EXHIBIT 13



Eleven-Year Summary of Financial Data



(in thousands, except per share data)



|     |  |           |         |                 |   |                                |  |                      |        |                    |   |           |  |   |                     |  |              |      |                       |      |                 |  |   |         |  |   |         |  |   |         |  |   |        
|---- |  | --------- | ------- | --------------- | - | ------------------------------ |  | -------------------- | ------ | ------------------ | - | --------- |  | - | ------------------- |  | ------------ | ---- | --------------------- | ---- | --------------- |  | - | ------- |  | - | ------- |  | - | ------- |  | - | -------
|     |  |           |         | Per Share Data  |   | PercentReturn OnAverage Equity |  |                      |        |                    |   |           |  |   |                    
|     |  | Net Sales |         | Cost Goods Sold |   | Net Earnings                   |  | Diluted Net Earnings |        | Basic Net Earnings |   | Dividends |  |   | ShareholdersEquity |  | Total Assets |      | Long-Term Obligations |      | Working Capital
|2004 |  | $         | 648,195 |                 | $ | 473,752                        |  | $                    | 35,052 |                    | $ | 1.05      |  | $ | 1.06                |  | $            | 0.57 |                       | 12.9 | %               |  | $ | 283,615 |  | $ | 501,560 |  | $ | 104,025 |  | $ | 213,145
|2003 |  |           | 561,391 |                 |   | 409,294                        |  |                      | 24,779 |                    |   | 0.74      |  |   | 0.75                |  |              | 0.53 |                       | 9.2  | %               |  |   | 261,488 |  |   | 476,955 |  |   | 79,465  |  |   | 171,802
|2002 |  |           | 549,507 |                 |   | 396,815                        |  |                      | 23,895 |                    |   | 0.69      |  |   | 0.70                |  |              | 0.52 |                       | 8.9  | %               |  |   | 274,598 |  |   | 472,761 |  |   | 105,285 |  |   | 199,023
|2001 |  |           | 557,459 |                 |   | 401,471                        |  |                      | 22,385 |                    |   | 0.65      |  |   | 0.66                |  |              | 0.52 |                       | 8.6  | %               |  |   | 262,485 |  |   | 457,527 |  |   | 98,673  |  |   | 173,638
|2000 |  |           | 621,242 |                 |   | 423,861                        |  |                      | 46,263 |                    |   | 1.34      |  |   | 1.36                |  |              | 0.50 |                       | 17.6 | %               |  |   | 260,845 |  |   | 464,978 |  |   | 99,832  |  |   | 174,803
|1999 |  |           | 585,551 |                 |   | 399,833                        |  |                      | 43,723 |                    |   | 1.19      |  |   | 1.21                |  |              | 0.45 |                       | 16.5 | %               |  |   | 266,109 |  |   | 423,941 |  |   | 56,305  |  |   | 183,956
|1998 |  |           | 596,660 |                 |   | 410,748                        |  |                      | 44,610 |                    |   | 1.17      |  |   | 1.21                |  |              | 0.40 |                       | 17.6 | %               |  |   | 264,292 |  |   | 411,926 |  |   | 57,015  |  |   | 176,126
|1997 |  |           | 564,756 |                 |   | 389,711                        |  |                      | 40,365 |                    |   | 1.09      |  |   | 1.13                |  |              | 0.36 |                       | 18.2 | %               |  |   | 243,434 |  |   | 355,889 |  |   | 27,929  |  |   | 141,268
|1996 |  |           | 508,526 |                 |   | 353,345                        |  |                      | 35,173 |                    |   | 0.97      |  |   | 1.00                |  |              | 0.30 |                       | 17.1 | %               |  |   | 200,325 |  |   | 325,486 |  |   | 45,027  |  |   | 146,975
|1995 |  |           | 478,315 |                 |   | 334,306                        |  |                      | 32,305 |                    |   | 0.84      |  |   | 0.88                |  |              | 0.26 |                       | 16.3 | %               |  |   | 211,377 |  |   | 313,462 |  |   | 25,255  |  |   | 145,069
|1994 |  |           | 422,714 |                 |   | 297,212                        |  |                      | 26,359 |                    |   | 0.69      |  |   | 0.73                |  |              | 0.21 |                       | 15.3 | %               |  |   | 184,262 |  |   | 283,155 |  |   | 26,303  |  |   | 118,550



Managements Discussion and
Analysis of Financial Condition and Results of Operations



Results of
Operations



Overview



Broad-based and consistent growth throughout 2004 resulted in record consolidated net sales
for the 2004 fiscal year. For the year, net sales advanced 15.5% from 2003. Gross and operating margins were 26.9% and 9.3%, respectively, compared to 27.1% and 8.2% a year ago. Net earnings in 2004 amounted to $35.1 million, an increase of 41.4%
from earnings of $24.8 million in 2003. Net earnings in 2002 were $23.9 million. Diluted earnings per share rose 41.1% to $1.05 in 2004 from $0.74 in 2003. Total dividends paid to shareholders in 2004 amounted to $0.57 per share, up from $0.53 per
share in 2003.



Net Sales



Net sales for 2004 were a record $648.2 million, rising 15.5% above 2003 net sales of $561.4
million. Sales in 2002 amounted to $549.5 million. Sales of electric motors increased 13.5% in 2004 and amounted to 76.2% of total product sales compared to 77.5% in 2003. Sales of drives products were up 15.7% for the year and amounted to 17.1% of
total product sales in 2004 compared to 17.0% in 2003. Sales of generator products rose 41.8% during the year and comprised 6.7% of total product sales versus 5.5% in 2003. Baldor serves many industries and geographic regions by selling to a broad
base of distributors and Original Equipment Manufacturers (OEMs) both domestically and in more than 70 countries around the world. For the years 2004, 2003, and 2002, sales to distributors and OEM customers remained at approximately 50% each. No
single customer accounted for more than 5% of sales in any year covered by this report.



Gross Margin



Gross margin was 26.9% in 2004 compared to 27.1%
in 2003 and 27.8% in 2002. Raw material costs increased sharply during 2004. Although productivity and product design improvements and price increases mitigated much of the effects of increased copper and steel costs, gross margin suffered during
the year.



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Operating Margin



Operating margin for 2004 improved to 9.3% from 8.2% in 2003 and 2002. Selling and administrative expenses decreased to 17.6% of net sales in 2004 from 18.9% in 2003 and
19.5% in 2002. We continued to reduce freight and warranty cost in 2004. Together, freight and warranty costs were 0.5% of net sales lower in 2004 than in 2003. During the fourth quarter of 2004, certain contingent liablilities were adjusted by
approximately $1.5 million to reflect current exposures, resulting in a reduction in selling and administrative expenses of 0.2% of sales. The remainder of improvement resulted from our ability to support a 15% increase in net sales without adding
fixed selling and administrative costs.



Net Earnings



Pre-tax margin improved to 8.1% for 2004 compared to 7.0% for 2003 and 6.9% in 2002. While
increased materials costs had a negative effect on gross margin, efficiencies in selling and administrative costs combined with increased sales volume resulted in better pre-tax margins. Net earnings for 2004 were up 41.4% from 2003 and diluted
earnings per share increased 41.1% to $1.05. During the fourth quarter of 2004, certain accrued income tax liablilities were adjusted to reflect current exposure. The resulting reduction in income tax expense amounted to approximately $2.1 million,
or $0.06 per diluted share.



International Sales



International sales (foreign affiliates and exports) amounted to $101.0 million in 2004, an
increase of 22.1% over the $82.8 million in 2003. International sales were $74.8 million in 2002. The majority of international sales are from products produced in the United States and exported.



Environmental Remediation



Management believes, based on its internal reviews and other factors, that any future costs
relating to environmental remediation and compliance will not have a material effect on the capital expenditures, earnings, cash flows, or competitive position of the Company.



Financial Position



Overview



The Companys financial position remained strong through 2004. We continued to increase our financial strength while investing in research and development for new and existing products, making capital investments
in our manufacturing facilities, expanding into new markets and continuing to invest in both our employees and customers education and training. Baldor believes the investment in our employees through training and education is a key to
continued success and improved shareholder value.



Investments in property,
plant and equipment amounted to $18.1 million in 2004, $15.1 million in 2003, and $10.6 million in 2002. These investments were made primarily to centralize operations, increase capacity, and improve quality and productivity.



The Companys commitment to research and development continues to help us maintain a
leadership position in the marketplace and satisfy customers needs. Investments in research and development amounted to $25.4 million in 2004, $21.9 million in 2003, and $22.5 million in 2002. We continue to make investments in new product
development as well as in existing products for improved performance, increased energy efficiency, and manufacturability.



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Liquidity and Capital Resources



Our liquidity position remained solid in 2004. The Company had working capital of $213.1 million at January 1, 2005, and $171.8 million at
January 3, 2004. The ratio of current assets to current liabilities was 3.5 to 1 at year-end 2004, compared to 2.7 to 1 at the end of fiscal year 2003. The increase in working capital and current ratio was partially related to the reclassification
of $25 million of the Companys outstanding long-term debt. The Company had a credit facility that expired in October 2004 and was classified as a current liability at January 3, 2004. The debt was refinanced in 2004 with a maturity date after
January 1, 2006. Accordingly, the debt is classified as non-current at January 1, 2005.



Liquidity was supported by cash flows from operations of $31.2 million in 2004, $62.8 million in 2003 and $53.6 million in 2002. The 15.5% increase in net sales during 2004 resulted in increased investments in accounts receivable and
inventories. Increases in trade accounts receivables in 2004 reduced operating cash flows by $19.3 million compared to 2003. This was a normal fluctuation with the increase in sales. The record sales volume of 2004 also resulted in increased
investment in finished goods and raw materials inventories, reducing operating cash flows by $11.9 million when compared to 2003. Normal increases in accounts payable resulted in a $6.9 million increase in operating cash flows compared to 2003.
Income tax payments made in 2004 increased $20.0 million over 2003. Payments made in 2003 were unusually low due to overpayments made in prior years.



The Company utilized a portion of its cash flows from operations to fund property, plant, and equipment additions of $18.1 million in 2004 and $15.1 million in 2003. In
addition, dividends were paid to shareholders amounting to $19.1 million for 2004 and $17.5 million for 2003. In 2003, the Company also funded the acquisition of Energy Dynamics, Inc. in the amount of $5.8 million and repurchased 1.5 million shares
of the Companys common stock for $26.7 million.



Total long-term debt,
including amounts classified as current maturities, was $104.0 million at January 1, 2005, compared to $105.3 million at January 3, 2004. The Companys credit agreements contain various financial covenants, and the Company was in compliance
with those covenants during all of the periods presented in this report.



Baldors principal source of liquidity is operating cash flows. Accordingly, the Company is dependent primarily on continued demand for our products as well as collectability of receivables from our customers. Our broad base of
customers and industries served, as well as our favorable position in the marketplace, ensure that fluctuations in a particular customers or industrys business will not have a material effect on the Companys sales or collectability
of receivables. As a result, management expects that the Companys foreseeable cash needs for operations and capital expenditures will continue to be met through operating cash flows and existing credit facilities.



The table below summarizes the Companys contractual obligations as of January 1, 2005.



|                               |  |       |         |                        |   |            |  |            |        |                  |   |        |  |   |      
|------------------------------ |  | ----- | ------- | ---------------------- | - | ---------- |  | ---------- | ------ | ---------------- | - | ------ |  | - | -----
|                               |  |       |         | Payments due by period
|(In thousands)                 |  | Total |         | Less than1 Year        |   | 1  3Years |  | 3  5Years |        | More Than5 Years
|Contractual Obligations:       |  |       |         |                        |   |            |  |            |        |                  |   |        |  |   |      
|Long-term debt obligations (a) |  | $     | 115,276 |                        | $ | 3,423      |  | $          | 66,748 |                  | $ | 42,945 |  | $ | 2,160
|Operating lease obligations    |  |       | 9,803   |                        |   | 3,579      |  |            | 2,115  |                  |   | 1,206  |  |   | 2,903
|Other Commercial Commitments:  |  |       |         |                        |   |            |  |            |        |                  |   |        |  |   |      
|Letters of Credit              |  |       | 2,257   |                        |   | 2,257      |  |            | 0      |                  |   | 0      |  |   | 0    

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|(a) | Includes interest on both fixed and variable rate obligations. Interest associated with variable rate obligations is based upon interest rates in effect at January 1, 2005. The
contractual amounts to be paid on variable rate obligations are affected by changes in market interest rates. Future changes in market interest rates could materially affect the contractual amounts to be paid.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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Dividend Policy



Annual dividends amounted to $0.57 per share in 2004 and $0.53 per share in 2003. There have been three dividend increases in the last five years and 10 increases in the
last 10 years. These increases were in line with Baldors policy of making increases periodically, as earnings and financial strength warrant. The objective is for shareholders to obtain dividend increases over time while also participating in
the growth of the Company.



Market Risk



Market risks relating to the Companys operations result primarily from changes in
commodity prices, interest rates, and foreign exchange rates. To maintain stable pricing for its customers, the Company enters into various hedging transactions as described below.



The Company is a purchaser of certain commodities, primarily copper, aluminum, and steel, and periodically utilizes commodity futures and
options for hedging purposes to reduce the effects of changing commodity prices. Generally, contract terms of a hedge instrument closely mirror those of the hedged item providing a high degree of risk reduction and correlation. Contracts that are
highly effective at meeting this risk reduction and correlation criteria are recorded using hedge accounting.



The Companys interest rate risk is related to its available-for-sale securities and long-term debt. Due to the short-term nature of the Companys securities portfolio, anticipated interest rate risk is not
considered material. The Companys debt obligations include certain notes payable to banks bearing interest at a quarterly variable rate. The Company manages its interest rate risk exposure by maintaining a mix of fixed and variable rates for
debt. A 1.0% increase in variable borrowing rates would not have a material effect on the Companys consolidated balance sheets, results of operations, or cash flows.



Foreign affiliates comprise less than 5% of total assets. The Company does not anticipate the use of derivatives for managing foreign
currency risk, but continues to monitor the effects of foreign currency exchange rates.



Critical Accounting Policies



The consolidated financial
statements have been prepared in accordance with accounting principles generally accepted in the United States, which require the Company to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the
consolidated financial statements and revenues and expenses during the periods reported. Actual results could differ from those estimates. The Company believes the following are the critical accounting policies, which could have the most significant
effect on the Companys reported results and require subjective or complex judgments by management.



Revenue Recognition: The Company sells products to its customers FOB shipping point. Title passes to the customer when the product is shipped. Accordingly, revenue is recognized when the product is shipped. The
Company has no further obligations associated with the product sale that would impact revenue recognition after the product is shipped.



Allowance for Doubtful Accounts: The Company records allowances for doubtful accounts based on customer-specific analysis, general matters such as current
assessments of past due balances and economic conditions, and historical losses. Additional allowances for doubtful accounts may be required if there is deterioration in past due balances, if economic conditions are less favorable than the Company
had anticipated, or for customer-specific circumstances, such as financial difficulty.



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Inventories:Inventories are valued at the lower of cost or market, with cost being determined principally by the
last-in, first-out (LIFO) method, except for non-U.S. inventories, which are determined by the first-in, first-out (FIFO) method. The valuation of LIFO inventories is made at the end of each year based on inventory levels and costs at that time. The
Company reviews the net realizable value of inventory on an on-going basis, with consideration given to deterioration, obsolescence, and other factors. If actual market conditions differ from those projected by management, adjustments to inventory
values may be required.



Self-Insurance Liabilities: The Companys
self-insurance programs include primarily product liability, workers compensation, and health. The Company self-insures from the first dollar of loss up to specified retention levels. Eligible losses in excess of self-insurance retention
levels and up to stated limits of liability are covered by policies purchased from third-party insurers. The aggregate self-insurance liability is estimated using the Companys claims experience and risk exposure levels for the periods being
valued and current conditions. Adjustments to the self-insured liabilities may be required to reflect emerging claims experience and other factors.



Long-Lived Assets and Goodwill: The Company evaluates the recoverability of the carrying amount of long-lived assets whenever events indicate that the carrying
amount of an asset may not be fully recoverable. The Company evaluates the recoverability of goodwill and other intangible assets with indefinite lives annually or more frequently if events indicate that an asset may be impaired. The Company uses
judgment when applying the impairment rules to determine when an impairment test is necessary. The Company is required to make estimates of its future cash flows related to the asset subject to review. These estimates require assumptions about
demand for the Companys products, future market conditions, technological developments, and future discount rates and growth rates.



Recently Issued Accounting Pronouncements



In December 2004, the FASB issued SFAS No. 123R, Share-Based Payment, a revision of SFAS No. 123, Accounting for Stock-Based Compensation and
superseding APB Opinion No. 25, Accounting for Stock Issued to Employees. SFAS No. 123R requires the Company to expense grants made under stock option plans. That cost will be recognized over the vesting period of the plans. SFAS No.
123R is effective for the first interim or annual period beginning after June 15, 2005. Upon adoption of SFAS No. 123R, amounts previously disclosed under SFAS No. 123 will be recorded in the consolidated statement of earnings. The Company is
evaluating the alternatives allowed under the standard, which the Company is required to adopt beginning in the third quarter of 2005. The Company expects the annual impact of adopting FAS 123R to be a reduction of $0.01 to $0.02 per diluted share.



In December 2004, the FASB issued FASB Staff Position No. FAS 109-2,
Accounting and Disclosure Guidance for the Foreign Earnings Repatriation Provision Within the American Jobs Creation Act of 2004. The American Jobs Creation Act of 2004 (the Act) contained a provision, which allows for an 85% dividends
received deduction with respect to certain dividends received from foreign subsidiaries. The Company does not expect to repatriate foreign earnings pursuant to the Act. Accordingly, the Act is not expected to have a significant effect on the
Companys consolidated financial statements.



Forward-looking
Statements



This annual report and other written reports and oral
statements made from time to time by the Company and its representatives may contain forward-looking statements. The forward-looking statements (generally identified by words or phrases indicating a projection or future expectation such as
outlook, optimistic, trends, expect(s), assuming, expectations, forecasted, estimates, expected) are based on the Companys current
expectations and some of them are subject to risks and uncertainties. Accordingly, you are cautioned that any such forward-looking statements are not guarantees of future performance and involve risks and



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uncertainties, and that actual results may differ materially from those projected in the forward-looking statements as a result of various factors. The
factors that might cause such differences include, but are not limited to, the following: (i) changes in economic conditions, (ii) developments or new initiatives by our competitors in the markets in which we compete, (iii) fluctuations in the costs
of select raw materials, (iv) the success in increasing sales and maintaining or improving the operating margins of the Company, and (v) other factors including those identified in the Companys filings made from time to time with the
Securities and Exchange Commission.



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Consolidated Balance Sheets

Baldor Electric Company and Affiliates



|                                                                                                                                                         |  |               |          |   |               |   |          |  
|-------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------- | -------- | - | ------------- | - | -------- | -
|(In thousands, except share data)                                                                                                                        |  | January 12005 |          |   | January 32004 |  
|ASSETS                                                                                                                                                   |  |               |          |   |               |   |          |  
|CURRENT ASSETS:                                                                                                                                          |  |               |          |   |               |   |          |  
|Cash and cash equivalents                                                                                                                                |  | $             | 12,054   |   |               | $ | 10,635   |  
|Marketable securities                                                                                                                                    |  |               | 32,392   |   |               |   | 36,654   |  
|Receivables, less allowances for doubtful accounts of $3,308 in 2004 and $3,870 in 2003.                                                                 |  |               | 101,088  |   |               |   | 83,200   |  
|Inventories:                                                                                                                                             |  |               |          |   |               |   |          |  
|Finished products                                                                                                                                        |  |               | 81,078   |   |               |   | 73,668   |  
|Work in process                                                                                                                                          |  |               | 12,239   |   |               |   | 10,721   |  
|Raw materials                                                                                                                                            |  |               | 59,732   |   |               |   | 51,295   |  
|                                                                                                                                                         |  |               |          |   |               |   |          |  
|                                                                                                                                                         |  |               | 153,049  |   |               |   | 135,684  |  
|LIFO valuation adjustment                                                                                                                                |  |               | (31,544  | ) |               |   | (23,561  | )
|                                                                                                                                                         |  |               |          |   |               |   |          |  
|                                                                                                                                                         |  |               | 121,505  |   |               |   | 112,123  |  
|Prepaid expenses                                                                                                                                         |  |               | 3,920    |   |               |   | 3,703    |  
|Other current assets and deferred income taxes                                                                                                           |  |               | 26,786   |   |               |   | 28,578   |  
|                                                                                                                                                         |  |               |          |   |               |   |          |  
|TOTAL CURRENT ASSETS                                                                                                                                     |  |               | 297,745  |   |               |   | 274,893  |  
|                                                                                                                                                         |  |              
|PROPERTY, PLANT AND EQUIPMENT:                                                                                                                           |  |               |          |   |               |   |          |  
|Land and improvements                                                                                                                                    |  |               | 6,126    |   |               |   | 6,287    |  
|Buildings and improvements                                                                                                                               |  |               | 60,179   |   |               |   | 59,530   |  
|Machinery and equipment                                                                                                                                  |  |               | 303,281  |   |               |   | 286,629  |  
|Allowances for depreciation and amortization                                                                                                             |  |               | (232,376 | ) |               |   | (216,812 | )
|                                                                                                                                                         |  |               |          |   |               |   |          |  
|NET PROPERTY, PLANT AND EQUIPMENT                                                                                                                        |  |               | 137,210  |   |               |   | 135,634  |  
|                                                                                                                                                         |  |               |          |   |               |   |          |  
|OTHER ASSETS:                                                                                                                                            |  |               |          |   |               |   |          |  
|Goodwill                                                                                                                                                 |  |               | 62,785   |   |               |   | 62,845   |  
|Other                                                                                                                                                    |  |               | 3,820    |   |               |   | 3,583    |  
|                                                                                                                                                         |  |               |          |   |               |   |          |  
|TOTAL ASSETS                                                                                                                                             |  | $             | 501,560  |   |               | $ | 476,955  |  
|                                                                                                                                                         |  |               |          |   |               |   |          |  
|LIABILITIES AND SHAREHOLDERS EQUITY                                                                                                                     |  |               |          |   |               |   |          |  
|CURRENT LIABILITIES:                                                                                                                                     |  |               |          |   |               |   |          |  
|Accounts payable                                                                                                                                         |  | $             | 39,075   |   |               | $ | 28,966   |  
|Employee compensation                                                                                                                                    |  |               | 7,825    |   |               |   | 6,820    |  
|Profit sharing                                                                                                                                           |  |               | 6,885    |   |               |   | 5,436    |  
|Accrued warranty costs                                                                                                                                   |  |               | 6,335    |   |               |   | 6,625    |  
|Accrued insurance obligations                                                                                                                            |  |               | 11,613   |   |               |   | 12,515   |  
|Other accrued expenses                                                                                                                                   |  |               | 6,037    |   |               |   | 7,494    |  
|Dividends payable                                                                                                                                        |  |               | 4,959    |   |               |   | 4,595    |  
|Income taxes payable                                                                                                                                     |  |               | 1,871    |   |               |   | 4,821    |  
|Current maturities of long-term obligations                                                                                                              |  |               | 0        |   |               |   | 25,819   |  
|                                                                                                                                                         |  |               |          |   |               |   |          |  
|TOTAL CURRENT LIABILITIES                                                                                                                                |  |               | 84,600   |   |               |   | 103,091  |  
|LONG-TERM OBLIGATIONS                                                                                                                                    |  |               | 104,025  |   |               |   | 79,465   |  
|DEFERRED INCOME TAXES                                                                                                                                    |  |               | 29,320   |   |               |   | 32,911   |  
|SHAREHOLDERS EQUITY:                                                                                                                                    |  |               |          |   |               |   |          |  
|Preferred stock, $0.10 par valueAuthorized shares: 5,000,000Issued and outstanding shares: None                                                          |  |               |          |   |               |   |          |  
|Common stock, $0.10 par valueAuthorized shares: 150,000,000Issued: 2004 - 40,423,054; 2003 - 40,018,261Outstanding: 2004 -
33,109,762; 2003 - 32,829,738 |  |               | 4,042    |   |               |   | 4,002    |  
|Additional capital                                                                                                                                       |  |               | 61,117   |   |               |   | 53,683   |  
|Retained earnings                                                                                                                                        |  |               | 354,696  |   |               |   | 338,696  |  
|Accumulated other comprehensive income (loss)                                                                                                            |  |               | 1,050    |   |               |   | (675     | )
|Treasury stock: 2004 - 7,313,292; 2003 - 7,188,523                                                                                                       |  |               | (137,290 | ) |               |   | (134,218 | )
|                                                                                                                                                         |  |               |          |   |               |   |          |  
|TOTAL SHAREHOLDERS EQUITY                                                                                                                               |  |               | 283,615  |   |               |   | 261,488  |  
|                                                                                                                                                         |  |               |          |   |               |   |          |  
|TOTAL LIABILITIES AND SHAREHOLDERS EQUITY                                                                                                               |  | $             | 501,560  |   |               | $ | 476,955  |  
|                                                                                                                                                         |  |               |          |   |               |   |          |  



See
notes to consolidated financial statements.



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Consolidated Statements of Earnings

Baldor Electric Company and Affiliates



|                                            |  |               |            |               |   |                 |  |   |           
|------------------------------------------- |  | ------------- | ---------- | ------------- | - | --------------- |  | - | ----------
|                                            |  | Year Ended   
|(In thousands, except share data)           |  | January 12005 |            | January 32004 |   | December 282002
|Net sales                                   |  | $             | 648,195    |               | $ | 561,391         |  | $ | 549,507   
|Other income, net                           |  |               | 1,938      |               |   | 1,960           |  |   | 1,383     
|                                            |  |               |            |               |   |                 |  |   |           
|                                            |  |               | 650,133    |               |   | 563,351         |  |   | 550,890   
|Cost and expenses:                          |  |               |            |               |   |                 |  |   |           
|Cost of goods sold                          |  |               | 473,752    |               |   | 409,294         |  |   | 396,815   
|Selling and administrative                  |  |               | 113,933    |               |   | 106,343         |  |   | 107,407   
|Profit sharing                              |  |               | 6,885      |               |   | 5,436           |  |   | 5,285     
|Interest                                    |  |               | 3,235      |               |   | 2,949           |  |   | 3,454     
|                                            |  |               |            |               |   |                 |  |   |           
|                                            |  |               | 597,805    |               |   | 524,022         |  |   | 512,961   
|                                            |  |               |            |               |   |                 |  |   |           
|Earnings before income taxes                |  |               | 52,328     |               |   | 39,329          |  |   | 37,929    
|Income taxes                                |  |               | 17,276     |               |   | 14,550          |  |   | 14,034    
|                                            |  |               |            |               |   |                 |  |   |           
|NET EARNINGS                                |  | $             | 35,052     |               | $ | 24,779          |  | $ | 23,895    
|                                            |  |               |            |               |   |                 |  |   |           
|Net earnings per share-basic                |  | $             | 1.06       |               | $ | 0.75            |  | $ | 0.70      
|                                            |  |               |            |               |   |                 |  |   |           
|Net earnings per share-diluted              |  | $             | 1.05       |               | $ | 0.74            |  | $ | 0.69      
|                                            |  |               |            |               |   |                 |  |   |           
|Weighted average shares outstanding-basic   |  |               | 32,953,382 |               |   | 32,928,369      |  |   | 34,060,853
|                                            |  |               |            |               |   |                 |  |   |           
|Weighted average shares outstanding-diluted |  |               | 33,485,261 |               |   | 33,404,733      |  |   | 34,622,136
|                                            |  |               |            |               |   |                 |  |   |           



See
notes to consolidated financial statements.



---

Summary of Quarterly Results of Operations (Unaudited)

Baldor Electric Company and Affiliates



(In thousands, except per share data)



|                                 |  |         |         |        |   |         |  |          |         |       |   |         |  |   |        
|-------------------------------- |  | ------- | ------- | ------ | - | ------- |  | -------- | ------- | ----- | - | ------- |  | - | -------
|                                 |  | Quarter |         |       
|                                 |  | First   |         | Second |   | Third   |  | Fourth** |         | Total
|2004: Net sales                  |  | $       | 152,823 |        | $ | 163,695 |  | $        | 168,832 |       | $ | 162,845 |  | $ | 648,195
|Gross profit                     |  |         | 42,188  |        |   | 44,616  |  |          | 44,739  |       |   | 42,900  |  |   | 174,443
|Net earnings                     |  |         | 7,439   |        |   | 8,472   |  |          | 8,731   |       |   | 10,410  |  |   | 35,052 
|Net earnings per share-basic     |  |         | 0.23    |        |   | 0.26    |  |          | 0.26    |       |   | 0.31    |  |   | 1.06   
|* Net earnings per share-diluted |  |         | 0.22    |        |   | 0.25    |  |          | 0.26    |       |   | 0.31    |  |   | 1.05   
|2003: Net sales                  |  | $       | 137,389 |        | $ | 138,523 |  | $        | 138,980 |       | $ | 146,499 |  | $ | 561,391
|Gross profit                     |  |         | 37,380  |        |   | 37,760  |  |          | 36,826  |       |   | 40,131  |  |   | 152,097
|Net earnings                     |  |         | 6,165   |        |   | 5,999   |  |          | 6,065   |       |   | 6,550   |  |   | 24,779 
|Net earnings per share-basic     |  |         | 0.18    |        |   | 0.18    |  |          | 0.19    |       |   | 0.20    |  |   | 0.75   
|Net earnings per share-diluted   |  |         | 0.18    |        |   | 0.18    |  |          | 0.18    |       |   | 0.20    |  |   | 0.74   

---

|* | The sum of the quarter amounts does not agree to the total due to rounding
|- | --------------------------------------------------------------------------

|** | Fourth quarter 2003 included 14 weeks. All other quarters presented included 13 weeks. Fourth quarter 2004 includes income tax adjustments of $(2.1) million and contincency reserve
adjustments of $(838,000), net of tax.
|-- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



---

Consolidated Statements of Cash Flow

Baldor Electric Company and Affiliates



|                                                                             |  |               |         |   |               |   |         |                 |  |   |         |  
|---------------------------------------------------------------------------- |  | ------------- | ------- | - | ------------- | - | ------- | --------------- |  | - | ------- | -
|                                                                             |  | Year Ended    |        
|(In thousands)                                                               |  | January 12005 |         |   | January 32004 |   |         | December 282002 | 
|Operating activities:                                                        |  |               |         |   |               |   |         |                 |  |   |         |  
|Net earnings                                                                 |  | $             | 35,052  |   |               | $ | 24,779  |                 |  | $ | 23,895  |  
|Adjustments to reconcile net earnings to net cash from operating activities: |  |               |         |   |               |   |         |                 |  |   |         |  
|Losses (gains) on sales of marketable securities                             |  |               | 165     |   |               |   | (94     | )               |  |   | (46     | )
|Depreciation                                                                 |  |               | 17,271  |   |               |   | 17,180  |                 |  |   | 17,595  |  
|Amortization                                                                 |  |               | 1,872   |   |               |   | 1,659   |                 |  |   | 1,410   |  
|Deferred income taxes                                                        |  |               | 583     |   |               |   | 8,909   |                 |  |   | 4,435   |  
|Changes in operating assets and liabilities:                                 |  |               |         |   |               |   |         |                 |  |   |         |  
|Receivables                                                                  |  |               | (17,888 | ) |               |   | 1,408   |                 |  |   | (448    | )
|Inventories                                                                  |  |               | (9,382  | ) |               |   | 2,561   |                 |  |   | 13,081  |  
|Other current assets                                                         |  |               | 235     |   |               |   | (1,593  | )               |  |   | 452     |  
|Accounts payable                                                             |  |               | 10,109  |   |               |   | 3,242   |                 |  |   | (3,541  | )
|Accrued expenses and other liabilities                                       |  |               | 169     |   |               |   | (2,227  | )               |  |   | (2,590  | )
|Income taxes                                                                 |  |               | (5,709  | ) |               |   | 3,640   |                 |  |   | (934    | )
|Other - net                                                                  |  |               | (1,286  | ) |               |   | 3,307   |                 |  |   | 265     |  
|                                                                             |  |               |         |   |               |   |         |                 |  |   |         |  
|Net cash from operating activities                                           |  |               | 31,191  |   |               |   | 62,771  |                 |  |   | 53,574  |  
|                                                                             |  |               |        
|Investing activities:                                                        |  |               |         |   |               |   |         |                 |  |   |         |  
|Additions to property, plant and equipment                                   |  |               | (18,107 | ) |               |   | (15,132 | )               |  |   | (10,556 | )
|Marketable securities purchased                                              |  |               | (29,176 | ) |               |   | (39,152 | )               |  |   | (32,014 | )
|Marketable securities sold                                                   |  |               | 33,024  |   |               |   | 29,516  |                 |  |   | 16,045  |  
|Acquisitions (net of cash acquired)                                          |  |               | 0       |   |               |   | (5,831  | )               |  |   | 0       |  
|                                                                             |  |               |         |   |               |   |         |                 |  |   |         |  
|Net cash used in investing activities                                        |  |               | (14,259 | ) |               |   | (30,599 | )               |  |   | (26,525 | )
|                                                                             |  |               |        
|Financing activities:                                                        |  |               |         |   |               |   |         |                 |  |   |         |  
|Additional long-term obligations                                             |  |               | 43,000  |   |               |   | 0       |                 |  |   | 14,000  |  
|Reduction of long-term obligations                                           |  |               | (44,259 | ) |               |   | (3,898  | )               |  |   | (7,268  | )
|Unexpended debt proceeds                                                     |  |               | 396     |   |               |   | 2       |                 |  |   | 3       |  
|Dividends paid                                                               |  |               | (19,052 | ) |               |   | (17,518 | )               |  |   | (17,931 | )
|Common stock repurchased                                                     |  |               | 0       |   |               |   | (26,686 | )               |  |   | 0       |  
|Stock option plans                                                           |  |               | 4,402   |   |               |   | 2,048   |                 |  |   | 3,098   |  
|                                                                             |  |               |         |   |               |   |         |                 |  |   |         |  
|Net cash used in financing activities                                        |  |               | (15,513 | ) |               |   | (46,052 | )               |  |   | (8,098  | )
|                                                                             |  |               |         |   |               |   |         |                 |  |   |         |  
|Net increase (decrease) in cash and cash equivalents                         |  |               | 1,419   |   |               |   | (13,880 | )               |  |   | 18,951  |  
|Beginning cash and cash equivalents                                          |  |               | 10,635  |   |               |   | 24,515  |                 |  |   | 5,564   |  
|                                                                             |  |               |         |   |               |   |         |                 |  |   |         |  
|Ending cash and cash equivalents                                             |  | $             | 12,054  |   |               | $ | 10,635  |                 |  | $ | 24,515  |  
|                                                                             |  |               |         |   |               |   |         |                 |  |   |         |  



See
notes to consolidated financial statements.



---

Consolidated Statements of Shareholders Equity

Baldor Electric Company and Affiliates



|                                                                              |  |              |  |                   |       |                  |   |        |                                             |   |         |                         |  |   |        |   |  |   |          |   |  |   |         |  
|----------------------------------------------------------------------------- |  | ------------ |  | ----------------- | ----- | ---------------- | - | ------ | ------------------------------------------- | - | ------- | ----------------------- |  | - | ------ | - |  | - | -------- | - |  | - | ------- | -
|                                                                              |  | Common Stock |  | AdditionalCapital |       | RetainedEarnings |   |        | AccumulatedOtherComprehensive Income (Loss) |   |         | TreasuryStock (at cost) |  |   | Total  |  
|(In thousands, except share data)                                             |  | Shares       |  | Amount            |       |                  |   |        |                                            
|BALANCE AT DECEMBER 30, 2001                                                  |  | 39,411       |  | $                 | 3,941 |                  | $ | 44,224 |                                             | $ | 325,642 |                         |  | $ | (8,164 | ) |  | $ | (103,158 | ) |  | $ | 262,485 |  
|Comprehensive income                                                          |  |              |  |                   |       |                  |   |        |                                             |   |         |                         |  |   |        |   |  |   |          |   |  |   |         |  
|Net earnings                                                                  |  |              |  |                   |       |                  |   |        |                                             |   | 23,895  |                         |  |   |        |   |  |   |          |   |  |   | 23,895  |  
|Other comprehensive income                                                    |  |              |  |                   |       |                  |   |        |                                             |   |         |                         |  |   |        |   |  |   |          |   |  |   |         |  
|Securities valuation adjustment, net of taxes of $51                          |  |              |  |                   |       |                  |   |        |                                             |   |         |                         |  |   | 85     |   |  |   |          |   |  |   | 85      |  
|Translation adjustments                                                       |  |              |  |                   |       |                  |   |        |                                             |   |         |                         |  |   | 1,900  |   |  |   |          |   |  |   | 1,900   |  
|Derivative unrealized loss, net of taxes of $831                              |  |              |  |                   |       |                  |   |        |                                             |   |         |                         |  |   | 1,299  |   |  |   |          |   |  |   | 1,299   |  
|                                                                              |  |              |  |                   |       |                  |   |        |                                             |   |         |                         |  |   |        |   |  |   |          |   |  |   |         |  
|Total other comprehensive income                                              |  |              |  |                   |       |                  |   |        |                                             |   |         |                         |  |   |        |   |  |   |          |   |  |   | 3,284   |  
|                                                                              |  |              |  |                   |       |                  |   |        |                                             |   |         |                         |  |   |        |   |  |   |          |   |  |   |         |  
|Total comprehensive income                                                    |  |              |  |                   |       |                  |   |        |                                             |   |         |                         |  |   |        |   |  |   |          |   |  | $ | 27,179  |  
|                                                                              |  |              |  |                   |       |                  |   |        |                                             |   |         |                         |  |   |        |   |  |   |          |   |  |   |         |  
|Stock option plans (net of 60,580 shares exchanged and $509,000 tax benefit)  |  | 282          |  |                   | 28    |                  |   | 4,433  |                                             |   |         |                         |  |   |        |   |  |   | (1,363   | ) |  |   | 3,098   |  
|Cash dividends at $0.52 per share                                             |  |              |  |                   |       |                  |   |        |                                             |   | (17,931 | )                       |  |   |        |   |  |   |          |   |  |   | (17,931 | )
|Other                                                                         |  |              |  |                   |       |                  |   |        |                                             |   | (233    | )                       |  |   |        |   |  |   |          |   |  |   | (233    | )
|                                                                              |  |              |  |                   |       |                  |   |        |                                             |   |         |                         |  |   |        |   |  |   |          |   |  |   |         |  
|BALANCE AT DECEMBER 28, 2002                                                  |  | 39,693       |  | $                 | 3,969 |                  | $ | 48,657 |                                             | $ | 331,373 |                         |  | $ | (4,880 | ) |  | $ | (104,521 | ) |  | $ | 274,598 |  
|Comprehensive income                                                          |  |              |  |                   |       |                  |   |        |                                             |   |         |                         |  |   |        |   |  |   |          |   |  |   |         |  
|Net earnings                                                                  |  |              |  |                   |       |                  |   |        |                                             |   | 24,779  |                         |  |   |        |   |  |   |          |   |  |   | 24,779  |  
|Other comprehensive income (loss)                                             |  |              |  |                   |       |                  |   |        |                                             |   |         |                         |  |   |        |   |  |   |          |   |  |   |         |  
|Securities valuation adjustment, net of tax benefits of $85                   |  |              |  |                   |       |                  |   |        |                                             |   |         |                         |  |   | (145   | ) |  |   |          |   |  |   | (145    | )
|Translation adjustments                                                       |  |              |  |                   |       |                  |   |        |                                             |   |         |                         |  |   | 2,809  |   |  |   |          |   |  |   | 2,809   |  
|Derivative unrealized gain, net of taxes of $985                              |  |              |  |                   |       |                  |   |        |                                             |   |         |                         |  |   | 1,541  |   |  |   |          |   |  |   | 1,541   |  
|                                                                              |  |              |  |                   |       |                  |   |        |                                             |   |         |                         |  |   |        |   |  |   |          |   |  |   |         |  
|Total other comprehensive income                                              |  |              |  |                   |       |                  |   |        |                                             |   |         |                         |  |   |        |   |  |   |          |   |  |   | 4,205   |  
|                                                                              |  |              |  |                   |       |                  |   |        |                                             |   |         |                         |  |   |        |   |  |   |          |   |  |   |         |  
|Total comprehensive income                                                    |  |              |  |                   |       |                  |   |        |                                             |   |         |                         |  |   |        |   |  |   |          |   |  | $ | 28,984  |  
|                                                                              |  |              |  |                   |       |                  |   |        |                                             |   |         |                         |  |   |        |   |  |   |          |   |  |   |         |  
|Stock option plans (net of 134,890 shares exchanged and $321,000 tax benefit) |  | 325          |  |                   | 33    |                  |   | 5,026  |                                             |   |         |                         |  |   |        |   |  |   | (3,011   | ) |  |   | 2,048   |  
|Cash dividends at $0.53 per share                                             |  |              |  |                   |       |                  |   |        |                                             |   | (17,518 | )                       |  |   |        |   |  |   |          |   |  |   | (17,518 | )
|Acquisition                                                                   |  |              |  |                   |       |                  |   |        |                                             |   | 62      |                         |  |   |        |   |  |   |          |   |  |   | 62      |  
|Common stock repurchased (1,500,000 shares)                                   |  |              |  |                   |       |                  |   |        |                                             |   |         |                         |  |   |        |   |  |   | (26,686  | ) |  |   | (26,686 | )
|                                                                              |  |              |  |                   |       |                  |   |        |                                             |   |         |                         |  |   |        |   |  |   |          |   |  |   |         |  
|BALANCE AT JANUARY 3, 2004                                                    |  | 40,018       |  | $                 | 4,002 |                  | $ | 53,683 |                                             | $ | 338,696 |                         |  | $ | (675   | ) |  | $ | (134,218 | ) |  | $ | 261,488 |  
|Comprehensive income                                                          |  |              |  |                   |       |                  |   |        |                                             |   |         |                         |  |   |        |   |  |   |          |   |  |   |         |  
|Net earnings                                                                  |  |              |  |                   |       |                  |   |        |                                             |   | 35,052  |                         |  |   |        |   |  |   |          |   |  |   | 35,052  |  
|Other comprehensive income (loss)                                             |  |              |  |                   |       |                  |   |        |                                             |   |         |                         |  |   |        |   |  |   |          |   |  |   |         |  
|Securities valuation adjustment, net of tax benefits of $92                   |  |              |  |                   |       |                  |   |        |                                             |   |         |                         |  |   | (157   | ) |  |   |          |   |  |   | (157    | )
|Translation adjustments                                                       |  |              |  |                   |       |                  |   |        |                                             |   |         |                         |  |   | 1,746  |   |  |   |          |   |  |   | 1,746   |  
|Derivative unrealized gain, net of taxes of $87                               |  |              |  |                   |       |                  |   |        |                                             |   |         |                         |  |   | 136    |   |  |   |          |   |  |   | 136     |  
|                                                                              |  |              |  |                   |       |                  |   |        |                                             |   |         |                         |  |   |        |   |  |   |          |   |  |   |         |  
|Total other comprehensive income                                              |  |              |  |                   |       |                  |   |        |                                             |   |         |                         |  |   |        |   |  |   |          |   |  |   | 1,725   |  
|                                                                              |  |              |  |                   |       |                  |   |        |                                             |   |         |                         |  |   |        |   |  |   |          |   |  |   |         |  
|Total comprehensive income                                                    |  |              |  |                   |       |                  |   |        |                                             |   |         |                         |  |   |        |   |  |   |          |   |  | $ | 36,777  |  
|                                                                              |  |              |  |                   |       |                  |   |        |                                             |   |         |                         |  |   |        |   |  |   |          |   |  |   |         |  
|Stock option plans (net of 124,769 shares exchanged and $630,000 tax benefit) |  | 405          |  |                   | 40    |                  |   | 7,434  |                                             |   |         |                         |  |   |        |   |  |   | (3,072   | ) |  |   | 4,402   |  
|Cash dividends at $0.57 per share                                             |  |              |  |                   |       |                  |   |        |                                             |   | (19,052 | )                       |  |   |        |   |  |   |          |   |  |   | (19,052 | )
|                                                                              |  |              |  |                   |       |                  |   |        |                                             |   |         |                         |  |   |        |   |  |   |          |   |  |   |         |  
|BALANCE AT JANUARY 1, 2005                                                    |  | 40,423       |  | $                 | 4,042 |                  | $ | 61,117 |                                             | $ | 354,696 |                         |  | $ | 1,050  |   |  | $ | (137,290 | ) |  | $ | 283,615 |  
|                                                                              |  |              |  |                   |       |                  |   |        |                                             |   |         |                         |  |   |        |   |  |   |          |   |  |   |         |  



See
notes to consolidated financial statements.



---

Notes to Consolidated Financial Statements

Baldor Electric Company and Affiliates

January 1, 2005



NOTE A SIGNIFICANT ACCOUNTING POLICIES



Line of Business: The Company operates in one industry segment that includes the
design, manufacture and sale of industrial electric motors, drives and generators.



Use of Estimates: The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the amounts reported in the
consolidated financial statements and accompanying notes. Actual results may differ from those estimates.



Consolidation:The consolidated financial statements include the accounts of the Company and all its affiliates. Intercompany accounts and transactions have been eliminated in consolidation.



Fiscal Year: The Companys fiscal year ends on the Saturday nearest to December
31, which results in a 52-week or 53-week year. Fiscal year 2004 contained 52 weeks. Fiscal year 2003 contained 53 weeks, and fiscal year 2002 contained 52 weeks.



Cash Equivalents: Cash equivalents consist of highly liquid investments having original maturities of three months or less.



Marketable Securities: All marketable securities are classified as
available-for-sale and are available to support current operations or to take advantage of other investment opportunities. Those securities are stated at estimated fair value based upon market quotes. Unrealized gains and losses, net of tax, are
computed on the basis of specific identification and are included in accumulated other comprehensive income. Realized gains, realized losses, and declines in value, judged to be other than temporary, are included in other income. The cost of
securities sold is based on the specific identification method and interest earned is included in other income.



Accounts Receivable: Trade receivables are recorded in the balance sheet at outstanding principal, adjusted for charge-offs and allowances for doubtful accounts.
The allowance for doubtful accounts is estimated based on historical losses and current conditions.



Inventories: The Company values inventories at the lower of cost or market, with cost being determined principally by the last-in, first-out method (LIFO), except for $16,835,000 in 2004 and $16,183,000 in
2003, at foreign locations, valued by the first-in, first-out method (FIFO).



Property, Plant and Equipment: Property, plant and equipment are stated at cost. Depreciation and amortization are computed principally using the straight-line method over the estimated useful lives of the assets ranging from 10 to
39 years for buildings and improvements and 3 to 15 years for machinery and equipment. Capitalized software costs amounting to $24.8 million and $22.1 million, net of accumulated amortization, at January 1, 2005, and January 3, 2004, respectively,
are included in machinery and equipment and are amortized over their estimated useful life of 15 years.



Fair Value of Financial Instruments: The Companys methods and assumptions used to estimate the fair value of financial instruments include quoted market prices for marketable securities and discounted
cash flow analysis for fixed rate long-term debt. The Company estimates that the fair value of its financial instruments approximates carrying value at January 1, 2005, and January 3, 2004. The carrying amounts of cash and cash equivalents,
receivables, and trade payables approximated fair value at January 1, 2005, and January 3, 2004, due to the short-term maturities of these instruments.



- 1 -



---

Self-Insurance Liabilities: The Companys self-insurance programs include primarily product liability,
workers compensation, and health. The Company self-insures from the first dollar of loss up to specified retention levels. Eligible losses in excess of self-insurance retention levels and up to stated limits of liability are covered by
policies purchased from third-party insurers. The aggregate self-insurance liability is estimated using the Companys claims experience and risk exposure levels for the periods being valued and current conditions. Adjustments to the
self-insured liabilities may be required to reflect emerging claims experience and other factors.



Goodwill: Goodwill and indefinite-lived intangible assets are reviewed for impairment on an annual basis, and more frequently if events occur or circumstances change that indicate possible impairment. The
January 1, 2005, and January 3, 2004, annual impairment tests resulted in no impairments.



Long-Lived Assets: Impairment losses are recognized on long-lived assets when information indicates the carrying amount of these assets will not be recovered through future operations or sale.



Benefit Plans: The Company has a profit-sharing plan covering most employees with more
than two years of service. The Company contributes 12% of pre-tax earnings of participating companies to the Plan.



Income Taxes: Income taxes are provided based on the liability method of accounting. Deferred income taxes are provided for the expected future tax consequences of
temporary differences between the basis of assets and liabilities reported for financial and tax purposes.



Research and Engineering: Costs associated with research, new product development, and product cost improvements are treated as expenses when incurred and amounted to approximately $25.4 million in 2004, $21.9
million in 2003, and $22.5 million in 2002.



Derivatives: The Company
recognizes all derivatives on the balance sheet at fair value. Derivatives that are not hedges are adjusted to fair value through earnings. If the derivative is a cash flow hedge, changes in the fair value are recognized in accumulated other
comprehensive income (loss) until the hedged item is recognized in earnings. If a hedge transaction is terminated, any unrealized gain (loss) at the date of termination is carried in accumulated other comprehensive income (loss) until the hedged
item is recognized as earnings. The ineffective portion of a derivatives change in fair value is recognized in earnings in the period of change.



Shipping and Handling Costs: The Company classifies all amounts billed to customers for shipping and handling as revenue and classifies gross shipping and handling
costs paid as selling expense. Costs included in selling and administrative expenses related to shipping and handling amounted to approximately $22.8 million in 2004, $20.9 million in 2003, and $22.4 million in 2002.



Stock-Based Compensation: The Company has certain stock-based employee compensation
plans, which are described more fully in Note J. In accounting for these plans, the Company applies the intrinsic value method permitted under SFAS No. 123, Accounting for Stock-Based Compensation, as amended by SFAS No. 148, Accounting
Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees, and related Interpretations.



SFAS No. 123 requires pro forma disclosure of the effects on net income and earnings per share when applying the fair value method of valuing stock-based compensation.
The following table sets forth the pro forma disclosure of net income and earnings per share using the Black-Scholes option pricing model. For purposes of this disclosure, the estimated fair value of options is amortized over the applicable
compensatory periods.



- 2 -



---

Pro Forma Information (In thousands except per share data)



|                                                                                                      |  |       |      |         |   |        |  
|----------------------------------------------------------------------------------------------------- |  | ----- | ---- | ------- | - | ------ | -
|2004                                                                                                  |  |       |      |         |   |        |  
|Net income, as reported                                                                               |  |       |      |         | $ | 35,052 |  
|Add: Stock-based compensation expense included in reported net income, net of tax effects             |  |       |      |         |   | 161    |  
|Less: Stock-based compensation expense determined under fair value method, net of related tax effects |  |       |      |         |   | (632   | )
|                                                                                                      |  |       |      |         |   |        |  
|Pro forma net income                                                                                  |  |       |      |         | $ | 34,581 |  
|                                                                                                      |  |       |      |         |   |        |  
|                                                                                                      |  |      
|                                                                                                      |  | Basic |      | Diluted |  
|Earnings per share:                                                                                   |  |       |      |         |   |        |  
|Reported                                                                                              |  | $     | 1.06 |         | $ | 1.05   |  
|Pro forma                                                                                             |  | $     | 1.05 |         | $ | 1.03   |  
|                                                                                                      |  |      
|2003                                                                                                  |  |       |      |         |   |        |  
|Net income, as reported                                                                               |  |       |      |         | $ | 24,779 |  
|Add: Stock-based compensation expense included in reported net income, net of tax effects             |  |       |      |         |   | 446    |  
|Less: Stock-based compensation expense determined under fair value method, net of related tax effects |  |       |      |         |   | (807   | )
|                                                                                                      |  |       |      |         |   |        |  
|Pro forma net income                                                                                  |  |       |      |         | $ | 24,418 |  
|                                                                                                      |  |       |      |         |   |        |  
|                                                                                                      |  |      
|                                                                                                      |  | Basic |      | Diluted |  
|Earnings per share:                                                                                   |  |       |      |         |   |        |  
|Reported                                                                                              |  | $     | 0.75 |         | $ | 0.74   |  
|Pro forma                                                                                             |  | $     | 0.74 |         | $ | 0.73   |  
|                                                                                                      |  |      
|2002                                                                                                  |  |       |      |         |   |        |  
|Net income, as reported                                                                               |  |       |      |         | $ | 23,895 |  
|Add: Stock-based compensation expense included in reported net income, net of tax effects             |  |       |      |         |   | 581    |  
|Less: Stock-based compensation expense determined under fair value method, net of related tax effects |  |       |      |         |   | (1,162 | )
|                                                                                                      |  |       |      |         |   |        |  
|Pro forma net income                                                                                  |  |       |      |         | $ | 23,314 |  
|                                                                                                      |  |       |      |         |   |        |  
|                                                                                                      |  |      
|                                                                                                      |  | Basic |      | Diluted |  
|Earnings per share:                                                                                   |  |       |      |         |   |        |  
|Reported                                                                                              |  | $     | 0.70 |         | $ | 0.69   |  
|Pro forma                                                                                             |  | $     | 0.68 |         | $ | 0.67   |  



Revenue Recognition: The
Company sells products to its customers FOB shipping point. Title passes to the customer when the product is shipped. Accordingly, revenue is recognized when the product is shipped. The Company has no further obligations associated with the product
sale that would impact revenue recognition after the product is shipped.



Earnings Per Share: The Companys presentation of financial results includes both basic earnings per share and diluted earnings per share in accordance with SFAS No. 128, Earnings Per Share. Basic earnings per share
excludes any dilutive effects of options, warrants, and convertible securities. Diluted earnings per share includes all dilutive common stock equivalents.



Foreign Currency Translation: Assets and liabilities of foreign affiliates are translated into U.S. dollars at year-end exchange rates. Income statement items are
generally translated at average exchange rates prevailing during the period. Translation adjustments are recorded in accumulated other comprehensive income (loss) in shareholders equity.



- 3 -



---

Product Warranties: The Company accrues for product warranty claims based on historical experience and the
expected costs to provide warranty service. Changes in the carrying amount of product warranty reserves for the year ended January 1, 2005, are as follows:



(In thousands)



|                           |  |                               |  |            |  |                           
|-------------------------- |  | ----------------------------- |  | ---------- |  | --------------------------
|Balance at January 3, 2004 |  | Charges to Costs and Expenses |  | Deductions |  | Balance at January 1, 2005
|$ 6,625                    |  | $ 2,277                       |  | $ (2,567)  |  | $ 6,335                   



Amounts included in selling and
administrative costs amounted to $2,277,000 in 2004, $2,700,000 in 2003, and $2,804,000 in 2002.



NOTE B LONG-TERM OBLIGATIONS



Long-term
obligations consist of the following:



|                                                          |  |      |         |      |   |        
|--------------------------------------------------------- |  | ---- | ------- | ---- | - | -------
|(In thousands)                                            |  | 2004 |         | 2003
|                                                          |  |      |         |      |   |        
|Industrial Development Bonds:                             |  |      |         |      |   |        
|Due in 2004 at variable rates ranging from 1.34% to 4.02% |  | $    | 0       |      | $ | 810    
|Due in 2010 at variable rate of 1.74%                     |  |      | 2,025   |      |   | 5,465  
|Notes payable to banks:                                   |  |      |         |      |   |        
|Due October 23, 2004 at 4.97% fixed rate                  |  |      | 0       |      |   | 25,000 
|Due March 31, 2004 at 1.92% variable rate                 |  |      | 0       |      |   | 12,000 
|Due July 31, 2004 at 1.91% variable rate                  |  |      | 0       |      |   | 15,000 
|Due January 31, 2007 at 2.88% variable rate               |  |      | 47,000  |      |   | 47,000 
|Due March 15, 2006 at 2.90% variable rate                 |  |      | 15,000  |      |   | 0      
|Due October 25, 2009 at 3.62% fixed rate                  |  |      | 25,000  |      |   | 0      
|Due September 30, 2009 at 4.63% fixed rate                |  |      | 15,000  |      |   | 0      
|Due November 1, 2004 at 10.16% fixed rate                 |  |      | 0       |      |   | 9      
|                                                          |  |      |         |      |   |        
|                                                          |  |      | 104,025 |      |   | 105,284
|Less current maturities                                   |  |      | 0       |      |   | 25,819 
|                                                          |  |      |         |      |   |        
|                                                          |  | $    | 104,025 |      | $ | 79,465 
|                                                          |  |      |         |      |   |        



Certain long-term obligations are
collateralized by property, plant and equipment with a net book value of approximately $626,000 at January 1, 2005.



Maturities of long-term obligations during the five year period ending 2009 are: 2005 - $0; 2006 - $15,000,000; 2007 - $47,000,000; 2008 - $0, 2009 and thereafter -
$42,025,000.



Certain long-term obligations require that the Company maintain
various financial ratios. These ratios were all met for 2004 and 2003. At January 1, 2005, the Company had outstanding letters of credit totaling $2,257,000 that will expire between February 28, 2005, and July 1, 2005. The Company expects to renew
these letters of credit prior to expiration.



Interest paid was $3,037,000 in
2004, $2,878,000 in 2003 and $3,312,000 in 2002.



The Company has a note
payable to bank of $47,000,000 secured by trade accounts receivable. This note was renewed March 5, 2004, with a maturity date of February 1, 2007. The Company utilizes a wholly-owned special purpose entity (SPE) to securitize the receivables. The
SPE has no other purpose other than the securitization and is consolidated in the Companys financial statements.



- 4 -



---

NOTE C MARKETABLE SECURITIES



Baldor currently invests in only high-quality, short-term investments, which it classifies as available-for-sale. Differences between
amortized cost and estimated fair value at January 1, 2005, and January 3, 2004, are not material and are included in accumulated other comprehensive income (loss). Because investments are predominantly short-term and are generally allowed to
mature, realized gains and losses for both years have been minimal. The following table presents the estimated fair value breakdown of investments by category:



|                                  |  |      |        |      |   |       
|--------------------------------- |  | ---- | ------ | ---- | - | ------
|(In thousands)                    |  | 2004 |        | 2003
|Municipal debt securities         |  | $    | 18,865 |      | $ | 20,678
|U.S. corporate debt securities    |  |      | 1,696  |      |   | 4,435 
|U.S. Treasury & agency securities |  |      | 11,831 |      |   | 11,641
|Other debt securities             |  |      | 1,412  |      |   | 3,639 
|                                  |  |      |        |      |   |       
|                                  |  |      | 33,804 |      |   | 40,393
|Less cash equivalents             |  |      | 1,412  |      |   | 3,739 
|                                  |  |      |        |      |   |       
|                                  |  | $    | 32,392 |      | $ | 36,654
|                                  |  |      |        |      |   |       



The estimated fair value of marketable
debt and equity securities at January 1, 2005, was $3,377,000 due in one year or less, $24,382,000 due in one to five years, $2,917,000 due in five to ten years, and $3,128,000 due after ten years. Because of the short-term nature of the
investments, expected maturities and contractual maturities are generally the same.



NOTE D INCOME TAXES



The Company made income tax payments of
$21,893,000 in 2004, $1,818,000 in 2003, and $10,174,000 in 2002. Income tax expense consists of the following:



|                  |  |      |        |      |   |        |  |   |        |  
|----------------- |  | ---- | ------ | ---- | - | ------ |  | - | ------ | -
|(In thousands)    |  | 2004 |        | 2003 |   | 2002   | 
|Current: Federal  |  | $    | 13,056 |      | $ | 3,908  |  | $ | 8,829  |  
|State             |  |      | 2,968  |      |   | 1,456  |  |   | 1,283  |  
|Foreign           |  |      | 669    |      |   | 277    |  |   | (513   | )
|                  |  |      |        |      |   |        |  |   |        |  
|                  |  |      | 16,693 |      |   | 5,641  |  |   | 9,599  |  
|                  |  |      |       
|Deferred: Federal |  |      | 46     |      |   | 8,418  |  |   | 3,837  |  
|State             |  |      | 537    |      |   | 491    |  |   | 598    |  
|Foreign           |  |      | 0      |      |   | 0      |  |   | 0      |  
|                  |  |      |        |      |   |        |  |   |        |  
|                  |  |      | 583    |      |   | 8,909  |  |   | 4,435  |  
|                  |  |      |        |      |   |        |  |   |        |  
|                  |  | $    | 17,276 |      | $ | 14,550 |  | $ | 14,034 |  
|                  |  |      |        |      |   |        |  |   |        |  



Deferred income taxes reflect the net
effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. The sources of these differences relate primarily to depreciation, certain
liabilities and bad debt expense.



The following table reconciles the
difference between the Companys effective income tax rate and the federal corporate statutory rate:



|                                    |  |      |    |  |      |    |  |      |   
|----------------------------------- |  | ---- | -- |  | ---- | -- |  | ---- | --
|                                    |  | 2004 |    |  | 2003 |    |  | 2002 |   
|Statutory federal income tax rate   |  | 35.0 | %  |  | 35.0 | %  |  | 35.0 | % 
|State taxes, net of federal benefit |  | 4.4  | %  |  | 3.3  | %  |  | 3.2  | % 
|Other                               |  | (6.4 | )% |  | (1.3 | )% |  | (1.2 | )%
|                                    |  |      |    |  |      |    |  |      |   
|Effective income tax rate           |  | 33.0 | %  |  | 37.0 | %  |  | 37.0 | % 
|                                    |  |      |    |  |      |    |  |      |   



- 5 -



---

The Company adjusted certain income tax liabilities during the fourth quarter of 2004 to reflect current exposure. These
adjustments amounted to approximately $2.1 million and accounted for the reduction in effective income tax rate for 2004. The adjustments are included in Other in the above reconciliation.



The principal components of deferred tax assets (liabilities) are as follows:



|                                           |  |      |         |   |      |   |         |  
|------------------------------------------ |  | ---- | ------- | - | ---- | - | ------- | -
|(In thousands)                             |  | 2004 |         |   | 2003 |  
|Accrued liabilities                        |  | $    | 3,653   |   |      | $ | 4,989   |  
|Bad debt reserves                          |  |      | 900     |   |      |   | 1,079   |  
|Foreign net operating losses               |  |      | 1,382   |   |      |   | 1,679   |  
|Employee compensation and benefits         |  |      | 898     |   |      |   | (2,300  | )
|                                           |  |      |         |   |      |   |         |  
|                                           |  |      | 6,833   |   |      |   | 5,447   |  
|Valuation allowance                        |  |      | (388    | ) |      |   | (363    | )
|                                           |  |      |         |   |      |   |         |  
|Deferred tax assets                        |  |      | 6,445   |   |      |   | 5,084   |  
|                                           |  |      |         |   |      |   |         |  
|Property, plant, equipment and intangibles |  |      | (27,295 | ) |      |   | (28,098 | )
|Derivative unrealized (gains) losses       |  |      | (1,033  | ) |      |   | (946    | )
|Securities valuation                       |  |      | (70     | ) |      |   | (22     | )
|                                           |  |      |         |   |      |   |         |  
|Deferred tax liabilities                   |  |      | (28,398 | ) |      |   | (29,066 | )
|                                           |  |      |         |   |      |   |         |  
|Net deferred tax liabilities               |  | $    | (21,953 | ) |      | $ | (23,982 | )
|                                           |  |      |         |   |      |   |         |  



Valuation allowance of $388,000 is to
adjust foreign net operating loss carryforwards to expected future utilization.



The Company has accumulated but undistributed earnings of foreign subsidiaries aggregating approximately $6.6 million at January 1, 2005 that are expected to be permanently reinvested in the business. It is not currently practicable to
estimate the tax liability that might be payable on the repatriation of these foreign earnings.



NOTE E FINANCIAL DERIVATIVES



Hedging of Copper and Aluminum Requirements



Periodically, the
Company uses derivative financial instruments to reduce its exposure to various market risks. The Company does not regularly engage in speculative transactions, nor does the Company regularly hold or issue financial instruments for trading purposes.
Generally, contract terms of a hedge instrument closely mirror those of the hedged item providing a high degree of risk reduction and correlation and are recorded using hedge accounting. Instruments that do not meet the criteria for hedge accounting
are marked to fair value with unrealized gains or losses reported currently in earnings.



The Company had derivative balances related to cash flow hedges, with a fair value of $2,650,000 and $2,426,000 recorded in other current assets at January 1, 2005, and January 3, 2004, respectively.



The amount recognized in cost of sales on cash flow hedges amounted to approximately $(4.7
million) and $(934,000) in 2004 and 2003, respectively. The Company expects that after-tax gains, totaling approximately $1.6 million recorded in accumulated other comprehensive income (loss) at January 1, 2005, related to cash flow hedges, will be
recognized in cost of sales within the next twelve months. The Company generally does not hedge anticipated transactions beyond 18 months.



- 6 -



---

NOTE F SHAREHOLDERS EQUITY



Shareholder Rights Plan



The Company maintains a shareholder rights plan intended to encourage a potential acquirer to negotiate directly with the Board of Directors. The purpose of the plan is
to ensure the best possible treatment for all shareholders. Under the terms of the plan, one Common Stock Purchase Right (a Right) is associated with each outstanding share of common stock. If an acquiring person acquires 20% or more of the
Companys common stock then outstanding, the Rights become exercisable and would cause substantial dilution. Effectively, each such Right would entitle its holder (excluding the 20% owner) to purchase shares of Baldor common stock for half of
the then current market price, subject to certain restrictions under the plan. A Rights holder is not entitled to any benefits of the Right until it is exercised. The Rights, which expire in May 2008, may be redeemed by the Company at any time prior
to someone acquiring 20% or more of the Companys outstanding common stock and in certain events thereafter.



Accumulated Other Comprehensive Income (Loss)



Balances of related after-tax components comprising accumulated other comprehensive income (loss), included in shareholders equity are as follows:



|                             |  |                              |      |   |                                        |   |       |                                       |  |   |                                                 |   |  |   |        |  
|---------------------------- |  | ---------------------------- | ---- | - | -------------------------------------- | - | ----- | ------------------------------------- |  | - | ----------------------------------------------- | - |  | - | ------ | -
|(In thousands)               |  | UnrealizedGains onSecurities |      |   | UnrealizedGains (Losses)on Derivatives |   |       | ForeignCurrencyTranslationAdjustments |  |   | TotalAccumulatedOtherComprehensiveIncome (Loss) |  
|Balance at December 28, 2002 |  | $                            | 181  |   |                                        | $ | (61   | )                                     |  | $ | (5,000                                          | ) |  | $ | (4,880 | )
|Net change 2003              |  |                              | (145 | ) |                                        |   | 1,541 |                                       |  |   | 2,809                                           |   |  |   | 4,205  |  
|                             |  |                              |      |   |                                        |   |       |                                       |  |   |                                                 |   |  |   |        |  
|Balance at January 3, 2004   |  |                              | 36   |   |                                        |   | 1,480 |                                       |  |   | (2,191                                          | ) |  |   | (675   | )
|Net change 2004              |  |                              | (157 | ) |                                        |   | 136   |                                       |  |   | 1,746                                           |   |  |   | 1,725  |  
|                             |  |                              |      |   |                                        |   |       |                                       |  |   |                                                 |   |  |   |        |  
|Balance at January 1, 2005   |  | $                            | (121 | ) |                                        | $ | 1,616 |                                       |  | $ | (445                                            | ) |  | $ | 1,050  |  
|                             |  |                              |      |   |                                        |   |       |                                       |  |   |                                                 |   |  |   |        |  



Share Repurchases



On February 14, 2003, the Company, pursuant to its stock repurchase plan, repurchased 1.5
million shares of its common stock for cash in the amount of $26.7 million.



NOTE G COMMITMENTS AND CONTINGENCIES



Operating Lease
Commitments



The Company leases certain computers, buildings, and other
equipment under operating lease agreements. Related rental expense was $6,100,000 in 2004, $6,600,000 in 2003, and $5,800,000 in 2002. Future minimum payments for operating leases having non-cancelable lease terms in excess of one year are: 2005 -
$3,579,000; 2006 - $1,279,000; 2007 - $836,000; 2008 - $674,000; 2009 and thereafter - $3,435,000.



Legal Proceedings and Contingent Liabilities



The Company is subject to a number of legal actions arising in the ordinary course of business. Management expects that the ultimate resolution of these actions will not materially affect the Companys financial position, results of
operations, or cash flows. During the fourth quarter of 2004, certain contingent liabilities were adjusted by approximately $1.5 million to reflect current exposures, resulting in a reduction in selling and administrative expenses.



- 7 -



---

NOTE H ACQUISITIONS



On February 13, 2003, the Company acquired all of the stock of Energy Dynamics, Inc. (EDI) for cash in the amount of $5.8 million. EDI is a designer,
assembler, and marketer of industrial generator sets. The acquisition has been accounted for as a purchase with resulting goodwill of approximately $5.8 million. EDIs results of operations for the year ended January 3, 2004, were not material
to the Companys consolidated financial statements. Accordingly, pro forma information has not been presented. The Companys consolidated financial statements include the results of operations and the assets and liabilities of EDI after
February 12, 2003.



NOTE I FOREIGN OPERATIONS



The Companys foreign operations include both export sales and the results of its
foreign affiliates in Europe, Australia, Singapore, and Mexico. Consolidated sales, earnings before income taxes, and identifiable assets consist of the following:



|                              |  |      |         |      |   |         |  |   |         |  
|----------------------------- |  | ---- | ------- | ---- | - | ------- |  | - | ------- | -
|(In thousands)                |  | 2004 |         | 2003 |   | 2002    | 
|Net Sales:                    |  |      |         |      |   |         |  |   |         |  
|United States Companies       |  |      |         |      |   |         |  |   |         |  
|Domestic customers            |  | $    | 547,092 |      | $ | 479,414 |  | $ | 474,729 |  
|Export customers              |  |      | 46,396  |      |   | 40,926  |  |   | 36,792  |  
|                              |  |      |         |      |   |         |  |   |         |  
|                              |  |      | 593,488 |      |   | 520,340 |  |   | 511,521 |  
|Foreign Affiliates            |  |      | 54,707  |      |   | 41,051  |  |   | 37,986  |  
|                              |  |      |         |      |   |         |  |   |         |  
|                              |  | $    | 648,195 |      | $ | 561,391 |  | $ | 549,507 |  
|                              |  |      |         |      |   |         |  |   |         |  
|Earnings Before Income Taxes: |  |      |         |      |   |         |  |   |         |  
|United States Companies       |  | $    | 50,217  |      | $ | 39,076  |  | $ | 38,524  |  
|Foreign Affiliates            |  |      | 2,111   |      |   | 253     |  |   | (595    | )
|                              |  |      |         |      |   |         |  |   |         |  
|                              |  | $    | 52,328  |      | $ | 39,329  |  | $ | 37,929  |  
|                              |  |      |         |      |   |         |  |   |         |  
|Assets:                       |  |      |         |      |   |         |  |   |         |  
|United States Companies       |  | $    | 480,865 |      | $ | 457,727 |  | $ | 455,699 |  
|Foreign Affiliates            |  |      | 20,695  |      |   | 19,228  |  |   | 17,062  |  
|                              |  |      |         |      |   |         |  |   |         |  
|                              |  | $    | 501,560 |      | $ | 476,955 |  | $ | 472,761 |  
|                              |  |      |         |      |   |         |  |   |         |  



NOTE J STOCK PLANS



At January 1, 2005, the Company had various stock plans. Grants can and have included:
(1) incentive stock options to purchase shares at market value at grant date, and/or (2) non-qualified stock options to purchase shares of stock equal to and less than the stocks market value at grant date. Grants from the 1990 Plan expire six
years from the grant date. All other grants expire 10 years from the date of grant. The 1987, 1989, and 1996 Plans have expired except for options outstanding. A summary of the Companys stock plans follows.



1990 Plan  Only non-qualified options can be granted from this Plan. Options
vest and become 50% exercisable at the end of one year and 100% exercisable at the end of two years. There are no charges to income. Shares authorized for grants: 1990 Plan501,600.



1987 and 1994 Plans  Incentive stock options vest and become fully exercisable with continued employment of six months for
officers and three years for non-officers. Restrictions on non-qualified stock options normally lapse after a period of five years or earlier under certain circumstances. Related compensation expense for the non-qualified stock options is amortized
over the applicable compensatory period. Shares authorized for grants: 1987 Plan  2,700,000; 1994 Plan - 4,000,000.



1989, 1996 and 2001 Plans  Each non-employee director is granted an annual grant consisting of non-qualified stock options to purchase: (1) 3,240 shares at a
price equal to the market value at grant date, and (2) 2,160 shares at a price equal to 50% of the market value at



- 8 -



---

grant date. These options are immediately exercisable. Related compensation expense on the options granted at 50% of market is amortized over the applicable
compensatory period. Shares authorized for grants: 1989 Plan540,000; 1996 Plan200,000; 2001 Plan - 200,000.



|              |  |                        |  |                        |  |                            
|------------- |  | ---------------------- |  | ---------------------- |  | ---------------------------
|              |  | 1990 Plan              |  | 1987 and 1994 Plans    |  | 1989, 1996 and 2001 Plans  
|Type          |  | Non-compensatory       |  | Compensatory           |  | Compensatory               
|Administrator |  | Stock Option Committee |  | Stock Option Committee |  | Executive Committee        
|Recipients    |  | District Managers      |  | Employees              |  | Non-employee Directors     
|Status        |  | Active                 |  | Active - 1994 Plan     |  | Active - 2001 Plan         
|              |  |                        |  | Expired - 1987 Plan    |  | Expired - 1989 & 1996 Plans



|                                            |  |                  |                |                  |   |                            |  |                   |               |                            |   |                 |  |   |              
|------------------------------------------- |  | ---------------- | -------------- | ---------------- | - | -------------------------- |  | ----------------- | ------------- | -------------------------- | - | --------------- |  | - | -------------
|Options Outstanding at Fiscal
Year-End      |  | Granted atMarket |                | Granted atMarket |   | Granted at Less thanMarket |  | Granted at Market |               | Granted at Less thanMarket
|Range of exercise prices                    |  | $                | 17.06 - $20.70 |                  | $ | 13.56 - $26.56             |  | $                 | 6.78 - $13.91 |                            | $ | 13.44 -  $23.40 |  | $ | 6.72 - $11.70
|                                            |  |                  |                |                  |  
|Options outstanding                         |  |                  | 71,004         |                  |   | 1,741,316                  |  |                   | 202,850       |                            |   | 161,352         |  |   | 93,353       
|Weighted-average exercise price             |  | $                | 20.12          |                  | $ | 20.05                      |  | $                 | 9.88          |                            | $ | 21.00           |  | $ | 10.42        
|Weighted-average remaining contractual life |  |                  | 3.6 years      |                  |   | 5.2 years                  |  |                   | 5.2 years     |                            |   | 5.9 years       |  |   | 5.7 years    
|                                            |  |                  |                |                  |  
|Options currently exercisable               |  |                  | 48,504         |                  |   | 1,401,816                  |  |                   | 202,850       |                            |   | 161,352         |  |   | 93,353       
|Weighted-average exercise price             |  | $                | 19.85          |                  | $ | 19.70                      |  | $                 | 9.88          |                            | $ | 21.00           |  | $ | 10.42        



A summary of the Companys
weighted average variables, using the Black-Scholes option pricing model, and stock option activity for fiscal years 2004, 2003, and 2002 follows.





|                                               |  |               |           |   |                            |   |           |               |  |   |                            |   |  |               |           |   |                            |   |           |   |  |   |           |  
|---------------------------------------------- |  | ------------- | --------- | - | -------------------------- | - | --------- | ------------- |  | - | -------------------------- | - |  | ------------- | --------- | - | -------------------------- | - | --------- | - |  | - | --------- | -
|                                               |  |               |           |   | 2004                       |   |           |               |  |   | 2003                       |   |  |               |           |   | 2002                       |  
|Weighted Average Variables                     |  |               |           |   |                            |   |           |               |  |   |                            |   |  |               |           |   |                            |   |           |   |  |   |           |  
|Volatility                                     |  |               |           |   |                            |   | 1.4       | %             |  |   |                            |   |  |               | 2.0       | % |                            |   |           |   |  |   | 2.5       | %
|Risk-free interest rates                       |  |               |           |   |                            |   | 4.0       | %             |  |   |                            |   |  |               | 3.7       | % |                            |   |           |   |  |   | 5.0       | %
|Dividend yields                                |  |               |           |   |                            |   | 2.3       | %             |  |   |                            |   |  |               | 2.6       | % |                            |   |           |   |  |   | 2.4       | %
|Expected option life                           |  |               |           |   |                            |   | 7.5 years |               |  |   |                            |   |  |               | 6.7 years |   |                            |   |           |   |  |   | 7.6 years |  
|Remaining contractual life                     |  |               |           |   |                            |   | 5.2 years |               |  |   |                            |   |  |               | 5.4 years |   |                            |   |           |   |  |   | 5.2 years |  
|                                               |  |               |           |   |                            |  
|                                               |  | ExercisePrice |           |   | Fair ValuePrice            |   |           | ExercisePrice |  |   | Fair ValuePrice            |   |  | ExercisePrice |           |   | Fair ValuePrice            |  
|Per share price of options granted during year |  |               |           |   |                            |   |           |               |  |   |                            |   |  |               |           |   |                            |   |           |   |  |   |           |  
|At market price                                |  | $             | 23.85     |   |                            | $ | 2.34      |               |  | $ | 20.27                      |   |  | $             | 1.45      |   |                            | $ | 21.68     |   |  | $ | 3.08      |  
|At less than market price                      |  | $             | 11.70     |   |                            | $ | 6.14      |               |  | $ | 10.11                      |   |  | $             | 4.55      |   |                            | $ | 9.81      |   |  | $ | 9.04      |  
|                                               |  |               |           |   |                            |  
|                                               |  |               |           |   |                            |   |           |               |  |   |                            |   |  |               |           |   |                            |   |           |   |  |   |           |  
|                                               |  | Shares        |           |   | WeightedAveragePrice/Share |   |           | Shares        |  |   | WeightedAveragePrice/Share |   |  | Shares        |           |   | WeightedAveragePrice/Share |  
|Stock Option Activity                          |  |               |           |   |                            |   |           |               |  |   |                            |   |  |               |           |   |                            |   |           |   |  |   |           |  
|Total options outstanding                      |  |               |           |   |                            |   |           |               |  |   |                            |   |  |               |           |   |                            |   |           |   |  |   |           |  
|Beginning Balance                              |  |               | 2,491,187 |   |                            | $ | 17.99     |               |  |   | 2,499,790                  |   |  | $             | 17.26     |   |                            |   | 2,601,234 |   |  | $ | 16.62     |  
|Granted                                        |  |               | 244,600   |   |                            |   | 23.10     |               |  |   | 421,500                    |   |  |               | 18.85     |   |                            |   | 233,300   |   |  |   | 19.17     |  
|Exercised                                      |  |               | (404,793  | ) |                            |   | 15.79     |               |  |   | (325,170                   | ) |  |               | 16.30     |   |                            |   | (281,618  | ) |  |   | 14.65     |  
|Expired                                        |  |               | (61,119   | ) |                            |   | 22.42     |               |  |   | (104,933                   | ) |  |               | 19.13     |   |                            |   | (53,126   | ) |  |   | 19.86     |  
|                                               |  |               |           |   |                            |   |           |               |  |   |                            |   |  |               |           |   |                            |   |           |   |  |   |           |  
|Ending Balance                                 |  |               | 2,269,875 |   |                            |   | 18.82     |               |  |   | 2,491,187                  |   |  |               | 17.99     |   |                            |   | 2,499,790 |   |  |   | 17.26     |  
|                                               |  |               |           |   |                            |   |           |               |  |   |                            |   |  |               |           |   |                            |   |           |   |  |   |           |  
|Shares authorized for grant                    |  |               | 8,141,600 |   |                            |   |           |               |  |   | 8,141,600                  |   |  |               |           |   |                            |   | 8,141,600 |   |  |   |           |  
|Shares exercisable, at year end                |  |               | 1,907,875 |   |                            |   | 18.32     |               |  |   | 1,993,787                  |   |  |               | 17.29     |   |                            |   | 2,110,490 |   |  |   | 16.74     |  
|Shares reserved for future grants, at year end |  |               | 1,280,867 |   |                            |   |           |               |  |   | 1,466,348                  |   |  |               |           |   |                            |   | 1,793,381 |   |  |   |           |  



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---

NOTE K EARNINGS PER SHARE



The table below details earnings per share for the years indicated:



|                                                     |  |      |            |      |   |            |  |   |           
|---------------------------------------------------- |  | ---- | ---------- | ---- | - | ---------- |  | - | ----------
|                                                     |  | 2004 |            | 2003 |   | 2002      
|Numerator Reconciliation:                            |  |      |            |      |   |            |  |   |           
|The numerator is the same for diluted and basic EPS: |  |      |            |      |   |            |  |   |           
|Net earnings (in thousands)                          |  | $    | 35,052     |      | $ | 24,779     |  | $ | 23,895    
|                                                     |  |      |            |      |   |            |  |   |           
|Denominator Reconciliation:                          |  |      |            |      |   |            |  |   |           
|Weighted average shares - basic                      |  |      | 32,953,382 |      |   | 32,928,369 |  |   | 34,060,853
|Effect of dilutive securities - stock options        |  |      | 531,879    |      |   | 476,364    |  |   | 561,283   
|                                                     |  |      |            |      |   |            |  |   |           
|Weighted average shares - diluted                    |  |      | 33,485,261 |      |   | 33,404,733 |  |   | 34,622,136
|                                                     |  |      |            |      |   |            |  |   |           
|Earnings Per Share - basic                           |  | $    | 1.06       |      | $ | 0.75       |  | $ | 0.70      
|Earnings Per Share - diluted                         |  | $    | 1.05       |      | $ | 0.74       |  | $ | 0.69      



The total number of anti-dilutive
securities excluded from the above calculations were approximately 192,000 and 747,000 at January 1, 2005, and January 3, 2004, respectively.



NOTE L RECENTLY ISSUED ACCOUNTING STANDARDS



In December 2004, the FASB issued SFAS No. 123R, Share-Based Payment, a revision of SFAS No. 123, Accounting for Stock-Based Compensation and
superseding APB Opinion No. 25, Accounting for Stock Issued to Employees. SFAS No. 123R requires the Company to expense grants made under stock option plans. That cost will be recognized over the vesting period of the plans. SFAS No.
123R is effective for the first interim or annual period beginning after June 15, 2005. Upon adoption of SFAS No. 123R, amounts previously disclosed under SFAS No. 123 will be recorded in the consolidated statement of earnings. The Company is
evaluating the alternatives allowed under the standard, which the Company is required to adopt beginning in the third quarter of 2005. The Company expects the annual impact of adopting FAS 123R to be a reduction of $0.01 to $0.02 per diluted share.



In December 2004, the FASB issued FASB Staff Position No. FAS 109-2,
Accounting and Disclosure Guidance for the Foreign Earnings Repatriation Provision Within the American Jobs Creation Act of 2004. The American Jobs Creation Act of 2004 (the Act) contained a provision which allows for an 85% dividends
received deduction with respect to certain dividends received from foreign subsidiaries. The Company does not expect to repatriate foreign earnings pursuant to the Act. Accordingly, the Act is not expected to have a significant effect on the
Companys consolidated financial statements.



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---

Report of Independent Registered Public Accounting Firm



Shareholders and Board of Directors, Baldor Electric Company and Affiliates



We have audited the accompanying consolidated balance sheets of Baldor Electric Company and
affiliates as of January 1, 2005 and January 3, 2004, and the related consolidated statements of earnings, cash flows, and shareholders equity for each of the three years in the period ended January 1, 2005. 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 the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.



In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Baldor Electric Company and affiliates at January 1, 2005 and January 3, 2004, and the consolidated results of their operations and their cash flows for each of the three years in the
period ended January 1, 2005, in conformity with accounting principles generally accepted in the United States.



We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of Baldor Electric Company and
affiliates internal control over financial reporting as of January 1, 2005, based on criteria established in InternalControl  Integrated Frameworkissued by the Committee of Sponsoring Organizations of the Treadway
Commission and our report dated March 3, 2005 expressed an unqualified opinion thereon.



\s\ Ernst & Young LLP



Fort Smith, Arkansas

March 3, 2005



- 11 -



---

Report of Independent Registered Public Accounting Firm



Shareholders and Board of Directors, Baldor Electric Company and Affiliates



We have audited managements assessment, included in the accompanying Report of
Management on Internal Control over Financial Reporting, that Baldor Electric Company and affiliates maintained effective internal control over financial reporting as of January 1, 2005, based on the criteria established in Internal Control
Integrated Frameworkissued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria). The Companys management is responsible for maintaining effective internal control over financial
reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express an opinion on managements assessment and an opinion on the effectiveness of the Companys internal
control over financial reporting based on our audit.



We conducted our audit in
accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial
reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, evaluating managements assessment, testing and evaluating the design and operating effectiveness of
internal control, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.



A companys internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability
of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A companys internal control over financial reporting includes those policies and procedures
that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the
company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the companys assets that could have a material effect on the financial statements.



Because of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies
or procedures may deteriorate.



In our opinion, managements assessment
that Baldor Electric Company and affiliates maintained effective internal control over financial reporting as of January 1, 2005, is fairly stated, in all material respects, based on the COSO criteria. Also in our opinion, Baldor Electric Company
and affiliates maintained, in all material respects, effective internal control over financial reporting as of January 1, 2005, based on the COSO criteria.



We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the accompanying consolidated balance sheets of
Baldor Electric Company and affiliates as of January 1, 2005 and January 3, 2004, and the related consolidated statements of earnings, cash flows and shareholders equity for each of the three years in the period ended January 1, 2005, and our
report dated March 3, 2005 expresses an unqualified opinion on these statements.



\s\ Ernst & Young LLP



Fort Smith, Arkansas

March 3, 2005



- 12 -



---

Report of Management on Responsibility for Financial Reporting



Management is responsible for the integrity and objectivity of the financial information
contained in this annual report. The accompanying financial statements have been prepared in conformity with accounting standards generally accepted in the United States, applying informed judgments and estimates where appropriate.



The Audit Committee of the Board of Directors is composed solely of outside directors and is
responsible for recommending to the Board the independent accounting firm to be retained for the coming year. The Audit Committee meets regularly with the independent auditors, with the Director of Audit Services, as well as with Baldor management,
to review accounting, auditing, internal accounting controls, and financial reporting matters. The independent auditors, Ernst & Young LLP, and the Director of Audit Services have direct access to the Audit Committee without the presence of
management to discuss the results of their audits.



|                                                
|------------------------------------------------
|\s\ John A. McFarland                           
|JOHN A. MCFARLAND                               
|Chairman and Chief Executive Officer            
|                                                
|\s\ Ronald E. Tucker                            
|RONALD E. TUCKER                                
|President, Chief Financial Officer and Secretary



- 13 -



---

Report of Management on Internal Control over Financial Reporting



Management is responsible for establishing and maintaining adequate internal control over
financial reporting, as such term is defined in Exchange Act Rule 13a-15(f). We maintain a system of internal controls that provide reasonable assurance that transactions are executed in accordance with managements authorization and recorded
properly to permit the preparation of consolidated financial statements in accordance with accounting principles generally accepted in the United States and that assets are safeguarded from unauthorized use or disposition.



We conducted an evaluation of the effectiveness of our internal control over financial
reporting based on the framework in Internal Control  Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. This assessment included review of the documentation of controls, assessment of the
design effectiveness of the controls, testing of the operating effectiveness of controls, and a conclusion on this assessment. Although there are inherent limitations in the effectiveness of any system of internal controls over financial reporting,
based on our assessment, we have concluded that our internal control over financial reporting was effective as of January 1, 2005. Ernst & Young, LLP, an independent registered public accounting firm, has issued an attestation report on
managements assessment of internal control over financial reporting, which is included in this report.



|                                                
|------------------------------------------------
|\s\ John A. McFarland                           
|JOHN A. MCFARLAND                               
|Chairman and Chief Executive Officer            
|                                                
|\s\ Ronald E. Tucker                            
|RONALD E. TUCKER                                
|President, Chief Financial Officer and Secretary



- 14 -



---

Dividends Paid



Baldors annual dividend rate for 2004 increased 8% percent over the 2003 rate. There have been three dividend increases in the last five years and 10 increases in
the last 10 years.



|            |  |      |      |      |   |      |  |   |     
|----------- |  | ---- | ---- | ---- | - | ---- |  | - | ----
|            |  | 2004 |      | 2003 |   | 2002
|1st quarter |  | $    | 0.14 |      | $ | 0.13 |  | $ | 0.13
|2nd quarter |  |      | 0.14 |      |   | 0.13 |  |   | 0.13
|3rd quarter |  |      | 0.14 |      |   | 0.13 |  |   | 0.13
|4th quarter |  |      | 0.15 |      |   | 0.14 |  |   | 0.13
|            |  |      |      |      |   |      |  |   |     
|Year        |  | $    | 0.57 |      | $ | 0.53 |  | $ | 0.52
|            |  |      |      |      |   |      |  |   |     



Common stock price range



|            |  |      |       |      |   |       |  |     |       |  |   |      
|----------- |  | ---- | ----- | ---- | - | ----- |  | --- | ----- |  | - | -----
|            |  | 2004 |       | 2003
|            |  | HIGH |       | LOW  |   | HIGH  |  | LOW
|1st quarter |  | $    | 24.70 |      | $ | 22.18 |  | $   | 22.24 |  | $ | 17.98
|2nd quarter |  |      | 24.21 |      |   | 21.90 |  |     | 23.00 |  |   | 20.35
|3rd quarter |  |      | 24.35 |      |   | 21.32 |  |     | 22.99 |  |   | 19.09
|4th quarter |  |      | 28.75 |      |   | 22.65 |  |     | 23.29 |  |   | 19.65



Shareholders



At January 1, 2005, there were 4,718 shareholders of record including employee shareholders
through participation in the benefit plans.



Ticker



The common stock of Baldor Electric Company trades on the New York Stock Exchange (NYSE)
with the ticker symbol BEZ.



Certifications



The Company has filed the Chief Executive Officer and Chief Financial Officer certifications
required by Section 302 of the Sarbanes-Oxley Act in its Form 10-K. Additionally, the Chief Executive Officer has provided the required annual certifications to the New York Stock Exchange.



- 15 -