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

  Results of Operations                                                 
            
  Summary

       Baldor extended its growth trend for the fifth consecutive year
  by posting record sales and earnings for 1996.  A modest 6.3%
  increase in sales was leveraged into an 8.9% increase in net earnings.
  Increased sales and improved productivity, together with a 2.2 million
  share stock repurchase, yielded an earnings per share increase of 
  15.2% -- one way in which Baldor has provided bettervalue for its 
  shareholders.

         The year of 1996 was one of improved balance for Baldor --
  better balance in the inventories of products demanded by our
  customers, better balance in the sales between our OEM and Distributor
  distribution channels, better balance in our production capacity, and a
  more balanced availability of people to serve our customers through the 
  addition of four new North American sales offices.  Financial strength and
  good balance have positioned us to meet the aggressive growth strategies
  that we have set forth in this report. 

  Net Sales

       Baldor reached a record sales level of $502.9 million in 1996, a
  6.3% increase over 1995 sales of $473.1 million.  Sales in 1994 were
  $418.2 million.  Sales to distributor customers in 1996 increased 8.7%,
  while sales to OEM customers in 1996 increased 5.9%, which brings us to a
  balanced mix between selling channels. In 1995, salesto distributors
  increased 14.2% over 1994 levels and OEM sales increased 17.5% over 1994
  levels.  Baldor serves many industries and geographic regions by selling
  to a broad base of distributors and OEMs, both domestically and in more
  than 55 countries around the world.  No single customer accounted for more
  than 4.0% of sales in any year covered by this report.  

       During 1996, we saw modest growth in motor products for pumps,
  blowers, fans, conveyers, and crane and hoist equipment.  Growth in
  1996 was especially good for a number of our products such as Super-E7
  premium-efficient motors,  farm products, and most of our drives products.
  These products grew at over twice our overall rate.  Sales of  products
  introduced in the previous five years accounted for over 25% of 1996 and
  1995 sales. Volume increase accounted for approximately  75% of the 1996
  sales growth. Baldor's last announced price increase was 3.3% in October
  1995.  

       The increase in 1995 sales over 1994 levels was about evenly split 
  between improved pricing, increased volumes, and product mix shifts.  Sales
  of drives grew at more than double the overall 1995 sales growth rate and
  sales of Super-E7 premium-efficient motors were also strong.   

<PAGE>

  Net Earnings

       Net earnings of $35.2 million in 1996 exceeded 1995 net earnings
  of $32.3 million by 8.9%.  Net earnings in 1994 were $26.4 million. 
  A modest sales growth in 1996 was leveraged into a good increase in
  net earnings through improvements in both the manufacturing and the
  sales and administrative areas.

       The gross margin percentage improved to 29.7% in 1996 from 29.3%
  in 1995 and 28.9% in 1994.  Baldor benefited from manufacturing 
  productivity improvements in both 1996 and 1995.  Selling and 
  administrative costs as a percent of sales improved to 16.8%  in 1996 from
  $16.9% in 1995 and 17.3% in 1994.  Baldor continues to increase its sales
  volumes without corresponding increases in administrative support costs. 
  Pre-tax margins improved to 11.4% in 1996 from 11.2% in 1995 and 10.3% in
  1994.  Our tax rate was lowered to 38.5% in 1996 from 39.0% in 1995 and 
  1994.

  International Operations

       Sales from international operations (foreign affiliates and exports)
  were $72.8 million in 1996, up from $66.0 million in 1995 and $54.6 million
  in 1994.  This marks our fifth consecutive year of double-digit sales
  growth in our international operations. Our export sales to many countries
  were particularly strong in 1996, most notably export sales into Canada.
  In addition, we saw good sales increases from our Australian and Latin
  American operations in 1996.  Sales in Europe  were particularly strong for
  both 1995 and 1994, but were essentially flat in 1996. 

       Foreign pre-tax earnings were $2.0 million  in 1996, compared to
  $1.2 million in 1995 and $1.7 million in 1994.  The decline in 1995
  was due primarily to the decline in the Mexican peso that year.


  Environmental Remediation

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




















  Financial Position

  Summary

       In 1996, Baldor continued to strengthen its position  through
  reinvestment in our company -- our  people, our products and
  manufacturing facilities,  and our Company's stock.  In 1996, we
  expanded our manufacturing capacity, continued to make investments in
  training and in research and development,  and  repurchased 2.2
  million shares of Baldor common stock.  In addition, we increased our
  dividend during 1996 -- twice. This makes seven increases in the past
  five years.  

  Investments

       In 1996, Baldor completed a 2.2 million share repurchase.  Two
  million shares were purchased from the estate of the late Mr. G.A.
  Schock in February of 1996.  An additional 200,000 shares were
  purchased on the open market over the course of 1996.  In the fourth
  quarter of 1996, the Board of Directors authorized the Company to
  repurchase an additional 1.0 million shares of Baldor common through
  December 31, 1997. 

<PAGE>

       Investments in property, plant and equipment for 1996 were $23.2
  million, compared to $23.1 million in 1995.  In 1996, we completed an
  84,000 square foot expansion of our Clarksville facility to house our
  expanded gear production, and we completed a 46,000 square foot
  expansion of the finished goods warehouse in Fort Smith.   We also
  leased additional space in Seattle, Washington, to expand our larger
  horsepower drives manufacturing -- all of which contribute to a
  better manufacturing balance to meet our customers' needs.

       In 1996, Baldor also increased its investments in research and
  development to $19.9 million from $17.2 million in 1995 and $14.8
  million in 1994.  Baldor's commitment to research and development
  continues to help it maintain a leadership position in the marketplace
  and to satisfy its customers' needs.  Over the past three years Baldor has
  introduced many new product lines to the marketplace.  We also continue to
  make investments in our existing products for greater performance, energy
  efficiency improvements, and manufacturability.

  Current Liquidity

       Cash flow from operations improved to $42.6 million in 1996 from
  $24.2 million in 1995.  In 1996, we increased inventory and
  receivables only $11.5 million , compared to $26.9 million in 1995. 
  Working Capital was $146.9 million at the end of 1996, compared to
  $145.1 million and $118.6 million at the end of 1995 and 1994,
  respectively.  The current ratio was 3.1 at the end of 1996 compared
  to 3.2 at the end of 1995.  Baldor also has available lines of credit
  of $30 million to support operations.  There were no borrowings
  outstanding under these lines at the end of 1996 or 1995.

  Long-Term Debt and Shareholder's Equity

       Long-term obligations increased to 18.4% of total capitalization
  at the end of 1996.  The increase over the 1995 level of 10.7%
  reflects the mid-term loan that funded the purchase of stock from Mr.
  Schock's estate. The 1996 weighted average interest rate on long-term
  debt was 6.0%. Shareholders' equity decreased from $211.4 million at
  the end of 1995 to $200.3 million at the end of 1996 due to the share
  repurchases.  Return on average shareholders' equity increased to
  17.1% in 1996 from 16.3% in 1995 and from 15.3% in 1994. 

  Dividend Policy

   In the fourth quarter of 1996, the Board of Directors approved a 10%
  increase in the quarterly cash dividend. This was in addition to the
  11% increase approved in the second quarter of 1996. The cash
  dividend was also increased 12.5% in 1995 and 20% in 1994.  These
  increases were in line with Baldor's policy of  making increases
  periodically, as earnings and financial strength warrant, but also of
  reinvesting a major portion of earnings to finance growth opportunities.
  The objective is for shareholders to obtain dividend increases over time
  while also participating in the growth of the Company.

<PAGE>


  CONSOLIDATED BALANCE SHEETS
  BALDOR ELECTRIC COMPANY AND AFFILIATES  

                                                                        
                    
                                             DECEMBER 28        DECEMBER 30
                                                    1996               1995
                                             -----------        -----------
  ASSETS (In thousands)

  CURRENT ASSETS:
       Cash and cash equivalents              $   7,950           $   6,322

       Marketable securities                     17,892              28,487

       Receivables, less allowances
        of $3,200 and $2,800, respectively       80,183              77,768

       Inventories:
         Finished products                       66,528              61,681
         Work-in-process                         13,483              11,978
         Raw materials                           39,162              36,972
                                               --------            --------     
                                                119,173             110,631
         LIFO valuation adjustment(deduction)   (26,786)            (26,942)
                                               --------            --------     
                                                 92,387              83,689
  Other current and deferred tax assets          19,745              15,829 
                                               --------            --------
            TOTAL CURRENT ASSETS                218,157             212,095

  OTHER ASSETS                                   11,965              12,296

  PROPERTY, PLANT AND EQUIPMENT:                              
       Land and improvements                      3,869               3,558
       Buildings and improvements                32,059              29,587
       Machinery and equipment                  166,542             149,069
       Allowances for depreciation and
         amortization (deduction)              (107,106)            (93,143)
                                               --------            --------
            NET PROPERTY, PLANT AND
              EQUIPMENT                          95,364              89,071
                                               --------            --------
                                              $ 325,486           $ 313,462
                                               ========            ========

  See notes to consolidated financial statements.

<PAGE>

  CONSOLIDATED BALANCE SHEETS
  BALDOR ELECTRIC COMPANY AND AFFILIATES  

                                                                        
                         
                                             DECEMBER 28        DECEMBER 30
                                                    1996               1995
                                             -----------        -----------     
  (In thousands, except share data)
  LIABILITIES AND SHAREHOLDERS' EQUITY
  CURRENT LIABILITIES:
       Accounts payable                       $   20,314         $   18,996
       Employee compensation                       5,932              5,110
       Profit sharing                              7,645              7,168
       Anticipated warranty costs                  4,500              4,100
       Accrued insurance obligations              14,286             12,627
       Other accrued expenses                     16,626             16,080
       Income taxes                                  766              1,967
       Current maturities of 
         long-term obligations                     1,113                978
                                               ---------          ---------
       TOTAL CURRENT LIABILITIES                  71,182             67,026

  LONG-TERM OBLIGATIONS                           45,027             25,255

  DEFERRED INCOME TAXES                            8,952              9,804

  SHAREHOLDERS' EQUITY:
     Preferred stock, $0.10 par value
       Authorized shares: 5,000,000
       Issued and outstanding shares: None
     Common stock, $0.10 par value
       Authorized shares: 50,000,000
       Issued shares:
       1996-28,617,688; 1995-28,168,038            2,862              2,817
     Additional capital                           37,112             32,476
     Retained earnings                           207,064            182,354
     Cumulative translation adjustments              346              1,246
     Treasury Stock at Cost
       (2,417,247 shares in 1996 and
        297,741 shares in 1995)                  (47,059)            (7,516)
                                                ---------         ---------
     TOTAL SHAREHOLDERS' EQUITY                  200,325            211,377
                                               ---------          ---------
                                              $  325,486         $  313,462
                                               =========          =========

  See notes to consolidated financial statements.

<PAGE>


  CONSOLIDATED STATEMENT OF EARNINGS
  BALDOR ELECTRIC COMPANY AND AFFILIATES

                                                         
                                                                        
              
                                                  YEARS ENDED 
                                   ---------------------------------------
                                   DECEMBER 28   DECEMBER 30   DECEMBER 31
                                          1996          1995          1994
                                   ---------------------------------------    
  (In thousands, except share data)
                
  Net sales                          $ 502,875     $ 473,103     $ 418,152   
  Other income, net                      2,497         2,596         1,668  
                                     ---------     ---------     ---------
                                       505,372       475,699       419,820
  Costs and expenses:
     Cost of goods sold                353,345       334,306       297,212
     Selling and administrative         84,522        80,019        72,329
     Profit sharing                      7,645         7,168         5,788
     Interest                            2,668         1,260         1,279
                                     ---------     ---------     --------- 
                                       448,180       422,753       376,608

  Earnings Before Income Taxes          57,192        52,946        43,212
  Income taxes                          22,019        20,641        16,853
                                     ---------     ---------     ---------
  NET EARNINGS                       $  35,173     $  32,305     $  26,359
                                     =========     =========     =========

  NET EARNINGS PER COMMON SHARE          $1.29         $1.12         $0.92
                                     =========     =========     =========

  Weighted average common shares           
     outstanding                    27,217,741    28,891,293    28,503,273
                                    ==========    ==========    ==========



  See notes to consolidated financial statements.


<PAGE>



  SUMMARY OF QUARTERLY RESULTS OF OPERATIONS (Unaudited)
  BALDOR ELECTRIC COMPANY AND AFFILIATES

                                                                        
                                                        
                                           QUARTER
                        -------------------------------------------------
                        FIRST      SECOND      THIRD     FOURTH     TOTAL
                        -----      ------      -----     ------     -----

  (In thousands, except share data)

  1996
    Net sales         $121,553    $129,906   $125,111   $126,305  $502,875
    Gross profit        35,811      38,425     37,310     37,984   149,530
    Net earnings         8,327       8,971      8,733      9,142    35,173
    Net earnings per
      common share        0.30        0.33       0.32       0.34      1.29  

  1995
    Net sales         $114,585    $121,839   $120,044   $116,635  $473,103
    Gross profit        33,558      35,698     35,190     34,351   138,797
    Net earnings         7,671       8,261      8,276      8,097    32,305
    Net earnings per
     common share         0.26        0.29       0.29       0.28      1.12


<PAGE>

  CONSOLIDATED STATEMENTS OF CASH FLOWS
  BALDOR ELECTRIC COMPANY AND AFFILIATES
                                              
                                                 YEARS  ENDED
                                     ---------------------------------------
                                     DECEMBER 28   DECEMBER 30   DECEMBER 31
                                            1996          1995          1994
                                     ---------------------------------------
  (In thousands)
  Operating activities:
    Net earnings                       $  35,173      $  32,305      $  26,359
    Adjustments to reconcile net                                     
     earnings to net cash provided
     by operating activities:
       Depreciation and amortization      17,277         15,583         13,121
       Deferred income taxes              (1,943)        (1,979)       (3,882)
       Changes in operating assets and                               
        liabilities:
          Receivables                     (2,815)        (7,315)      (11,887)
          Inventories                     (8,698)       (19,591)      (10,480)
          Other current assets            (2,826)        (3,020)          (52)
          Accounts payable                 1,318            194         6,113
          Accrued expenses                 7,149          4,967        12,017
          Income taxes                    (1,201)          (810)          656
          Other, net                        (873)         3,851           (70)
                                        ---------      ---------    ---------
  Net cash from operating activities      42,561         24,185        31,895
  
  Investing activities:
    Additions to property, plant
     and equipment                       (23,183)       (23,112)      (22,131)
    Marketable securities purchased      (33,315)       (50,881)      (45,153)
    Marketable securities sold            43,910         48,987        41,388
                                        ---------      ---------     ---------
  Net cash used in
      investing activities               (12,588)       (25,006)      (25,896)

  Financing activities:
    Additional long-term borrowings       38,000                        6,000
    Reduction of long-term obligations   (18,093)          (995)       (1,737)
    Unexpended debt proceeds                 353          5,641        (5,220)
    Dividends paid                       (10,498)        (9,416)       (7,648)
    Stock option plans                     3,902          3,065         4,144
     Common stock repurchased            (42,009)                          
                                        ---------      ---------     ---------
  Net cash used in 
      financing activities               (28,345)        (1,705)       (4,461)
  Net increase (decrease) in cash and
      cash equivalents                     1,628         (2,526)        1,538
  Beginning cash and
      cash equivalents                     6,322          8,848         7,310
                                        ---------      ---------     ---------
  Ending cash and 
      cash equivalents                  $  7,950       $  6,322      $  8,848
                                        =========      =========     =========

  See notes to consolidated financial statements.
<PAGE>

<TABLE>
  CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
  BALDOR ELECTRIC COMPANY AND AFFILIATES  

<CAPTION>
                                                                
                                                                           Cumulative      Treasury 
                                 Common Stock     Additional    Retained   Translation     Stock
                                Shares   Amount      Capital    Earnings   Adjustments     (at cost)    Total
                                ------   ------   ----------    --------   -----------    ----------   ---------
  (In thousands, except per share amounts)

  <S>                           <C>      <C>         <C>        <C>            <C>            <C>         <C>        
  BALANCE AT JANUARY 1, 1994    17,968   $1,809      $20,830    $141,729       $ (835)      $ (2,994)   $160,539

  Stock option plans, net
   of shares exchanged             342       38        5,041                                    (935)      4,144
  Translation adjustments                                                       1,284                      1,284
  Net earnings                                                    26,359                                  26,359
  Securities valuation adjustment,
   net of deferred taxes of $267                                    (416)                                   (416)
  Cash dividends at $0.28                                               
    per common share                                              (7,648)                                 (7,648)
                                 ------   ------   ----------    --------   ----------   --------------   ---------
BALANCE AT DECEMBER 31, 1994     18,310    1,847       25,871    160,024          449         (3,929)    184,262

  Stock option plans, net
    of shares exchanged             332       47        6,605                                 (3,587)      3,065
  Translation adjustments                                                         797                        797
  Net earnings                                                    32,305                                  32,305
  Securities valuation adjustment,
    net of deferred taxes of $233                                    364                                     364
  Three-for-two common stock
    split effected in the form
    of a 50% stock dividend       9,228      923                    (923)           
  Cash dividends at $0.34 per
    common share                                                  (9,416)                                 (9,416)
                                 ------   ------   ----------    --------   ----------   --------------  ---------
  BALANCE AT DECEMBER 30, 1995   27,870    2,817       32,476    182,354        1,246           (7,516)  211,377

  Stock option plans, net
    of shares exchanged             380       45        5,290                                   (1,433)    3,902
  Translation adjustments                                                        (900)                      (900)
  Net earnings                                                    35,173                                  35,173
  Securities Valuation Adjustment, 
    net of  deferred Taxes of $11                                     35                                      35
  Cash dividends at $0.40
    per common share                                             (10,498)                                (10,498)
  Common stock repurchased       (2,210)                                                       (42,009)  (42,009)
  Contributions to benefit plans    160                  (654)                                   3,899     3,245
                                 ------   ------   ----------    --------   ----------   --------------  ---------
  BALANCE AT DECEMBER 28, 1996   26,200   $2,862      $37,112    $207,064      $  346         $(47,059) $200,325 
                                 ======   ======   ==========    ========   ==========   ==============  =========
  
See notes to consolidated financial statements.

</TABLE>

<PAGE>

  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
  BALDOR ELECTRIC COMPANY AND AFFILIATES
  December 28, 1996


  NOTE A -- SIGNIFICANT ACCOUNTING POLICIES

  Line of Business:  The Company operates primarily in one industry
  segment which includes the design, manufacture and sale of electric
  motors and drives.  Use of Estimates:  The preparation of financial
  statements in conformity with generally accepted accounting
  principles requires management to make estimates and assumptions that
  affect the amounts reported in the 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- or 53- week year.  Fiscal years
  1996, 1995 and 1994 all contained 52 weeks.

  Cash Equivalents:  Cash equivalents consist of highly liquid
  investments having original maturities of three months or less and
  are valued at cost which approximates market.

  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 Retained
  Earnings.  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.

  Inventories:  The Company values inventories at the lower of cost or
  market, cost being determined principally by the last-in, first-out
  method (LIFO), except for $14,166,000 in 1996 and $10,836,000 in 1995
  at foreign locations, valued by the first-in, first-out method
  (FIFO).

  Property, Plant and Equipment:  Property, plant and equipment,
  including assets under capital leases, are stated at cost. 
  Depreciation and amortization are computed principally using the
  straight-line method over the estimated useful lives of the assets
  and the remaining term of capital leases, respectively.

  Long-Lived Assets: In fiscal year 1996, the Company adopted Statement
  of Financial Accounting Standards No. 121 (SFAS No. 121), Accounting
  for the Impairment of Long-Lived Assets and for Long-Lived Assets to
  be Disposed Of.  SFAS No. 121 requires impairment losses to be
  recognized when information indicates the carrying amount of
  long-lived assets, intangibles and any goodwill related to those
  assets will not be recovered through future operations or sale.  SFAS
<PAGE>


  No. 121 was applied prospectively from the date of adoption and the
  effect of adoption was not material.

  Benefit Plans:  The Company has a profit sharing plan covering most
  employees with over two years service.  Baldor contributes 12% of
  earnings before income taxes 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.

  Net Earnings Per Common Share:  Net earnings per common share are
  computed by dividing net earnings by the weighted average number of
  shares of common stock and common stock equivalents (dilutive stock
  options) outstanding during the year.  Since the dilutive effect of
  common stock options is similar in both calculations, net earnings
  per common share reflects both primary and fully diluted earnings per
  share.

  Stock-Based Compensation: In fiscal year 1996, the Company  adopted
  Statement of Financial Accounting Standards No.123 (SFAS No. 123),
  Accounting for Stock-Based Compensation, which establishes financial
  accounting and reporting standards for stock-based employee
  compensation plans.  SFAS No. 123 requires that the fair value of
  employee stock-based compensation plans be recorded as a component of
  compensation expense as of the grant date or, in lieu of expense
  recognition under SFAS No. 123, companies may follow current guidance
  under Accounting Principals Board Opinion No. 25 (APB 25), Accounting
  for Stock Issued to Employees.  Companies electing to remain with APB 25
  accounting guidance must provide pro forma disclosures of net income and
  earnings per share as if the fair value based method defined in SFAS
  No. 123 had not been applied.  The Company has elected to continue accounting
  for its stock-based compensation under the provisions of APB 25.  As such, 
  SFAS No. 123 did not have an effect on the Company's reported financial 
  results for 1996.

  Research and Engineering:  Costs associated with research, new
  product development and product cost improvements are treated as
  expenses when incurred and amounted to approximately $19,900,000 in
  1996, $17,200,000 in 1995, and $14,800,000 in 1994.

  Reclassification:  The Company has reclassified the presentation of
  certain prior year information to be consistent with the presentation
  in the current year.













  NOTE B -- LONG-TERM OBLIGATIONS

  Long-term obligations consist of the following:                
               

                                                        1996     1995    
                                                        ----     ---- 
  (in thousands)
  Industrial Development Bonds:
    due through 1997 at 6.0% fixed rate               $  113   $  245
    due through 2004 at 5.29% fixed rate               5,030    5,525
    due through 2004 at 4.35% variable rate            2,300    2,300
    due through 2004 at 6.0% fixed rate                   57       63
    due through 2004 at 8.25% fixed rate(paid in 1996)          4,365
    due through 2009 at 7.75% fixed rate               3,000    3,000
    due through 2009 at 7.875% fixed rate              7,200    7,200
    due through 2010 at 4.15% variable rate            3,440    3,440
  Notes payable to banks: 
    due March 1, 1999 at 5.85% variable rate          25,000
    due November 1, 2003 at 11.8% (paid in 1996)                   95
                                                     -------  -------    
                                                      46,140   26,233
  Less current maturities                              1,113      978
                                                     -------  -------
                                                     $45,027  $25,255
                                                     =======  =======


  At December 28, 1996, Industrial Development Bond proceeds of
  $6,389,000 are included in Other Assets.  Certain long-term
  obligations are collateralized by property, plant and equipment with
  a net book value of $11,863,000 at December 28, 1996.

  Maturities of long-term obligations during each of the five fiscal
  years ending 2001 are:  1997--$1,113,000; 1998--$1,070,000;
  1999--$26,145,000; 2000--$1,215,000; and 2001--$1,290,000. 
  Industrial Development Bonds include capital lease obligations of
  $3,170,000 at December 28, 1996. Aggregate future minimum capital
  lease payments at December 28, 1996, are $6,187,000 including
  interest of $3,017,000.    


  Certain long-term obligations require, among other things, that the
  Company maintain certain financial ratios and restrict cumulative
  cash dividends and other distributions.  Retained earnings of
  $13,955,000 at December 28, 1996, were unrestricted.  At December 28,
  1996, the Company had outstanding letters of credit totaling
  $6,709,000.

  Interest paid was $2,988,000 in 1996, $1,730,000 in 1995 and,
  $1,565,000 in 1994. 

  The Company had lines of credit aggregating $30,000,000 available at
  December 28, 1996. These arrangements do not have termination dates
  but are reviewed annually. Interest on these lines of credit is at
  rates mutually agreed upon at the time of borrowing. There were no
  outstanding borrowings under these lines at December 28, 1996.


  NOTE C -- MARKETABLE SECURITIES

  Baldor currently invests in only high-quality, short-term investments
  which it classifies as available-for-sale.  As such, there were no significant
  differences between amortized cost and estimated fair value at December 28,
  1996 or December 30, 1995.  Additionally, because investments are 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:
                                      December 28     December 30
                                             1996            1995
                                      -----------     ----------- 
  (In thousands)
  Municipal debt securities               $12,843         $18,079
  U.S. corporate debt securities            2,925          10,970
  U.S. Treasury & agency securities         7,331           2,938
  Other debt securities                     5,039           4,871
                                      -----------     -----------
                                           28,138          36,858
  Less cash equivalents                    10,246           8,371
                                      -----------     -----------
                                          $17,892         $28,487
                                      ===========     ===========
                    
  The estimated fair value of marketable debt and equity securities at
  December 28, 1996, was $10,799,000 due in one year or less,
  $2,243,000 due in one to three years, and $4,850,000 due after three
  years.  Because of the short-term nature of the investments, expected
  maturities and contractual maturities are normally the same.





  NOTE D -- INCOME TAXES

  The Company made income tax payments of $22,718,000 in 1996,
  $21,643,000 in 1995, and $18,830,000 in 1994.  Income tax expense
  consists of the following:

                                    1996       1995       1994
                                    ----       ----       ----
  (in thousands)       

  Current:     Federal           $19,887    $19,125    $18,679
               State               2,591      2,614      1,757
               Foreign               637        776        566
  Deferred                        (1,096)    (1,874)    (4,149)         
                                 --------   --------   --------
                                 $22,019    $20,641    $16,853          
                                 ========   ========   ========

  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:   
                                                                        
                                                                        
                                           1996     1995     1994
                                           ----     ----     ----       
  Statutory federal income tax rate        35.0%    35.0%    35.0% 
  State taxes, net of federal benefit       3.0      3.3      3.4
  Other                                     0.5      0.7      0.6       
                                           ----     ----     ----
  Effective income tax rate                38.5%    39.0%    39.0%      
       
                                                      

  NOTE E -- FINANCIAL DERIVATIVES

  Hedging of Foreign Exchange Risks

  As a result of having various foreign operations, the Company engages
  in a limited amount of hedging to minimize the effects of fluctuating
  foreign currencies on its intercompany pricing.  The Company's
  investment in foreign currency options is included in Other Current
  Assets at cost, net of realized gains deferred, and is amortized to
  Other Income over the period in which intercompany sales of foreign
  affiliates occur, generally within the following twelve months.

  At December 28, 1996 and December 30, 1995, the investments in
  foreign currency derivatives were not significant.  

  Hedging of Copper and Aluminum Requirements

  The Company purchases significant amounts of copper and aluminum, key
  ingredients in its motor production, under short-term firm price
  contracts which are renegotiated annually.  In order to hedge itself
  from exposure to price fluctuations on these two metals, the Company
  purchases various options, the cost of which is carried in Other
  Current Assets, net of realized gains deferred, and is amortized to
  Cost of Goods Sold over the period that the metal is used.

  The net unamortized costs with respect to the Company's metal hedging 
  programs were not material at December 28, 1996, and December 30,
  1995.

<PAGE>


  NOTE F -- SHAREHOLDERS' EQUITY

  On August 7, 1995, the Company's Board of Directors authorized a
  three-for-two stock split effected in the form of a 50% stock
  dividend payable September 6, 1995, to shareholders of record on
  August 18, 1995.  This resulted in the issuance of 9,228,086
  additional shares of common stock.  All per share and weighted
  average share amounts have been restated to reflect this stock split.

  On February 16, 1996, Baldor purchased 2,000,000 shares of its common
  stock from the estate of Mr. G. A. Shock for $19.00 per share.  This
  purchase was at a discount to the market and was funded with a
  mid-term bank loan.


  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 Baldor 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. Until a Right is exercised, the holder of the Right is not entitled 
  to any of the benefits of being a shareholder of the Company.  The Rights,
  which expire in May 2008, may be redeemed by the Company at any time
  prior to someone acquiring 20% or more of Baldor's outstanding common
  stock and in certain events thereafter.  

   

  NOTE G -- OPERATING LEASES

  The Company leases certain computers, buildings, and other equipment
  under operating lease agreements.  Related rental expense was
  $4,800,000 in 1996, $4,300,000 in 1995, and $3,900,000 in 1994. 
  Future minimum payments for operating leases having noncancelable
  lease terms in excess of one year are:  1997 -- $2,225,000; 1998 --
  $1,885,000; 1999 -- $1,761,000; 2000 -- $1,681,000; 2001 -- $609,000;
  and decline substantially thereafter.


  NOTE H -- 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:






                                      1996      1995      1994
                                      ----      ----      ----          
  (in thousands)
  Net Sales:
    United States Companies      
         Domestic customers       $430,014  $407,078  $363,548
         Export customers           30,831    25,068    21,232
                                  --------  --------  --------
                                   460,845   432,146   384,780
    Foreign Affiliates              42,030    40,957    33,372
                                  --------  --------  --------
                                  $502,875  $473,103  $418,152
                                  ========  ========  ========

  Earnings Before Income Taxes:
     United States Companies      $ 55,160  $ 51,723  $ 41,508
     Foreign Affiliates              2,032     1,223     1,704
                                  --------  --------  --------
                                    57,192  $ 52,946    43,212
                                  ========  ========  ========
  Assets:
     United States Companies      $297,496  $285,381  $261,984
     Foreign Affiliates             27,990    28,081    21,171
                                  --------  --------  --------
                                  $325,486  $313,462  $283,155
                                  ========  ========  ========

  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 the Cumulative
  Translation Adjustment account in Shareholders' Equity.


  NOTE I -- STOCK PLANS

  The Company accounts for stock option grants in accordance with APB
  Opinion No. 25, Accounting for Stock Issued to Employees, and related
  interpretations as discussed in more detail below.  Incentive stock
  options to purchase shares at prices not less than the market value
  at the date of grant and non-qualified stock options to purchase
  shares of restricted stock equal to and less than the stock's market
  value at the date of grant have been granted.  The grants made from
  each plan expire ten years from date of grant except for grants made
  from the 1990 plan which expire six years from date of grant.  A
  summary of the Company's current stock option plans is below:

                            PLAN
  PLAN                  ADMINISTRATOR              RECIPIENTS
  -----------------------------------------------------------
  Compensatory Plans    (see note 1)
  1987                  Stock Option Committee     Employees
  1994                  Stock Option Committee     Employees
  1989 (see note 3)     Executive Committee        Non-employee directors
  1996                  Executive Committee        Non-employee directors


  Non-compensatory Plans (see note 2)
  1981 (see note 3)     Board of Directors         Employees
  1990                  Board of Directors         District Managers


  Note 1: Under the 1987 plan and the 1994 plan, incentive stock
  options vest and become fully exercisable at the end of six months or
  three years of continued employment for officers and non-officers,
  respectively.  Grants can include incentive stock options,
  non-qualified stock options, restricted shares, formula price shares,
  and stock appreciation rights. 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 restriction period.

  Under the 1996 plan, each non-employee director is granted an annual
  grant consisting of a non-qualified stock option to purchase 1,620
  shares at prices equal to the market value at the date of grant and a
  non-qualified stock option to purchase 1,080 shares at prices equal
  to 50% of the market value at the date of grant.  These options
  become exercisable in five equal installments beginning on the
  grant's first anniversary.  Related compensation expense on the
  options granted at 50% of market is amortized over the restriction
  period.

<PAGE>

  Note 2: Under the 1990 plan, only non-qualified options can be
  granted and 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 in connection with the non-compensatory stock
  option plans.

  Note 3: This plan has expired except for unexercised options
  outstanding.

  The alternative fair value accounting provided for under Statement of
  Financial Accounting Standards No. 123 (SFAS No. 123), Accounting for
  Stock-Based Compensation, requires the use of option valuation
  models.  The Company uses the Black-Scholes option valuation model
  which was developed for use in estimating the fair value of traded
  options.  Traded options have no vesting restrictions and are fully
  transferable.  The Black-Scholes model also requires the input of
  highly subjective assumptions including the expected stock price
  volatility and the estimated life of the option. The Company's
  employee stock options have characteristics significantly different
  from those of traded options and changes in the subjective input
  assumptions can materially affect the fair value estimate. 
  Therefore, in management's opinion, the existing models do not
  necessarily provide a reliable single measure of the fair value of
  its employee stock options.

  The pro forma information regarding net income and earnings per share
  required by SFAS No. 123 has been determined as if the Company had
  accounted for its employee stock options under the fair value method
  of SFAS No. 123.  The fair value for these options was estimated as
  of the date of grant using a Black-Scholes option pricing model with
  the following weighted average assumptions for 1995 and 1996,
  respectively: risk-free interest rates of 7.9% and 5.7%; dividends
  yields of 1.8% for both years; volatility factors of the expected
  market price of the Company's common stock of 19.2% and 20.0%; and
  weighted average expected option life of 7.1 years and 6.4 years.

  For purposes of pro forma disclosures, the estimated fair value of
  the options is amortized to expense over the options' vesting
  periods.  The initial impact on pro forma net income and net income
  per share may not be representative of the compensation expense in
  future years when the effect of the amortization of multiple awards
  would be reflected in the pro forma disclosure.

<PAGE>

  A summary of the Company's stock option activity and the Company's
  pro forma earnings information for fiscal 1996 and fiscal 1995 follows:

                                                                        
         
                                           1996                   1995   
                                ---------------------    --------------------- 
                                           Weighted                 Weighted
                                        Average Price            Average Price
  STOCK OPTION ACTIVITY         Shares    per Share      Shares    per Share  
  ---------------------         ---------------------    ---------------------
  Total options outstanding:
      Beginning Balance         2,088,629     $ 9.688    2,258,118     $12.120
      Granted                     609,800      18.514      314,100      16.807
      Exercised                  (546,480)      6.587     (461,839)      6.987
      Canceled                    (48,863)     14.468      (21,750)     14.815
                                ----------               ---------- 
      Ending Balance            2,103,086      12.799    2,088,629       9.688
                                ==========               ==========

  Shares available for grant:   7,493,700                7,343,700
  Shares exercisable:           1,358,856                1,602,260
  Shares reserved for 
    future grants:              1,154,630                1,678,967
  
  Weighted average
    remaining contractual life  6.6 years                6.0 years

  Weighted average fair value per share
   of options granted during the year
       At market price                         $5.34                     $6.29
       At less than market price              $10.57                    $10.84


  PRO FORMA INFORMATION (in thousands, except for earnings per share
                         information)

  Pro forma net income                       $33,989                   $31,781
  Pro forma earnings per share                 $1.26                     $1.10


<PAGE>


  REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS

  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 December 28, 1996 and
  December 30, 1995, and the related consolidated statements of
  earnings, cash flows and shareholders' equity for each of the three
  years in the period ended December 28, 1996.  These financial
  statements are the responsibility of the Company's management.  Our
  responsibility is to express an opinion on these financial statements
  based on our audits.

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

  In our opinion, the financial statements referred to above present
  fairly, in all material respects, the consolidated financial position
  of Baldor Electric Company and affiliates at December 28, 1996 and
  December 30, 1995, and the consolidated results of their operations
  and their cash flows for each of the three years in the period ended
  December 28, 1996, in conformity with generally accepted accounting
  principles.



  /s/ Ernst & Young LLP
  ----------------------
  Little Rock, Arkansas
  January 31, 1997

<PAGE>



  REPORT OF MANAGEMENT ON RESPONSIBILITY FOR FINANCIAL REPORTING

  Baldor 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 generally accepted accounting principles, applying informed
  judgements and estimates where appropriate.

  Baldor maintains a system of internal accounting control that
  provides reasonable assurance that assets are safeguarded and
  transactions are executed in accordance with management's
  authorization and recorded properly to permit the preparation of
  financial statements in accordance with generally accepted accounting
  principles.

  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.

  Ernst & Young LLP, independent certified public accountants, have
  audited Baldor's financial statements.  Management has made available
  to Ernst & Young LLP all of the Company's financial records and
  related data, as well as the minutes of shareholders' and directors'
  meetings.


           
       ---------------------------         -------------------------
       R. S. Boreham, Jr.                  R. L. Qualls
       Chairman of the Board               Vice Chairman and Chief
                                           Executive Officer


   

       -----------------------------       --------------------------
       John McFarland                      Lloyd G. Davis
       President                           Chief Financial Officer,
                                           Executive Vice
                                           President- Finance, 
                                           Secretary, and Treasurer


      
 <PAGE>



  SHAREHOLDER INFORMATION

  DIVIDEND POLICY
  To periodically increase dividends as earnings and financial strength
  warrant, but also to reinvest a major portion of earnings to help
  finance growth opportunities.  The objective being for shareholders
  to obtain dividend increases over time, while also participating in
  the growth of the Company.



  DIVIDENDS PAID                       1996         1995           1994
  1st quarter                          $.09         $.08           $.06
  2nd quarter                           .10          .08            .07
  3rd quarter                           .10          .09            .07
  4th quarter                           .11          .09            .08
                                       ----         ----           ----
  Year                                 $.40         $.34           $.28



  COMMON STOCK PRICE RANGE
  NYSE SYMBOL-BEZ                     1996                1995          
                                -----------         ------------
                              High      Low         High    Low
  1st quarter                 22-3/8    18-1/2      19-1/2  17-1/4
  2nd quarter                 25        19          19-7/8  18-3/8
  3rd quarter                 22-1/2    19-1/8      26-1/2  19-1/8
  4th quarter                 24-3/4    18-5/8      25-1/4  20


  SHAREHOLDERS
  4,568 at December 28, 1996 including shareholders of record and
  employees through benefit plans.


  TRANSFER AGENT AND REGISTRAR
  Wachovia Bank of North Carolina, N.A.
  Wachovia Shareholder Services
  P.O. Box 8217
  Boston, Massachusetts  02266-8217
  (800) 633-4236


  INDEPENDENT AUDITORS
  Ernst & Young LLP
  425 West Capitol - Suite 3600
  Little Rock,  Arkansas 72201


  GENERAL COUNSEL
  Peper, Martin, Jensen, Maichel and Hetlage
  720 Olive Street
  St. Louis, Missouri  63101<PAGE>



  FORM 10-K REPORT
  Shareholders may obtain additional financial information about Baldor
  from the Company's Form 10-K report filed with the Securities and
  Exchange Commission.  Copies are available on request without charge.

  INVESTOR INFORMATION INQUIRIES
  Requests for additional copies of the Annual Report, or other
  materials and information you may wish regarding the condition and
  prospects of the Company, should be directed to:  Investor Relations,
  Baldor Electric Company, P.O. Box 2400, Fort Smith, Arkansas  72902.

  SHAREHOLDERS' ANNUAL MEETING
  The Annual Meeting of the Shareholders of Baldor Electric Company
  will be held at 10:30 a.m., Saturday, May 3, 1997, at the Holiday
  Inn, 700 Rogers Avenue, Fort Smith, Arkansas  72901.