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, 1998
                                                          or

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

For the transition period from                     to              
                               --------------------   -------------
COMMISSION FILE NUMBER              0-19703
                       ---------------------------------------------------------

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

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


  25 MAIN STREET, ANSONIA, CONNECTICUT                            06401
--------------------------------------------------------------------------------
(Address of principal executive offices)                        (Zip code)

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

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

    COMMON STOCK $.01 PAR VALUE                        NASDAQ  
--------------------------------------------------------------------------------
                                (Title of Class)

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

 Yes X  No   .
    ---   ---

Indicate by check mark if disclosure of delinquent  filers  pursuant to Item 405
of Regulation  S-K is not contained  herein,  and will not be contained,  to the
best of registrant's  knowledge,  in definitive proxy or information  statements
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 22, 1999

was $5,301,164.

The number of shares  outstanding of the  registrant's  common stock as of March
22, 1999 was 5,386,586 shares.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the definitive  Proxy  Statement to be delivered to  stockholders in
connection  with the Annual Meeting of  Stockholders  to be held on June 2, 1999
are incorporated by reference into Part III.

                     Exhibit Index Appears on Pages 43 - 44


                                  Page 1 of 49
<PAGE>


                                     PART I

ITEM 1 - BUSINESS

GENERAL

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

          The Company's  rubber  processing  equipment is primarily sold to tire
manufacturers 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 large plastic
resins  producers and compounders of plastics.  The Company markets its products
through its strategically  located domestic and international  sales and service
organization.

COMPANY STRATEGY

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

          In line with this  growth  strategy,  in  December  1997,  the Company
acquired the assets of the Francis Shaw Rubber  Machinery  ("Shaw")  business in
England for the  production of  INTERMIX(R)  internal  mixers with  intermeshing
rotors,  extruders and related  equipment.  The products serve  principally  the
technical rubber goods manufacturers and the tire industry.  The internal mixers
produced by Shaw are essentially  similar to the Company's  BANBURY(R)  internal
mixers,  differing only in the configuration of the mixing rotors.  The combined
complimentary product lines provide the Company with global access to all rubber
products  manufacturers,  thereby  increasing  market share. The Shaw operations
were  transferred to the Farrel Limited  facility  beginning in the fall of 1998
and will be totally  integrated  by the end of the  second  quarter  1999.  As a
result,  Shaw  manpower  will have been  reduced  from 218 to  approximately  60
employees and redundant plant overheads totally eliminated.

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.


                                  Page 2 of 49
<PAGE>


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

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

PRODUCTS AND SERVICES

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

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

                                             Year           Year         Year
                                             ended          ended        ended
                                           12/31/98       12/31/97     12/31/96
                                           --------       --------     --------

New Machines/Related Services.........       56.9%          57.1%         53.3%
Aftermarket...........................       43.1%          42.9%         46.7%
                                            ------         ------        ------
Total.................................      100.0%         100.0%        100.0%
                                            ======         ======        ======

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

CUSTOMERS AND MARKETING

          The   Company's   principal   customers   are   domestic  and  foreign
manufacturers  of rubber and plastic  materials.  The Company's  customers often
purchase  significant  equipment  for  new  plants,  plant  expansion  or  plant
modernization.  Purchases by any single  customer  typically vary  significantly
from year to year according to each  customer's  capital  equipment  needs. As a
result, the composition of the Company's customers may vary from one year to the
next.  The Company  considers its  operations to be one operating  segment.  The
sales,  manufacturing,  assembly  and  distribution  are  essentially  the same.
Segment information for new equipment sales, aftermarket sales, geographic sales
and operating  results for fiscal 1998, 1997 and 1996 are reported in Note 16 to
the Consolidated Financial Statements.

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


                                  Page 3 of 49
<PAGE>


PROCESS LABORATORY SERVICES

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

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

COMPETITION

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

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

BACKLOG

          The  Company's  backlog of orders  considered  firm by  management  at
December 31, 1998, 1997 and 1996 was approximately $33 million,  $47 million and
$50  million,  respectively.  Substantially  all of the orders  included  in the
December  31, 1998  backlog have  contractual  ship dates in fiscal  1999.  Firm
backlog at March 19, 1999 and March 20,  1998 was $38  million and $59  million,
respectively.

MANUFACTURING

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

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


                                  Page 4 of 49
<PAGE>


          The  production  equipment  acquired  in the  1997  Shaw  acquisition,
located  in  Manchester,  England,  is being  transferred  to  Farrel  Limited's
facility in nearby Rochdale,  England. The facility integration is planned to be
completed  during  the  second  quarter  of 1999  and is  expected  to  generate
substantial cost reductions and production efficiencies.

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

COMPONENTS AND RAW MATERIALS

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

RESEARCH AND DEVELOPMENT AND ENGINEERING

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

                                            Year        Year        Year
                                           ended       ended       ended
                                          12/31/98    12/31/97    12/31/96
                                          --------    --------    --------
                                               (Dollars in thousands)
Research and development expense
  pertaining to new products or
  significant improvements to
  existing products ..................     $1,485      $1,567      $1,993

All other product  development and
  engineering expenditures  related
  to ongoing refinements, improvements
  of existing products, and custom
  engineering ........................      3,700       2,874       3,329
                                           ------      ------      ------

Total ................................     $5,185      $4,441      $5,322
                                           ======      ======      ======

Percent of net sales .................       5.3%        5.2%        7.0%

PATENTS AND TRADEMARKS

          The Company  possesses  rights  under a number of domestic and foreign
patents and trademarks relating to its products and business.  The Company holds
approximately  200 patents which cover  technology  utilized in its products and
currently  has  approximately  40 patent  applications  pending.  The  Company's
patents have  expiration  dates  ranging from 1999  through  2015.  Although the
Company  believes  that its patents  provide  some  competitive  advantage,  the
Company also depends upon trade  secrets,  unpatented  proprietary  know-how and
continuing  technological  innovation  to develop and maintain  its  competitive
advantage.

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


                                  Page 5 of 49
<PAGE>


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 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.

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

EMPLOYEES

          As of December 31, 1998, the Company had 498 employees compared to 606
employees at December 31, 1997  (including  218  employees at the acquired  Shaw
operations).  In  anticipation  of the  consolidation  of the  operations in the
United  Kingdom,  the Shaw  workforce in Manchester was reduced by 126 employees
during  1998 and will be further  reduced  to about 60 during the first  quarter
1999. The Company has collective  bargaining agreements in the U.S. and the U.K.
which cover approximately 139 employees.  The U.S. agreement expires on June 15,
2000. The agreement in the U.K. expires April 1, 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.

<TABLE>
<CAPTION>
        LOCATION                       PRINCIPAL USE                  APPROX. SQ. FT.
-------------------------------------------------------------------------------------
<S>                                    <C>                                    <C>    
Ansonia, Connecticut.........          Office, research, laboratory,          520,000
                                       repair, rebuild, assembly and
                                       storage
Deer Park, Texas.............          Repair and rebuild                      22,000
Rochdale, England............          Office, research, laboratory,          210,000
                                       manufacturing, repair and rebuild,
                                       and storage
Manchester, England (Corbett St.)      Office, research, laboratory,           99,000    (leased)
                                       manufacturing, repair
                                       and rebuild, and storage
Derby, Connecticut                     Available for sale                     225,000    (sold January 1999)

</TABLE>

          During 1997 the Company  relocated  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.  The Company's Derby,  Connecticut  facility was sold during January
1999.


                                  Page 6 of 49
<PAGE>



          The Corbett Street,  Manchester,  England  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 Company has exercised an early  termination  option to
vacate these premises as of June 1999.

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

ITEM 3 - LEGAL PROCEEDINGS

          As  previously  described  in Part I,  in  Item 1,  Environmental,  in
February 1995, the Company and The Black & Decker Corporation settled litigation
as to the  environmental  conditions at the Ansonia and Derby  facilities at the
time  of the  Company's  purchase  of  them  from  USM in May  1986.  Under  the
Settlement  Agreement,  Black & Decker has assumed full  responsibility  for all
investigation  and  any  remediation  of  pre-May,  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 or by companies that manufactured similar
machinery  prior to the Company's  acquiring the right to  manufacture  and sell
that  equipment in May 1986.  The  previous  owner of the  technology  which the
Company  acquired in May, 1986, is obligated to defend and indemnify the Company
for any claims or liabilities arising out of pre-May 1986, activities. While the
outcome of lawsuits or other proceedings against the Company cannot be predicted
with any  certainty,  the Company does not expect that these matters will have a
material  adverse  effect on the  Company's  financial  position  or  results of
operations.


                                  Page 7 of 49
<PAGE>



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

           None.


                                  Page 8 of 49
<PAGE>



                                     PART II

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

          (a) Price Range of Common Stock and Dividends

          The  Company's  Common  Stock is traded over the counter and quoted on
the NASDAQ 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 1998                                 HIGH      LOW          DIVIDEND
-----------                                 ----      ---          --------

First Quarter                               $6.50     $4.38        -
Second Quarter                              $6.13     $3.25        $0.04
Third Quarter                               $3.78     $1.88        $0.04
Fourth Quarter                              $2.94     $2.00        -


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


          (b) As of March 22, 1999 the  approximate  number of record holders of
the Company's common stock was 850.

          (c) Dividends

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

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


                                  Page 9 of 49
<PAGE>



ITEM 6 - SELECTED CONSOLIDATED FINANCIAL DATA

<TABLE>
<CAPTION>
                                                              Year          Year         Year          Year          Year
                                                              Ended         Ended        Ended         Ended         Ended
                                                             12/31/98      12/31/97     12/31/96      12/31/95      12/31/94
                                                             --------      --------     --------      --------      --------
STATEMENT OF OPERATIONS DATA:                                            (In thousands, except per share data)

<S>                                                          <C>           <C>          <C>           <C>           <C>     
Net Sales ...............................................    $ 98,036      $ 85,382     $ 75,836      $ 80,067      $ 75,501
                                                             ========      ========     ========      ========      ========
Gross margin ............................................    $ 22,772      $ 17,711     $ 18,123      $ 19,760      $ 20,008
                                                             ========      ========     ========      ========      ========
   As a percent of net sales ............................        23.2%         20.7%        23.9%         24.7%         26.5%
                                                             ========      ========     ========      ========      ========
Operating income ........................................    $  4,622      $  1,635     $    654      $  1,591      $  2,601
   Other income (expense), net (2) ......................        (799)          449         (174)         (135)        1,436
                                                             --------      --------     --------      --------      --------
Income before income taxes ..............................       3,823         2,084          480         1,456         4,037
Provision for income taxes ..............................       1,546           727          154           554         1,531
                                                             --------      --------     --------      --------      --------
Net income ..............................................    $  2,277      $  1,357     $    326      $    902      $  2,506
                                                             ========      ========     ========      ========      ========

Net income per share - Basic and diluted (1) ............    $   0.38      $   0.23     $   0.05      $   0.15      $   0.41
                                                             ========      ========     ========      ========      ========
Dividends per share of Common Stock .....................    $   0.08      $   0.64     $   0.06      $   0.20      $   0.04
                                                             ========      ========     ========      ========      ========
Weighted  Average Shares Outstanding - Basic (000's) (1)        5,942         5,950        5,970         6,027         6,076
                                                             ========      ========     ========      ========      ========
Weighted Average Shares outstanding - Diluted (000's) (1)       5,966         5,951        5,972         6,030         6,097
                                                             ========      ========     ========      ========      ========

Balance Sheet Data:
   Current Assets .......................................    $ 48,273      $ 37,104     $ 40,187      $ 41,991      $ 37,697
   Current Liabilities ..................................    $ 28,351      $ 23,286     $ 19,841      $ 22,878      $ 16,613
   Working Capital Ratio ................................         1.7           1.6          2.0           1.8           2.3
   Total assets .........................................    $ 62,723      $ 56,381     $ 50,731      $ 53,412      $ 47,979
   Long-term debt .......................................    $  3,983      $  5,283     $    214      $    388      $    587
   Stockholders' equity .................................    $ 26,301      $ 25,782     $ 28,553      $ 27,814      $ 28,726

Other Data:
   Backlog ..............................................    $ 33,269      $ 46,554     $ 50,225      $ 29,745      $ 39,123
</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 49
<PAGE>


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

SAFE HARBOR STATEMENTS UNDER PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995

          Certain  statements  contained  in  the  Company's  public  documents,
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 could cause actual results to differ  materially from these  statements.
These factors include, but are not limited to pricing pressures from competitors
and/or customers; continued economic and political uncertainty in certain of the
Company's  markets;  the Company's ability to maintain and increase gross margin
levels;  the Company's  ability to generate  positive cash;  changes in business
conditions,  in general, and, in particular,  in the businesses of the Company's
customers and  competitors;  assessment of the impact of the Year 2000 and other
factors which might be described from time to time in the Company's filings with
the Securities and Exchange Commission.

FISCAL 1998 COMPARED TO FISCAL 1997:

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

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

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

          Full year operating  expenses  increased $2.0 million to $18.1 million
in 1998  compared to 1997.  The 1998 amount  includes  selling  expenses of $0.7
million  and general and  administrative  expenses of $1.4  million at the newly
acquired Shaw operations. Excluding the impact of the Shaw operations, operating
expenses  decreased by $0.1 million to $16.0  million  during 1998.  The Company
intends  to  consolidate   the  operations  of  Shaw  into   manufacturing   and
administrative facilities in Rochdale,  England, thereby, reducing a significant
portion of the Shaw overhead expenses.  The Company expects the consolidation to
be  accomplished  in the second  quarter of 1999.  The  Company  has reduced the
headcount  at Shaw to 92 at December  31, 1998  compared to 218 at December  31,
1997. Further, Shaw manpower will be reduced to about 60 by the end of the first
quarter.

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

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


                                 Page 11 of 49
<PAGE>


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

FISCAL 1997 COMPARED TO FISCAL 1996:

          Net  sales in 1997 and 1996 were  $85.4  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 considers the markets served by
the Company's products to be extremely competitive and, to some extent, affected
by the  uncertainty  in Eastern  Europe and the Middle East.  Additionally,  Far
Eastern markets are  particularly  competitive and volatile.  Certain  Southeast
Asian  countries are  experiencing  currency  instability  which  contributes to
uncertainty in the region. Many rubber  manufacturers  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 20.7%
from 23.9%.  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 $0.5 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.

          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 $0.2 million to
$7.0  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.

          During 1997 the Company  completed the  consolidation of the assembly,
repair and spare parts operations,  conducted in its Derby, Connecticut facility
into available  space in its Ansonia  facility,  to reduce  operating  costs and
enhance  efficiencies.  The cost of this project was approximately $1.3 million,
which included  capitalized costs of approximately $1.0 million for improvements
to facilities  and equipment.  While the Company  expects cost savings to result
from this  consolidation,  the size of such savings cannot be predicted with any
certainty.

          Other  income,  net of  other  expense,  includes  approximately  $0.7
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 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.


                                 Page 12 of 49
<PAGE>


MATERIAL CONTINGENCIES

          As  described  in Part 1, Item 3, in  February  1995,  the Company and
Black & Decker  entered  into a Settlement  Agreement  pursuant to which Black &
Decker  agreed  to  assume  full   responsibility   for  the  investigation  and
remediation of any pre-May,  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 January 19, 1999, the Company sold all of
its Derby,  Connecticut,  real estate and facilities. By the terms of that sale,
the  purchaser  committed  to  cooperate  with Black & Decker in any  additional
investigation  of the Derby  property and any  remediation of that property that
might be  required  by the DEP.  In  addition,  the  Company  has been  named an
additional  insured  on a  $5.0million  environmental  policy  obtained  by  the
purchaser  and the  purchaser  is  obligated  to name the Company an  additional
insured on any and all other  environmental  insurance  policies obtained by the
purchaser  related to the Derby property.  On the basis of the preliminary  data
now  available  there is no reason to believe  that any  remediation  activities
which might be required as a result of the findings of the assessment  will have
a material  effect upon the capital  expenditures,  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 1998 increased $6.6 million,  or
roughly 8.6%, to approximately $84.7 million compared to $77.0 million in fiscal
1997 and $96.0  million in fiscal  1996.  The 1998  increase in orders  includes
$13.7 million in orders from the newly acquired Shaw operations.

          In the  case of  major  equipment  orders,  up to  twelve  months  are
required to complete the manufacturing process.  Accordingly,  revenues reported
in the statement of operations may represent  orders  received in the current or
previous periods during which economic  conditions in various geographic markets
of the world impact our level of order intake.  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 1998 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,
1998 and 1997 is $33 million and $47 million, respectively. The contractual ship
dates for  substantially  all of the December 31, 1998 backlog are in 1999.  The
backlog at March 19, 1999 and March 20,  1998 was $38  million and $59  million,
respectively.

LIQUIDITY AND CAPITAL RESOURCES; CAPITAL EXPENDITURES

          Working  capital and the working  capital  ratio at December  31, 1998
were $19.9 million and 1.7 to 1.0,  respectively,  compared to $13.8 million and
1.6 to 1.0 at  December  31,  1997,  respectively.  The  increase in the working
capital  ratio at December  31, 1998 is  attributed  to the $5.3  million  asset
purchase  agreement  receivable.  See  Note  2  to  the  Consolidated  Financial
Statements for important  information  concerning the Company's demand under the
profit guaranty and the revised purchase price allocation. During the year ended
December 31, 1998 the Company paid dividends of $0.08 per share.  On January 19,
1999, the Company declared a dividend of $0.16 per share which was paid February
15, 1999. 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 paid between April 23, 1997 through June 1998.

          During  January  1999,  the Company  completed the sale of excess real
estate located in Derby,  Connecticut for $2.4 million. In addition,  subsequent
to  December  31,  1998,  under the  stock  repurchase  plan,  the  Company  has
repurchased  552,900  common shares in the amount of $1,272,000  (see Note 10 to
the Consolidated Financial Statements).


                                 Page 13 of 49
<PAGE>


          Due to the nature of the Company's business, many sales are of a large
dollar amount. Consequently, accounts receivable and/or inventory may be at high
levels from time to time and may result in a temporary  decline in cash provided
from  operating  activities.  Historically,  the  Company  has  not  experienced
significant  problems regarding the collection of accounts  receivable.  Many of
the  Farrel  Shaw  customers  are  new to  the  company.  While  there  were  no
significant  collection  problems during 1998,  Farrel Shaw customers tend to be
smaller and less liquid than the Company's historical customer base. 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,  1998,  the  Company  had a worldwide  multi-currency
credit facility with a major U.S. bank in the amount of $25.0 million consisting
of an $18.5 million  revolving credit facility for direct borrowings and letters
of credit and up to (pound)3.0 million for foreign exchange contracts and a five
year term note.  Interest  varies based upon  prevailing  market  interest.  The
facility  contains  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.  At December  31, 1998,  there was $5.3 million  outstanding
under  the term  loan.  The term loan was used to  finance  the  acquisition  of
selected assets of the Francis Shaw Rubber  Machinery  Business.  (See Note 2 to
the Consolidated Financial Statements.) At December 31, 1997, under the previous
credit facility (see Note 8 to the Consolidated  Financial Statements) there was
$7.1 million in direct borrowings outstanding.  There were $5.1 million and $6.0
million  of  letters  of  credit  outstanding  at  December  31,  1998 and 1997,
respectively.

          The revolving credit facility expires December 31, 2002. The term note
is  payable  in  equal  quarterly  payments  of  (pound)200,000   (approximately
$332,000) through December 31, 2002.

          Management  anticipates  that its cash balances,  operating cash flows
and  available  credit  line will be adequate  to fund its  anticipated  capital
commitments and working capital requirements for at least the next twelve months
including  integration of the Shaw asset  acquisition.  The Company made capital
expenditures of approximately $2.1 million and $1.9 million,  during fiscal 1998
and 1997, respectively.  The increase in capital expenditures in 1998 is largely
attributed to upgrading the  Company's  information  systems at locations in the
United Kingdom.

          The Company  manufactures  and  assembles  its  products in the United
Kingdom  and  assembles  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 has  instituted a Year 2000  readiness  project to address
the impact and risks related to the ability of the Company's  computer hardware,
computer programs, equipment with embedded computer chips and critical suppliers
to operate and function  properly  during the year change from December 31, 1999
to January 1, 2000, and to process date information correctly thereafter.

          The project is divided into three components - Business  Applications,
comprising the Company's internal  information  systems as well as the readiness
of third party  suppliers of goods and services whose Year 2000 readiness  could
potentially  have  significant  impact  on  the  Company's  operations;  Product
Applications,  relating to micro-processors within the control equipment sold by
the Company; and Equipment Applications, which relate to micro-processors within
operating equipment utilized in the Company's day to day operations.


                                 Page 14 of 49
<PAGE>



          The  project  team is  made  up of  internal  resources  from  various
disciplines,  including  operations,  facility management,  product engineering,
management  information  systems  and  finance.  The major  objectives  for each
component  are to: (1) identify  and document  Year 2000 issues which affect the
Company;  (2) inventory  systems,  machines and  processes  affected by the Year
2000; (3) assess Year 2000 readiness for  identified  items;  and (4) design and
implement  a plan to  achieve  Year 2000  readiness  for  significant  Year 2000
issues. The  identification and inventory of systems,  machine and processes has
been  completed.  The  assessment and plan to achieve Year 2000 readiness are at
various stages of completion for each of the three major components.

          The Business  Applications  component of the Company's  Year 2000 plan
relates primarily to the Company's  principal internal  information system which
consists of a mainframe  operated with third party purchased  computer software.
The  conversion to a Year 2000  compliant  version of the software was completed
during the fourth  quarter of 1998,  however,  system testing will continue into
the first-half of 1999.  This included the  replacement of hardware and software
for one of our UK  operations  to  provide  consistency  with the US  operation.
Similar  systems  for our  newly  acquired  subsidiary  in the UK have  not been
upgraded due to the planned  consolidation  at our other UK operation  which has
been upgraded.  The balance of the Company's computer based information  systems
consist  primarily of  individual  work  stations and personal  computers.  Work
stations in Engineering  were upgraded in 1997. All personal  computer  hardware
and software has been tested.  Modifications to the equipment are being made and
upgrades purchased for non-Year 2000 ready equipment.  The total amount expended
in the current and prior year,  related to the  Company's  internal  information
system, was approximately $0.9 million. Additional expenditures to complete this
phase is estimated to be less than $0.1 million. A significant  portion of these
expenditures  would have  occurred  without the Year 2000 issue and, in general,
these expenditures have not been accelerated.

          The  identification  and assessment of critical suppliers of goods and
services is in process.  Critical suppliers include suppliers of components used
in the Company's products as well as suppliers of goods and services used in the
Company's  operations.  Critical  suppliers have been identified as suppliers of
goods or services that, if interrupted for an extended period,  might impact the
Company's  ability to  provide  goods and  services  to its  customers,  satisfy
obligations  to its  employees and vendors and which might pose a risk of injury
or damage to individuals,  property or the  environment.  Critical  suppliers of
goods and services are being  contacted to assess their  readiness  for the Year
2000.  Due to the varying degree of impact the Year 2000 might cause and general
uncertainty  inherent  in the Year  2000  problem,  the  Company  is  unable  to
determine  if  third  party  supplier  readiness  would  materially  impact  the
Company's results of operations, liquidity or financial condition.

          The Product  Applications  component of the  Company's  Year 2000 plan
relates  primarily to  microprocessors  within the control equipment sold by the
Company.  The Company has identified  auxiliary  equipment and components  which
were  supplied  with its products and which might pose a risk that the Company's
product  will  not  function   properly  in  the  Year  2000.   The  process  is
substantially  complete.  Some supplied  components may require  modification or
upgrade.  The extent of  modifications  required  are  dependent  on the use and
extent of integration of our equipment at a customer's  location.  The Company's
efforts  are   expected  to  continue  to  assist  our   customers  to  maximize
serviceability  of  Company  supplied  equipment.  The  cost  of an  upgrade  or
modification  may  result in a  warranty  obligation  and  charge to  results of
operations  of the  Company.  The Company is unable to  determine  a  reasonable
estimate at this time.  However,  the Company does not expect that these matters
will have a material  adverse  effect on the  Company's  financial  position  or
results of operations and some of the cost might be recovered from the Company's
vendors.

          Equipment  Applications  component  of the  Company's  Year  2000 plan
relates  to  microprocessors  within the  operating  equipment  utilized  in the
Company's day to day  operations.  The  identification  of equipment used in the
Company's operation has been completed.  The equipment used in our manufacturing
and other  operations are not  integrated  systems,  but consist  principally of
individual  stand alone  machine  tools and  equipment.  Failure of one piece of
equipment  would  not  materially  impact  operations.  Correspondence  with the
equipment  suppliers to determine Year 2000 readiness is in process and expected
to be complete before the end of June 1999.  Individual pieces of equipment have
been identified for replacement.  The cost of such equipment  identified to date
for  replacement is not  significant.  Replacement of all effected  equipment is
expected to be completed by the middle of 1999.

          The failure to correct a material Year 2000 problem could result in an
interruption  in,  or a  failure  of,  certain  normal  business  activities  or
operations.  Such failures could  materially and adversely  affect the Company's
results of  operations,  liquidity and financial  condition.  Due to the general
uncertainty  inherent  in the Year  2000  problem,  resulting  in part  from the
uncertainty of the Year 2000  readiness of third-party  suppliers and customers,
the Company is unable to


                                 Page 15 of 49
<PAGE>


determine at this time whether the consequences of Year 2000 failures might have
a material impact on the Company's results of operations, liquidity or financial
condition.  The Year 2000  Project  is  expected  to  significantly  reduce  the
company's  level of uncertainty  about the Year 2000 problem and, in particular,
about the Year 2000 compliance and readiness of its critical  suppliers of goods
and services.  The Company  believes that with the  completion of the Project as
scheduled,  the possibility of significant  interruptions  of normal  operations
should be reduced.

          The  above  contains  forward-looking  statements  including,  without
limitation, statements relating to the Company's plans, strategies,  objectives,
expectations,  intentions, and adequate resources, that are made pursuant to the
"safe harbor"  statements  of the Private  Securities  Litigation  Reform Act of
1995. Readers are cautioned that  forward-looking  statements  contained in this
Year  2000  disclosure  should  be read in  conjunction  with  the  safe  harbor
statements of the Private Securities  Litigation Reform Act of 1995 contained on
page eleven of this report.

          Taking into account the  foregoing,  the following  are  identified as
some, but not all of,  important risk factors that could cause actual results to
differ materially from those expressed in any forward-looking statement made by,
or on behalf  of, the  Company:  the  availability  and cost of  personnel;  the
ability to locate and correct all items; and timely responses to and corrections
by third-parties and suppliers.  Due to the general uncertainty  inherent in the
Year  2000  problem,  resulting  in part from the  uncertainty  of the Year 2000
readiness of third-parties and the  interconnection  of global  businesses,  the
Company  cannot  ensure  its  ability  to timely  and  cost-effectively  resolve
problems  associated with the Year 2000 issue that may affect its operations and
business, or expose it to third-party liability.

EURO CONVERSION

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

IMPACT OF RECENTLY ISSUED ACCOUNT STANDARDS

          In June 1998,  the FASB  issued  Statement  No.  133,  Accounting  for
Derivative  Instruments and Hedging Activities,  which must be adopted effective
January 1, 2000.  The  Statement  will  require  the  Company to  recognize  all
derivatives on the balance sheet at fair value.  Derivatives that are not hedges
must be adjusted  to fair value  through  income.  If a  derivative  is a hedge,
depending  on the  nature  of  the  hedge,  changes  in the  fair  value  of the
derivative  will either be offset against the change in fair value of the hedged
asset,  liability,  or firm commitment through earnings,  or recognized in other
comprehensive  income  until the hedged  item is  recognized  in  earnings.  The
ineffective  portion of a derivative's  change in fair value will be immediately
recognized  in earnings.  The Company does not  anticipate  that the adoption of
this  Statement  will have a significant  effect on its results of operations or
financial position.

ITEM 7A - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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

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


                                 Page 16 of 49
<PAGE>



ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA


                               FARREL CORPORATION
                   INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

                                                                            PAGE

Report of Independent Auditors................................................18

Financial Statements:

Consolidated Balance Sheets as of December 31, 1998 and 1997..................19

Consolidated Statements of Income for the years ended 
  December 31, 1998, 1997, and 1996 ..........................................20

Consolidated Statements of Stockholders' Equity for 
  the years ended December 31, 1998, 1997 and 1996............................21

Consolidated Statements of Cash Flows for the years 
  ended December 31, 1998, 1997 and 1996......................................22

Notes to Consolidated Financial Statements...............................23 - 39


                                 Page 17 of 49
<PAGE>



The Board of Directors and Stockholders
Farrel Corporation

We  have  audited  the  accompanying   consolidated  balance  sheets  of  Farrel
Corporation  as of  December  31, 1998 and 1997,  and the  related  consolidated
statements of income,  stockholders' equity and cash flows for each of the three
years in the period ended December 31, 1998. 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, 1998 and 1997, and the  consolidated  results of its
operations  and its cash flows for each of the three  years in the period  ended
December 31, 1998 in conformity with generally accepted accounting principles.

                                              Ernst & Young LLP

Stamford, Connecticut
March 18, 1999





                                 Page 18 of 49
<PAGE>


<TABLE>
                                         FARREL CORPORATION
                                    CONSOLIDATED BALANCE SHEETS

<CAPTION>
                                                                12/31/98     12/31/97
                                                                --------     --------
                                                                     (In thousands)
   ASSETS
Current Assets:
<S>                                                             <C>          <C>     
  Cash and cash equivalents (Note 1) .......................    $  5,786     $  1,447
  Accounts receivable, net of allowance for doubtful
   accounts of $297 and $179, respectively .................      20,708       14,423
  Inventory (Notes 1 and 5) ................................      14,542       18,277
  Asset purchase agreement receivable (Note 2) .............       5,284           --
  Other current assets (Note 13) ...........................       1,953        2,957
                                                                --------     --------
    Total current assets ...................................      48,273       37,104
Property, plant and equipment, net of accumulated
  depreciation of $11,648 and $9,786, respectively
 (Notes 1 and 6) ...........................................      11,614       12,416
Goodwill, net of accumulated amortization of $0.4 at
  December 31, 1998 (Note 2) ...............................       1,555        5,295
Other assets (Notes 1, 3 and 11) ...........................       1,281        1,566
                                                                --------     --------
Total assets ...............................................    $ 62,723     $ 56,381
                                                                ========     ========

   LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
  Accounts payable .........................................    $ 14,039     $  8,317
  Accrued expenses and taxes  (Notes 2 and 7) ..............       4,284        4,753
  Advances from customers (Note 1) .........................       7,017        6,412
  Accrued installation and warranty costs  (Note 1) ........       1,683        1,326
  Dividends payable ........................................          --          951
  Short-term debt (Note 8) .................................       1,328        1,527
                                                                --------     --------
   Total current liabilities ...............................      28,351       23,286

Long-term debt (Note 8) ....................................       3,983        5,283
Postretirement benefit obligation (Note 11) ................       1,171        1,213
Other long-term obligations (Note 11) ......................       2,429          592
Deferred income taxes (Notes 1 and 13) .....................         488          225
Commitments and contingencies (Note 9) .....................          --           --
                                                                --------     --------
   Total liabilities .......................................      36,422       30,599
                                                                --------     --------
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
  Treasury stock, 202,620 and 199,524 shares at
December
  31, 1998 and 1997, respectively, at cost .................        (990)        (984)
  Retained earnings ........................................       9,576        7,776
  Accumulated other comprehensive expense (Note 12) ........      (1,641)        (366)
                                                                --------     --------
   Total stockholders' equity ..............................      26,301       25,782
                                                                --------     --------
Total liabilities and stockholders' equity .................    $ 62,723     $ 56,381
                                                                ========     ========
</TABLE>
                       See Notes to Consolidated Financial Statements



                                 Page 19 of 49
<PAGE>



                               FARREL CORPORATION
                        CONSOLIDATED STATEMENTS OF INCOME



                                                        Year Ended
                                         ---------------------------------------
                                            12/31/98     12/31/97     12/31/96
                                            --------     --------     --------
                                                      (In thousands)
Net sales ..............................    $ 98,036     $ 85,382     $ 75,836
Cost of sales ..........................      75,264       67,671       57,713
                                            --------     --------     --------
Gross margin ...........................      22,772       17,711       18,123
Operating expenses:
   Selling .............................       7,869        7,076        6,792
   General and administrative (Note 4)..       8,796        7,433        8,684
   Research and development ............       1,485        1,567        1,993
                                            --------     --------     --------
     Total operating expenses ..........      18,150       16,076       17,469
Operating income .......................       4,622        1,635          654

Interest income ........................         544          291          203
Interest expense .......................      (1,140)         (71)        (145)
Other (expense)/income, net (Note 15)...        (203)         229         (232)
                                             --------     --------     --------
Income before income taxes .............        3,823        2,084          480
Provision/(benefit) for income taxes
 (Notes 1 and 13):
     Current ...........................        1,010          811           (7)
     Deferred ..........................          536          (84)         161
                                             --------     --------     --------
     Total .............................        1,546          727          154
                                             --------     --------     --------
Net income .............................     $  2,277     $  1,357     $    326
                                             ========     ========     ========

Per share data: (Note 14)
Basic and diluted net income per share..     $   0.38     $   0.23     $   0.05
                                             ========     ========     ========
Average shares outstanding (000's):
   Basic ...............................        5,942        5,950        5,970
                                             ========     ========     ========
   Diluted .............................        5,966        5,951        5,972
                                             ========     ========     ========

                 See Notes to Consolidated Financial Statements


                                 Page 20 of 49
<PAGE>

<TABLE>

                                                          FARREL CORPORATION
                                            CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

<CAPTION>
                                                                                                       Accumulated
                                                                       Paid                               Other         Total
                                                 Common stock           in      Treasury    Retained   comprehensive Stockholders'
                                             Shares       Amount      Capital    stock      earnings      expense       equity
                                          -------------- ---------- ----------- --------  -----------  ------------  -------------
                                                                          (In thousands, except shares)
<S>                                         <C>           <C>         <C>        <C>       <C>           <C>          <C>     
Balance, December 31, 1995 ............     6,142,106     $    61     $19,295    ($837)    $ 10,287      ($  992)     $ 27,814
Comprehensive Income:
Net income ............................          --          --          --       --            326         --        $    326
                                                                                                                      --------
Other Comprehensive income, net of tax
  Foreign currency translation ........          --          --          --       --           --            878      $    878
  Minimum pension liability ...........          --          --          --       --           --             70      $     70
                                                                                                                      --------
Other Comprehensive income ............                                                                                    948
                                                                                                                      --------
Comprehensive income ..................                                                                                  1,274
Treasury stock transactions ...........          --          --          --       (150)         (25)        --        ($   175)
Cash dividend declared
  at $.06 per common share ............          --          --          --       --           (360)        --        ($   360)
                                          -----------     -------     -------    -----     --------      -------      --------

Balance, December 31, 1996 ............     6,142,106     $    61     $19,295    ($987)    $ 10,228      ($   44)     $ 28,553
                                          -----------     -------     -------    -----     --------      -------      --------
Comprehensive Income:
Net income ............................          --          --          --       --          1,357         --        $  1,357
                                                                                                                      --------
Other Comprehensive income, net of tax
  Foreign currency translation ........          --          --          --       --           --           (295)     ($   295)
  Minimum pension liability ...........          --          --          --       --           --            (27)     ($    27)
                                                                                                                      --------
Other Comprehensive income ............                                                                                   (322)
                                                                                                                      --------
Comprehensive income ..................                                                                                  1,035
Treasury stock transactions ...........          --          --          --          3           (3)        --               0
Cash dividend declared
  at $.64 per common share ............          --          --          --       --         (3,806)        --        ($ 3,806)
                                          -----------     -------     -------    -----     --------      -------      --------
Balance, December 31, 1997 ............     6,142,106     $    61     $19,295    ($984)    $  7,776      ($  366)     $ 25,782
                                          -----------     -------     -------    -----     --------      -------      --------
Comprehensive Income:

Net income ............................          --          --          --       --          2,277         --        $  2,277
                                                                                                                      --------
Other Comprehensive income, net of tax
  Foreign currency translation ........          --          --          --       --           --             (1)          ($1)
  Minimum pension liability ...........                                                                   (1,274)      ($1,274)
                                                                                                                      --------
Other Comprehensive income ............                                                                               ($ 1,275)
                                                                                                                      --------
Comprehensive income ..................                                                                               $  1,002
Treasury stock transactions ...........          --          --          --         (6)          (2)        --        ($     8)
Cash dividend declared ................          --          --          --       --           (475)        --        ($   475)
  at $.08 per common share
                                          ===========     =======     =======    =====     ========      =======      ========
Balance, December 31, 1998.............     6,142,106     $    61     $19,295    ($990)    $  9,576      ($1,641)     $ 26,301
                                          ===========     =======     =======    =====     ========      =======      ========

                                             See Notes to Consolidated Financial Statements

</TABLE>


                                 Page 21 of 49
<PAGE>



<TABLE>
                                              FARREL CORPORATION
                                     CONSOLIDATED STATEMENTS OF CASH FLOWS



<CAPTION>
                                                                        Year         Year         Year
                                                                       ended         ended        ended
                                                                      12/31/98     12/31/97     12/31/96
                                                                      --------     --------     --------
<S>                                                                   <C>          <C>          <C>     
Cash flows from operating activities:
  Net income .....................................................    $  2,277     $  1,357     $    326
  Adjustments to reconcile net income to net
  cash used in/provided by operating activities:
   Gain on disposal of fixed assets ..............................        (288)        (746)        --
   Depreciation and amortization .................................       2,311        1,667        1,699
   (Increase)/ decrease in accounts receivable ...................      (6,259)       4,471        5,104
   Decrease/(increase) in inventory ..............................       1,569          261         (915)
   Increase/(decrease) in accounts payable .......................       5,660       (2,514)      (3,732)
   Increase in advances from customers ...........................         590          608          795
  (Decrease)/increase in accrued expenses and taxes ..............      (1,145)       1,075       (1,767)
   Increase(decrease) in accrued installation and warranty costs           354           (4)        (344)
   Increase/(decrease) in long-term employee benefit obligations           181            6         (171)
   Other .........................................................         207         (500)         787
                                                                      --------     --------     --------
   Total adjustments .............................................       3,180        4,324        1,456
                                                                      --------     --------     --------
   Net cash provided by operating activities .....................       5,457        5,681        1,782
                                                                      --------     --------     --------

  Cash flows from investing activities:
    Refund of Shaw asset purchase price ..........................       2,701         --           --
    Proceeds from disposal of fixed assets .......................       1,193        1,027           15
    Purchases of property, plant and equipment ...................      (2,113)      (1,878)      (1,321)
    Acquisition of Shaw assets ...................................                  (10,855)        --
                                                                      --------     --------     --------
    Net cash provided by (used in) investing activities ..........       1,781      (11,706)      (1,306)

Cash flows from financing activities:
    Proceeds from long term borrowings ...........................        --          6,680         --
    Repayment of long term borrowings ............................      (1,536)        (196)        (200)
    (Purchase) issuance of treasury stock ........................          (6)           3         (175)
    Used for dividends paid ......................................      (1,427)      (2,856)        (360)
                                                                      --------     --------     --------
    Net cash (used in) provided by financing activities ..........      (2,969)       3,631         (735)
Effect of foreign currency exchange rate changes on cash .........          70            9           25
                                                                      --------     --------     --------
Net increase \ (decrease) in cash and cash equivalents ...........       4,339       (2,385)        (234)
Cash and cash equivalents--
    Beginning of period ..........................................       1,447        3,832        4,066
                                                                      --------     --------     --------
    End of period ................................................    $  5,786     $  1,447     $  3,832
                                                                      ========     ========     ========
Income taxes paid ................................................    $    870     $    746     $    756
                                                                      ========     ========     ========
Interest paid ....................................................    $    474     $     76     $     55
                                                                      ========     ========     ========

                            See Notes to Consolidated Financial Statements
</TABLE>



                                 Page 22 of 49
<PAGE>



                               FARREL CORPORATION
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 - PRINCIPLES OF CONSOLIDATION AND SIGNIFICANT ACCOUNTING POLICIES

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

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

          The   Company's   principal   customers   are   domestic  and  foreign
manufacturers of rubber and plastics.  Foreign  customers are primarily  located
throughout 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 when purchased. The carrying amount approximates fair value
because of the short maturity of those instruments.

  (b)  Other Financial Instruments:
       ---------------------------
          The carrying  amount of the Company's  trade  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 23 of 49
<PAGE>


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

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

           The Company 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  $9.4 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 No. 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
No. 128 requirements. (See Note 14 to the financial statements.)

  (k)  Foreign Currency Translation:
       ----------------------------
          Assets  and   liabilities   denominated  in  foreign   currencies  are
translated  into United States  dollars at current  exchange  rates.  Income and
expense accounts are translated at average rates of exchange  prevailing  during
the year.

          Adjustments  resulting  from  the  translation  are  included  in  the
accumulated other  comprehensive  expense in stockholders'  equity.  Transaction
gains and losses are included in  earnings.  The Company  experienced  a foreign
currency  transaction  loss of  $71,000  in 1998 and  $131,000  in fiscal  1997,
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, 1998, the Company has entered
into $1.8 million of forward  exchange  contracts  for  transactions  related to
amounts to be received for sales  commitments.  A loss of approximately  $14,000
has been  deferred  on these  transactions  to be offset  against  the  exchange
earnings to be recognized on the hedged  transaction.  The Company is exposed to
loss in the event of  nonperformance  by the Company's  bank, the other party to
the  foreign  exchange  contracts.  However,  the  Company  does not  anticipate
nonperformance by its bank.



                                 Page 24 of 49
<PAGE>


  (l)   Use of Estimates:
        ----------------
          The  preparation of financial  statements in conformity with generally
accepted  accounting  principles  requires  management  to  make  estimates  and
assumptions  that affect the amounts  reported in the financial  statements  and
accompanying notes. Actual results can differ from those estimates.

  (m)   Recent Accounting Pronouncements:
        --------------------------------
          In  June  1998,  the  Financial   Accounting  Standards  Board  issued
Statement No. 133, Accounting for Derivative Instruments and Hedging Activities.
The Company  expects to adopt the new Statement  effective  January 1, 2000. The
Statement  will require the Company to recognize all  derivatives on the balance
sheet at fair  value.  The  Company  does not  anticipate  the  adoption of this
Statement  will  have a  significant  effect on its  results  of  operations  or
financial position.

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

NOTE 2 - ASSET PURCHASE

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

          In June 1998,  the Company  and the Seller  reached  agreement  on the
inventory value transferred  resulting in a payment to the Company by the Seller
of  approximately  $2.7  million , which  amount was used to reduce the purchase
price.  The  operations of Shaw produced a loss (as computed  under the terms of
the  Agreement) of  approximately  $3.6 million for the year ended  December 31,
1998.  Accordingly,  the Company has  recorded a  receivable  from the Seller at
December 31, 1998 of  approximately  $5.3 million  under the terms of the Profit
Guaranty provisions of the Agreement and reduced the purchase price. The Company
made demand on the Seller  under the Profit  Guaranty.  In late March 1999,  the
Company  received  notice from the Seller that they do not agree with the Profit
Guaranty   calculation,   however,  the  amount  of  any  dispute  will  not  be
communicated  to the Company  until review of the Profit  Guaranty by the Seller
under the terms of the  Agreement,  which is expected to be in April,  1999. The
Company  believes it is in full  compliance  with the terms of the Agreement and
expects to recover  the amounts due under the Profit  Guaranty.  Any  difference
between the amounts  recorded at December 31, 1998 and amounts received from the
Seller will result in an adjustment of the purchase price allocation.

          The Agreement also required the transfer of the pension  liability for
the Shaw employees  together with the pension assets related to those employees.
The Agreement called for the Seller to appoint an actuary who, together with the
Company's  actuary and the third party that holds the  pension  assets,  were to
determine the related pension  amounts to be transferred.  In February 1999, the
Seller  agreed to  appoint  an actuary  to  fulfill  the  obligations  under the
Agreement.  The  consolidated  financial  statements  do not include any amounts
related to the  transferred  Shaw  employees as those  amounts are presently not
determinable.  The net amount of the actuarially  determined excess or shortfall
of the pension  assets  compared with the projected  benefit  obligation for the
Shaw employees will be recorded as an additional  purchase price adjustment when
determined.


                                 Page 25 of 49
<PAGE>


          The  revised  purchase  price of $7.2  million has been  allocated  as
follows:

                                             (In thousands)

              Inventory .................        $2,312
              Machinery & Equipment......         2,505
              Patents and trademarks.....           835
              Goodwill ..................         1,555
                                                 ------
                                                 $7,207
                                                 ======

          Included  in  the  allocation  above  were  estimated  liabilities  of
approximately  $2.3 million for costs of consolidating  the Shaw operations with
the Company's  existing Rochdale,  England facility  including moving,  employee
separation and other costs.  Through  December 31, 1998, the Company has charged
$1.2  million of employee  separation  and  $50,000 of other  costs  against the
liability  recorded.  The remaining amount of the liability recorded is expected
to be incurred by June 30, 1999.

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

NOTE 3 - OTHER ASSETS
                                                         12/31/98  12/31/97
                                                         --------  --------
                                                           (In thousands)

Technology license............................              $167      $334
Assets held for disposal......................               240       209
Acquired patents and technical know how.......               664       835
Other.........................................               210       188
                                                          ------    -------
  Total.......................................            $1,281    $1,566
                                                          ======    ======

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

NOTE 4 - RELATED PARTY TRANSACTIONS

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

          Under the Financial Services Agreement, the Company pays First Funding
an annual  retainer of $450,000 for Mr. Jones'  services.  The Company also pays
for advisory  services  provided by other First  Funding  employees on an hourly
basis and out-of-pocket  expenses. The Company also pays transaction fees in the
event of certain  successful  transactions.  The Company recorded amounts due to
First Funding of $866,000, $894,000, and $687,000 in fiscal 1998, 1997 and 1996,
respectively.  In addition,  the Company also reimbursed First Funding $236,000,
$319,000,  and $211,000 for  out-of-pocket  costs during the same three periods,
respectively.  These amounts include  $177,000 and $460,000 for services related
to  the  Shaw  Asset  Purchase  Agreement  (see  Note  2)  for  1998  and  1997,
respectively.  Also  included  during 1998 is $205,000  related to restating and
amending  our credit  facility  to include a term note to finance the Shaw Asset
Purchase and to increase the amount  available  under the credit facility and to
lengthen the term of the credit facility (see Note 8).


                                 Page 26 of 49
<PAGE>


NOTE 5 - INVENTORY

Inventory is comprised of the following:
                                                         12/31/98    12/31/97
                                                         --------    --------
                                                             (In thousands)

          Stock and raw materials...................     $7,279        $9,459
          Work-in-process...........................      7,263         8,818
                                                        -------      --------
          Total.....................................    $14,542       $18,277
                                                        =======       =======

           Of the above  inventories at December 31, 1998 and 1997, $7.2 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
$0.5 million at December 31, 1998 and 1997.

NOTE 6 - PROPERTY, PLANT AND EQUIPMENT

Property, plant and equipment is comprised of the following:

                                                          12/31/98    12/31/97
                                                          --------    --------
                                                              (In thousands)

         Land and buildings........................        $4,081      $3,927
         Machinery, equipment and other............        18,546      18,163
         Construction in progress..................           635         112
                                                          --------   ---------
                                                           23,262      22,202
           Accumulated depreciation................       (11,648)     (9,786)
                                                          --------   ---------
           Property, plant and equipment, net......       $11,614     $12,416
                                                          ========    ========

          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  $0.8  million  and $1.0  million at  December  31, 1998 and 1997,
respectively.  Also  included  are  income  taxes  payable of $1.0  million,  at
December 31, 1998 and 1997.

NOTE 8 - BANK CREDIT ARRANGEMENTS

          During  January 1998,  the Company  amended and restated its worldwide
multi-currency  credit  facility  with a  major  U.S.  bank  from a $20  million
revolving  credit  facility to a $25 million  credit  facility  consisting of an
$18.5 million  revolving  credit  facility for direct  borrowings and letters of
credit and up to (pound)3.0  million for foreign  exchange  contracts and a five
year term note.  Interest  varies based upon  prevailing  market  interest rates
(8.4% and 8.75% at  December  31,  1998 and 1997,  respectively).  The  facility
contains  limits on direct  borrowings and letters of credit combined based upon
stipulated  percentages  of accounts  receivable,  inventory  and  backlog.  The
facility  also  contains  covenants  specifying  minimum and  maximum  operating
thresholds for operating results and selected  financial  ratios.  The agreement
contains certain restrictions on investments, borrowings and the sale of assets.
The  Company's  ability to pay  dividends is limited to (a) 25% of the Company's
cumulative net income during the most recently  completed  four fiscal  quarters
after deducting  distributions  previously made and (b) purchases by the Company
of its common stock during the same period. At December 31, 1998, there was $5.3
million  outstanding  under the term loan. At December 31, 1997,  there was $7.1
million in direct borrowings outstanding under the previous credit facility. The
weighted  averaged  interest rate incurred on  short-term  borrowings  was 8.6%,
8.18% and 7.68% in fiscal  1998,  1997 and 1996,  respectively.  There were $5.1
million and $6.0 million of letters of credit  outstanding  at December 31, 1998
and 1997, respectively.



                                 Page 27 of 49
<PAGE>


          During  November 1998,  the credit  facility was amended to extend the
expiration  date of the  revolving  credit  facility  from  December 31, 1999 to
December 31,  2002,  and an  insignificant  reduction in the margin added to the
base rate to determine the periodic interest rate.

          The term note is payable in equal quarterly payments of (pound)200,000
through  December  31,  2002.  Approximately,  ((pound)800,000)  $1,328,000  and
$1,322,000 is classified as current and $3,983,000 and $5,283,000 was classified
as long term at December 31, 1998 and 1997, respectively.

          The Company had a loan in the amount of  (pound)125,000  ($205,000) at
December 31, 1997 from a U.K.  bank which was  collateralized  by the  Company's
facility in Rochdale, England. The loan was paid in full during 1998.

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)
------------------------                            --------------
1999                                                     $324
2000                                                      289
2001                                                      145
2002                                                       18
2003                                                       16
Thereafter                                                 14


          Rental expense for the year ended December 31, 1998, 1997 and 1996 was
$594,000, $332,000, $374,000, respectively.

   (b)    Contingencies:
          -------------

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

NOTE 10 - STOCK PLANS

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

          The 1997  Omnibus  Stock  Incentive  Plan  authorizes  the granting of
incentive  stock  options  and  non-qualified  stock  options to  purchase up to
500,000 shares of common stock. Option awards may be granted by the Compensation
Committee of the Board of Directors through May 23, 2007 to eligible  employees.
The terms (exercise price, exercise period and expirations) of each option award
are at the  discretion of the  Compensation  Committee  subject to the following
limitations.  The exercise  price of an  Incentive  Stock Option may not be less
than the fair  market  value as of the date of the grant (or 110% in the case of
an incentive stock option granted to a 10% stockholder). The exercise period may
not exceed 10 years from the date of the grant.  During 1998 options to purchase
60,000 shares were granted under this plan.


                                 Page 28 of 49
<PAGE>


          In prior years,  the Company  granted stock options under a previously
sponsored plan to eligible  employees and directors of the Company.  At December
31, 1998, options to purchase 455,000 shares remain outstanding under that 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>
                                                      1998                      1997                     1996         
                                               -------------------     ---------------------     --------------------
                                                        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            459        $5.86         296        $6.96
Granted                                           60      2.19            -           -            375         4.38
Exercised                                          -      -               -           -            -           -
Forfeited                                          4      3.88            -           -            212         4.76  
                                               -------------------     ---------------------     --------------------
Outstanding, end of year                         515     $5.45            459        $5.86         459        $5.86  
                                               -------------------     ---------------------     --------------------
Exercisable, end of year                         420     $5.96            374        $6.32         279        $7.05
Weighted-average fair value of options
    granted during the year                    $1.19                      -                      $1.75         -
</TABLE>

         The  following  table  summarizes   information   about  stock  options
outstanding at December 31, 1998:

<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>  
$2.19 - $3.74        60,000              10 years     $2.19                20,000         $2.19
 3.75 -  5.50       274,000               6            4.52               219,500          4.67
 5.51 -  8.50        95,000             4.5            6.32                95,000          6.32
 8.51 - 10.00        86,000             3.0            9.73                86,000          9.73     
--------------------------------------------------------------         ----------------------------
$2.19 -$10.00       515,000             5.7 years     $5.45               420,500         $5.96
</TABLE>

          Pro forma  information  regarding net income and earnings per share is
required by FAS 123, and has been determined as if the Company had accounted for
its  employee  stock  options  under the fair value  method of FAS 123. The fair
value for these options granted under the Stock Option Plan was estimated at the
date of grant using the Black-Scholes option pricing model, one of the allowable
valuation  models under FAS 123,  with the  following  assumptions  for 1998 and
1996:

                                                           1998          1996
                                                           ----          ----
Risk free interest rate ..........................        4.65%          6.0%
Dividend yields ..................................         2.0%          2.0%
Expected volatility factor of the expected
market price of the Company's common stock .......         .595          .458
Weighted average expected life of each option.....        8 yrs.        8 yrs.


                                 Page 29 of 49
<PAGE>


          The  weighted  average fair value of options  granted  during 1988 was
$1.19 and 1996 was  $1.75.  There  were no  options  granted  during  1997.  The
Black-Scholes  option  valuation  model was developed for use in estimating  the
fair value of traded  options  which have no vesting  restriction  and are fully
transferable.  In addition,  option valuation models require the input of highly
subjective  assumptions  including the expected stock price volatility.  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
                                                         ----------
                                            12/31/98     12/31/97    12/31/96
                                           -------------------------------------
                                           (In thousands, except per share data)


Pro Forma Net Income                          $2,237       $1,331       $258
Pro Forma earnings per share-basic
  and diluted                                    .37          .22        .04


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

          Under the 1997 Employees' Stock Purchase Plan, the Board of Directors'
may offer each eligible  employee of the Company the right to purchase,  in each
year through 2001,  shares of common stock  equivalent in value to not more than
5% of the employee's annual  compensation,  up to a maximum of $25,000 per year.
At the  time of the  offering  by the  Board of  Directors  the  employees  must
designate the amount to be withheld  during the next 24 month  purchase  period.
The  purchase  price is the lower of 85% of the fair market  value of the common
stock on the date of offering  or 85% of the fair  market  value on the date the
applicable purchase period ends. Not more than an aggregate of 490,000 shares of
common stock may be purchased  under the stock  purchase plan. Any employee who,
after the purchase, would hold 5% or more of the common stock is ineligible.  No
options to purchase shares were offered during 1998.

          Under the  stock  purchase  plan 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 1998 and 1997,  approximately
5,400 and 13,000 shares, respectively,  were distributed to employees under this
plan. The 1998 and 1997  distribution  includes 404 and 647 shares  respectively
from the Company's  treasury account,  for which retained earnings was adjusted.
At December 31, 1998, there were approximately  5,000 shares subscribed to under
these plans.

          The Company may  reaquire up to  $2,250,000  of its common stock under
its  discretionary  open market stock  repurchase  plan.  During fiscal 1998 the
Company   reacquired  3,500  shares  of  common  stock,   under  this  plan  for
approximately $9,000, which are included in treasury stock. There were no shares
repurchased   during  1997.   Subsequent  to  December  1998,  the  Company  has
repurchased 552,900 shares for approximately $1.3 million.

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


                                 Page 30 of 49
<PAGE>


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
                                                             ----------
                                                    12/31/98  12/31/97  12/31/96
                                                    --------  --------  --------
       Domestic pension expense:                           (In thousands)

Service cost-benefits earned during the period..    $  62     $  62     $  65
Interest cost on projected benefit obligation...      136       124       122
Expected return on plan assets .................     (147)     (127)     (125)
Recognized net actuarial (gains)/loss ..........       27        26        26
Amortization of transition, asset ..............        7         7         8
Amortization of prior service cost .............       11         7         8
                                                    ------    ------    ------
    Net domestic pension expense ...............    $  96     $  99     $ 104
                                                    ======    ======    ======

    Foreign pension expense:

Service cost-benefits earned during the period..    $ 641     $ 258     $ 226
Interest cost on projected benefit obligation...      762       728       648
Estimated return on plan assets ................     (799)     (802)     (715)
Recognized net actuarial (gains)/loss ..........        6        --        --
Amortization of transition asset ...............     (159)     (152)     (150)
Amortization of prior service cost .............       --        (7)       --
                                                    ------    ------    ------
    Net foreign pension expense ................    $ 451     $  25     $   9
                                                    ======    ======    ======

          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.


                                 Page 31 of 49
<PAGE>



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

                                                  Domestic          Foreign
                                                December 31,      December 31,
                                               1998     1997     1998     1997
                                               ----     ----     ----     ----

Change in Projected Benefit Obligation
   Balance at the beginning of the year        1,991    1,755   10,252    9,063
   Service cost                                   62       62      294      259
   Interest cost                                 136      124      762      731
   Plan participant contributions                  -        -      148      125
   Actuarial losses                              305      114    1,543    1,005
   Foreign currency exchange rates                 -        -       52     (325)
   Benefits paid                                (107)    (104)    (685)    (606)
   Plan amendments                                 -       40        -        -
                                             -------- -------- -------- --------
   Balance at the end of the period           $2,387   $1,991  $12,366  $10,252
                                             ======== ======== =======  ========
Change in Fair Value Plan Assets
   Balance at the beginning of the year        1,780    1,553    9,800    9,289
   Actual return on assets                       184      171      929    1,326
   Contributions - employer                      257      160        -        -
   Contributions - employee                        -        -      148      125
   Foreign currency exchange rates                 -        -       51     (334)
   Benefits paid                                (107)    (104)    (685)    (606)
                                             -------- -------- -------- --------
   Balance at the end of the period           $2,114   $1,780  $10,243   $9,800
                                             ======== ======== ======== ========
Funded status of the plan
   (Under)/over funded                          (273)    (211)  (2,123)    (452)
   Unrecognized net actuarial loss               745      504    2,099      699
   Unamortized prior service cost                  2        9        -        -
   Unamortized net transition obligation (asset)  68       79      (40)    (198)
                                             -------- -------- -------- --------
   Prepaid/(Accrued) Pension Expense            $542     $381     ($64)     $49
                                             ======== ======== ======== ========
   Discount rate                                6.25%    7.00%    6.00%    7.50%
   Rate of increase in future compensation
      levels                                     N/A      N/A     4.50%    4.50%
   Expected long-term rate of return on         
      plan assets                               8.00%    8.00%    8.00%    9.00%


           The Company changed the discount rate in 1998 and 1997 in response to
   the lower  current and  projected  interest  rates.  The  Company  recorded a
   minimum  liability of $2,429,000  and $592,000 at December 31, 1998 and 1997,
   respectively.  The Company has also recorded intangible assets of $70,000 and
   $88,000,  the amounts  allowable under FAS 87, at December 31, 1998 and 1997,
   respectively,  which are included in Other Assets.  The minimum  liability in
   excess of the  intangible  asset has been recorded as  comprehensive  expense
   included  in   stockholders'   equity,   net  of  applicable   income  taxes.
   Comprehensive expense was $1,855,000 and $43,000 for the years ended December
   31, 1998 and 1997, respectively.

           The  Company  has a  domestic  401(k)  retirement  plan for  salaried
   employees   which   includes   matching   and   discretionary    non-matching
   contributions by the Company. Approximately $78,000, $119,000 and $113,000 of
   such contributions were expensed in fiscal 1998, 1997 and 1996, respectively.
   No discretionary  contributions  were made by the Company during fiscal 1998,
   1997 or 1996.


                                 Page 32 of 49
<PAGE>



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
                                                   12/31/98  12/31/97   12/31/96
                                                   --------  --------   --------
                                                          (In thousands)

Service cost- benefits earned during the period..      --        --        --
Interest cost on accumulated postretirement
  benefit obligation ............................     $81       $90       $90
                                                      ---       ---       ---
Net periodic postretirement benefit costs .......     $81       $90       $90
                                                      ===       ===       ===

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

                                                     12/31/98     12/31/97
                                                     --------     --------
                                                          (In thousands)
   Accumulated postretirement benefit obligation:
       Beginning of the year                           $1,221       $1,247
       Interest cost                                       81           90
       Recognized actuarial loss                           69           37
       Benefits Paid                                    (123)        (153)
                                                     --------     --------
   Accumulated postretirement obligation:
       End of the year                                 $1,248       $1,221
       Unrecognized actuarial loss                       (77)          (8)
                                                     --------     --------
   Accrued postretirement benefit obligation           $1,171       $1,213
                                                     ========     ========

          The  assumed   discount  rate  used  in  determining  the  accumulated
postretirement  benefit  obligation was 6.25% and 7.00% at December 31, 1998 and
1997,  respectively.  The assumed  health care cost trend rate used in measuring
the accumulated  postretirement benefit obligation was 9.0% at December 31, 1998
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.


                                 Page 33 of 49
<PAGE>


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

                                               1-Percentage-      1-Percentage-
                                                   Point              Point
                                                 Increase           Decrease
                                               --------------------------------

Effect on the interest cost components in 1998        $87              $(76)
Effect on postretirement benefit obligation 
  as of 1998                                       $1,341           $(1,161)

NOTE 12 - ACCUMULATED COMPREHENSIVE INCOME (EXPENSE)

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

                                         Foreign
                                         Currency        Minimum
                                        Translation      Pension
                                        Adjustments     Liability        Total
                                        -----------     ---------        -----
Balance at December 31, 1996 ......       $   232        $  (276)       $   (44)
Cumulative translation adjustment .          (295)                         (295)
Minimum pension liability
adjustment ........................                          (43)           (43)
Deferred taxes relating to minimum
  Pension liability
                                                              16             16
                                          -------        -------        -------
Balance at December 31, 1997 ......       $   (63)       $  (303)       $  (366)
Cumulative translation adjustment..            (1)                           (1)
Minimum pension liability
adjustment ........................                       (1,855)        (1,855)
Deferred taxes relating to minimum
  Pension liability                                          581            581
                                          -------        -------        -------
Balance at December 31, 1998 ......       $   (64)       $(1,577)       $(1,641)
                                          =======        =======        =======



                                 Page 34 of 49
<PAGE>



NOTE 13 - PROVISION FOR INCOME TAXES

          Pre-tax  income/(loss)  and income taxes for the years ended  December
31, 1998, 1997 and 1996 are as follows:

                                                           Year ended
                                                12/31/98    12/31/97    12/31/96
                                                --------    --------    --------
The domestic and foreign components                      (In thousands)
  of income/(loss) before
  income taxes are:
                   Domestic ................    $ 3,325     $    89     ($1,544)
                   United Kingdom ..........        498       1,995       2,024
                                                -------     -------     -------
                                                $ 3,823     $ 2,084     $   480
                                                =======     =======     =======
The provision/(benefit) for income taxes is:
               Current:
                   United States ...........    $   918     $   101     ($  646)
                   United Kingdom ..........          9         658         664
                   State taxes .............         83          52         (25)
                                                -------     -------     -------
                                                  1,010         811          (7)
                                                -------     -------     -------
               Deferred:
                   United States ...........        127         (50)        232
                   United Kingdom ..........        171           7          41
                   State taxes .............        238         (41)       (112)
                                                -------     -------     -------
                                                    536         (84)        161
                                                -------     -------     -------
                                                $ 1,546     $   727     $   154
                                                =======     =======     =======

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

                                                  12/31/98     12/31/97
                                                  --------     --------
                                                      (In thousands)
     DEFERRED TAX LIABILITIES:
     Fixed Assets                                  $1,396       $1,054
     Inventory valuation                               78          258
     Intangibles                                      249            -
                                                  -------      -------
     Total deferred tax liabilities                 1,723        1,312
                                                  -------      -------

     DEFERRED TAX ASSETS:
     Non pension postretirement benefits             (469)        (485)
     Installation and warranty cost accruals         (190)        (324)
     Vacation reserve                                 (98)         (94)
     Bad debt reserve                                 (53)         (51)
     Pension                                         (686)        (202)
     State tax loss carryforwards                       -         (197)
     Redundancy reserve                              (137)           -
     Other reserves                                  (343)           -
     Other                                            (28)         (30)
                                                   -------     --------
     Total deferred tax assets                     (2,004)      (1,383)
                                                   -------     --------
     Net deferred tax (asset)                      $ (281)     $   (71)
                                                   =======     ========

          Other current  assets  includes  $769,000 and $296,000 of deferred tax
assets at December 31, 1998 and 1997, respectively.


                                 Page 35 of 49
<PAGE>



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

                                                        Year ended
                                              12/31/98    12/31/97     12/31/96
                                              --------    --------     --------
                                                       (In thousands)

Statutory provision ......................    $ 1,300     $   709      $   163
U.S.--U.K. rate differential .............        (20)        (57)          17
State income taxes, net of federal benefit        212           7          (90)
Permanent differences ....................         79          98           30
Other ....................................        (25)        (30)          34
                                              -------     -------      -------
Actual provision .........................    $ 1,546     $   727      $   154
                                              =======     =======      =======

NOTE 14 - EARNINGS PER SHARE

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


<TABLE>
<CAPTION>
                                                       Year          Year          Year
                                                      Ended         ended         ended
                                                     12/31/98      12/31/97      12/31/96
                                                     --------      --------      --------
                                                       (In thousands, except share data)
<S>                                                 <C>           <C>           <C>       
Net income applicable to
  common stockholders ..........................    $    2,277    $    1,357    $      326
                                                    ==========    ==========    ==========


Weighted average number of common
shares outstanding - Basic earnings per Share ..     5,941,837     5,950,240     5,969,708

Effect of dilutive stock and
 purchase options ..............................        24,539         1,403         2,393
                                                    ----------    ----------    ----------


Weighted average number of common shares 
outstanding - Diluted earnings per share             5,966,376     5,951,643     5,972,101
                                                    ==========    ==========    ==========

Net income per share-basic .....................    $     0.38    $     0.23    $     0.05
                                                    ==========    ==========    ==========


Net income per share-diluted ...................    $     0.38    $     0.23    $     0.05
                                                    ==========    ==========    ==========
</TABLE>


                                 Page 36 of 49
<PAGE>



NOTE 15 - OTHER INCOME/(EXPENSE), NET

          For the year ended  December 31, 1998,  and 1997 other  income/expense
includes  gains of  approximately  $0.3 million and $0.7 million,  respectively,
from the disposal of  machinery  and  equipment  no longer  used.  There were no
individually significant items of other income or expense in 1996.

NOTE 16 - FOREIGN OPERATIONS, EXPORT SALES AND MAJOR CUSTOMERS

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

          The following  provides gross revenue by product and  geographic  area
for the years ended December 31, 1998, 1997 and 1996:

Sale by Product Line                              1998       1997       1996
--------------------                              ----       ----       ----

New Machines                                    $56,057     $48,745   $40,317
Spares                                           20,206      19,735    18,535
Repairs                                          21,154      16,493    16,610
Other                                               619         409       374
                                                -------     -------   -------
    Total                                       $98,036     $85,382   $75,836
                                                =======     =======   =======

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

United States                                   $51,274     $39,402   $40,487
United Kingdom                                    9,915       6,122     5,134
Europe (excluding U.K.)                          21,310      12,952    12,701
North America (excluding U.S.)                    3,099       1,456     4,005
Asia                                              6,446      22,220    10,587
Middle East                                       4,271       1,058     1,465
Other                                             1,721       2,172     1,457
                                                -------     -------   -------
    Total                                       $98,036     $85,382   $75,836
                                                =======     =======   =======

          Sales  for  1997  included  sales  to one  customer  located  in Korea
totaling  $13  million.  There were no other  sales to a single  customer  which
exceeded  10% of the  Company's  revenue for the years ended  December 31, 1998,
1997 and 1996.

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


                                 Page 37 of 49
<PAGE>



          Net sales to unaffiliated  customers,  operating  income and assets of
the U.S. and U.K.  operations for the years ended  December 31, 1998,  1997, and
1996 are as follows:

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

Year ended 12/31/98:
    Sales to unaffiliated Customers          $57,387      $40,649      $98,036
    Operating income                          $3,489       $1,133       $4,622
    Long-lived assets                         $5,502       $8,948      $14,450
    Total assets                             $28,464      $34,259      $62,723


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

Year ended 12/31/96:
    Sales to unaffiliated Customers          $50,811      $25,025      $75,836
    Operating income                        ($1,501)       $2,155         $654
    Long-lived assets                         $5,189       $5,355      $10,544
    Total assets                             $31,011      $19,720      $50,731



                                 Page 38 of 49
<PAGE>


NOTE 17 - QUARTERLY FINANCIAL DATA (UNAUDITED):

          Summarized quarterly financial data for fiscal 1998 and 1997:


<TABLE>
<CAPTION>
                                                             (In thousands except per share data)
                                                                           Quarter
                                                        -----------------------------------------------
                                                          First      Second       Third     Fourth
                                                        ----------  ----------  ----------  -----------
<S>                                                     <C>         <C>         <C>         <C>    
FISCAL 1998
Net Sales                                                 $15,976     $24,954     $21,626      $35,480
                                                        ==========  ==========  ==========  ===========
Gross Margin                                               $4,236      $6,100      $4,341       $8,095
                                                        ==========  ==========  ==========  ===========
Other (expense)                                            ($234)      ($255)       ($64)       ($246)
                                                        ==========  ==========  ==========  ===========
Net income/(loss)                                            $110        $737      ($202)       $1,632
                                                        ==========  ==========  ==========  ===========
Basic and diluted net income/(loss) per common share        $0.02       $0.12     ($0.03)        $0.27
                                                        ==========  ==========  ==========  ===========
Basic weighted average shares outstanding (000's)           5,943       5,943       5,942        5,939
                                                        ==========  ==========  ==========  ===========
Diluted weighted average shares outstanding (000's)         5,983       5,947       5,942        5,944
                                                        ==========  ==========  ==========  ===========

<CAPTION>
                                                                           Quarter
                                                        -----------------------------------------------
                                                          First      Second       Third     Fourth
                                                        ----------  ----------  ----------  -----------
<S>                                                     <C>         <C>         <C>         <C>    
FISCAL 1997
Net Sales                                                 $16,123     $26,183     $21,955      $21,121
                                                        ==========  ==========  ==========  ===========
Gross Margin                                               $3,338      $5,344      $5,429       $3,600
                                                        ==========  ==========  ==========  ===========
Other Income/(expense)                                       $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
                                                        ==========  ==========  ==========  ===========
</TABLE>


                                 Page 39 of 49
<PAGE>


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

           None.


                                 Page 40 of 49
<PAGE>


                                    PART III

ITEM 10 - DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

          The  information  called  for by this item is  incorporated  herein by
reference to the definitive  Proxy Statement to be filed with the Securities and
Exchange  Commission  not later than 120 days after the year ended  December 31,
1998 and  delivered to  stockholders  in connection  with the Annual  Meeting of
Stockholders to be held on June 2,1999.

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,
1998 and  delivered to  stockholders  in connection  with the Annual  Meeting of
Stockholders to be held on June 2, 1999.

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,
1998 and  delivered to  stockholders  in connection  with the Annual  Meeting of
Stockholders to be held on June 2, 1999.

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,
1998 and  delivered to  stockholders  in connection  with the Annual  Meeting of
Stockholders  to be held on  June  2,  1999.  See  also  Notes  to  Consolidated
Financial Statements, Note 4, appearing in Item 8 herein.


                                 Page 41 of 49
<PAGE>


                                     PART IV

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

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

       1.  Financial Statements

       Report of Independent Auditors.........................................18
       Consolidated Balance Sheets as of December 31, 1998 and, 1997..........19
       Consolidated Statements of Income for the years ended
         December 31, 1998, 1997, and 1996....................................20
       Consolidated Statements of Stockholders' Equity for the years
         ended December 31, 1998, 1997 and 1996...............................21
       Consolidated Statements of Cash Flows for years ended 
         December 31, 1998, 1997 and 1996.....................................22
       Notes to Consolidated Financial Statements........................23 - 39

       2.  Financial Statement Schedule

       Report of Independent Auditors on Financial Statement Schedule.........47
       Schedule II - Valuation and Qualifying Accounts........................48

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


                                 Page 42 of 49
<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                     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      Amended and restated  Credit  Agreement  between Farrel
               Corporation  and Chase Manhattan Bank dated January 23,
               1998. Filed as an exhibit to the Registrant's  Form 10K
               for the year ended December 31, 1997.                         N/A

Exhibit 4      First  amendment  to the  amended and  restated  Credit
               Agreement   Between   Farrel   Corporation   and  Chase
               Manhattan Bank dated November 30, 1998.                        51

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 43 of 49
<PAGE>


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

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

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

Exhibit 10(k)  Agreement  of  Purchase  and Sale of  certain  property
               located  in  Derby  CT  between   National   RE/sources
               Acquisition,  LLC and Farrel Corporation dated July 17,
               1998,  and  reinstatement  agreement  dated October 15,
               1998.                                                          

Exhibit 11     Statement re: Computation of per share earnings.               

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.

No such  reports  were filed by the Company  during the year ended  December 31,
1998.


                                 Page 44 of 49
<PAGE>



                                   SIGNATURES

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


                                            Farrel Corporation




                                            /S/ ROLF K. LIEBERGESELL            
                                            ------------------------------------
                                            Rolf K. Liebergesell
                                            Chief Executive Officer
                                            President and Chairman of the Board


                                            MARCH 29, 1999
                                            ------------------------------------
                                            Date







                                 Page 45 of 49
<PAGE>


                                   SIGNATURES

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


SIGNATURE                  TITLE                                     DATE

/S/ROLF K. LIEBERGESELL    Chief Executive Officer, President   MARCH 29, 1999
Rolf K. Liebergesell       and Chairman of the Board           -----------------


/S/THEODORE E. JENNY       Vice  President-Chief Financial      MARCH 26, 1999
Theodore E. Jenny          Officer (Chief Accounting Officer)  -----------------

                                                                MARCH 30, 1999
/S/CHARLES S. JONES        Director                            -----------------
Charles S. Jones

                                                                MARCH 28, 1999
/S/JAMES A. PURDY          Director                            -----------------
James A. Purdy

                                                                MARCH 29, 1999
/S/HOWARD J. AIBEL         Director                            -----------------
Howard J. Aibel

                                                                MARCH 30, 1999
/S/GLENN ANGIOLILLO        Director                            -----------------
Glenn Angiolillo

                                                                MARCH 29, 1999
/S/ALBERTO SHAIO           Director                            -----------------
Alberto Shaio



                                 Page 46 of 49
<PAGE>



The Board of Directors and Stockholders
Farrel Corporation


We have audited the consolidated  financial  statements of Farrel Corporation as
of  December  31,  1998 and 1997,  and for each of the three years in the period
ended December 31, 1998, and have issued our report thereon dated March 18, 1999
(included  elsewhere  in this  Annual  Report on Form  10-K).  Our  audits  also
included the financial statement schedule for the years ended December 31, 1998,
1997 and 1996  listed in Item  14(a) of this Form  10-K.  This  schedule  is the
responsibility of the Company's management.  Our responsibility is to express an
opinion based on our audits.

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

                                                  Ernst & Young LLP

Stamford, Connecticut
March 18, 1999




                                 Page 47 of 49
<PAGE>


                                                                     SCHEDULE II

                                          FARREL CORPORATION
                                   VALUATION AND QUALIFYING ACCOUNTS

<TABLE>


<CAPTION>
COLUMN A                               COLUMN B                COLUMN C                 COLUMN D         COLUMN E
-------------------------------------  -------------- ----------------------------  ----------------- ----------------
                                                                      Charged
                                        Balance at     Charged to    (credited)
                                         beginning     costs and      to other                          Balance at
Name of Debtor                           of period      expenses     accounts (1)    Deductions (2)    end of period
-------------------------------------  -------------- ------------- --------------  ----------------- ----------------
<S>                                        <C>           <C>             <C>             <C>                <C>  
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
Year ended 12/31/98
-------------------
Allowance for doubtful
  receivables                                179           261              -              (143)              297
Reserve for excess and obsolete
  inventory items                            751           916              3              (120)            1,550
Accrued installation and warranty
  costs                                    1,326         2,282              2            (1,927)            1,683

</TABLE>



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

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



                                 Page 48 of 49
<PAGE>




                  (Financial Data Schedule Filed with the SEC)







                                 Page 49 of 49