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, 1997
                                                                 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
 incorporation or organization)                             identification no.)


    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
incorporated 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 20, 1998 was $17,159,191.

The number of shares  outstanding of the  registrant's  common stock as of March
20, 1998 was 5,942,582 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 May 20, 1998,
are incorporated by reference into Part III.

                     Exhibit Index Appears on Pages 40 - 41







                                  Page 1 of 45
<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.  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 and manufacturers of rubber goods, such as sheet products,  molded
products,  automotive  components,  footwear and wire and cable. In the plastics
processing  industry,  the  Company's  equipment is primarily  sold to commodity
plastics 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 of a
relatively  constant sized market by broadening  its product range,  to continue
strengthening  its market  position,  particularly  in Asia, and to solidify its
position as a low cost producer by manufacturing  proprietary  components in its
U.K. plant and assembling machines in its U.S. and U.K. facilities.  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.

         During 1996 the Company ceased  component  manufacturing  operations in
its Derby,  Connecticut  facility and consolidated  all component  manufacturing
activities in its Rochdale, England facility. During 1997, the Company completed
the consolidation of its domestic assembly, repair and spare parts operations in
Ansonia, Connecticut and improvements to its repair facility in Texas.

         During 1996 the Company also reorganized its domestic marketing,  sales
and engineering  efforts along the lines of the two major  industries  served by
the  Company's  products,   rubber  and  plastic.   Management   considers  this
realignment of resources to have enabled the Company to better  concentrate  its
efforts on each industry.  The enhanced focus on customer needs in each industry
allows  the  Company's  personnel  to  specialize  in  the  applications  of the
Company's  machines  needed for each industry and to better service the needs of
the Company's customers.

          In  continuing  the  Company's  strategy  to expand  its  markets,  on
December  19, 1997,  the Company  acquired  selected  assets of the Francis Shaw
Rubber  Machinery  ("Shaw")  business in England for the  production of INTERMIX
[registered  trademark] 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  [registered  trademark]  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  market  share.  The  acquisition
included a backlog of $6 million all of which is expected to ship during 1998.



                                  Page 2 of 45
<PAGE>






         The  operations of Shaw are currently  conducted in  manufacturing  and
office  facilities  located  in  Manchester,  England.  The  Company  intends to
consolidate  the  operations  of  Shaw  into  manufacturing  and  administrative
facilities  in  Rochdale,  England.  The  Company  intends to shift from  highly
integrated  manufacturing  processes,  to increased outsourcing  consistent with
current Company  operations.  The current Rochdale facilities are believed to be
sufficient to absorb the anticipated volume without major disruption.

         The  Company  has  developed  a  preliminary  plan  to  transition  and
integrate  Shaw  operations.  The  asset  purchase  agreement  provides  for  an
operating and lease  agreement for a two year period ending December 19, 1999 to
complete the  transition.  The Company is  evaluating  the impact on  production
techniques,  physical  facilities,  employee base,  sales force,  sales methods,
customer  base  and  terms  of the  purchase  agreement  in  adopting  a plan to
integrate  Shaw  operations.  It is  intended  that  the  consolidation  will be
accomplished  in the first half of 1999.  Significant  to the purchase price and
short term  operations is a guarantee  from the Seller that the acquired  assets
will  generate  a pre-tax  profit  (as  defined  in the  agreement)  of at least
[Pounds] 1.0 million for fiscal 1998. The asset purchase agreement provides that
any  shortfall  in this  amount  will be paid to the  Company  by the Seller and
represent a reduction  in the  purchase  price.  See Note 2 to the  Consolidated
Financial Statements.

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  and  manufacturers  of rubber goods such as sheet products,
molded products,  automotive components,  footwear and wire and cable. 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.

         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.  Industry  performance is related to, among other things,
consumer  spending and general  economic  conditions.  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 have been  adversely  impacted by political and
economic  difficulties  in  Eastern  Europe and the Middle  East.  In 1997,  the
Company has been  adversely  affected by the  financial  insecurity  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.  Taiwan and the  People's  Republic of China  continue to  experience
growth,  albeit at a slower level than in recent months.  Business  potential in
the Peoples'  Republic of China will be extremely  competitive and restricted by
credit availability.

         New capital and marketing expenditures in the Company's markets depend,
in large part, on an increase in market demand  creating the need for additional
capacity.


                                  Page 3 of 45
<PAGE>





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,   pre-installation   and
post-installation  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
                                            12/31/97    12/31/96    12/31/95
                                            --------    --------    --------

New Machines/Related Services...........      57.1%       53.3%       56.5%
Aftermarket.............................      42.9%       46.7        43.5
                                             ------      ------      ------
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 equipment in significant  quantities 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.  Sales,  operating results and export sales by geographic area
for  fiscal  1997,  1996 and 1995 are  reported  in Note 15 to the  Consolidated
Financial Statements.

         The  Company's  products  are sold  primarily  by its direct  sales and
support staff.  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 are assisted and supported by
employees of the Company.

Process Laboratory Services

         The Company maintains its primary process laboratory in Ansonia,
Connecticut and a second  laboratory in Rochdale,  England.  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 and serves to  introduce  the
Company's  technology to potential  customers.  An additional process laboratory
exists at the recently  acquired leased facilities in Manchester,  England.  The
equipment  located  there will  ultimately  be  consolidated  into the Company's
laboratories at Rochdale,  England and Ansonia,  Connecticut.  This will enhance
the demonstration capabilities of both laboratories significantly,  thereby more
aggressively  supporting the sales effort.  The Company uses its laboratories to
demonstrate recent developments in processing equipment and to provide customers
with  production-size  equipment  in order  to  experiment  with new  processing
techniques and formulations. The



                                  Page 4 of 45
<PAGE>




Company  considers  its process  laboratories  to be vital  contributors  to its
continuing technology development and customer service efforts and, as a result,
routinely modernizes its process laboratories and related equipment. The Company
has  experienced an increased trend to test its plastics  processing  machinery,
such as the CP-SERIES II [trademark],  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 will be increased
further with the  installation  of the Farrel Twin Screw  Extruder  (FTX) in two
University  laboratories:  Akron University,  Akron, Ohio, USA and University of
Paderborn,   Paderborn,  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 divisions or  subsidiaries  of larger  companies with
financial and other resources greater than those of the Company. The Company has
historically  faced,  and  will  continue  to  face,  considerable   competitive
pressures,  particularly  price  competition.  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, 1997, 1996 and 1995 was approximately $47 million,  $50 million and
$30  million,  respectively.  Substantially  all of the orders  included  in the
December  31, 1997  backlog have  contractual  ship dates in fiscal  1998.  Firm
backlog  at  March  20,  1998  and  1997  was  $59  million  and  $56   million,
respectively.

Manufacturing

         The Company's manufacturing facility in Rochdale,  England provides the
Company with fully integrated manufacturing processes 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 owns repair and
rebuild  facilities in Ansonia,  Connecticut,  Deer Park,  Texas,  and Rochdale,
England and contracts for such services in Australia and Singapore.

         Early in 1997 the Company  announced the  consolidation of its domestic
assembly, repair and spare parts operations, performed in its Derby and Ansonia,
Connecticut  facilities  into  available  space  in  Ansonia  to  reduce  annual
operating  costs and  enhance  operating  efficiencies.  The  consolidation  was
substantially completed during 1997.





                                  Page 5 of 45
<PAGE>




         In 1997, the Company  acquired assets and leased  facilities to produce
INTERMIX [registered  trademark] internal mixers and extruders as well as repair
and  fabrication  facilities  in  Manchester,  England.  The Company  intends to
consolidate  these  manufacturing  and  repair  operations  with  facilities  in
Rochdale, England.

         Management  considers  these  facilities  as  giving  the  Company  the
flexibility needed to service its customers.

Components and Raw Materials

         The Company purchases most of the components used in manufacturing
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.

Research and Development and Engineering

         The  Company's  research and  development  and  engineering  staffs are
located in Ansonia,  Connecticut  and Rochdale and  Manchester,  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 new twin screw sheeter is an example of the  collaborative  success of
the research and development and product  engineering staffs working together to
produce a new product as well as the recent development of a new longer,  higher
powered melt pump discharge continuous mixer. Current development activities are
in the  batch  mixing  process.  The  acquisition  of the  INTERMIX  [registered
trademark]   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
                                        12/31/97        12/31/96        12/31/95
                                        --------        --------        --------
                                                (Dollars in thousands)
Research and development expense
  pertaining to new products or
  significant improvements to
  existing products                      $1,567          $1,993          $2,101

All other product  development and
  engineering  expenditures  related
  to ongoing refinements, improvements
  of existing products, and custom
  engineering                             2,874           3,329           3,444
                                         ------          ------          ------
Total                                    $4,441          $5,322          $5,545
                                         ======          ======          ======

Percent of net sales                        5.2%            7.0%            6.9%

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 42  patent  applications  pending.  The  Company's  patents  have
expiration  dates ranging from 1998 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.





                                  Page 6 of 45
<PAGE>




         The Company  considers the  following  trademarks to be material to its
business:   FARREL  [registered   trademark];   BANBURY[registered   trademark];
INTERMIX[registered   trademark];   ST[trademark];   MVX[trademark];   CP-SERIES
II[trademark], FTX[trademark], and TSS[trademark].

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,  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 now 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, earnings or the competitive position of the Company.

Employees

         As of  December  31,  1997,  the Company  had 606  full-time  employees
(including  218  employees at the acquired Shaw  operations)  compared to 397 at
December 31, 1996. The Company has collective  bargaining agreements in the U.S.
and the U.K.  which cover  approximately  237  employees  (including  121 at the
acquired Shaw  operations).  The U.S.  agreement was renegotiated  during fiscal
1997 and expires on June 15, 2000. The Company has three  agreements in the U.K.
which expire at various dates from June 1, 1998 through March 31, 1999.

Item 2 - Properties

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


                                                                        Approx.
         Location                    Principal Use                      Sq. Ft.
--------------------------------------------------------------------------------
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

Manchester, England (Corbett St.)    Office, research, laboratory,       99,000
                                     manufacturing, repair
                                     and rebuild, and storage

Manchester, England (Vaughan St.)    Office, fabrication                 13,000

Derby, Connecticut                   Available for sale/lease           225,000


         Early in 1997 the Company  announced  the  relocation  of its  domestic
assembly  and  storage  operations  from  its  Derby,  Connecticut  facility  to
available space in its Ansonia,  Connecticut  facility to reduce operating costs
and to enhance  efficiency.  This  consolidation was  substantially  complete at
December 31,



                                  Page 7 of 45
<PAGE>




1997. The Company's Derby,  Connecticut facility is available for sale or lease.
Subsequent  to December 31, 1997,  the Company  signed a  conditional  letter of
intent to sell the property in Derby,  CT. Final  assembly,  product testing and
quality  control  activities  are  performed  by Company  personnel  at both the
Ansonia and Rochdale England facilities.

         The Corbett Street facilities are subject to a lease which expires
December 19, 1999. The lease of these facilities was acquired in connection with
the purchase of assets of the Francis Shaw Rubber Machinery business.  The lease
effectively  provides  the Company a two year period of  transition  in which to
consolidate  these  operations  with the  facilities in Rochdale,  England.  The
Vaughan Street facilities are subject to a lease through March, 2005.

         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

         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,  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 which 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, 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.  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.

Item 4 - Submission of Matters to a Vote of Security Holders

              None.




                                  Page 8 of 45
<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 National  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 1997                      High         Low             Dividend
-----------                      ----         ---             --------

First Quarter                    $3.88        $2.38            $0.16
Second Quarter                   $4.00        $2.63            $0.16
Third Quarter                    $4.38        $2.63            $0.16
Fourth Quarter                   $6.00        $3.00            $0.16



Fiscal 1996                      High         Low             Dividend
-----------                      ----         ---             --------

First Quarter                    $4.38        $2.88            $0.06
Second Quarter                   $4.50        $3.00               --
Third Quarter                    $4.38        $2.75               --
Fourth Quarter                   $3.63        $2.38               --


          (b) As of March 20, 1998 the  approximate  number of record holders of
the Company's common stock was 742.

          (c) Dividends

          The Company  intends,  from time to time, to pay cash dividends on its
Common Stock, as the Board of Directors,  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 issuances of the  Company's  equity  shares
that were not registered under the Securities Act.




                                  Page 9 of 45
<PAGE>



Item 6 - Selected Consolidated Financial Data
<TABLE>
<CAPTION>

                                                                      Year        Year        Year        Year        Year
                                                                     ended       ended       ended       ended        ended
                                                                    12/31/97    12/31/96    12/31/95    12/31/94    12/31/93
                                                                    --------    --------    --------    --------    --------
Statement of Operations Data:                                                (In thousands, except per share data)

<S>                                                                 <C>         <C>          <C>         <C>         <C>
Net Sales                                                           $85,382     $75,836      $80,067     $75,501     $75,750
                                                                    =======     =======      =======     =======     =======
Gross margin                                                        $17,711     $18,123      $19,760     $20,008     $20,189
                                                                    =======     =======      =======     =======     =======
   As a percent of net sales                                          20.7%       23.9%        24.7%       26.5%       26.7%
                                                                    =======     =======      =======     =======     =======
Operating income                                                     $1,635        $654       $1,591      $2,601      $1,853
   Other income (expense), net (2)                                      449       (174)        (135)       1,436       (136)
                                                                    -------     -------      -------     -------     -------
Income before income taxes                                            2,084         480        1,456       4,037       1,717
Provision for income taxes                                              727         154          554       1,531         508
                                                                    -------     -------      -------     -------     -------
Net income                                                           $1,357        $326         $902      $2,506      $1,209
                                                                    =======     =======      =======     =======     =======

Net income per share - Basic and diluted (1)                          $0.23       $0.05        $0.15       $0.41       $0.20
                                                                    =======     =======      =======     =======     =======
Dividends per share of Common Stock                                   $0.64       $0.06        $0.20       $0.04       $0.16
                                                                    =======     =======      =======     =======     =======
Weighted  Average Shares Outstanding - Basic (000's) (1)              5,950       5,970        6,027       6,076       6,127
                                                                    =======     =======      =======     =======     =======
Weighted Average Shares outstanding - Diluted (000's) (1)             5,951       5,972        6,030       6,097       6,138
                                                                    =======     =======      =======     =======     =======

Balance Sheet Data:
   Current Assets                                                   $37,104     $40,187      $41,991     $37,697     $40,675
   Current Liabilities                                              $23,286     $19,841      $22,878     $16,613     $20,179
   Working Capital Ratio                                                1.6         2.0          1.8         2.3         2.0
   Total assets                                                     $56,381     $50,731      $53,412     $47,979     $50,227
   Long-term debt                                                    $5,283        $214         $388        $587        $740
   Stockholders' equity                                             $25,782     $28,553      $27,814     $28,726     $26,362

Other Data:
   Backlog                                                          $46,554     $50,225      $29,745     $39,123      $32,960
</TABLE>

(1)  Restated  to reflect the  adoption of  statement  of  Financial  Accounting
Standards No. 128, "Earnings per Share".

(2) Other income in 1994 includes  $1.3 million as a result of a curtailment  of
postretirement  benefits accounted for under Financial  Accounting Standards No.
88.  "Employers  Accounting for Settlements and  Curtailments of Defined Benefit
Pension Plans and for Termination Benefits."



                                 Page 10 of 45
<PAGE>




Item 7 - Management's Discussion and Analysis of Financial Condition and Results
of Operations

Fiscal 1997 Compared to Fiscal 1996:

         Net  sales in 1997 and 1996  were  $85.3  million  and  $75.8  million,
respectively.  A  substantial  portion  of the 1997  shipments  reflects  orders
received in 1996 when the dollar value of the Company's  order intake was higher
than that  experienced in prior years.  Management  still  considers the markets
served by the  Company's  products  to be  extremely  competitive  and,  to some
extent,  affected by  continuing  uncertainty  in Eastern  Europe and the Middle
East.  Additionally,  Far  Eastern  markets  are  particularly  competitive  and
volatile  at this time.  Certain  Southeast  Asian  countries  are  experiencing
currency instability which contributes to uncertainty in the region. Many rubber
manufacturers  also continue to operate at less than full  capacity.  Management
anticipates  that the  markets  served by the  Company's  products  will  remain
extremely  competitive  and that those  markets  characterized  by economic  and
political uncertainty will likely continue to be affected by such conditions.

         The Company  received  approximately  $77 million in orders during 1997
compared to $96 million in 1996 when the Company received  several  individually
large  orders.  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 may represent  orders  received in the current or
previous  fiscal  periods.  In addition,  the cyclical nature of industry demand
and,  therefore,  order intake,  may affect the Company's results of operations.
The  Company's  ability  to  maintain  and  increase  net sales  depends  upon a
strengthening and stability in the Company's traditional markets.

         Gross  margin in 1997 and 1996 was  $17.7  million  and $18.1  million,
respectively,  representing  a decrease in the gross margin  percentage to 21.0%
from 24.0%.  This decline is largely due to the mix of products  sold in the two
periods and to continued  stiff  competition.  The 1997 shipments also include a
higher  relative  proportion  of new machine  sales than in 1996 which  generate
lower margins than the Company's more profitable spare parts, rebuild and repair
business.  The 1997 margin also reflects the impact of a $.5 million increase in
commissions  on  shipments  to markets in the world where the  Company  must use
outside  representatives  in addition  to its sales  force to conduct  business.
Market  conditions  continue to exert significant  pressure on margins,  a trend
which is expected to continue in the foreseeable future.

         Operating  expenses  were  reduced  $1.5 million to $16 million in 1997
compared to 1996. The decline in administrative  costs is largely due to reduced
investment  banking fees. The increase in selling  expenses of $.2 million to $7
million in 1997 as compared to 1996 is largely attributed to increased marketing
programs  including costs to attend the premier plastic  industry  convention in
the United  States,  which occurs every three  years.  Research and  development
expenses  declined  primarily  as a result of  reduced  headcount.  Lastly,  the
reduction  in  operating  costs is also due to  continuing  efforts to  strictly
control expenses.




                                 Page 11 of 45
<PAGE>





         During 1997 the Company  substantially  completed the  consolidation of
its domestic assembly,  repair and spare parts operations,  from two facilities,
(Derby and Ansonia) in Connecticut,  to available space in the Ansonia facility,
to reduce  operating  costs and enhance  efficiencies.  The cost of this project
through  December  31,  1997 was  approximately  $1.0  million,  which  included
capitalized  costs of  approximately  $.8 million for improvements to facilities
and  equipment  in 1997.  While the Company  expects cost savings to result from
this  consolidation,  the size of such  savings  cannot  be  predicted  with any
certainty.

         As a result of this consolidation, the Company's Derby facility is held
as available for sale or lease.  The Company has  transferred the remaining book
value of this facility and any remaining assets no longer anticipated to be used
from  Property,  Plant,  and  Equipment  to  Other  Assets  at the end of  1996.
Subsequent  to December 31, 1997,  the Company  signed a  conditional  letter of
intent to sell the Derby  property.  The  letter of intent is subject to various
terms and conditions,  some of which may affect the net proceeds or consummation
of the sale. No loss on the disposal of the assets is  anticipated at this time,
and, as a result,  no  provision  for loss has been made.  It is  possible  that
proceeds  realized  from the  disposal  of  these  assets  may be less  than the
remaining  book value.  The  recoverability  of these  assets will be  evaluated
periodically  as  required  by  FAS  121,  "Accounting  For  the  Impairment  of
Long-Lived Assets and for Long Lived Assets to be Disposed Of."

         Other income, net of other expense,  includes approximately $.7 million
from the  disposal of  machinery  and  equipment  the Company will no longer use
which results from consolidating its two Connecticut  facilities into one single
facility. The consolidation has been substantially completed.

         The  effective  income tax rates in 1997 and 1996 were 34.9% and 32.1%,
respectively.  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.

Fiscal 1996 Compared to Fiscal 1995:

         Net sales were $75.8  million in fiscal 1996  compared to $80.1 million
in fiscal 1995.  Management  believes the Company  operates in markets which are
extremely competitive,  and to some extent, affected by continuing after-effects
of recessions in the capital goods markets in Western Europe, as well as ongoing
political and economic  uncertainty  in Eastern  Europe and the Middle East. Far
Eastern markets remain particularly competitive and difficult to penetrate. Many
rubber and  plastic  manufacturers  also  continue  to operate at less than full
capacity. The timing of receipt of customer orders will also impact the relative
level of shipments in any financial  reporting period.  Management is encouraged
by the recent improvement in the level of order intake and backlog, as discussed
later.  It does,  however,  anticipate  that the markets served by the Company's
products will remain extremely  competitive and that those markets characterized
by economic and  political  uncertainty  will likely  continue to be affected by
such conditions.

         Gross margin was $18.1  million in 1996  compared to the $19.8  million
generated in 1995.  The  percentage  also  declined in 1996 to 23.9 percent from
24.7 percent in 1995.  The year to year  comparison  is attributed to the mix of
products sold, which can differ  significantly  from one period to the next, and
to continued stiff  competition.  In addition,  management has elected to pursue
certain  machinery  rebuild markets more  aggressively to increase market share,
and has accepted lower margins in the near term to do so. The market  conditions
discussed  above continue to exert  significant  pressure on the level of margin
percentage  achieved,  a trend which is expected to continue in the  foreseeable
future.

         In an effort to  compensate  for the  significant  pressure on margins,
management has taken several  measures to  aggressively  control costs in recent
years including the consolidation of component  manufacturing into the Company's
U.K.  plant  during  1996.  The  Company's  U.K.  plant  was  selected  for this
cost-effective  consolidation  into a single  facility  due to its  more  modern
equipment and its greater supply of readily  available  skilled labor.  Assembly
operations  continue to be  performed  in both the United  States and the United
Kingdom





                                 Page 12 of 45
<PAGE>





         Total  operating  expenses  were reduced  approximately  $.7 million to
$17.5 million in 1996 compared to $18.2 million in 1995.  Savings were generated
in all three  categories of operating  costs largely due to the  elimination  of
selected  executive  and staff  positions  worldwide.  The  reduction in selling
expenses also reflects the  consolidation of the Company's  marketing offices in
Continental Europe to England. Administrative costs in 1996 included $.8 million
of third  party costs which were  deferred  in prior  years in  connection  with
efforts,  ultimately  unsuccessful,  to identify,  negotiate,  and contract with
several  acquisition  candidates,  primarily  outside  the United  States.  This
non-recurring  write-off of  previously  deferred  costs has largely  offset the
other savings previously discussed. No further costs were deferred during 1996.

         The 1996 income tax rate, as a percentage of pre-tax income,  was 32.1%
compared to 38.0% in 1995.  The  relatively  low 1996 rate is  attributed to the
combination  of the pre-tax loss in the United States and taxable  income in the
United Kingdom.  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.

Material Contingencies

         As described in Part 1, Item 3, 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,  1986
environmental  contamination  at the Company's  Ansonia and Derby  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, a preliminary environmental assessment of the Company's properties in
Ansonia and Derby,  Connecticut  has been  conducted  by Black & Decker.  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,
earnings  or the  competitive  position of the  Company.  This  forward  looking
statement  could,   however,  be  influenced  by  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 1997  decreased $19 million,  or
roughly 20%, to approximately $77 million compared to $96 million in fiscal 1996
and $71 million in fiscal 1995. The 1997 decrease in orders  compared to 1996 is
distributed  across product lines and  geographically  around the world with the
largest  regional  decrease  occurring  in the Far  East,  due to the  uncertain
economic environment at this time.

         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 had been severely depressed in various
geographic markets of the world. 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.  There can be no assurance that the level of
orders experienced in 1997 will continue,  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, 1997
is $47  million  and is largely  attributed  to the  decrease  in orders in 1997
compared to 1996. Backlog at December 31, 1996 was $50 million.  The contractual
ship dates for  substantially  all of the December 31, 1997 backlog are in 1998.
The  backlog  at  March  20,  1998 and 1997  was $59  million  and $56  million,
respectively.




                                 Page 13 of 45
<PAGE>





Liquidity and Capital Resources; Capital Expenditures

         Working capital and the working capital ratio at December 31, 1997 were
$13.8 million and 1.6 to 1, respectively, compared to $20.3 million and 2.0 to 1
at December 31, 1996, respectively. The decrease in the working capital ratio at
December 31, 1997 is attributed  to the purchase of selected  assets the Francis
Shaw Rubber  Machinery  Business on December 19, 1997.  The net assets  acquired
(see Note 2 to the Consolidated Financial Statements) included current liability
provisions of $2.1 million for the consolidation of the acquired assets into the
operations of the Company's Rochdale, England facilities.  During the year ended
December 31, 1997 the Company paid dividends of $0.48 per share. The Company has
also declared a dividend of $0.16 per share which was paid January 7, 1998.  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.  The  Company  received  a waiver  from its bank with  respect  to
dividends  declared  during 1997.  No  assurance  can be given that the level of
dividends declared in 1997 will continue in 1998.

         Due to the nature of the Company's business,  many sales are of a large
dollar amount. Consequently, accounts receivable and/or inventory may be at high
levels from time to time resulting in a temporary  decline 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, 1997, the Company had a worldwide multi-currency credit
facility  with a major  U.S.  bank in an  amount  of $20.0  million  for  direct
borrowings  and  letters  of credit and up to  (pound)3.0  million  for  foreign
exchange contracts. Interest varies based upon prevailing market interest rates.
The facility contains limits on direct borrowings and letters of credit combined
based upon stipulated levels of accounts receivable,  inventory and backlog. The
facility also contains  covenants  specifying minimum and maximum thresholds for
operating results and selected financial ratios. At December 31, 1997, there was
$7.1  million in direct  borrowings  under this  facility.  There were no direct
borrowings outstanding under this facility at December 31, 1996. There were $6.0
million and $8.1 million in letters of credit  outstanding  at December 31, 1997
and 1996, respectively.

         On January 23, 1998, the credit facility was amended and restated.  The
amended and restated  facility  provides for total  borrowings  of  $25,000,000,
consisting of an $18.5 million  revolving  credit  facility and a five year term
loan for up to $6.5  million.  Concurrently  with the  execution  of the amended
credit agreement,  the Company converted [Pounds] 4.0 million of the outstanding
balance  under the  previous  credit  facility to a term note.  The term loan is
payable in equal  quarterly  payments  over a five year period.  At December 31,
1997,  [Pounds]  3.2 million is  classified  as long term.  The  amended  credit
facility  contains  limits in direct  borrowings and letters of credit  combined
based upon stipulated levels of accounts  receivable,  inventory and backlog. It
also contains covenants  specifying minimum and maximum thresholds for operating
results and selected  financial ratios and the same  restrictions on the payment
of dividends as contained in the previous agreement as described above.

         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
including  integration of the Shaw asset  acquisition.  The Company made capital
expenditures of approximately $1.9 million and $1.3 million,  during fiscal 1997
and 1996, respectively.  The increase in capital expenditures in 1997 is largely
attributed to certain  improvements  related to the Company's  domestic assembly
and storage facilities.




                                 Page 14 of 45
<PAGE>




         The Company  manufactures  its products in the United Kingdom and sells
its products in the United States, United Kingdom 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
regularly  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 is aware of the issues associated with the programming code
in existing computer systems as the millennium (year 2000) approaches. The "year
2000" problem is pervasive  and complex as virtually  every  computer  operation
will be affected in some way by the rollover of the two-digit  year value to 00.
The issue is whether  computer  systems will properly  recognize  date-sensitive
information  when  the  year  changes  to  2000.  Systems  that do not  properly
recognize such  information  could generate  erroneous data or cause a system to
fail.

         The    Company's    year   2000   project   is   comprised   of   three
components-business    applications,    product   applications   and   equipment
applications.  The business  applications  component  consists of the  Company's
business  computer  systems,  as well as the  computer  systems  of  third-party
suppliers or customers  whose Year 2000 problems  could  potentially  impact the
Company.  Product  applications  exposure consist of micro processors within the
control  equipment  sold by the  Company.  Equipment  exposures  consist  of the
micro-processors  within  operating  equipment such as pumps,  compressors,  and
furnaces.

         The majority of the  Company's  business  applications  are third party
purchased  applications.  The  Company  expended  $.5  million  during  1997 and
anticipates  spending $.3 million during 1998 as part of the Company's policy to
utilize current information technology in its business applications. The Company
has begun the  implementation of the vendor's current upgrade which is year 2000
compliant.

         The  Company is  assembling  a task force of  internal  resources  from
various  disciplines,   including  operations,   facility  management,   product
engineering,  management  information  systems and finance to evaluate  the year
2000  readiness with respect to product and equipment  applications.  Work plans
detailing product control systems readiness  including  evaluating  customer and
vendor  readiness,  and a  comprehensive  inventory  of  monitoring  and control
devices for plants,  safety systems and other similar  operating systems and the
resources  required  are  expected  to be in  place  by  the  end of  1998  with
completion in the first quarter of 1999.

Safe Harbor Statements under Private Securities Litigation Reform Act of 1995

         Certain  statements   contained  in  the  Company's  public  documents,
including 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 that could cause actual results to differ materially from these
statements,  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.

Item 7A -  Quantitative  and  Qualitative  Disclosures  About  Market Risk - Not
Applicable




                                 Page 15 of 45
<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, 1997 and 1996....................................................18

Consolidated Statements of Income for the years
ended December 31, 1997, 1996, and 1995 ......................................19

Consolidated Statements of Stockholders' Equity
for the years ended December 31, 1997, 1996 and 1995..........................20

Consolidated Statements of Cash Flows for the years
ended December 31, 1997, 1996 and 1995........................................21

Notes to Consolidated Financial Statements.................................22-36




                                 Page 16 of 45
<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, 1997 and 1996,  and the  related  consolidated
statements of income,  stockholders' equity and cash flows for each of the three
years in the period ended December 31, 1997. These financial  statements are the
responsibility of the Company's management.  Our responsibility is to express an
opinion on these financial statements based on our audits.

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

In our opinion. the consolidated  financial statements referred to above present
fairly, in all material respects,  the consolidated financial position of Farrel
Corporation at December 31, 1997 and 1996, and the  consolidated  results of its
operations  and its cash flows for each of the three  years in the period  ended
December 31, 1997 in conformity with generally accepted accounting principles.

                                                      /s/ ERNST & YOUNG LLP

                                                      Ernst & Young LLP


Stamford, Connecticut
March 19, 1998




                                 Page 17 of 45
<PAGE>




                               FARREL CORPORATION
                           CONSOLIDATED BALANCE SHEETS



                                                          12/31/97      12/31/96
                                                          --------      --------
                                                              (In thousands)
   ASSETS
Current Assets:

Cash and cash equivalents (Note 1)                          $1,447       $3,832
  Accounts receivable, net of allowance for
   doubtful accounts of $179 and $464,
   respectively                                             14,423       19,189
  Inventory (Notes 1 and 5)                                 18,277       14,187
  Other current assets (Notes 2 and 12)                      2,957        2,979
                                                       ------------  -----------
    Total current assets                                    37,104       40,187
Property, plant and equipment, net of accumulated
  depreciation of $9,786 and $8,357, respectively
 (Notes 1 and 6)                                            12,416        9,555
Goodwill (Note 2)                                            5,295
Other assets (Notes 1, 3 and 11)                             1,566          989
                                                       ------------  -----------
Total assets                                               $56,381      $50,731
                                                       ============  ===========

   LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
  Accounts payable                                          $8,317      $11,058
  Accrued expenses and taxes  (Notes 2 and 7)                4,753        2,344
  Advances from customers (Note 1)                           6,412        4,865
  Accrued installation and warranty costs
   (Note 1)                                                  1,326        1,360
  Dividends payable                                            951
  Short-term debt (Note 8)                                   1,527          214
                                                       ------------  -----------
   Total current liabilities                                23,286       19,841

Long-term debt (Note 8)                                      5,283          214
Postretirement benefit obligation (Note 11)                  1,213        1,277
Other long-term obligations (Note 11)                          592          522
Deferred income taxes (Notes 1 and 12)                         225          324
Commitments and contingencies (Note 9)                         ---          ---
                                                       ------------  -----------
   Total liabilities                                        30,599       22,178
                                                       -----------   -----------
Stockholders' equity (Note 10):
  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
  Cumulative translation adjustment (Note 1)                   (63)         232
  Treasury stock, 199,524 and 200,261 shares
   at December 31, 1997 and 1996, respectively,
   at cost                                                    (984)        (987)
  Retained earnings                                          7,776       10,228
  Minimum pension liability                                   (303)        (276)
                                                       ------------  -----------

   Total stockholders' equity                               25,782       28,553
                                                       ------------  -----------
Total liabilities and stockholders' equity                 $56,381      $50,731
                                                       ============  ===========
                 See Notes to Consolidated Financial Statements




                                 Page 18 of 45
<PAGE>




                               FARREL CORPORATION
                        CONSOLIDATED STATEMENTS OF INCOME


                                                      Year Ended
                                           ----------------------------------
                                           12/31/97     12/31/96     12/31/95
                                           --------     --------     --------
                                                     (In thousands)
Net sales                                   $85,382     $75,836      $80,067

Cost of sales                                67,671      57,713       60,307
                                          ----------   ---------     --------
Gross margin                                 17,711      18,123       19,760
Operating expenses:
   Selling                                    7,076       6,792        7,940
   General and administrative (Note 4)        7,433       8,684        8,128
   Research and development                   1,567       1,993        2,101
                                          ----------   ---------     --------
     Total operating expenses                16,076      17,469       18,169
Operating income                              1,635         654        1,591

Interest income                                 291         203          345
Interest expense                               (71)       (145)         (86)
Other (expense)/income, net (Note 14)           229       (232)        (394)
                                          ----------   ---------     --------
Income before income taxes                    2,084         480        1,456
Provision/(benefit) for income taxes
  (Notes 1 and 12):
     Current                                    811         (7)          654
     Deferred                                  (84)         161        (100)
                                          ----------   ---------     --------
     Total                                      727         154          554
                                          ----------   ---------     --------
Net income                                   $1,357        $326         $902
                                          ==========   =========     ========

Per share data: (Note 13)
Basic and diluted net income per share        $0.23       $0.05        $0.15
                                          ==========   =========     ========
Average shares outstanding (000's):
   Basic                                      5,950       5,970        6,027
                                          ==========   =========     ========
   Diluted                                    5,951       5,972        6,030
                                          ==========   =========     ========

                 See Notes to Consolidated Financial Statements






                                 Page 19 of 45
<PAGE>




                               FARREL CORPORATION
                 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY


<TABLE>
<CAPTION>

                                                        Paid                   Cumulative                 Minimum        Total
                              Common stock               in        Treasury   translation    Retained     Pension     Stockholders'
                                 Shares     Amount     capital      stock      adjustment    earnings     Liability      equity
                               ---------   --------    -------     --------     ---------    --------     ---------    ----------
                                                                   (In thousands, except shares)

<S>                            <C>          <C>         <C>        <C>           <C>           <C>        <C>          <C>
Balance, December 31, 1994     6,142,106          61      19,295        (497)        (597)      10,594    ($    130)      28,726
                               ---------   ---------   ---------   ---------    ---------    ---------    ---------    ---------
Foreign currency translation        --          --          --          --            (49)        --           --            (49)
Net income                          --          --          --          --           --            902         --            902
Treasury stock transactions         --          --          --          (340)        --           --           --           (340)
Cash dividend declared
  at $.20 per common share          --          --          --          --           --         (1,209)        --         (1,209)
Minimum pension liability           --          --          --          --           --           --           (216)        (216)
                               ---------   ---------   ---------   ---------    ---------    ---------    ---------    ---------
Balance, December 31, 1995     6,142,106          61      19,295        (837)        (646)      10,287         (346)      27,814
                               ---------   ---------   ---------   ---------    ---------    ---------    ---------    ---------
Foreign currency translation        --          --          --          --            878         --           --            878
Net income                          --          --          --          --           --            326         --            326
Treasury stock transactions         --          --          --          (150)        --            (25)        --           (175)
Cash dividend declared
  at $.06 per common share          --          --          --          --           --           (360)        --           (360)
Minimum pension liability           --          --          --          --           --           --             70           70
                                                       ---------   ---------    ---------    ---------    ---------    ---------
                               ---------   ---------   ---------   ---------    ---------    ---------    ---------    ---------
Balance, December 31, 1996     6,142,106   $      61   $  19,295   ($    987)   $     232    $  10,228    ($    276)   $  28,553
                               ---------   ---------   ---------   ---------    ---------    ---------    ---------    ---------
Foreign currency translation        --          --          --          --      ($    295)        --           --           (295)
Net income                          --          --          --          --           --          1,357         --          1,357
Treasury stock transactions         --          --          --             3         --             (3)        --              0
Cash dividend declared
  at $.64 per common share          --          --          --          --           --         (3,806)        --         (3,806)
Minimum pension liability           --          --          --          --           --           --            (27)         (27)
                               =========   =========   =========   =========    =========    =========    =========    =========
Balance, December 31, 1997     6,142,106   $      61   $  19,295   ($    984)   ($     63)   $   7,776    ($    303)   $  25,782
                               =========   =========   =========   =========    =========    =========    =========    =========

                                               See Notes to Consolidated Financial Statements

</TABLE>





                                 Page 20 of 45
<PAGE>




                               FARREL CORPORATION
                      CONSOLIDATED STATEMENTS OF CASH FLOWS


                                                Year        Year        Year
                                               ended       ended       ended
                                              12/31/97    12/31/96    12/31/95
                                              --------    --------    --------
Cash flows from operating activities:

  Net income                                   $1,357      $326       $902
  Adjustments to reconcile net income
    to net cash used in/provided by
    operating activities:
  (Gain)/loss on disposal of fixed
    assets                                       (746)      ---        100
  Depreciation and amortization                 1,667     1,699      1,609
  Decrease /(increase) in accounts
    receivable                                  4,471     5,104     (3,860)
  Decrease/(increase)  in inventory               261      (915)    (5,759)
  (Decrease)/increase in accounts payable      (2,514)   (3,732)     7,030
  Increase in advances from customers             608       795        777
  Increase/(decrease) in accrued
    expenses and taxes                          1,075    (1,767)      (139)
  Decrease in accrued installation
    and warranty costs                             (4)     (344)      (281)
  Decrease/(increase) in long-term
    employee benefit obligations                    6      (171)       (38)
  Other                                          (500)      787       (424)
                                              -------    -------    -------
  Total adjustments                             4,324     1,456       (985)
                                              -------    -------    -------
  Net cash provided by /(used in)
   operating activities                         5,681     1,782        (83)
                                              -------    -------    -------

Cash flows from investing activities:
  Proceeds from disposal of fixed assets        1,027        15         50
  Purchases of property, plant and
    equipment                                  (1,878)   (1,321)    (2,490)
  Purchase of technology license agreement        ---       ---        (22)
  Acquisition of Shaw assets                  (10,855)      ---        ---
                                              -------    -------    -------
  Net cash (used in) investing activities     (11,706)   (1,306)    (2,462)

Cash flows from financing activities:
  Repayment of short term borrowings              ---       ---     (1,057)
  Proceeds from long term borrowings            6,680       ---        ---
  Repayment of long term borrowings              (196)     (200)      (197)
  Issuance (purchase) of treasury stock             3      (175)      (340)
  Used for dividends paid                      (2,856)     (360)    (1,209)
                                              -------    -------    -------
  Net cash provided by (used in)
    financing activities                        3,631      (735)    (2,803)
Effect of foreign currency exchange
  rate changes on cash                              9        25         30
                                              -------    -------    -------
Net decrease in cash and cash equivalents      (2,385)     (234)    (5,318)
Cash and cash equivalents--
  Beginning of period                          $3,832     $4,066     9,384
                                              -------    -------    -------
  End of period                                $1,447     $3,832    $4,066
                                              =======    =======    =======
Income taxes paid                                $746       $756    $1,175
                                              =======    =======    =======
Interest paid                                     $76        $55       $93
                                              =======    =======    =======


                 See Notes to Consolidated Financial Statements





                                 Page 21 of 45
<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 Eastern and Western 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 relative importance 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  purchased  with a maturity  of three
months or less. 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  receivable  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 on an average cost 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  (see Note 2). The  transaction  was
accounted for as a purchase.  Goodwill represents the excess purchase price over
the  estimated  fair value of the assets  acquired  and is being  amortized on a
straight line basis over 20 years.




                                 Page 22 of 45
<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  requires  advances from customers upon entering a contract
and 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  $9.6  million  of  undistributed  earnings  of  foreign
subsidiaries  because it is  expected  that those  earnings  will be  reinvested
indefinitely.

   (j)   Earnings Per Share:
         In 1997, the Financial  Accounting Standards Board issued Statement No.
128,  Earnings per Share.  Statement 128 replaced the calculation of primary and
fully  diluted  earnings  per share with basic and diluted  earnings  per share.
Basic  earnings per share  excludes any dilutive  effects of stock  options (see
Note 10). Diluted earnings per share is very similar to the previously  reported
fully diluted earnings per share. All earnings per share amounts for all periods
have been presented, and where appropriate, restated to conform to the Statement
128 requirements. (See Note 13 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  the  translation  are  included  in  the
cumulative translation adjustment in stockholders' equity. Transaction gains and
losses are  included in earnings.  The Company  experienced  a foreign  currency
transaction  loss of $131,000 in 1997 and $89,000 in fiscal 1995,  respectively.
The transaction gain or loss in 1996 was not significant.

         The Company 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, 1997, the Company has entered
into $.9  million of forward  exchange  contracts  for  transactions  related to
amounts to be paid for purchase commitments. A loss of approximately $24,000 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



                                 Page 23 of 45
<PAGE>




the event of  nonperformance  by the  Company's  bank,  the  other  party to the
foreign   exchange   contracts.   However,   the  Company  does  not  anticipate
nonperformance by its bank.

  (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)     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 of the Francis  Shaw  Rubber  Machinery
operations  from EIS Group PLC of the UK. The  purchase  price was  [Pounds] 6.5
million (approximately $10.9 million), subject to further reduction as described
below.

         The Asset Purchase  Agreement  provides for a reduction in the purchase
price to the extent the value of  inventory  on hand at the closing date is less
than  [Pounds] 3.0  million.  In addition,  the Seller has  guaranteed  that the
acquired  assets  will  generate  a pre-tax  profit (as  defined)  of, at least,
[Pounds] 1.0 million for fiscal 1998.  Any shortfall in this amount will be paid
to the Company representing a reduction in the purchase price.

         The results of operations  from December 19, 1997 through  December 31,
1997,  are included in the  consolidated  results of the Company.  The agreement
provides for an  operating  and lease  agreement  during the  transition  of the
operations from the Seller to the Company. The agreement contains provisions for
the  completion  of sales orders in process  retained by the seller and lease of
facilities  housing the operations which will be relocated and consolidated with
existing facilities in the U.K.

         The acquired assets are recorded at estimated fair value and
include machinery and equipment, inventory and intangible assets as follows:

Machinery & equipment                                 $   2,805
Inventory stock, net of customer deposits
of $1,009                                                 3,512
Patents/technical know how                                  835
Other assets                                              1,598
Goodwill                                                  5,295
                                                          -----
    Total                                             $  14,045
                                                         ======

          The  above  preliminary   purchase  price  allocation  is  based  upon
Management's  judgment considering  information  currently available.  The final
purchase  price and  allocation  is subject to  revisions  as  described  above,
agreement by the Seller and terms of the Asset Purchase  Agreement.  The Company
has objected to the closing date  inventory  valuation and has put the Seller on
notice that it will request a substantial refund.

         The Seller did not maintain and the Company was not provided historical
financial information for the Shaw operations.  Based on the limited information
available,  the Company  estimates  that the pro forma  revenues  and net income
would  not  vary  materially  from  the  historical   amounts  reported  in  the
Consolidated Statements of Income.




                                 Page 24 of 45
<PAGE>





          Included in the purchase  price  allocation,  the Company has recorded
current  liabilities of $2.1 million for the costs of consolidating the acquired
operations  with current  facilities  in Rochdale,  England.  The costs  include
employee separation, moving and other costs.

Note 3 - Other Assets
                                                      12/31/97     12/31/96
                                                      --------     --------
                                                          (In thousands)

Technology license................................       $334         $501
Assets held for disposal..........................        209          389
Notes receivable..................................         --           38
Acquired patents and technical know how...........        835
Other.............................................        188           61
                                                     --------     --------
  Total...........................................     $1,566         $989
                                                       ======       ======



         Assets held for  disposal  represent  the  remaining  book value of the
Company's Derby, Connecticut  manufacturing facility and its remaining machinery
and  equipment no longer  expected to be used.  Subsequent to December 31, 1997,
the Company  signed a conditional  letter of intent to sell the Derby  property.
The letter of intent is subject to various terms and  conditions,  some of which
may affect the net proceeds or consummation of the sale. Currently, the estimate
of the discounted fair value of the assets exceeds the remaining book value and,
therefore,  no provision for loss has been made at this time. The recoverability
of  these  assets  will  be  evaluated  periodically  as  required  by FAS  121,
"Accounting For the Impairment of Long-Lived Assets and for Long Lived Assets to
be Disposed  Of." It is possible  that the proceeds to be received from the sale
of these  assets may prove to be less than the  remaining  book value,  at which
point in time the appropriate provision for loss will be made.

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  paid  First  Funding
$894,000, $687,000 and $718,000 in fiscal 1997, 1996 and 1995, respectively.  In
addition,  the Company also  reimbursed  First  Funding  $319,000,  $211,000 and
$285,000 for  out-of-pocket  costs during the same three periods,  respectively.
The fiscal 1997  amount  included  $460,000  for  services  related to the asset
purchase (see Note 2) and amended credit facility (see Note 8) . The fiscal 1995
amount  included  services  regarding the  extension of the Company's  worldwide
credit facility.




                                 Page 25 of 45
<PAGE>





Note 5 - Inventory

Inventory is comprised of the following:
                                                  12/31/97         12/31/96
                                                  --------         --------
                                                       (In thousands)
            Stock and raw materials...........      $9,459           $5,905
            Work-in-process...................       8,818            8,282
                                                  --------         --------
            Total.............................     $18,277          $14,187
                                                   =======          =======

         Of the above  inventories at December 31, 1997 and 1996, $9 million 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  $.5
million at December 31, 1997 and 1996.

Note 6 - Property, Plant and Equipment

Property, plant and equipment is comprised of the following:
                                                           12/31/97    12/31/96
                                                           --------    --------
                                                               (In thousands)

           Land and buildings...........................     $3,927     $3,024
           Machinery, equipment and other...............     18,163     14,700
           Construction in progress.....................        112        188
                                                           --------   --------
                                                             22,202     17,912
             Accumulated depreciation...................     (9,786)    (8,357)
                                                             -------    -------
             Property, plant and equipment, net.........    $12,416     $9,555
                                                            =======     ======

         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  $1.0  million  and $.8  million at  December  31,  1997 and 1996,
respectively.  Also  included  are  income  taxes  payable of $1.0  million,  at
December 31, 1997 and 1996.

Note 8 - Bank Credit Arrangements

         At December 31,1997, the Company had a worldwide  multi-currency credit
facility  with a major  U.S.  bank in the  amount of $20.0  million  for  direct
borrowings  and  letters of credit and up to  [Pounds]  3.0  million for foreign
exchange contracts.  Interest varies based upon prevailing market interest rates
(8.75% and 7.25% at December  31,  1997 and 1996,  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 the making of investments, on borrowings and on
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, 1997,
there was $7.1 million in direct  borrowings under this facility.  There were no
direct  borrowings  outstanding  under this  facility at  December 31 1996.  The
weighted  averaged  interest rate incurred on short-term  borrowings  was 8.18%,
7.68 % and 7.75% in fiscal 1997, 1996 and 1995, respectively. There



                                 Page 26 of 45
<PAGE>




were $6.0 million and $8.1 million of letters of credit  outstanding at December
31, 1997 and 1996, respectively.

         The Company has a loan in the amount of [Pounds] 125,000 ($205,000) and
[Pounds] 250,000 ($428,000) at December 31, 1997 and 1996, respectively,  from a
U.K.  bank  which is  collateralized  by the  Company's  facility  in  Rochdale,
England.  The loan  matures  in  January  1999 for which  semi-annual  principal
payments of approximately [Pounds] 62,500 began in 1995.  Approximately [Pounds]
125,000 ($205,000 and $214,000) at December 31, 1997 and 1996, respectively,  is
classified as payable  currently and [Pounds] 125,000  ($214,000) was classified
as long term at December 31, 1996.  The interest rate on this loan is 10 percent
per annum.

         On January 23,  1998,  the credit  facility  was  amended.  The amended
facility  provides for total  borrowings of $25 million,  consisting of an $18.5
million  revolving  credit  facility  and a five  year  term loan for up to $6.5
million.  Concurrently with the execution of the amended credit  agreement,  the
Company  converted  [Pounds]  4  million  (approximately  $6.5  million)  of the
outstanding  balance under the previous credit facility to a term note. The term
loan is payable in equal quarterly payments over a five year period. At December
31, 1997,  [Pounds] 3.2 million  (approximately  $5.3  million) is classified as
long term. The amended credit facility  contains limits in direct borrowings and
letters of credit combined based upon stipulated levels of accounts  receivable,
inventory and backlog. It also contains covenants specifying minimum and maximum
thresholds for operating results and selected financial ratios.

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)
------------------------                                     --------------
1998                                                                 495
1999                                                                 361
2000                                                                 123
2001                                                                  93
2002                                                                 134
Thereafter                                                            71
                                                                   -----
                                                                  $1,277
                                                                  ======

              Rental expense for the year ended December 31, 1997, 1996 and 1995
was $332,000, $374,000, $452,000, 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 operation.

Note 10 - Stock Plans

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





                                 Page 27 of 45
<PAGE>




         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.  There  were no stock  options
granted during 1997.

         In prior years,  the Company  granted  stock options under a previously
sponsored plan to eligible  employees and directors of the Company.  At December
31, 1997, options to purchase 459,000 shares remain outstanding under the plan.

         The Company has elected to continue to account 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,
"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>
                                                        1997                      1996                        1995
                                               --------------------       ---------------------      --------------------
                                                        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                   459    $5.86             296       $6.96                286        $7.04
Granted                                            -         -            375        4.38                 72         5.28
Exercised                                          -         -              -           -                  -            -
Forfeited                                          -         -            212        4.76                 62         5.42
                                               --------------------       ---------------------      --------------------
Outstanding, end of year                         459    5.86              459       $5.86                296        $6.96
                                               --------------------       ---------------------      --------------------
Exercisable, end of year                         374    6.32              279       $7.05                213        $7.58
Weighted-average fair value of options
    granted during the year                        -                     $1.75                         $2.20         --
</TABLE>

         The  following  table  summarizes   information   about  stock  options
outstanding at December 31, 1997:

<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>
 $3.75 -   $5.50         278,000              7.0 years           $4.51                   193,250             $4.79
  5.51 -    8.50          95,000                 5.5               6.32                    95,000              6.32
  8.51 -   10.00          86,000                 4.0               9.73                    86,000              9.73
---------------------------------------------------------------------------           -----------------------------
 $3.75 -  $10.00         459,000                 6.2              $5.86                   374,250             $6.32

</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



                                 Page 28 of 45
<PAGE>




date of grant using the Black-Scholes option pricing model, one of the allowable
valuation models under FAS 123, with the following assumptions for 1996:

                                                          1996

    Risk   free   interest   rate                         6.0%
    Dividend yields                                       2.0%
    Expected volatility  factor  of the  expected
    market price of the Company's common stock             .458
    Weighted average expected life of each option         8 Yrs

        The  weighted  average  fair value of options  granted  during  1996 was
$1.75.  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.  Because the Company's  employee stock options have  characteristics
different than those of traded  options,  and because  changes in the subjective
input assumptions can materially affect the fair value estimate, 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.  It is also not
likely that the current pro forma net income will 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:




                                                               Year ended
                                                               ----------
                                                        12/31/97        12/31/96
                                                        --------        --------
                                                         (In thousands, except
                                                            per share data)


Pro Forma Net Income                                     $1,331            $258
Pro Forma earnings per share - basic and diluted            .22             .04



        During 1997, the Company adopted the 1997 Employee's Stock Purchase Plan
as a successor to the 1992 Employees Stock Purchase Plan.

        The 1997 Stock Purchase Plan gives each eligible employee of the Company
the right to purchase,  in each of the years 1997 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.  Each May,  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.

        Under the  stock  purchase  plans in July  1997 and May 1996,  employees
elected to purchase approximately 9,000 and 3,000 shares,  respectively,  of the
Company's common stock through these plans. During 1997 and 1996,  approximately
13,000 and 9,000 shares, respectively,  were distributed to employees under this
plan.  The 1997  distribution  includes 647 shares from the  Company's  treasury
account,  for which retained earnings was adjusted.  At December 31, 1997, there
were approximately 13,000 shares subscribed to under these plans.





                                 Page 29 of 45
<PAGE>




        The Company may reaquire up to  $2,250,000 of its common stock under its
discretionary  open market stock repurchase plan. During fiscal 1996 the Company
reacquired  54,150  shares of common  stock,  under this plan for  approximately
$175,000, 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 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:



                                                            Year ended
                                                            ----------
                                                  12/31/97   12/31/96   12/31/95
                                                  --------   --------   --------
         Domestic pension expense:                       (In thousands)


Service cost-benefits earned during the period..    $62        $65         $82
Interest cost on projected benefit obligation...    124        122         110
Actual return on plan assets....................   (171)       (31)       (174)
Amortization of deferred items..................     84        (52)        113
                                                   -----      -----       -----
     Net domestic pension expense                   $99       $104        $131
                                                   =====      =====       =====

    Foreign pension expense:

Service cost-benefits earned during the period..   $258       $226        $220
Interest cost on projected benefit obligation...    728        648         598
Actual return on plan assets....................   (802)      (743)       (931)
Amortization of deferred items..................   (159)      (122)        116
                                                   -----      -----       -----
    Net foreign pension expense                     $25         $9         $ 3
                                                   =====      =====       =====





                                 Page 30 of 45
<PAGE>




         Over  the long  run,  the  Company's  funding  policy  is  designed  to
accumulate  sufficient  assets  in the  benefit  plans to meet  obligations  for
retirement  benefits.  Because at any point in time  there  will be  differences
between the estimates used in establishing  pension cost and funding amounts and
actual  experience,  there will always be an amount by which the Company is over
or under-funded.  The domestic plan was under-funded by $211,000 and $202,000 at
December 31, 1997 and 1996,  respectively,  which the Company  expects to reduce
through contributions to the pension plan in the future.

         The  following  table sets forth the funded  status of the domestic and
foreign defined benefit plans and amounts recognized in the balance sheets:

<TABLE>
<CAPTION>

                                                                              Domestic                        Foreign
                                                                            December 31,                    December 31,
                                                                            ------------                    ------------
                                                                        1997           1996             1997           1996
                                                                        ----           ----             ----           ----
<S>                                                                     <C>             <C>             <C>            <C>
     Actuarial present value of:
        Vested benefit obligations                                      $1,884          $1,694          $9,984         $8,828
                                                                        ======          ======          ======         ======

        Accumulated benefit obligation                                  $1,991          $1,755          $9,984         $8,828
                                                                        ======          ======          ======         ======
     Plan assets at fair value                                          $1,780          $1,553          $9,800         $9,289
     Actuarial present value of projected benefit
        obligation for service rendered to date                          1,991           1,755          10,252          9,063

     Projected benefit obligation (in excess of)/
        less than plan assets                                             (211)           (202)           (452)           226

     Unrecognized actuarial variances                                      504             461             699            223
     Unamortized net transition liability/(asset)                            9              16            (198)          (372)
     Unamortized prior service costs                                        79              45             ---            ---
     Additional minimum liability                                         (592)           (522)            ---            ---
                                                                        ------          ------          ------         ------
     Accrued pension (cost)/benefit                                      ($211)          ($202)            $49            $77
                                                                        ======          ======          ======         ======
     Plans assumptions:
       Discount rate                                                     7.00%           7.25%           7.50%          8.50%
       Rate of increase in future compensation levels                      N/A             N/A           4.50%          5.50%
       Expected long-term rate of return on plan assets                  8.00%           8.00%           9.00%          9.00%
</TABLE>


        The Company  changed the discount  rate in 1997 in response to the lower
current and projected interest rates. The Company changed the expected long term
rate of return on plan assets in 1996 due to the fact the Company  retained  the
services of a professional  investment advisor to manage the assets of the Plan.
As a result, investment returns are anticipated to improve. The Company recorded
a minimum  liability  of $592,000  and  $522,000 at December  31, 1997 and 1996,
respectively.  The Company has also  recorded  intangible  assets of $88,000 and
$61,000,  the amounts  allowable  under FAS 87, at  December  31, 1997 and 1996,
respectively,  which are  included in Other  Assets.  The minimum  liability  in
excess of the intangible asset has been recorded as a reduction of stockholders'
equity, net of applicable income taxes.

        During 1996 the Company reduced the workforce of employees covered
    by the  domestic  defined  benefit  plan,  and as a  result,  experienced  a
    curtailment  of the  pension  obligation.  The  Company  accounted  for this
    curtailment  under  FAS  88,  "Employers'  Accounting  for  Settlements  and
    Curtailments of Defined Benefit Pension Plans and for Termination Benefits."
    The impact on 1996 operations was a minor gain.




                                 Page 31 of 45
<PAGE>





        The Company has a domestic 401(k) retirement plan for salaried employees
which includes  matching and  discretionary  non-matching  contributions  by the
Company.  Approximately  $119,000,  $113,000 and $147,000 of such  contributions
were  expensed in fiscal 1997,  1996 and 1995,  respectively.  No  discretionary
contributions were made by the Company during fiscal 1997, 1996 or 1995.

    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
elimination  of these  benefits  reduced the  obligation by  approximately  $1.3
million ($.8 million net of approximately  $.5 million of deferred income taxes)
from that which was previously  recorded by the Company when it adopted FAS 106,
"Employers  Accounting for  Postretirement  Benefits Other Than  Pensions".  The
Company  accounted for the elimination of these benefits under the provisions of
FAS 106. The following table summarizes the Company's expense for postemployment
benefits other than pensions.




                                                           Year ended
                                                           ----------
                                                 12/31/97   12/31/96   12/31/95
                                                 --------   --------   --------
                                                         (In thousands)

Service cost- benefits earned during
  the period                                       ---        ---        ---

Interest cost on accumulated postretirement
  benefit obligation                               $90        $90       $111
                                                  ----       ----       ----
Net periodic postretirement benefit costs          $90        $90       $111
                                                  ====       ====       ====

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

                                                       12/31/97         12/31/96
                                                       --------         --------
                                                             (In thousands)
Accumulated postretirement benefit obligation:
     Retirees and dependents                             $1,221          $1,219
     Fully eligible plan participants                       ---              28
     Other active plan participants                         ---             ---
                                                         ------          ------
                                                          1,221           1,247
Unrecognized net gain (loss) from experience
         differences and change in assumptions              (8)              30
                                                         ------          ------
Postretirement benefit obligation                        $1,213          $1,277
                                                         ======          ======





                                 Page 32 of 45
<PAGE>




        The  assumed   discount  rate  used  in  determining   the   accumulated
postretirement  benefit  obligation was 7.00% and 7.25% at December 31, 1997 and
1996,  respectively.  The assumed  health care cost trend rate used in measuring
the accumulated  postretirement benefit obligation was 9.0% at December 31, 1997
and  declines  .5% per year to 5.5% by the year 2005 and  remains  at that level
thereafter.  The change in  assumptions  did not have a  material  impact on the
obligation or net periodic  postretirement benefit cost. The accumulated benefit
obligation as of December 31, 1997 and net periodic  postretirement  health care
cost for fiscal 1997 would increase  approximately 8.1% and 8.5%,  respectively,
with an annual one  percentage  point  increase in the assumed  health care cost
rate.

Note 12 - Provision for Income Taxes

        Pre-tax  income/(loss) and income taxes for the years ended December 31,
1997, 1996 and 1995 are as follows:



                                                            Year ended
                                                  12/31/97   12/31/96   12/31/95
                                                  --------   --------   --------
The domestic and foreign  components
of (In  thousands)  income/(loss)before
income taxes are:
    Domestic                                          $89     ($1,544)     $971
    United Kingdom                                  1,995       2,024       485
                                                   ------     -------    ------
                                                   $2,084        $480    $1,456
                                                   ======     =======    ======
The provision/(benefit) for income taxes is:
    Current:
      United States                                   101       ($646)     $437
      United Kingdom                                  658         664        88
      State taxes                                      52         (25)      129
                                                       --         ---      ----
                                                      811          (7)      654
    Deferred:
      United States                                   (50)       $232     $(117)
      United Kingdom                                    7          41        53
      State taxes                                     (41)       (112)      (36)
                                                   ------     -------    ------
                                                      (84)        161      (100)
                                                   ------     -------    ------
                                                     $727        $154      $554
                                                   ======     =======    ======
T
Deferred tax liabilities/(assets) result from the following differences between
financial reporting and tax accounting.

                                                      12/31/97       12/31/96
                                                      --------       --------
                                                            (In thousands)
   Deferred tax liabilities:
   -------------------------
   Depreciation                                        $1,054         $1,128
   Inventory valuation                                    258            186
   Other                                                    -             46
                                                      -------       --------
   Total deferred tax liabilities                       1,312          1,360
                                                      -------        -------

   Deferred tax assets:
   --------------------
   Non pension postretirement benefits                   (485)          (511)
   Installation and warranty cost accruals               (324)          (220)
   Vacation reserve                                       (94)          (154)
   Bad debt reserve                                       (51)           (57)
   Minimum pension liability                             (202)          (184)
   State tax loss carryforwards                          (197)          (180)
   Other                                                  (30)           ---
                                                      --------       --------
   Total deferred tax assets                           (1,383)        (1,306)
                                                      --------       --------
   Net deferred tax liability/(asset)                $    (71)      $     54
                                                      ========       ========





                                 Page 33 of 45
<PAGE>




        Other  current  assets  includes  $296,000  and $274,000 of deferred tax
assets at December 31, 1997 and 1996,  respectively.  Other current  assets also
includes  prepaid  income taxes of $665,000 at December 31, 1996.  The state tax
loss carryforwards expire in the year 2011.

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




                                                      Year ended
                                         12/31/97       12/31/96        12/31/95
                                         --------       --------        --------
    (In thousands)

    Statutory provision                     709           $163           $495
    U.S.--U.K. rate differential            (57)            17             (5)
    State income taxes, net of
      federal benefit                         7            (90)            62
    Permanent differences                    98             30             39
    Other                                   (30)            34            (37)
                                           -----          -----          -----
    Actual provision                       $727           $154           $554
                                           =====          =====          =====

Note 13 - Earnings per Share


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


                                             Year            Year        Year
                                             ended          ended        ended
                                           12/31/97        12/31/96     12/31/95
                                           --------        --------     --------
                                             (In thousands, except share data)
Net income applicable to
  common stockholders                         $1,357           $326        $902
                                           =========      =========    =========


Weighted average number of common
shares outstanding - Basic earnings
  per Share                                5,950,240      5,969,708    6,026,942

Effect of dilutive stock and
 purchase options                              1,403          2,393        3,364
                                           ---------      ---------   ----------


Weighted average number of
common shares outstanding -
  Diluted earnings per share               5,951,643      5,972,101    6,030,307
                                           =========      =========    =========

Net income per share-basic                     $0.23          $0.05        $0.15
                                           =========      =========    =========


Net income per share-diluted                   $0.23          $0.05        $0.15
                                           =========      =========    =========



                                 Page 34 of 45
<PAGE>





Note 14 - Other income/(expense), net

        For the year ended December 31, 1997,  other  income/expense  includes a
gain of  approximately  $.7 million from the disposal of machinery and equipment
no longer used. There were no individually  significant items of other income or
expense in 1996.

Note 15 - Foreign Operations, Export Sales and Major Customers

        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.

        Net sales to unaffiliated customers,  operating income and assets of the
U.S. and U.K.  operations for the years ended December 31, 1997,  1996, and 1995
are as follows: United United States Kingdom Consolidated (In thousands)


                                              United     United
                                              States     Kingdom    Consolidated
                                             -----------------------------------
                                                       (In thousands)

    Year ended 12/31/97
         Sales to unaffiliated Customers      $60,594     $24,788     $85,382
         Operating income                      $(310)      $1,945      $1,635
         Assets                               $29,867     $26,514     $56,381

    Year ended 12/31/96:
         Sales to unaffiliated Customers      $50,811     $25,025     $75,836
         Operating income                    ($1,501)      $2,155        $654
         Assets                               $31,011     $19,720     $50,731

    Year ended 12/31/95:
         Sales to unaffiliated customers      $58,957     $21,110     $80,067
         Operating income                      $1,169        $422      $1,591
         Assets                               $36,390     $17,022     $53,412

        The breakdown of U.S. sales to foreign  countries  grouped by geographic
area is as follows:





                                           Year           Year            Year
                                           ended          ended           ended
                                         12/31/97       12/31/96        12/31/95
                                         --------       --------        --------
                                                     (In thousands)
Korea                                     $14,051         $2,053            $675
Asia                                        4,307         $3,452          $9,243
North America, other than the U.S.          1,452          3,975           9,232
Middle East                                    74            119           3,142
All other                                   1,414            797             699
                                          -------        -------         ------=
                                          $21,298        $10,396         $22,991
                                          =======        =======         =======


         Sales to Korea in 1997 includes $13 million to one customer.





                                 Page 35 of 45
<PAGE>




Note 16 - Quarterly Financial Data (unaudited):

             Summarized quarterly financial data for fiscal 1997 and 1996:

<TABLE>
<CAPTION>

                                                                  (In thousands except per share data)
                                                                                  Quarter
                                                             -----------------------------------------------
                                                               First        Second      Third       Fourth
                                                             ----------   ----------   --------   ----------
Fiscal 1997

<S>                                                            <C>          <C>        <C>          <C>
Net Sales                                                      $16,123      $26,183    $21,955      $21,121
                                                             ==========   ==========   ========   ==========
Gross Margin                                                    $3,338       $5,344     $5,429       $3,600
                                                             ==========   ==========   ========   ==========
Other Income (expense) net                                        $300         $167        $20        ($38)
                                                             ==========   ==========   ========   ==========
Net income/(loss)                                               ($106)         $870       $712       ($119)
                                                             ==========   ==========   ========   ==========
Basic and diluted net income/(loss) per common share           ($0.02)        $0.15      $0.12      ($0.02)
                                                             ==========   ==========   ========   ==========
Basic weighted average shares outstanding (000's)                5,942        5,942      5,949        5,946
                                                             ==========   ==========   ========   ==========
Diluted weighted average shares outstanding (000's)              5,942        5,943      5,955        5,953
                                                             ==========   ==========   ========   ==========

                                                                                  Quarter
                                                             -----------------------------------------------
                                                               First        Second      Third      Fourth
                                                             ----------   ----------   --------   ----------
Fiscal 1996
Net Sales                                                      $17,865      $13,196    $18,081      $26,694
                                                             ==========   ==========   ========   ==========
Gross Margin                                                    $4,359       $2,818     $4,141       $6,805
                                                             ==========   ==========   ========   ==========
Other Income/(expense)                                           ($48)          $64      ($93)         ($97)
                                                             ==========   ==========   ========   ==========
Net income/(loss)                                                 $181     ($1,170)      ($25)       $1,340
                                                             ==========   ==========   ========   ==========
Basic and diluted net income/(loss) per common share             $0.03      ($0.20)      $0.00        $0.22
                                                             ==========   ==========   ========   ==========
Basic weighted average shares outstanding (000's)                5,985        5,973      5,963        5,836
                                                             ==========   ==========   ========   ==========
Diluted weighted average shares outstanding (000's)              5,987        5,973      5,963        5,837
                                                             ==========   ==========   ========   ==========
</TABLE>





                                 Page 36 of 45
<PAGE>






Item 9 -  Changes  in and  Disagreements  with  Accountants  on  Accounting  and
          Financial Disclosure

              None.




                                 Page 37 of 45
<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,
1997 and  delivered to  stockholders  in connection  with the Annual  Meeting of
Stockholders to be held on May 20, 1998.

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,
1997 and  delivered to  stockholders  in connection  with the Annual  Meeting of
Stockholders to be held on May 20, 1998.

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,
1997 and  delivered to  stockholders  in connection  with the Annual  Meeting of
Stockholders to be held on May 20, 1998.

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,
1997 and  delivered to  stockholders  in connection  with the Annual  Meeting of
Stockholders  to be  held  on May 20,  1998.  See  also  Notes  to  Consolidated
Financial Statements, Note 4, appearing in Item 8 herein.




                                 Page 38 of 45
<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, 1997 and, 1996.........................................18
         Consolidated Statements of Income for
          the years ended December 31, 1997, 1996, and 1995...................19
         Consolidated Statements of Stockholders' Equity
          for the years ended December 31, 1997,
          1996 and 1995.......................................................20
         Consolidated Statements of Cash Flows for years
          ended December 31, 1997, 1996 and 1995..............................21
         Notes to Consolidated Financial Statements........................22-36

         2.   Financial Statement Schedule

         Report of Independent Auditors on Financial
          Statement Schedule..................................................44
         Schedule II - Valuation and Qualifying Accounts......................45

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




                                 Page 39 of 45
<PAGE>




3. Exhibits                                                                 Page
Exhibits
--------
Exhibit 2(1)        Sale   and    purchase    agreement   of
                    the Francis   Shaw   Rubber    Machinery
                    Business dated December 4,1997,  between
                    Francis Shaw Rubber  Machinery  Limited,
                    PRC Fabrications Limited, EIS Group PLC,
                    Farrel   Bridge   Limited   and   Farrel
                    Limited.  Filed  as an  exhibit  to  the
                    Registrant's  Report  on Form  8K  dated
                    December   19,  1997  and   incorporated
                    herein by reference.                                     N/A

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           Amendment and  Restatement of the Credit
                    Agreement  between  Farrel   Corporation
                    Chase  Manhattan  Bank  of  Connecticut,
                    N.A.  and  Chase   Manhattan  Bank  N.A.
                    London dated January 23, 1998.

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(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 40 of 45
<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 11          Statement re:  Computation  of per share
                    earnings.  See Note 13 to the Company's
                    Consolidated Financial Statments included
                    herewith.

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

Exhibit 27          Financial Data Schedule



(b) Reports on Form 8K.

The following report on Form 8-K was filed by the registrant  during the quarter
ended December 31, 1997.

Item 2           December 19, 1997           The    registrant    completes
                                             acquisition of selected assets
                                             of  the  Francis  Shaw  Rubber
                                             Machinery Business









                                 Page 41 of 45
<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/Rolf K. Liebergesell
                                   -----------------------------------
                                   Rolf K. Liebergesell
                                   Chief Executive Officer
                                   President and Chairman of the Board


                                   March  30, 1998
                                   ---------------
                                   Date








                                 Page 42 of 45
<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,
Rolf K. Liebergesell             President and chairman            3/30/98
                                 of the Board                    ---------------

/s/ Catherine M. Boisvert
-------------------------        Vice President and Controller,    3/30/98
Catherine M. Boisvert            (Chief Accounting Officer)      ---------------

/s/ Charles S. Jones                                               3/31/98
-------------------------        Director                        ---------------
Charles S. Jones


-------------------------        Director                        ---------------
James A. Purdy


-------------------------        Director                        ---------------
Howard J. Aibel

/s/ Glenn Angiolillo                                               3/27/98
-------------------------        Director                        ---------------
Glenn Angiolillo

/s/ Alberto Shaio                                                  3/30/98
-------------------------        Director                        ---------------
Alberto Shaio








                                 Page 43 of 45
<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,  1997 and 1996,  and for each of the three years in the period
ended December 31, 1997, and have issued our report thereon dated March 19, 1998
included  elsewhere in this Annual Report on Form 10-K. Our audits also included
the financial statement schedule for the years ended December 31, 1997, 1996 and
1995 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.

                                            /s/ ERNST & YOUNG LLP

                                            Ernst & Young LLP


Stamford, Connecticut
March 19, 1998




                                 Page 44 of 45
<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 12/31/95
-------------------

<S>                                            <C>             <C>            <C>             <C>               <C>
Allowance for doubtful
  receivables                                    499           (323)            0                (74)             102
Reserve for excess and obsolete
  inventory items                              2,131            598            (1)            (1,686)           1,042
Accrued installation and warranty
  costs                                        1,915            864           (10)            (1,145)           1,624

Year ended 12/31/96
-------------------
Allowance for doubtful
  receivables                                    102            362            10                (10)             464
Reserve for excess and obsolete
  inventory items                              1,042            119            67               (137)           1,091
Accrued installation and warranty
  costs                                        1,624          1,840            92             (2,196)           1,360

Year ended 12/31/97
-------------------

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
</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 and
      restructuring reserve 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 45 of 45