represent orders received
in the current or previous period.

         Gross  margin in 1998 and 1997 was  $22.8  million  and $17.7  million,
respectively.  The margin  percentage  increased  to 23.2% in 1998 from 20.7% in
1997  largely  due to the  mix of  products  sold in the two  periods  and  cost
reduction actions. The 1997 results included several large new machine shipments
with relatively lower gross margins.

         Operating  expenses  increased  $2.0  million to $18.1  million in 1998
compared to 1997. The 1998 amount includes  selling expenses of $0.7 million and
general and  administrative  expenses of $1.4 million at the newly acquired Shaw
operations.  Excluding  the impact of the Shaw  operations,  operating  expenses
decreased by $0.1 million to $16.0 million during 1998. The Company consolidated
the  operations  of Shaw into  manufacturing  and  administrative  facilities in
Rochdale, England, in the second quarter of 1999 thereby, reducing a significant
portion of the Shaw overhead expenses.

         Interest expense for 1998 was $1.1 million, an increase of $1.0 million
from 1997. The increase is due to borrowings  associated with the acquisition of
the Shaw operations.  Interest income was $0.5 million for 1998 and $0.3 million
for 1997.

         Net other  expense  for 1998,  was $0.2  million  compared to net other
income  of $0.2  million  in 1997.  Included  are  gains  from the  disposal  of
machinery  and equipment the Company will no longer use of $0.3 million and $0.7
million during the years ended 1998 and 1997, respectively.

         The  effective  income  tax rate in 1998 and 1997 was 40.4% and  34.9%,
respectively.  The increase in the  effective tax rate during 1998 is attributed
to a higher portion of the 1998 taxable income earned in the United States which
has a higher  effective tax rate.  The Company  provides for income taxes in the
jurisdictions  in which it pays income taxes at the statutory rates in effect in
each  jurisdiction  adjusted for  differences  in providing for income taxes for
financial reporting and income tax purposes.

MATERIAL CONTINGENCIES

         As described in Part 1, Item 3, in February 1995, the Company and Black
& Decker  entered into a Settlement  Agreement  pursuant to which Black & Decker
agreed to assume full  responsibility  for the  investigation and remediation of
any pre-May 12, 1986  environmental  contamination at the Company's  Ansonia and
Derby,  Connecticut  facilities,  as required by the  Connecticut  Department of
Environmental  Protection  ("DEP").  As  part  of the  settlement,  the  Company
transferred  by quit claim  deed a vacant  surfaced  parking  lot to the City of
Ansonia. As required by the Settlement Agreement,  environmental  assessments of
the Ansonia and Derby properties are being conducted by Black & Decker.




                                 Page 12 of 49
<PAGE>





         On January 19, 1999,  the Company  sold all of its Derby,  Connecticut,
real estate and facilities.  By the terms of that sale, the purchaser  committed
to cooperate  with Black & Decker in any additional  investigation  of the Derby
property and any remediation of that property that might be required by the DEP.
In addition,  the Company has been named an additional insured on a $5.0 million
environmental policy obtained by the purchaser and the purchaser is obligated to
name the  Company  an  additional  insured  on any and all  other  environmental
insurance policies obtained by the purchaser related to the Derby property.

         On the basis of the  preliminary  data now available there is no reason
to believe that any remediation  activities  which might be required as a result
of the findings of the assessment  will have a material  effect upon the capital
expenditures,  results of  operations,  financial  position  or the  competitive
position of the Company.  This forward  looking  statement  could,  however,  be
influenced  by any  findings  of  environmental  contamination  attributable  to
post-May 12, 1986 activities, the results of any further investigation which the
DEP might require,  by DEP's conclusions and requirements  based upon its review
of complete information when such is available,  unanticipated discoveries,  the
possibility  that new or different  environmental  laws might be adopted and the
possibility that further  regulatory review or litigation might become necessary
or appropriate.

ORDERS AND BACKLOG

         Orders  received by the Company  during  1999  decreased  approximately
$14.7 million,  or approximately  17.4%, to approximately $70.0 million compared
to $84.7  million in fiscal 1998.  The decrease is primarily in the European and
Asian markets and is a result of weak market demand.

         The Company's  products are  primarily  supplied to  manufacturers  and
represent capital commitment for new plants, expansion or modernization.  In the
case of major equipment orders, up to twelve months are required to complete the
manufacturing  process.  Accordingly,  revenues  reported  in the  statement  of
operations  may  represent  orders  received in the current or previous  periods
during which  economic  conditions  in various  geographic  markets of the world
impact our level of order intake.  Many of the  Company's  customers and markets
are operating with excess  capacity  thereby  reducing the number of projects in
our traditional  markets for plant expansion and  modernization.  The Company is
experiencing  increased  pricing  pressures  from our  competitors in an overall
smaller market.  Further, the cyclical nature of industry demand and, therefore,
the timing of order  intake may effect the  Company's  quarterly  results in the
current and future  fiscal  quarters.  The  Company's  ability to  maintain  and
increase net sales depends upon a  strengthening  and stability in the Company's
traditional  markets and our ability to control costs to effectively  compete in
the  current  market.  There  can be no  assurance  that  the  level  of  orders
experienced in 1999 will continue,  that market  conditions will not worsen,  or
that  improvements in the Company's  traditional  markets will lead to increased
orders for the Company's products.

         The level of backlog considered firm by management at December 31, 1999
and 1998 is $28.9 million and $33.3 million,  respectively. The contractual ship
dates for  substantially  all of the December  31, 1999 backlog is in 2000.  The
backlog  at March  17,  2000 and  March 19,  1999 was  $33.0  million  and $38.0
million, respectively.

LIQUIDITY AND CAPITAL RESOURCES; CAPITAL EXPENDITURES

         Working capital and the working capital ratio at December 31, 1999 were
$17.5 million and 2.0 to 1.0, respectively, compared to $19.4 million and 1.7 to
1.0 at December 31, 1998, respectively.  During the year ended December 31, 1999
the Company paid dividends of $0.24 per share.  On January 10, 2000, the Company
declared a dividend of $0.04 per share  which was paid on February 4, 2000.  The
Company's  ability to pay  dividends  in the future is limited  under the credit
facility  described  below to the  aggregate of (a) 25% of net income during the
most recently  completed  four fiscal  quarters  after  deducting  distributions
previously  made and (b) purchases by the Company of its common stock during the
same period.

         During 1999, the Company extended its  discretionary  open market stock
repurchase program,  increasing the amount to be used to repurchase common stock
by $2.5 million to $4,750,000.  During 1999 the Company has repurchased  694,300
shares  of  common  stock at  varying  times  and in  varying  amounts  totaling
approximately  $1.5 million.  The  repurchased  shares are held in treasury (See
Note 10 to the Consolidated Financial Statements).




                                 Page 13 of 49
<PAGE>





         Due to the nature of the Company's business,  many sales are of a large
dollar  amount.  Consequently,  the timing of recording such sales may cause the
balances in accounts receivable and/or inventory to fluctuate  dramatically from
time to time and may result in  significant  fluctuations  in cash provided from
operating activities.  Historically, the Company has not experienced significant
problems  regarding  the  collection  of  accounts  receivable.  The Company has
historically  financed its operations  with cash  generated by operations,  with
customer progress payments and borrowings under its bank credit facilities.

         At December 31, 1999, the Company had a worldwide multi-currency credit
facility with a major U.S. bank in the amount of $25.0 million  consisting of an
$18.5 million  revolving  credit  facility for direct  borrowings and letters of
credit and up to (pound)3.0  million for foreign  exchange  contracts and a five
year term note.  Interest  varies based upon  prevailing  market  interest.  The
facility  contains  combined  limits on direct  borrowings and letters of credit
based upon stipulated percentages of accounts receivable, inventory and backlog.
The facility also contains  covenants  specifying  minimum and maximum operating
thresholds for operating results and selected  financial  ratios.  The agreement
contains certain restrictions on the making of investments, on borrowings and on
the sale of assets. At December 31, 1999, the maximum borrowing and/or letter of
credit issuance available under the revolving credit facility to the Company and
subsidiaries  based upon borrowing  formula was $14.1  million.  At December 31,
1999 and 1998,  there was $3.9  million and $5.3 million  outstanding  under the
term loan, respectively.  There were $3.8 million and $5.1 million of letters of
credit outstanding at December 31, 1999 and 1998, respectively.

         The revolving  credit facility expires December 31, 2002. The term note
is  payable  in  equal  quarterly  payments  of  (pound)200,000   (approximately
$322,000) through December 31, 2002.

         Management anticipates that its cash balances, operating cash flows and
available  credit  line  will  be  adequate  to  fund  its  anticipated  capital
commitments  and  working  capital  requirements  for at least  the next  twelve
months. The Company made capital  expenditures of approximately $1.1 million and
$2.1 million, during fiscal 1999 and 1998, respectively.

         In fiscal 2000, new legal minimum funding  guidelines  become effective
in the U.K. which are significantly  different than the prior guidelines.  Based
upon preliminary  discussions with the Company's  actuaries,  the new guidelines
will most likely require the Company to make significant  cash  contributions to
the Company's  U.K.  pension  plans.  In recent years,  the Company has not been
required to make contributions to the U.K. pension plans.

         The  Company  manufactures  and  assembles  its  products  in the U.K.,
assembles its products in the U.S. and sells its products in the U.S.,  U.K. and
other foreign markets. The Company's financial position and results are affected
by changes in foreign  currency  exchange rates in the foreign  markets in which
its operates.  When the value of the U.S.  dollar or U.K.  sterling  strengthens
against other  currencies,  the value of the transaction in the foreign currency
decreases.  The Company, from time to time, enters into foreign exchange forward
and option  contracts to hedge foreign currency  transactions.  Foreign currency
transactions  generally  are for short  periods of no more than six  months.  In
addition,  the  Company  maintains  foreign  currency  bank  accounts  in  other
currencies in which it regularly transacts business.

         The Company's  interest  income and expense are sensitive to changes in
the market level of interest rates.  The changes in interest rates earned on the
Company's cash  equivalents and short term  investments as well as interest paid
on its debt are variable and are adjusted to market conditions.

YEAR 2000

         The  Company  undertook  a year 2000  readiness  project to address the
impact and risks  related to the  ability of the  Company's  computer  hardware,
computer programs, equipment with embedded computer chips and critical suppliers
to operate and  function  properly  during the  transition  to the year 2000 and
thereafter.

         The Company has not experienced any  significant  operational  problems
related to the year 2000. The total amount  expended,  relating to the Company's
internal  information  systems was approximately  $1.0 million.  Other expenses,
primarily  manufacturing and office equipment  replacement and employee costs of
the year 2000 readiness




                                 Page 14 of 49
<PAGE>




project were not material.  During  January 2000, the Company  applied  software
changes for year 2000  issues  which  occurred.  The  Company  will  continue to
monitor its operations for year 2000 issues.

EURO CONVERSION

         On January 1, 1999,  the European  Economic  and  Monetary  Union (EMU)
entered into a three-year  transition phase during which a common currency,  the
"EURO" was  introduced  in  participating  countries.  The Company does not have
operations in the participating  countries and the conversion to the EURO is not
expected to have a material impact on the Company's financial position,  results
of operations or cash flows.  However,  uncertainty exists as to the effects the
EURO will have on the marketplace.

IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS

         In June  1998,  the FASB  issued  Statement  No.  133,  Accounting  for
Derivative  Instruments and Hedging Activities,  which must be adopted effective
January 1, 2001.  The  Statement  will  require  the  Company to  recognize  all
derivatives on the balance sheet at fair value.  Derivatives that are not hedges
must be adjusted  to fair value  through  income.  If a  derivative  is a hedge,
depending  on the  nature  of  the  hedge,  changes  in the  fair  value  of the
derivative  will either be offset against the change in fair value of the hedged
asset,  liability,  or firm commitment through earnings,  or recognized in other
comprehensive  income  until the hedged  item is  recognized  in  earnings.  The
ineffective  portion of a derivative's  change in fair value will be immediately
recognized  in earnings.  The Company does not  anticipate  that the adoption of
this  Statement  will have a significant  effect on its results of operations or
financial position.

ITEM 7A - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

         The Company is exposed to market risk from changes in foreign  currency
and interest rates. The Company manufactures many of its products and components
in the  United  Kingdom  and  purchases  many  components  in  foreign  markets.
Approximately  50% of the Company's  revenue are generated from foreign markets.
The Company  manages its risk to foreign  currency  rate changes by  maintaining
foreign  currency  bank  accounts in  currencies  which it  regularly  transacts
business and the use of foreign exchange forward  contracts.  The Company,  from
time to time, enters into foreign exchange forward and option contracts to hedge
foreign  currency  transactions.  These derivative  instruments  usually involve
little  complexity  and are generally for short periods of less than six months.
The Company does not enter into derivative  contracts for trading in speculative
purposes.  The amount of foreign exchange  forward  contracts are not considered
material to the Company's financial position or its operations.

         The Company's  cash  equivalents  and  short-term  investments  and its
outstanding debt bear variable  interest rates. The rates are adjusted to market
conditions.  Changes in the market rate effects  interest earned and paid by the
Company. The Company does not use derivative  instruments to offset the exposure
to changes in interest rates.  Changes in the interest rates are not expected to
have a material impact on the Company's results of operations.




                                 Page 15 of 49
<PAGE>




ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

                               FARREL CORPORATION
                   INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

                                                                           Page
                                                                           ----

Report of Independent Auditors...............................................17

Financial Statements:

Consolidated Balance Sheets as of December 31, 1999 and 1998.................18

Consolidated Statements of Income for the years ended
December 31, 1999, 1998, and 1997 ...........................................19

Consolidated Statements of Stockholders' Equity for the years
ended December 31, 1999, 1998 and 1997.......................................20

Consolidated Statements of Cash Flows for the years ended
December 31, 1999, 1998 and 1997.............................................21

Notes to Consolidated Financial Statements..............................22 - 38




                                 Page 16 of 49
<PAGE>




                         Report of Independent Auditors

The Board of Directors and Stockholders
Farrel Corporation

We  have  audited  the  accompanying   consolidated  balance  sheets  of  Farrel
Corporation  as of  December  31, 1999 and 1998,  and the  related  consolidated
statements of income,  stockholders' equity and cash flows for each of the three
years in the period ended December 31, 1999. These financial  statements are the
responsibility of the Company's management.  Our responsibility is to express an
opinion on these financial statements based on our audits.

We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable  assurance about whether the financial  statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting  the amounts and  disclosures in the financial  statements.  An audit
also includes assessing the accounting principles used and significant estimates
made by  management,  as well as  evaluating  the  overall  financial  statement
presentation.  We believe  that our audits  provide a  reasonable  basis for our
opinion.

In our opinion, the consolidated  financial statements referred to above present
fairly, in all material respects,  the consolidated financial position of Farrel
Corporation at December 31, 1999 and 1998, and the  consolidated  results of its
operations  and its cash flows for each of the three  years in the period  ended
December 31, 1999 in conformity with accounting principles generally accepted in
the United States.

                                Ernst & Young LLP

Stamford, Connecticut
February 14, 2000




                                 Page 17 of 49
<PAGE>




                               FARREL CORPORATION

                           CONSOLIDATED BALANCE SHEETS

                        (In thousands, except share data)

<TABLE>
<CAPTION>

                                                                      12/31/99          12/31/98
                                                                      --------          --------

   ASSETS
Current Assets:

<S>                                                                   <C>               <C>
  Cash and cash equivalents                                           $  6,069          $  5,786
  Accounts receivable, net of allowance for doubtful
   accounts of $185 and $297, respectively                              15,027            20,708
  Inventory                                                             11,975            14,542
  Asset purchase agreement receivable                                     --               5,284
  Other current assets                                                   1,374             1,953
                                                                      --------          --------
    Total current assets                                                34,445            48,273
Property, plant and equipment, net of accumulated
  depreciation of $13,186 and $11,648, respectively                     10,995            11,614
Goodwill, net of accumulated amortization of $40                          --               1,555
Prepaid pension costs                                                    2,881               542
Other assets                                                               541             1,281
                                                                      --------          --------
Total assets                                                          $ 48,862          $ 63,265
                                                                      ========          ========
   LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:

  Accounts payable                                                    $  7,837          $ 14,039
  Accrued expenses and taxes                                             2,157             4,826
  Advances from customers                                                4,015             7,017
  Accrued installation and warranty costs                                1,629             1,683
  Short-term debt                                                        1,292             1,328
                                                                      --------          --------
   Total current liabilities                                            16,930            28,893
Long-term debt                                                           2,584             3,983
Postretirement benefit obligation                                        1,138             1,171
Minimum pension obligation                                               1,030             2,429
Deferred income taxes                                                    1,316               488
Commitments and contingencies                                               --                --
                                                                      --------          --------
   Total liabilities                                                    22,998            36,964
Stockholders' equity
  Preferred stock, par value $100, 1,000,000 shares
   authorized, no shares issued                                             --                --
  Common stock, par value $.01, 10,000,000 shares
   authorized, 6,142,106 shares issued                                      61                61
  Paid in capital                                                       19,295            19,295
  Treasury stock, 892,045 and 202,620 shares at December
  31, 1999 and 1998, respectively, at cost                              (2,513)             (990)
  Retained earnings                                                      9,943             9,576
  Accumulated other comprehensive expense                                 (922)           (1,641)
                                                                      --------          --------
   Total stockholders' equity                                           25,864            26,301
                                                                      --------          --------
Total liabilities and stockholders' equity                            $ 48,862          $ 63,265
                                                                      ========          ========
</TABLE>

                 See Notes to Consolidated Financial Statements




                                 Page 18 of 49
<PAGE>




                               FARREL CORPORATION

                        CONSOLIDATED STATEMENTS OF INCOME

                      (In thousands, except per share data)

<TABLE>
<CAPTION>

                                                                          Year Ended
                                                           --------------------------------------
                                                           12/31/99       12/31/98       12/31/97
                                                           --------       --------       --------
<S>                                                        <C>            <C>            <C>
Net sales                                                  $ 74,054       $ 98,036       $ 85,382

Cost of sales                                                55,898         75,264         67,671
                                                           --------       --------       --------
Gross margin                                                 18,156         22,772         17,711
Operating expenses:
   Selling                                                    6,791          7,869          7,076
   General and administrative                                 8,508          8,796          7,433
   Research and development                                   1,570          1,485          1,567
                                                           --------       --------       --------
     Total operating expenses                                16,869         18,150         16,076
Operating income                                              1,287          4,622          1,635

Interest income                                                 384            544            291
Interest expense                                               (449)        (1,140)           (71)
Gain from sale of real estate                                 1,879             --             --
Other (expense)/income, net                                    (226)          (203)           229
                                                           --------       --------       --------
Income before income taxes                                    2,875          3,823          2,084
Provision/(benefit) for income taxes:
     Current                                                  1,143          1,010            811
     Deferred                                                   (28)           536            (84)
                                                           --------       --------       --------
     Total                                                    1,115          1,546            727
                                                           --------       --------       --------
Net income                                                 $  1,760       $  2,277       $  1,357
                                                           ========       ========       ========

Per share data:
Basic and diluted net income per share                     $   0.32       $   0.38       $   0.23
                                                           ========       ========       ========
Average shares outstanding (000's):

   Basic                                                      5,448          5,942          5,950
                                                           ========       ========       ========
   Diluted                                                    5,454          5,966          5,951
                                                           ========       ========       ========
</TABLE>

                 See Notes to Consolidated Financial Statements




                                 Page 19 of 49
<PAGE>




                               FARREL CORPORATION

                 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

                        (In thousands, except share data)

<TABLE>
<CAPTION>

                                                                                                          Accumulated
                                                                      Paid                                   Other        Total
                                                Common stock           in        Treasury     Retained   comprehensive Stockholders'
                                            Shares        Amount     capital      stock       earnings      expense       equity
                                            ----------   ----------  ----------  ----------   ----------   ----------   ----------
<S>                                         <C>         <C>         <C>         <C>          <C>          <C>          <C>
Balance, December 31, 1996                  6,142,106   $       61  $   19,295  ($     987)  $   10,228   ($      44)  $   28,553
Comprehensive Income:
Net income                                       --           --          --          --          1,357         --          1,357
                                                                                                                       ----------
Other Comprehensive income, net of tax
  Foreign currency translation                   --           --          --          --           --           (295)        (295)
  Minimum pension liability                      --           --          --          --           --            (27)         (27)
                                                                                                                       ----------
Other Comprehensive loss                                                                                                     (322)
                                                                                                                       ----------
Comprehensive income                                                                                                        1,035
                                                                                                                       ----------
Treasury stock transactions                      --           --          --             3           (3)        --           --
Cash dividend declared
  at $.64 per common share                       --           --          --          --         (3,806)        --         (3,806)

                                           ----------   ----------  ----------  ----------   ----------   ----------   ----------
Balance, December 31, 1997                  6,142,106   $       61  $   19,295  ($     984)  $    7,776   ($     366)  $   25,782
                                           ----------   ----------  ----------  ----------   ----------   ----------   ----------
Comprehensive Income:
Net income                                       --           --          --          --          2,277         --          2,277
                                                                                                                       ----------
Other Comprehensive income, net of tax
  Foreign currency translation                   --           --          --          --           --             (1)          (1)
  Minimum pension liability                      --           --          --          --           --         (1,274)      (1,274)
                                                                                                                       ----------
Other Comprehensive loss                                                                                                   (1,275)
                                                                                                                       ----------
Comprehensive income                                                                                                        1,002
Treasury stock transactions                      --           --          --            (6)          (2)        --             (8)
Cash dividend declared
  at $.08 per common share                       --           --          --          --           (475)        --           (475)
                                           ----------   ----------  ----------  ----------   ----------   ----------   ----------
Balance, December 31, 1998                  6,142,106   $       61  $   19,295  ($     990)  $    9,576   ($   1,641)  $   26,301
                                           ----------   ----------  ----------  ----------   ----------   ----------   ----------
Comprehensive Income:
Net income                                       --           --          --          --          1,760         --          1,760
                                                                                                                       ----------
Other Comprehensive income, net of tax
  Foreign currency translation                   --           --          --          --           --           (245)        (245)
  Minimum pension liability                      --           --          --          --           --            964          964
                                                                                                                       ----------
Other Comprehensive income                                                                                                    719
                                                                                                                       ----------
Comprehensive income                                                                                                        2,479
Treasury stock transactions                      --           --          --        (1,523)         (17)        --         (1,540)
Cash dividend declared
  at $.24 per common share                       --           --          --          --         (1,376)        --         (1,376)
                                           ----------   ----------  ----------  ----------   ----------   ----------   ----------
Balance, December 31, 1999                  6,142,106   $       61  $   19,295  ($   2,513)  $    9,943   ($     922)  $   25,864
                                           ==========   ==========  ==========  ==========   ==========   ==========   ==========
</TABLE>

                 See notes to Consolidated Financial Statements




                                 Page 20 of 49
<PAGE>







                               FARREL CORPORATION

                      CONSOLIDATED STATEMENTS OF CASH FLOWS

                                 (In thousands)



<TABLE>
<CAPTION>

                                                                                  Year          Year          Year
                                                                                  ended         ended         ended
                                                                                12/31/99      12/31/98      12/31/97
                                                                                --------      --------      --------

Cash flows from operating activities:

<S>                                                                             <C>           <C>           <C>
  Net income                                                                    $  1,760      $  2,277      $  1,357
  Adjustments to reconcile net income to net
  cash used in/provided by operating activities:
   Gain on disposal of fixed assets                                               (1,930)         (288)         (746)
   Depreciation and amortization                                                   2,362         2,311         1,667
   Decrease / (increase) in accounts receivable                                    5,456        (6,259)        4,471
   Decrease in inventory                                                           2,143         1,569           261
   (Decrease) / increase in accounts payable                                      (5,986)        5,660        (2,514)
   (Decrease) / increase  in advances from customers                              (2,945)          590           608
   (Decrease) / increase in accrued expenses and taxes                            (2,342)       (1,145)        1,075
   (Decrease) / increase in accrued installation and warranty costs                  (25)          354            (4)
   (Decrease) / increase in long-term employee benefit obligations                  (128)          181             6
   Other                                                                             457           207          (500)
                                                                                  -------       -------       -------
   Total adjustments                                                              (2,938)        3,180         4,324
                                                                                  -------       -------       -------
   Net cash (used in) provided by operating activities                            (1,178)        5,457         5,681
                                                                                  -------       -------       -------

  Cash flows from investing activities:

    Proceeds from disposal of fixed assets                                         2,279         1,193         1,027
    Purchases of property, plant and equipment                                    (1,092)       (2,113)       (1,878)
    Refund of Shaw asset purchase price                                            4,405         2,701          --
    Acquisition of Shaw assets                                                      --            --         (10,855)
                                                                                  -------       -------       -------
    Net cash provided by (used in) investing activities                            5,592         1,781       (11,706)

Cash flows from financing activities:

    Proceeds from long term borrowings                                              --            --           6,680
    Repayment of long term borrowings                                             (1,293)       (1,536)         (196)
    (Purchase) issuance of treasury stock                                         (1,523)           (6)            3
    Dividends paid                                                                (1,376)       (1,427)       (2,856)
                                                                                  -------       -------       -------
    Net cash (used in) provided by financing activities                           (4,192)       (2,969)        3,631
Effect of foreign currency exchange rate changes on cash                              61            70             9
                                                                                  -------       -------       -------
Net increase / (decrease) in cash and cash equivalents                               283         4,339        (2,385)
Cash and cash equivalents--
    Beginning of period                                                            5,786         1,447         3,832
                                                                                  -------       -------       -------
    End of period                                                               $  6,069      $  5,786      $  1,447
                                                                                  =======       =======       =======
Income taxes paid                                                               $  2,760      $    870      $    746
                                                                                  =======       =======       =======
Interest paid                                                                   $    445      $    474      $     76
                                                                                  =======       =======       =======
</TABLE>

                 See Notes to Consolidated Financial Statements




                                 Page 21 of 49
<PAGE>





                               FARREL CORPORATION
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 - PRINCIPLES OF CONSOLIDATION AND SIGNIFICANT ACCOUNTING POLICIES

         The accompanying consolidated financial statements include the accounts
of  Farrel  Corporation  and its  wholly-owned  subsidiaries.  All  intercompany
balances and transactions have been eliminated in consolidation.

         The Company  designs,  manufactures,  sells and  services  machinery to
customer  specifications  for the rubber and plastics  industry.  The  Company's
principal  products are batch and  continuous  mixers,  extruders,  pelletizers,
calenders and mills.  The Company also provides  process  engineering  services,
process  design  and  related  services  for  rubber  and  plastics   processing
installations in conjunction with its sales of capital equipment.  The Company's
new machinery and related services generally  represents slightly more than half
of its revenues.  The Company's  aftermarket  business  consists of  contractual
repair,  refurbishment  and equipment  upgrade  services,  spare parts sales and
field services.

         The   Company's   principal   customers   are   domestic   and  foreign
manufacturers of rubber and plastics.  Foreign  customers are primarily  located
throughout Europe, Asia and the Middle East.

         Due to the nature of the  Company's  products,  which can  individually
cost up to $4.0  million,  the percent of sales of any  product  line can change
significantly from year to year. However,  the more significant products are the
Company's batch and continuous mixers.

  (a) Cash and Cash Equivalents:

         Cash and cash equivalents include cash on hand, amounts due from banks,
and any other highly liquid  investments with a maturity of three months or less
when purchased. The carrying amount approximates fair value because of the short
maturity of those instruments.

  (b)   Other Financial Instruments:

         The carrying  amount of the Company's  trade  receivables  and payables
approximates fair value because of the short maturity of these instruments.  The
carrying value of long term debt  approximates  fair value. The interest rate on
the long-term debt is variable and approximates current market rates.

  (c)   Inventory:

         Inventory  is  valued  at the  lower of cost or  market.  Inventory  is
accounted for on the last-in,  first-out  (LIFO) basis in the U.S. and first-in,
first-out (FIFO) basis in the U.K.

  (d)   Property, Plant and Equipment:

         Property,  plant and  equipment  is stated  at cost.  Improvements  are
capitalized and expenditures  for normal  maintenance and repairs are charged to
expense.  Depreciation  is  computed  on a  straight  line  basis  based  on the
estimated  useful  lives of the related  assets  which range from 5 to 40 years.
Assets no longer anticipated to be used are segregated from Property,  Plant and
Equipment  and  included  in  Other  Assets.  See  Note  3  to  these  financial
statements.

  (e)   Goodwill:

         On December  19,  1997,  the  Company  acquired  certain  assets of the
Francis Shaw Rubber Machinery operations. The transaction was accounted for as a
purchase.  Goodwill represents the excess purchase price over the estimated fair
value of the assets  acquired and was being  amortized on a straight  line basis
over 20 years (see Note 2).




                                 Page 22 of 49
<PAGE>




  (f)   Patents and Acquired Technology:

         Other assets  includes  acquired  patents and technical  know-how and a
technology license agreement which represents the cost of licensed and purchased
technology,  know how, and trade secrets including  technology which is patented
or for which a patent  has been  applied  for.  Such  costs are  amortized  over
periods from 5 to 7 years.

  (g)   Revenue Recognition:

         Revenue on new  machine  sales is  recognized  upon  completion  of the
customer  contract,  which  generally  coincides  with the shipment.  Revenue on
repair and  refurbishment  of customer  owned  machines is  recognized  when the
contractual work is completed. Spare parts revenue is recognized upon shipment.

         The Company typically  requires advances from customers upon entering a
contract and at times will require  progress  payments during the  manufacturing
process.  Generally,  letters of credit are  required on  contracts  with export
customers to minimize credit and currency risk.

  (h)   Product Installation and Warranty Obligations:

         Estimated costs to be incurred under product  installation and warranty
obligations  relating to products  which have been sold are  provided for at the
time of sale.

  (i)   Income Taxes:

         Deferred income taxes are provided on temporary differences between the
financial  statement and tax basis of the Company's  assets and  liabilities  in
accordance with the liability  method of accounting for income taxes.  Provision
has not  been  made  for  U.S.  income  taxes  or  additional  foreign  taxes on
approximately  $10.4 million of undistributed  earnings of foreign  subsidiaries
because it is expected that those earnings will be reinvested indefinitely.

  (j)   Earnings Per Share:

         Basic  earnings per share is  determined  by dividing net income by the
weighted average shares  outstanding for the period.  Diluted earnings per share
reflects  the  potential  dilution  that could occur if options to issue  common
stock (see Note 10) were  exercised and converted to common stock.  (See Note 14
to the financial statements.)

  (k)   Foreign Currency Translation:

         Assets and liabilities denominated in foreign currencies are translated
into  United  States  dollars  at current  exchange  rates.  Income and  expense
accounts are translated at average rates of exchange prevailing during the year.
Adjustments  resulting from these  translations  are included in the accumulated
other comprehensive expense in stockholders' equity.

         Transaction  gains and losses are  included  in  earnings.  The Company
experienced a foreign  currency  transaction gain of $63,000 in 1999 and foreign
currency  transaction  losses of $71,000  and  $131,000 in fiscal 1998 and 1997,
respectively,  which  amounts  are  included  in  cost  of  goods  sold  in  the
accompanying financial statements.

         The Company,  from time to time, enters into foreign exchange contracts
for  non-trading  purposes,  exclusively  to minimize  its  exposure to currency
fluctuations  on trade  receivables  and payables.  As a result,  changes in the
values  of  foreign  currency  contracts  offset  changes  in the  values of the
underlying  assets and  liabilities  due to changes in foreign  exchange  rates,
effectively deferring gains and losses on trade receivables and payables and the
related hedges until the date the  transactions are settled in cash. At December
31,  1999,  the  Company  has  entered  into $0.5  million of  forward  exchange
contracts  for  transactions  related  to  amounts  to  be  received  for  sales
commitments.  A  gain  of  approximately  $5,000  has  been  deferred  on  these
transactions to be offset against the exchange  earnings to be recognized on the
hedged   transaction.   The   Company  is  exposed  to  loss  in  the  event  of
nonperformance  by the Company's  bank, the other party to the foreign  exchange
contracts. The Company does not anticipate nonperformance by its bank.




                                 Page 23 of 49
<PAGE>




  (l)     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. Actual results can differ from those estimates.

  (m)     Recent Accounting Pronouncements:

         In June 1998, the Financial Accounting Standards Board issued Statement
No. 133,  Accounting  for Derivative  Instruments  and Hedging  Activities.  The
Company  expects to adopt the new  Statement  effective  January  1,  2001.  The
Statement  will require the Company to recognize all  derivatives on the balance
sheet at fair  value.  The  Company  does not  anticipate  the  adoption of this
Statement  will  have a  significant  effect on its  results  of  operations  or
financial position.

  (n)     Advertising:

         Advertising  costs are  expensed  in the period the  advertising  takes
place.  Advertising expense for the years ended December 31, 1999, 1998 and 1997
was $248,000, $296,000 and $198,000, respectively.

  (o)     Reclassifications:

         Certain   amounts  in  prior  year  financial   statements   have  been
reclassified   to   conform   with  the   current   year   presentation.   These
reclassifications had no impact on previously reported results of operations.

NOTE 2 - ASSET PURCHASE

         On December 19, 1997, Farrel Shaw Limited, a wholly owned subsidiary of
the Company,  acquired  certain  assets and the  operations  of the Francis Shaw
Rubber  Machinery  ("Shaw")  operations from EIS Group PLC of the United Kingdom
("Seller").  The estimated  purchase price,  including costs of the acquisition,
was approximately $13.9 million.  The purchase and sale agreement  ("Agreement")
between  the  Company  and the  Seller  required  subsequent  adjustment  to the
purchase price if (1) the inventory  value of Shaw at the transfer date was less
than  approximately  $5 million  and (2) the Shaw  operations  did not produce a
minimum profit, as defined in the Agreement,  of approximately  $1.7 million for
the year ended December 31, 1998 (the "Profit Guaranty").

         In June 1998,  the  Company  and the Seller  reached  agreement  on the
inventory value transferred  resulting in a payment to the Company by the Seller
of  approximately  $2.7  million , which  amount was used to reduce the purchase
price.  The  operations of Shaw produced a loss (as computed  under the terms of
the  Agreement) of  approximately  $3.6 million for the year ended  December 31,
1998. Accordingly, the Company recorded a receivable from the Seller at December
31, 1998 of  approximately  $5.3 million under the terms of the Profit  Guaranty
provisions  of the Agreement and reduced the purchase  price.  In May 1999,  the
Company reached an agreement with the seller and received a cash payment of $4.4
million under the Profit  Guaranty  provisions of the Agreement.  The difference
between  the amount  recorded  at  December  31,  1998 for the  Profit  Guaranty
receivable  and the amount  received  from the Seller in May 1999 resulted in an
adjustment of the purchase price allocation.

         The Agreement  also required the transfer of the pension  liability for
the Shaw employees  together with the pension assets related to those employees.
The Agreement called for the Seller to appoint an actuary who, together with the
Company's  actuary and the third party that holds the  pension  assets,  were to
determine the related pension  amounts to be transferred.  In February 1999, the
Seller  agreed to  appoint  an actuary  to  fulfill  the  obligations  under the
Agreement.  The consolidated financial statements as of December 31, 1998 do not
include any amounts related to the  transferred  Shaw employees as those amounts
were not  determinable.  In the  fourth  quarter  of 1999,  the data for the net
amount of the actuarially  determined excess of the pension assets compared with
the projected  benefit  obligation  for the Shaw employees was finalized and was
recorded as an  additional  purchase  price  adjustment,  which  resulted in the
elimination of the amount of goodwill previously recorded.






                                 Page 24 of 49
<PAGE>




         The  revised  purchase  price of $7.8  million  has been  allocated  as
follows:

                                                       (In thousands)

          Inventory                                          $2,312
          Machinery & Equipment                               2,505
          Prepaid pension costs                               2,161
          Patents and trademarks                                835
                                                             ------
                                                             $7,813
                                                             ======

         Included  in  the  allocation  above  were  estimated   liabilities  of
approximately  $2.3 million for costs of consolidating  the Shaw operations with
the Company's  existing Rochdale,  England facility  including moving,  employee
separation  and other costs.  The majority of this has been expended by December
31, 1999.

         The  results  of  Shaw  are  included  in  the  consolidated  financial
statements  for the years  ended  December  31, 1999 and 1998 and for the period
from December 19, 1997 to December 31, 1997.  The Seller did not  maintain,  and
the Company was not provided,  separate  historical  financial  information  for
Shaw. Accordingly, the Company is not able to estimate the pro forma revenue and
net income for the year ended December 31, 1997.

NOTE 3 - OTHER ASSETS

                                                          12/31/99   12/31/98
                                                          --------   --------
                                                              (In thousands)

Technology license...................................          -         $167
Assets held for disposal.............................          -          240
Acquired patents and technical know how..............       $484          664
Other................................................         57          210
                                                           -----      -------
  Total..............................................       $541       $1,281
                                                            ====       ======

         Included  in other  assets at  December  31,  1998 are assets  held for
disposal  that  represent  the  remaining  book  value of the  Company's  Derby,
Connecticut  manufacturing  facility and  machinery and equipment of Shaw at the
Manchester,  England  facilities no longer expected to be used. In January 1999,
the Company completed the sale of the Derby property for $2.4 million.

NOTE 4 - RELATED PARTY TRANSACTIONS

         The Company is a party to an agreement  with First Funding  Corporation
(the  "Financial  Services  Agreement"),  pursuant to which the Company  retains
First Funding as its exclusive investment adviser.  Charles S. Jones, a director
of the Company and owner of over 5% of the Company's  outstanding  Common Stock,
is an executive officer of First Funding.  The Financial  Services Agreement may
be  terminated  by either  party upon  twelve  months  written  notice or by the
Company in the event that Mr. Jones is no longer an officer or employee of First
Funding.

         Under the Financial Services Agreement,  the Company pays First Funding
an annual  retainer of $450,000 for Mr. Jones'  services.  The Company also pays
for advisory  services  provided by other First  Funding  employees on an hourly
basis and out-of-pocket  expenses. The Company also pays transaction fees in the
event of certain  successful  transactions.  The Company recorded amounts due to
First Funding of $719,000, $866,000, and $894,000 in fiscal 1999, 1998 and 1997,
respectively.  In addition,  the Company also reimbursed First Funding $160,000,
$236,000,  and $319,000 for  out-of-pocket  costs during the same three periods,
respectively.   The  1998  and  1997  amounts  include  $177,000  and  $460,000,
respectively,  for services  related to the Shaw Asset  Purchase  Agreement (see
Note 2). Also included during 1998 is $205,000 related to restating and amending
the Company's  credit  facility to include a term note to finance the Shaw Asset
Purchase,  to increase  the amount  available  under the credit  facility and to
lengthen the term of the credit facility (see Note 8).




                                 Page 25 of 49
<PAGE>





NOTE 5 - INVENTORY

Inventory is comprised of the following:
                                                          12/31/99      12/31/98
                                                          --------      --------
                                                              (In thousands)
            Stock and raw materials..................      $7,934        $7,279
            Work-in-process..........................       4,041         7,263
                                                            -----       -------
            Total....................................     $11,975       $14,542
                                                          =======       =======

         Of the above  inventories  at December 31, 1999 and 1998,  $6.8 million
and $7.2  million,  respectively  are  valued  using  the LIFO  method.  Current
replacement  costs of those  inventories as of these dates were greater than the
LIFO carrying amounts by approximately $0.4 million and $0.5 million at December
31, 1999 and 1998, respectively.

NOTE 6 - PROPERTY, PLANT AND EQUIPMENT

Property, plant and equipment is comprised of the following:

                                                           12/31/99     12/31/98
                                                           --------     --------
                                                               (In thousands)

           Land and buildings........................      $4,033        $4,081
           Machinery, equipment and other............      19,794        18,546
           Construction in progress..................         354           635
                                                           ------      --------
                                                           24,181        23,262
             Accumulated depreciation................     (13,186)      (11,648)
                                                          --------      --------
             Property, plant and equipment, net......     $10,995       $11,614
                                                          =======       =======

         Estimated  depreciable  lives of buildings  are 33-40 years.  Estimated
depreciable lives of machinery,  equipment and other depreciable assets are 5-10
years.  The amounts  indicated here exclude the assets held for resale which are
included in Other Assets. See Note 3 to these financial statements.

NOTE 7 - ACCRUED EXPENSES AND TAXES

         Accrued  expenses  and taxes  includes  accrued  wages and  benefits of
approximately  $1.2  million  and $1.3  million at  December  31, 1999 and 1998,
respectively.  Also  included are income taxes  payable of $0.5 million and $1.0
million, at December 31, 1999 and 1998.

NOTE 8 - BANK CREDIT ARRANGEMENTS

         The Company has a worldwide  multi-currency $25 million credit facility
with a major U.S. bank consisting of an $18.5 million  revolving credit facility
for direct  borrowings  and letters of credit and up to  (pound)3.0  million for
foreign  exchange  contracts  and a five year term note.  The  revolving  credit
facility  expires on December 31, 2002.  Interest  varies based upon  prevailing
market   interest   rates  (7.8%  and  8.4%  at  December  31,  1999  and  1998,
respectively).  The facility contains limits on direct borrowings and letters of
credit  combined  based upon  stipulated  percentages  of  accounts  receivable,
inventory and backlog.  The facility also contains covenants  specifying minimum
and maximum operating  thresholds for operating  results and selected  financial
ratios. The agreement contains certain  restrictions on investments,  borrowings
and the sale of assets. The Company's ability to pay dividends is limited to (a)
25% of the Company's  cumulative  net income during the most recently  completed
four fiscal  quarters  after  deducting  distributions  previously  made and (b)
purchases by the Company of its common stock during the same period. At December
31, 1999, the maximum borrowing and/or letter of credit issuance available under
the revolving  credit  facility to the Company and  subsidiaries  based upon the
borrowing base formula was $14.1 million.  The weighted  averaged  interest rate
incurred on short-term




                                 Page 26 of 49
<PAGE>




borrowings  was  7.58%,   8.6%  and  8.18%  in  fiscal  1999,   1998  and  1997,
respectively.  There  were $3.8  million  and $5.1  million of letters of credit
outstanding at December 31, 1999 and 1998, respectively.

         At December 31, 1999 and 1998,  there was $3.9 million and $5.3 million
outstanding  under the term loan.  The term note is  payable in equal  quarterly
payments of (pound)200,000 through December 31, 2002. Approximately,  $1,292,000
((pound)800,000)  and  $1,328,000 is classified  as current and  $2,584,000  and
$3,983,000  was  classified  as  long  term  at  December  31,  1999  and  1998,
respectively.

NOTE 9 - COMMITMENTS AND CONTINGENCIES

  (a) Commitments:

         Aggregate future lease commitments under operating leases,  principally
for office space, equipment and vehicles, are as follows:

Year ending December 31,                                    (In thousands)
------------------------                                    --------------
2000                                                               $383
2001                                                                208
2002                                                                 78
2003                                                                 23
2004 and thereafter                                                  25

         Rental expense for the year ended December 31, 1999,  1998 and 1997 was
$464,000, $594,000, $332,000, respectively.

  (b) Contingencies:

         The Company is a defendant in certain  lawsuits arising in the ordinary
course of business,  primarily  related to product  liability  claims  involving
machinery  manufactured  by the Company.  While the outcome of lawsuits or other
proceedings against the Company cannot be predicted with certainty,  the Company
does not expect that these  matters will have a material  adverse  effect on the
Company's financial position or results of operations.

NOTE 10 - STOCK PLANS

         The  Company  sponsors  a Stock  Option  Plan and an  Employees'  Stock
Purchase Plan, both established in 1997.

         The 1997  Omnibus  Stock  Incentive  Plan  authorizes  the  granting of
incentive  stock  options  and  non-qualified  stock  options to  purchase up to
500,000 shares of common stock. Option awards may be granted by the Compensation
Committee of the Board of Directors through May 23, 2007 to eligible  employees.
The terms (exercise price, exercise period and expirations) of each option award
are at the  discretion of the  Compensation  Committee  subject to the following
limitations.  The exercise  price of an  Incentive  Stock Option may not be less
than the fair  market  value as of the date of the grant (or 110% in the case of
an incentive stock option granted to a 10% stockholder). The exercise period may
not exceed 10 years from the date of the grant.  At December 31,  1999,  415,000
shares are available for future issuance.

         Prior to 1997 the Company  granted  stock  options  under a  previously
sponsored plan to eligible  employees and directors of the Company.  At December
31, 1999, options to purchase 435,000 shares remain outstanding under that plan.

         The Company  accounts for stock  options  under  Accounting  Principles
Board Opinion No. 25 , "Accounting  for Stock Issued to Employees"  (APB 25) and
not the fair value method as provided by FAS 123,




                                 Page 27 of 49
<PAGE>




"Accounting  and Disclosure of Stock-Based  Compensation."  The Company's  Stock
Option Plan requires  options to be granted at the market price of the Company's
common stock on the date the options are granted,  and as a result, under APB 25
no compensation expense is recognized.

         The following  table  presents a summary of the Company's  stock option
activity and related information for the years ended:

<TABLE>
<CAPTION>

                                                        1999                      1998                      1997
                                               --------------------      ----------------------    ----------------------
                                                        Weighted-                   Weighted-                  Weighted-
                                                         Average                     Average                    Average
                                               Options   Exercise         Options    Exercise        Options    Exercise
                                                (000's)   Price             (000's)    Price            (000's)   Price
                                               --------------------      ----------------------    ----------------------

<S>                                              <C>         <C>             <C>        <C>              <C>        <C>
Outstanding, beginning of year                   515         $5.45           459        $5.86            459        $5.86
Granted                                           85          2.00            60         2.19              -            -
Exercised                                          -             -             -            -              -            -
Forfeited                                         86          3.34             4         3.88              -            -
                                               -------------------        -------------------      ----------------------
Outstanding, end of year                         514         $5.32           515        $5.45            459        $5.86
                                               -------------------        -------------------      ----------------------
Exercisable, end of year                         435         $5.83           420        $5.96            374        $6.32
Weighted-average fair value of options
    granted during the year                                  $1.18                      $1.19                           -
</TABLE>


         The  following  table  summarizes   information   about  stock  options
outstanding at December 31, 1999:

<TABLE>
<CAPTION>

                            Options Outstanding                                             Options Exercisable
---------------------------------------------------------------------------           ------------------------------
                                            Weighted-            Weighted-                                 Weighted-
                                             Average             Average                                    Average
   Range of           Number of             Remaining            Exercise              Number of            Exercise
Exercise Prices         Options          Contractual Life          Price                 Options               Price
---------------------------------------------------------------------------           ------------------------------
<S>          <C>          <C>                     <C>             <C>                      <C>                <C>
  $2.00 -    $3.74        85,000                  10 years        $2.00                    28,333             $2.00
   3.75 -     5.50       248,000                   5               4.55                   225,750              4.61
   5.51 -     8.50        95,000                 3.5               6.32                    95,000              6.32
   8.51 -    10.00        86,000                 2.0               9.73                    86,000              9.73
---------------------------------------------------------------------------           -----------------------------
  $2.19 -   $10.00       514,000                 5.3 years        $5.32                   435,083             $5.83
</TABLE>


         Pro forma  information  regarding  net income and earnings per share is
required by FAS 123, and has been determined as if the Company had accounted for
its  employee  stock  options  under the fair value  method of FAS 123. The fair
value for these options granted under the Stock Option Plan was estimated at the
date of grant using the Black-Scholes option pricing model, one of the allowable
valuation  models under FAS 123,  with the  following  assumptions  for 1999 and
1998:

<TABLE>
<CAPTION>

                                                                                1999               1998
                                                                                ----               ----
<S>                                                                             <C>                <C>
         Risk free interest rate                                                6.52%              4.65%
         Dividend yields                                                        2.0%               2.0%
         Expected volatility factor of the expected
           market price of the Company's common stock                            .639               .595
         Weighted average expected life of each option                         8 yrs.             8 yrs.
</TABLE>




                                 Page 28 of 49
<PAGE>




         The weighted average fair value of options granted during 1999 and 1998
was $1.18 and $1.19,  respectively.  There were no options  granted during 1997.
The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded  options,  which have no vesting  restriction and are fully
transferable.  In addition,  option valuation models require the input of highly
subjective  assumptions  including  the  expected  stock price  volatility.  The
Company's  employee stock options have  characteristics  different than those of
traded options,  and changes in the subjective input  assumptions can materially
affect the fair value estimate,  therefore,  in management's judgment,  applying
the provisions of FAS 123 does not necessarily provide a reliable single measure
of the fair value of its stock  options.  The  current pro forma net income will
not necessarily be representative of pro forma net income in future years.

         For purposes of pro forma disclosures,  the estimated fair value of the
options is amortized to expense over the options vesting  period.  The Company's
pro forma information is as follows:

<TABLE>
<CAPTION>

                                                                              Year ended
                                                                              ----------
                                                               12/31/99        12/31/98      12/31/97
                                                               --------------------------------------
                                                                (In thousands, except per share data)


<S>                                                               <C>             <C>          <C>
Pro Forma Net Income                                              $1,731          $2,237       $1,331
Pro Forma earnings per share - basic and diluted                   $0.32           $0.37        $0.22
</TABLE>


         Under the 1997 Employees'  Stock Purchase Plan, the Board of Directors'
may offer each eligible  employee of the Company the right to purchase,  in each
year through 2001,  shares of common stock  equivalent in value to not more than
5% of the employee's annual  compensation,  up to a maximum of $25,000 per year.
At the  time of the  offering  by the  Board of  Directors  the  employees  must
designate the amount to be withheld  during the next 24 month  purchase  period.
The  purchase  price is the lower of 85% of the fair market  value of the common
stock on the date of offering  or 85% of the fair  market  value on the date the
applicable purchase period ends. Not more than an aggregate of 500,000 shares of
common stock may be purchased  under the stock  purchase plan. Any employee who,
after the purchase, would hold 5% or more of the common stock is ineligible.  No
options to purchase shares were offered during 1999 and 1998.

         During  1999  and  1998,   approximately   11,700  and  5,400   shares,
respectively,  were  distributed to employees under this plan. The 1999 and 1998
distribution  includes  4,875 and 404  shares  respectively  from the  Company's
treasury  account,  for which  retained  earnings was adjusted.  At December 31,
1999, there were no shares subscribed to under these plans.

         The Company may reaquire up to $4,750,000 of its common stock under its
discretionary open market stock repurchase plan. During fiscal 1999 and 1998 the
Company reacquired 694,300 and 3,500 shares of common stock, respectively, under
this plan for  approximately  $1.5  million and $9,000,  respectively  which are
included in treasury stock. There were no shares repurchased during 1997.

NOTE 11 - BENEFIT PLANS

         The accounting for pensions and retiree health benefits,  which will be
paid out over an  extended  period of time in the  future,  requires  the use of
significant estimates concerning  uncertainties about employee turnover,  future
pay scales,  interest  rates,  rates of return on investments and future medical
costs.  The  estimates  of  these  future  employee  costs  are  allocated  in a
systematic  manner to the years when  service is  rendered to the Company by the
employee.  The annual cost is comprised of the service cost component related to
current  employee  service,  an  interest  cost  related to the  increase in the
benefit  obligations  due to the passage of time (the  benefit  obligations  are
stated at a present  value  which  increases  each year as the  discount  period
decreases), less




                                 Page 29 of 49
<PAGE>




the  earnings  achieved  on  assets  invested  in  the  employee  benefit  plan.
Differences  between  the  estimates  and actual  experience  are  deferred  and
amortized to expense over a period of time.

PENSION PLANS

         The Company has  retirement  plans  covering  portions of domestic  and
foreign  employees.  The Company funds the domestic plan in accordance  with the
Employee Retirement Income Security Act of 1974 (ERISA) and the foreign plans in
accordance  with  appropriate  governmental  regulations in the United  Kingdom.
Pension expense is actuarially  determined in accordance with generally accepted
accounting principles and differs from amounts funded annually.

         The  Company has a domestic  defined  benefit  pension  plan for hourly
employees  which provides  benefits based on employees'  years of service.  Plan
assets are invested in short-term securities, equity securities and real estate.
The Company has two foreign defined benefit pension plans covering substantially
all employees which provide  stipulated  amounts at retirement based on years of
service and earnings.  Plan assets are invested in  securities,  real estate and
cash.  The following  table  summarizes  the  components of domestic and foreign
pension expense:

<TABLE>
<CAPTION>

                                                                                 Year ended
                                                                                 ----------
                                                               12/31/99           12/31/98         12/31/97
                                                               --------           --------         --------
         Domestic pension expense:                                             (In thousands)
    <S>                                                               <C>            <C>             <C>
    Service cost-benefits earned during the period.....               $75            $62             $62
    Interest cost on projected benefit obligation......               146            136             124
    Expected return on plan assets....................               (174)          (147)           (127)
    Recognized net actuarial loss.....................                 52             27              26
    Amortization of transition, asset.................                  2              7               7
    Amortization of prior service cost................                 11             11               7
                                                                       --          -----          ------
         Net domestic pension expense                                $112            $96             $99
                                                                     ====            ===             ===

         Foreign pension expense:
    Service cost-benefits earned during the period.....              $761           $641            $258
    Interest cost on projected benefit obligation......             1,265            762             728
    Estimated return on plan assets....................            (1,568)          (799)           (802)
    Recognized net actuarial loss......................                32              6               -
    Amortization of transition asset...................               (39)          (159)           (152)
    Amortization of prior service cost.................                 -             -               (7)
                                                                 --------        -------        ---------
         Net foreign pension expense                                 $451           $451             $25
                                                                     ====          =====           =====
</TABLE>

         The Company's  funding policy is guided by government  regulations  and
the  Company's  desire to accumulate  sufficient  assets in the benefit plans to
meet  obligations  for  retirement  benefits.  At any point in time there may be
differences  between  the  estimates  used  in  establishing  pension  cost  for
accounting  purposes,  the criteria for funding  amounts and actual  experience,
thus  there  will  always  be  an  amount  by  which  the  Company  is  over  or
under-funded.




                                 Page 30 of 49
<PAGE>





         The following table sets forth the funded status under U.S.  accounting
standards  of the  domestic  and  foreign  defined  benefit  plans  and  amounts
recognized in the balance sheets:

<TABLE>
<CAPTION>

                                                                  Domestic                Foreign
                                                                December 31,            December 31,
                                                              1999        1998        1999        1998
                                                            --------    --------    --------    --------

Change in Projected Benefit Obligation

   <S>                                                      <C>         <C>         <C>         <C>
   Balance at the beginning of the year                     $  2,387    $  1,991    $ 12,366    $ 10,252
   Service cost                                                   75          62         761         294
   Interest cost                                                 146         136       1,265         762
   Plan participant contributions                               --          --           239         148
   Actuarial (gain) losses                                       (84)        305         982       1,543
   Foreign currency exchange rates                              --          --          (328)         52
   Benefits paid                                                (117)       (107)       (808)       (685)
   Business combinations                                        --          --         9,189        --
                                                            --------    --------    --------    --------
   Balance at the end of the period                         $  2,407    $  2,387    $ 23,666    $ 12,366
                                                            ========    ========    ====================
Change in Fair Value Plan Assets

   Balance at the beginning of the year                     $  2,114    $  1,780    $ 10,243    $  9,800
   Actual return on assets                                       120         184       5,064         929
   Contributions - employer                                      162         257         111        --
   Contributions - employee                                     --          --           239         148
   Foreign currency exchange rates                              --          --          (273)         51
   Benefits paid                                                (117)       (107)       (808)       (685)
   Business combinations                                        --          --        12,212        --
                                                            --------    --------    --------    --------
   Balance at the end of the period                         $  2,279    $  2,114    $ 26,788    $ 10,243
                                                            ========    ========    ====================
Funded status of the plan
   (Under)/over funded                                      ($   128)   ($   273)   $  3,122    ($ 2,123)
   Unrecognized net actuarial (gain)  loss                       662         745        (832)      2,099
   Unamortized prior service cost                                 57          68        --          --
   Unamortized net transition obligation (asset)                --             2        --           (40)
                                                            --------    --------    --------    --------
   Prepaid/(Accrued) Pension Expense                        $    591    $    542    $  2,290    ($    64)
                                                            ========    ========    ====================
   Discount rate                                                6.50%       6.25%       6.00%       6.00%
   Rate of increase in future compensation levels                N/A         N/A        3.00%       4.50%
   Expected long-term rate of return on plan assets             8.00%       8.00%       7.00%       8.00%
</TABLE>



         The above 1999 amounts  reflect the  transfer of the pension  liability
and pension  assets related to the Farrel Shaw Rubber  Machinery  asset purchase
(see Note 2).

         The funded status under regulatory guidelines used to determine legally
required  minimum  funding  amounts will most likely vary from the funded status
for U.S. accounting purposes and the funded status could vary significantly.

         The Company  changed  the  domestic  discount  rate in 1999 and 1998 in
response to current and projected interest rates. The Company recorded a minimum
pension  liability of $1,030,000  and  $2,429,000 at December 31, 1999 and 1998,
respectively.  The Company has also  recorded  intangible  assets of $57,000 and
$70,000,  the amounts  allowable  under FAS 87, at  December  31, 1999 and 1998,
respectively,  which are  included in Other  Assets.  The minimum  liability  in
excess  of the  intangible  asset has been  recorded  as  comprehensive  expense
included in stockholders' equity, net of applicable income taxes. Comprehensive






                                 Page 31 of 49
<PAGE>




income was  $1,399,000 in fiscal 1999 and  comprehensive  expense was $1,855,000
and $43,000 for fiscal 1998 and 1997, respectively (see Note 12).

         For foreign  pension plans with  accumulated  obligations  in excess of
plan assets, the projected benefit  obligation,  accumulated  benefit obligation
and fair value of plan assets were $3.9 million,  $3.8 million and $3.3 million,
respectively, at December 31,1999.

         The  Company  has  a  domestic  401(k)  retirement  plan  for  salaried
employees which includes matching and discretionary  non-matching  contributions
by  the  Company.  Approximately  $112,000,  $78,000  and  $119,000  of  Company
contributions were expensed in fiscal 1999, 1998 and 1997, respectively.

POSTEMPLOYMENT BENEFITS OTHER THAN PENSIONS
-------------------------------------------

         The  Company  generally  provided  health  care  benefits  to  eligible
domestic  union  retired  employees  and their  dependents  through  age 65. The
Company is  self-insured  for claims prior to age 65 and pays these as incurred.
Retired  employees and their  dependents  were  entitled to select  Supplemental
Medicare  Coverage A and B only at age 65. The  Company  pays 75% of the monthly
Medicare premiums for most of these  individuals.  Eligibility for these retiree
health care benefits was attained  upon reaching age 60 and  completing 10 years
of service.

         During 1994 the Company  renegotiated  its contract with domestic union
employees in which  postemployment  medical  benefits were eliminated for future
retirees.  Employees  who  retired  prior  to the  signing  of the new  contract
maintain the postemployment medical benefits granted under prior contracts.  The
following table  summarizes the Company's  expense for  postemployment  benefits
other than pensions.

<TABLE>
<CAPTION>

                                                                                Year ended
                                                                   12/31/99       12/31/98     12/31/97
                                                                   --------       --------     --------
                                                                              (In thousands)

         <S>                                                          <C>            <C>          <C>
         Service cost- benefits earned during the period              ---            ---          ---
         Interest cost on accumulated postretirement
           benefit obligation                                         $49            $81          $90
                                                                      ---            ---          ---
         Net periodic postretirement benefit costs                    $49            $81          $90
                                                                      ===            ===          ===
</TABLE>

         The Company's non-pension  postretirement benefit plans are not funded.
The status of the plans are as follows:

<TABLE>
<CAPTION>
                                                                   12/31/99     12/31/98
                                                                   --------     --------
                                                                       (In thousands)
    Accumulated postretirement benefit obligation:
         <S>                                                        <C>           <C>
         Beginning of the year                                      $1,248        $1,221
         Interest cost                                                  57            81
         Recognized actuarial (gain) loss                             (309)           69
         Benefits Paid                                                 (78)         (123)
                                                                      ----         -----
         End of the year                                               918         1,248
         Unrecognized actuarial (gain) loss                            220           (77)
                                                                       ---      --------
    Accrued postretirement benefit obligation                       $1,138        $1,171
                                                                    ======        ======
</TABLE>

         The  assumed   discount  rate  used  in  determining   the  accumulated
postretirement  benefit  obligation was 6.50% and 6.25% at December 31, 1999 and
1998, respectively.  The change in assumptions did not have a material impact on
the obligation or net periodic  postretirement  benefit cost. The assumed health
care cost trend rate used in measuring the  accumulated  postretirement  benefit
obligation  was 8.5% at December  31, 1999 and  declines .5% per year to 5.5% by
the year 2005 and remains at that level thereafter.


                                 Page 32 of 49
<PAGE>





         The assumed health care cost trend rate has a significant effect on the
amounts reported. A one-percentage-point  change in the assumed health care cost
trend rate would have the following effects:

<TABLE>
<CAPTION>

                                                                                     1-Percentage-       1-Percentage-
                                                                                           Point             Point
                                                                                         Increase           Decrease
                                                                                     -------------------------------
                                                                                              (In thousands)
         <S>                                                                                <C>               <C>
         Increase (decrease) in the interest cost components in 1999                        $4                $(4)
         Increase (decrease) in postretirement benefit obligation as of 1999               $72               $(68)
</TABLE>

    NOTE 12 - ACCUMULATED COMPREHENSIVE INCOME (EXPENSE)

         The components of other comprehensive income (expense) are as follows:

<TABLE>
<CAPTION>

                                                                Foreign
                                                                Currency             Minimum
                                                               Translation           Pension
                                                               Adjustments           Liability             Total
                                                               -----------           ---------             -----
                                                                                  (In thousands)

<S>                                                                    <C>               <C>                  <C>
Balance at December 31, 1996                                           $232              ($276)               ($44)

Cumulative translation adjustment                                      (295)                 -                (295)

Minimum pension liability adjustment                                      -                (43)                (43)

Deferred taxes relating to minimum
  pension liability                                                       -                 16                  16
                                                                ------------       ------------         -----------
Balance at December 31, 1997                                            (63)              (303)               (366)

Cumulative translation adjustment                                        (1)                 -                  (1)

Minimum pension liability adjustment                                      -             (1,855)             (1,855)
Deferred taxes relating to minimum
  pension liability                                                       -                581                 581
                                                                ------------       ------------         -----------
Balance at December 31, 1998                                            (64)            (1,577)             (1,641)


Cumulative translation adjustment                                      (245)                -                 (245)

Minimum pension liability adjustment                                      -              1,399               1,399

Deferred taxes relating to minimum
  pension liability                                                       -               (435)               (435)
                                                                ------------       ------------         ----------
Balance at December 31, 1999                                          ($309)             ($613)              ($922)
                                                                ============       ============         ==========
</TABLE>






                                 Page 33 of 49
<PAGE>





    NOTE 13 - PROVISION FOR INCOME TAXES

         Pre-tax  income and income taxes for the years ended December 31, 1999,
1998 and 1997 are as follows:

<TABLE>
<CAPTION>

                                                                                      Year ended
                                                                        12/31/99       12/31/98        12/31/97
                                                                        --------       --------        --------
                                                                                    (In thousands)
    The domestic and foreign  components of
    income before income taxes are:
                           <S>                                            <C>            <C>               <C>
                           Domestic                                       $2,284         $3,325            $89
                           United Kingdom                                    591            498          1,995
                                                                             ---        -------          -----
                                                                          $2,875         $3,823         $2,084
                                                                          ======         ======         ======
    The provision/(benefit) for income taxes is:
                      Current:
                           United States                                    $825           $918           $101
                           United Kingdom                                    110              9            658
                           State                                             208             83             52
                                                                             ---         ------         ------
                                                                           1,143          1,010            811
                                                                           -----          -----         ------
                      Deferred:
                           United States                                     (49)           127            (50)
                           United Kingdom                                     47            171              7
                           State                                             (26)           238            (41)
                                                                           ------        ------         -------
                                                                             (28)           536            (84)
                                                                           ------       -------         -------
                                                                          $1,115         $1,546           $727
                                                                          ======         ======          =====
</TABLE>

         Deferred tax liabilities/(assets) result from the following differences
between financial reporting and tax accounting.

<TABLE>
<CAPTION>
                                                                        12/31/99        12/31/98
                                                                        --------        --------
                                                                             (In thousands)
                Deferred tax liabilities:
                -------------------------
                <S>                                                       <C>            <C>
                Fixed Assets                                              $1,062         $1,396
                Pension                                                      562              -
                Inventory valuation                                           86             78
                Intangibles                                                  145            249
                                                                             ---        -------
                Total deferred tax liabilities                             1,855          1,723
                                                                           -----        -------
                Deferred tax assets:
                --------------------
                Non pension postretirement benefits                         (455)          (469)
                Installation and warranty cost accruals                     (334)          (190)
                Vacation reserve                                             (98)           (98)
                Bad debt reserve                                             (38)           (53)
                Pension                                                        -           (686)
                Redundancy reserve                                             -           (137)
                Other reserves                                              (114)          (343)
                Other                                                        (50)           (28)
                                                                        ---------       --------
                Total deferred tax assets                                 (1,089)        (2,004)
                                                                           ------        -------
                Net deferred tax liability (asset)                        $  766         $ (281)
                                                                          ======         =======
</TABLE>

         Other  current  assets  includes  $550,000 and $769,000 of deferred tax
assets at December 31, 1999 and 1998, respectively.




                                 Page 34 of 49
<PAGE>





A  reconciliation  from statutory U.S. federal income taxes to the actual income
taxes is as follows:

<TABLE>
<CAPTION>

                                                                                     Year ended
                                                                       12/31/99       12/31/98        12/31/97
                                                                       --------       --------        --------
                                                                                   (In thousands)

    <S>                                                                  <C>             <C>              <C>
    Statutory provision                                                  $978            $1,300           $709
    U.S.--U.K. rate differential                                          (44)              (20)           (57)
    State income taxes, net of federal benefit                            120               212              7
    Permanent differences                                                  75                79             98
    Other                                                                 (14)              (25)           (30)
                                                                     ---------         ---------       --------
    Actual provision                                                   $1,115            $1,546         $  727
                                                                       ======            ======         ======
</TABLE>

    NOTE 14 - EARNINGS PER SHARE

    The following table sets forth the computation of basic and diluted earnings
per share:

<TABLE>
<CAPTION>

                                                                         Year             Year             Year
                                                                        ended            ended            ended
                                                                       12/31/99         12/31/98         12/31/97
                                                                       --------         --------         --------
                                                                           (In thousands, except share data)
Net income applicable to
  common stockholders                                                       $1,760           $2,277           $1,357
                                                                    ===============  ===============  ===============

<S>                                                                      <C>              <C>              <C>
Weighted average number of common
shares outstanding - Basic earnings per Share                            5,447,807        5,941,837        5,950,240

Effect of dilutive stock and
 purchase options                                                            6,195           24,539            1,403
                                                                    ---------------  ---------------  ---------------

Weighted average number of
common shares outstanding - Diluted earnings per share                   5,454,002        5,966,376        5,951,643
                                                                    ===============  ===============  ===============

Net income per share-basic                                                   $0.32            $0.38            $0.23
                                                                    ===============  ===============  ===============

Net income per share-diluted                                                 $0.32            $0.38            $0.23
                                                                    ===============  ===============  ===============
</TABLE>





                                 Page 35 of 49
<PAGE>





NOTE 15 - OTHER INCOME/(EXPENSE), NET

         For the year ended  December  31, 1998,  and 1997 other  income/expense
includes  gains of  approximately  $0.3 million and $0.7 million,  respectively,
from the disposal of fixed assets.

NOTE 16 - FOREIGN OPERATIONS, EXPORT SALES AND MAJOR CUSTOMERS

         The Company's  operations  are considered  one operating  segment.  The
Company's products consist of new machines,  spares and repair related services.
The Company's products and services are sold to commercial  manufacturers in the
plastic and rubber industries.  The manufacturing,  assembly and distribution of
the Company's products are essentially the same.

         The following provides gross revenue by product and geographic area for
the years ended December 31, 1999, 1998 and 1997:

                                                           (In Thousands)

     Sale by Product Line                            1999       1998       1997
     --------------------                            ----       ----       ----

     New Machines                                  $33,192    $56,057    $48,745
     Spares                                         18,981     20,206     19,735
     Repairs                                        20,620     21,154     16,493
     Other                                           1,261        619        409
                                                   -------    -------    -------
     Total                                         $74,054    $98,036    $85,382
                                                   =======    =======    =======

     Geographic Sales by Destination
     -------------------------------

     United States                                 $41,353    $51,274    $39,402
     United Kingdom                                  4,889      9,915      6,122
     Europe (excluding U.K.)                        15,805     21,310     12,952
     North America (excluding U.S.)                  2,766      3,099      1,456
     Asia                                            5,964      6,446     22,220
     Middle East                                       432      4,271      1,058
     Other                                           2,845      1,721      2,172
                                                   -------    -------    -------
          Total                                    $74,054    $98,036    $85,382
                                                   =======    =======    =======

         Sales for 1997 included sales to one customer located in Korea totaling
$13 million.  There were no other sales to a single  customer which exceeded 10%
of the Company's revenue for the years ended December 31, 1999 and 1998.

         The Company operates a global business with  interdependent  operations
and employs a global management  approach.  In consideration of certain economic
factors,  the  distribution  of  customer  orders and  associated  revenues  and
expenses  between the U.S. or U.K. is at the discretion of management.  As such,
the chart below should not be construed as indicative of U.S. and U.K. operating
results were the Company not to operate in such a manner.




                                 Page 36 of 49
<PAGE>




         Net sales to unaffiliated customers, operating income and assets of the
U.S. and U.K.  operations for the years ended  December 31, 1999,  1998 and 1997
are as follows:

<TABLE>
<CAPTION>

                                                                  United        United
                                                                  States        Kingdom      Consolidated
                                                                  ---------------------------------------
                                                                             (In  thousands)
    <S>                                                          <C>             <C>            <C>
    Year ended 12/31/99:
         Sales to unaffiliated Customers                         $47,970         $26,084        $74,054
         Operating income                                           $647            $640         $1,287
         Long-lived assets                                        $5,713          $8,704        $14,417
         Total assets                                            $24,451         $24,411        $48,862

    Year ended 12/31/98:
         Sales to unaffiliated Customers                         $57,387         $40,649        $98,036
         Operating income                                         $3,489          $1,133         $4,622
         Long-lived assets                                        $6,044          $8,948        $14,992
         Total assets                                            $29,006         $34,259        $63,265


    Year ended 12/31/97:
         Sales to unaffiliated Customers                         $60,594         $24,788        $85,382
         Operating income                                          $(310)         $1,945         $1,635
         Long-lived assets                                        $5,920         $13,357        $19,277
         Total assets                                            $26,411         $29,970        $56,381
</TABLE>




                                 Page 37 of 49
<PAGE>




NOTE 17 - QUARTERLY FINANCIAL DATA (UNAUDITED):

         Summarized quarterly financial data for fiscal 1999 and 1998:



<TABLE>
<CAPTION>

                                                                                  (In thousands except per share data)
                                                                                                 Quarter
                                                                        ----------------------------------------------------------
                                                                           First         Second          Third       Fourth
                                                                        ------------   ------------   ------------   -------------
FISCAL 1999

<S>                                                                         <C>            <C>            <C>             <C>
Net Sales                                                                   $13,294        $17,282        $20,091         $23,387
                                                                        ============   ============   ============   =============
Gross Margin                                                                 $2,404         $4,538         $6,165          $5,049
                                                                        ============   ============   ============   =============
Other income / (expense)                                                     $1,835            $73          ($174)          ($146)
                                                                        ============   ============   ============   =============
Net income/(loss)                                                             ($117)          $282         $1,096            $499
                                                                        ============   ============   ============   =============
Basic and diluted net income/(loss) per common share                         ($0.02)         $0.05          $0.20           $0.09
                                                                        ============   ============   ============   =============
Basic weighted average shares outstanding (000's)                             5,813          5,387          5,461           5,293
                                                                        ============   ============   ============   =============
Diluted weighted average shares outstanding (000's)                           5,813          5,392          5,461           5,293
                                                                        ============   ============   ============   =============

                                                                                                 Quarter

                                                                        ----------------------------------------------------------
                                                                           First         Second          Third           Fourth
                                                                        ------------   ------------   ------------   -------------
FISCAL 1998

Net Sales                                                                   $15,976        $24,954        $21,626         $35,480
                                                                        ============   ============   ============   =============
Gross Margin                                                                 $4,236         $6,100         $4,341          $8,095
                                                                        ============   ============   ============   =============
Other expense                                                                 ($234)         ($255)          ($64)          ($246)
                                                                        ============   ============   ============   =============
Net income/(loss)                                                              $110           $737          ($202)         $1,632
                                                                        ============   ============   ============   =============
Basic and diluted net income/(loss) per common share                          $0.02          $0.12         ($0.03)          $0.27
                                                                        ============   ============   ============   =============
Basic weighted average shares outstanding (000's)                             5,943          5,943          5,942           5,939
                                                                        ============   ============   ============   =============
Diluted weighted average shares outstanding (000's)                           5,983          5,947          5,942           5,944
                                                                        ============   ============   ============   =============
</TABLE>


         In the fourth quarter of 1999, the Company finalized the accounting for
the  purchase  of  certain  assets  and the  operations  of Shaw,  as more fully
discussed  in Note 2. This  resulted  in the  reversal  of  $100,000 of goodwill
amortization  expensed in prior quarters.  In addition, in the fourth quarter of
1999,  the Company  recorded an  adjustment  to write down the value of its U.K.
inventory by approximately $1,000,000.




                                 Page 38 of 49
<PAGE>




ITEM 9 -  CHANGES  IN AND  DISAGREEMENTS  WITH  ACCOUNTANTS  ON  ACCOUNTING  AND
          FINANCIAL DISCLOSURE

              None.




                                 Page 39 of 49
<PAGE>




                                    PART III

ITEM 10 - DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

         The  information  called  for by this  item is  incorporated  herein by
reference to the definitive  Proxy Statement to be filed with the Securities and
Exchange  Commission  not later than 120 days after the year ended  December 31,
1999 and  delivered to  stockholders  in connection  with the Annual  Meeting of
Stockholders to be held on June 14, 2000.

ITEM 11 - EXECUTIVE COMPENSATION

         The  information  called  for by this  item is  incorporated  herein by
reference to the definitive  Proxy Statement to be filed with the Securities and
Exchange  Commission  not later than 120 days after the year ended  December 31,
1999 and  delivered to  stockholders  in connection  with the Annual  Meeting of
Stockholders to be held on June 14, 2000.

ITEM 12 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

         The  information  called  for by this  item is  incorporated  herein by
reference to the definitive  Proxy Statement to be filed with the Securities and
Exchange  Commission  not later than 120 days after the year ended  December 31,
1999 and  delivered to  stockholders  in connection  with the Annual  Meeting of
Stockholders to be held on June 14, 2000.

ITEM 13 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

         The  information  called  for by this  item is  incorporated  herein by
reference to the definitive  Proxy Statement to be filed with the Securities and
Exchange  Commission  not later than 120 days after the year ended  December 31,
1999 and  delivered to  stockholders  in connection  with the Annual  Meeting of
Stockholders  to be held on June  14,  2000.  See  also  Notes  to  Consolidated
Financial Statements, Note 4, appearing in Item 8 herein.




                                 Page 40 of 49
<PAGE>




                                     PART IV

ITEM 14 - EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND REPORTS ON FORM 8-K

  (a) Documents Filed as Part of Form 10-K Page

      1.   Financial Statements

      Report of Independent Auditors.........................................17
      Consolidated Balance Sheets as of December 31,
       1999 and 1998.........................................................18
      Consolidated Statements of Income for the years
       ended December 31, 1999, 1998 and 1997................................19
      Consolidated Statements of Stockholders' Equity
       for the years ended December 31, 1999, 1998 and 1997..................20
      Consolidated Statements of Cash Flows for years
       ended December 31, 1999, 1998 and 1997................................21
      Notes to Consolidated Financial Statements........................22 - 38

      2.   Financial Statement Schedule

      Report of Independent Auditors on Financial Statement Schedule.........46
      Schedule II - Valuation and Qualifying Accounts........................47

      All other  schedules are omitted  because they are not applicable  or  the
      required   information  is shown  in the  financial  statements  or  notes
      thereto.




                                 Page 41 of 49
<PAGE>






3. Exhibits                                                                Page
                                                                           ----
Exhibits
--------

Exhibit 3(a)      Articles  of  Incorporation  - Filed  as an
                  exhibit   to  the   Registrant's   Registration
                  Statement  as  Form  S-1  (No.   33-43539)  and
                  incorporated herein by reference.                         N/A

Exhibit 3(b)      By-laws  -  Filed  as  an  exhibit  to  the
                  Registrant's Registration Statement as Form S-1
                  (No.  33-43539)  and  incorporated   herein  by
                  reference.                                                N/A

Exhibit 4         Amended and restated Credit  Agreement  between
                  Farrel  Corporation  and  Chase Manhattan  Bank
                  dated January 23, 1998.  Filed as an exhibit to
                  the  Registrant's  Form 10K for the year  ended
                  December 31, 1997.                                        N/A

Exhibit 4         First  amendment  to the amended  and  restated
                  Credit Agreement Between Farrel Corporation and
                  Chase Manhattan Bank dated November 30,   1998.
                  Filed as an exhibit to the Registrants's Form
                  10K For the year ended December 31, 1998.                 N/A

Exhibit 10(b)     Employment   Agreement   between  Rolf  K.
                  Liebergesell and the Registrant, dated November
                  1,   1991.   Filed   as  an   exhibit   to  the
                  Registrant's Registration Statement as Form S-1
                  (No.  33-43539)  and  incorporated   herein  by
                  reference.                                                N/A

Exhibit 10(b)     First  Amendment to Employment  Agreement
                  between  Rolf  K.  Liebergesell  and registrant
                  effective  as of December 1, 1997,  filed as an
                  exhibit  to the  Registrants  Form  10Q for the
                  quarter ended March 29, 1998.                             N/A

Exhibit 10(d)     Standard   Corporate   Financial  Services
                  contract between First Funding  Corporation and
                  the Registrant, dated June 17, 1986, as amended
                  by a Letter  Agreement  dated November 1, 1991.
                  Filed  as  an  exhibit   to  the   Registrant's
                  Registration   Statement   as  Form   S-1  (No.
                  33-43539) and incorporated herein by reference.           N/A

Exhibit 10(e)     1997 OMNIBUS Stock  Incentive  Plan - Filed
                  as an  exhibit to the  Registrant's  definitive
                  Proxy  Statement re: Annual  Meeting on May 23,
                  1997 and incorporated herein by reference.                N/A

Exhibit 10(f)     1997 Employee's Stock Purchase Plan - Filed
                  on the Registrant's  registration  Statement as
                  Form  S-8  (No.   333-30735)  and  incorporated
                  herein by reference.                                      N/A

Exhibit 10(g)     Environmental   Agreement   between   USM
                  Corporation and the Registrant  dated as of May
                  12,   1986.   Filed  as  an   exhibit   to  the
                  Registrant's Registration Statement as Form S-1
                  (No.  33-43539)  and  incorporated   herein  by
                  reference.                                                N/A



                                 Page 42 of 49
<PAGE>




Exhibit 10(h)     Form of Director Indemnification Agreement.
                  Filed  as  an  exhibit   to  the   Registrant's
                  Registration   Statement   as  Form   S-1  (No.
                  33-43539) and incorporated herein by reference.           N/A

Exhibit 10(i)     Environmental  Settlement Agreement between
                  The   Black  &  Decker   Corporation   and  the
                  Registrant dated February 17, 1995. Filed as an
                  exhibit to the  Registrant's  Form 10-K for the
                  year ended December 31, 1994.                             N/A

Exhibit 10(j)     Secondment   Agreement   between  Karl  N.
                  Svensson  and the  Registrant,  dated  March 3,
                  1995.  Filed as an exhibit to the  Registrant's
                  Form 10-Q for the quarter  ended June 30, 1996.           N/A

Exhibit 10(k)     Agreement  of Purchase and Sale of certain
                  property  located in Derby, CT between National
                  RE/sources   Acquisition,    LLC   and   Farrel
                  Corporation    dated   July   17,   1998,   and
                  reinstatement agreement dated October 15, 1998.
                  Filed as an  exhibit to the  Registrants's Form
                  10K for the year ended December 31, 1998.                 N/A

Exhibit 11        Statement   re:   Computation   of  per   share
                  earnings.                                                  35

Exhibit 21        Subsidiaries  -  Filed  as an  exhibit  to  the
                  Registrant's Registration Statement as Form S-1
                  (No.  33-43539)  and  incorporated   herein  by
                  reference.                                                N/A

Exhibit 23        Consent of Ernst & Young LLP                               48

Exhibit 27        Financial Data Schedule                                    49



  (b)  Reports on Form 8K.

No such  reports  were filed by the Company  during the year ended  December 31,
1999.




                                 Page 43 of 49
<PAGE>





                                   SIGNATURES
                                   ----------

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


                                                Farrel Corporation



                                                /s/ Walter C. Lazarcheck
                                                -----------------------------
                                                Walter C. Lazarcheck
                                                Vice President and Chief
                                                Financial Officer


                                                March 24, 2000
                                                -----------------------------
                                                Date






                                 Page 44 of 49
<PAGE>






                                   SIGNATURES
                                   ----------

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

Signature                        Title                            Date
---------                        -----                            ----

/s/Rolf K. Liebergesell          Chief Executive Officer,         March 24, 2000
-------------------------        President and                    --------------
Rolf K. Liebergesell             Chairman of the Board


/s/Walter C. Lazarcheck          Vice President - Chief           March 24, 2000
-------------------------        Financial Officer                --------------
Walter C. Lazarcheck             (Chief Accounting Officer)


/s/Charles S. Jones              Director                         March 24, 2000
-------------------------                                         --------------
Charles S. Jones


/s/James A. Purdy                Director                         March 24, 2000
-------------------------                                         --------------
James A. Purdy


/s/Howard J. Aibel               Director                         March 24, 2000
-------------------------                                         --------------
Howard J. Aibel


/s/Glenn Angiolillo              Director                         March 24, 2000
-------------------------                                         --------------
Glenn Angiolillo


/s/Alberto Shaio                 Director                         March 24, 2000
-------------------------                                         --------------
Alberto Shaio






                                 Page 45 of 49
<PAGE>




                        Report of Independent Auditors on
                    Consolidated Financial Statement Schedule


The Board of Directors and Stockholders
Farrel Corporation


We have audited the consolidated  financial  statements of Farrel Corporation as
of  December  31,  1999 and 1998,  and for each of the three years in the period
ended  December 31, 1999,  and have issued our report thereon dated February 14,
2000  (included  elsewhere in this Annual Report on Form 10-K).  Our audits also
included the financial statement schedule for the years ended December 31, 1999,
1998 and 1997  listed in Item  14(a) of this Form  10-K.  This  schedule  is the
responsibility of the Company's management.  Our responsibility is to express an
opinion based on our audits.

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

                                          Ernst & Young LLP

Stamford, Connecticut
February 14, 2000






                                 Page 46 of 49
<PAGE>






                                                                     SCHEDULE II

                               FARREL CORPORATION
                        VALUATION AND QUALIFYING ACCOUNTS



<TABLE>
<CAPTION>

COLUMN A                                       COLUMN B                COLUMN C                 COLUMN D         COLUMN E
-----------------------------------------  ----------------  -----------------------------  ----------------  --------------
                                                                               Charged
                                             Balance at       Charged to      (credited)
                                              beginning        costs and       to other                        Balance at
Name of Debtor                                of period        expenses      accounts (1)   Deductions (2)    end of period
-----------------------------------------  ----------------  --------------  -------------  ----------------  --------------
Year ended 12/31/97
-------------------
<S>                                                   <C>             <C>            <C>             <C>               <C>
Allowance for doubtful
  receivables                                         $464            ($50)          ($8)            ($227)            $179
Reserve for excess and obsolete
  inventory items                                   $1,091            $208          ($23)            ($525)            $751
Accrued installation and warranty
  costs                                             $1,360          $2,182          ($25)          ($2,191)          $1,326

Year ended 12/31/98
-------------------
Allowance for doubtful
  receivables                                         $179            $261            ---            ($143)            $297
Reserve for excess and obsolete
  inventory items                                     $751            $916            $3             ($120)          $1,550
Accrued installation and warranty
  costs                                             $1,326          $2,282            $2           ($1,927)          $1,683

Year ended 12/31/99
-------------------
Allowance for doubtful
  receivables                                         $297            $163           ($4)            ($271)            $185
Reserve for excess and obsolete
  inventory items                                   $1,550            $106          ($21)            ($281)          $1,354
Accrued installation and warranty
  costs                                             $1,683          $1,426          ($30)          ($1,450)          $1,629
</TABLE>


(1)   Represents foreign currency  translation  adjustments  charged or credited
      to stockholders' equity.
(2)   Represents  accounts  receivable  written off,  obsolete  inventory  items
      written off,  reductions  in accrued  installation  and warranty  costs to
      reflect expenditures incurred.

The  allowances  for doubtful  receivables  and reserves for excess and obsolete
inventory  items have been  deducted  in the  balance  sheets from the assets to
which they  apply.  The accrued  installation  and  warranty  costs are shown as
liabilities in the balance sheet.




                                 Page 47 of 49