UNITED STATES

                                    FORM 10-K
                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
            ACT OF 1934

For the fiscal year ended           December 31, 1998                      
                          -------------------------------------------------
                                       OR
[  ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
           EXCHANGE ACT OF 1934

For the transition period from                            to                 

Commission file number - 1-9294
                               Imo Industries Inc.
             (Exact name of registrant as specified in its charter)

               Delaware                           21-0733751
  (State or other jurisdiction of    (I.R.S. Employer Identification No.)
  incorporation or organization)

  1009 Lenox Drive, Building Four West
      Lawrenceville, New Jersey                                 08648
   (Address of principal executive offices)                  (Zip Code)

Registrant's telephone number, including area code 609-896-7600.

Securities registered pursuant to Section 12(b) of the Act:  None

Securities registered pursuant to Section 12(g) of the Act:  None

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

    Indicate by check mark if disclosure of delinquent  filers  pursuant to Item
405 of Regulation S-K is not contained,  and will not be contained,  to the best
of Registrant's knowledge, in this Form 10-K or any amendment to this Form 10-K.
(X )

Shares of Registrant's common stock, $.01 par value, outstanding as of 
March 24, 1999 ............................................................100

                       DOCUMENTS INCORPORATED BY REFERENCE

Identification of Documents                  Part into which Incorporated 
         None




                                     PART I

Item 1. Business.


General

Imo  Industries  Inc.  (hereinafter  with its  subsidiaries  referred  to as the
"Company")  is an  integrated  multinational  manufacturer  of a broad  range of
engineered  industrial  products  designed  primarily  to  transfer  liquids  or
regulate and control motion in a variety of industrial applications. The Company
markets its  products  on a  worldwide  basis to a diverse  customer  base.  The
Company operates in two distinct industry segments:
Fluid Handling and Industrial Positioning.

      Fluid  Handling.  The Fluid Handling  segment designs and produces a broad
range of pumps, including screw,  centrifugal and gear pumps. The pumps designed
and produced by the Fluid Handling  segment serve a variety of  applications  in
the following industries: chemicals, marine and offshore engineering, energy and
power generation,  sewage and environmental  engineering,  pulp and paper, water
treatment and other process industries.  In Fluid Handling,  the Company markets
its products principally under the Imo and Warren brand names.

      Industrial  Positioning.  The Industrial  Positioning  segment designs and
produces  a wide  range of  power  transmission  and  motion  control  products,
including enclosed gear drives, speed reducers, open gearing components,  AC and
DC motor controllers,  push-pull cable and remote control systems. In Industrial
Positioning,  the Company believes that Boston Gear and Morse Controls are sales
leaders  in  their  respective  market  segments.   Boston  Gear  products  have
applications  in a wide range of industrial  manufacturing  operations,  ranging
from  packaging  machinery and equipment to integrated  steel and pulp and paper
mills. Morse Controls products are sold into a variety of end use markets with a
concentration in the mobile equipment, marine and aviation sectors.

The Company's  previously  sold Roltra Morse,  Instrumentation,  Electro-Optical
Systems  and  Turbomachinery   businesses  are  accounted  for  as  discontinued
operations and, accordingly, have been excluded from the Company's segments. The
Company sold its Roltra Morse  business on February 27, 1998.  The  remainder of
the Electro-Optical Systems business and the Instrumentation  business were sold
in 1997.

History

The Company,  founded in 1901 in the United States by Dr. Carl Gustaf Patrick de
Laval, a Swedish  scientist,  was incorporated in Delaware on March 2, 1959. The
Company was acquired by Transamerica  Corporation  ("Transamerica") in 1963, and
in 1964, Transamerica merged its existing wholly owned manufacturing subsidiary,
General  Metals  Corporation,  into the  Company.  At the close of  business  on
December 18, 1986,  Transamerica  distributed  all of the issued and outstanding
shares of the Company common stock to holders of record of  Transamerica  common
stock on the basis of one share of Company  common  stock for each ten shares of
Transamerica  common  stock  held (the  "Distribution")  and since that time the
Company has operated on a stand-alone basis.

On August  28,  1997,  Colfax  Corporation  ("Colfax"),  previously  known as II
Acquisition  Corp.,  acquired  approximately  93% of the  Company's  outstanding
shares of common stock pursuant to its tender offer for all  outstanding  shares
of common stock of the Company (the  "Acquisition").  The consideration paid was
$7.05 per share of common stock or $112.1 million in total. On July 2, 1998, Imo
Merger Corp.,  a wholly owned  subsidiary  of Colfax,  merged with and into Imo,
pursuant to a short-form  merger under  Delaware law  ("back-end  merger").  The
Company  was the  surviving  corporation  in the  back-end  merger and as result
became a wholly owned subsidiary of Colfax.

Information  regarding the  Acquisition of the Company is contained in Note 2 to
the  Consolidated  Financial  Statements  included  in Part IV of this Form 10-K
Report as indexed at Item 14(a)(1).

Industry Segments

A description  of the principal  products and services  offered by each business
segment of the Company,  as well as the principal  markets for such products and
services,  are set forth below.  Certain  information with respect to net sales,
operating  profit,  and  identifiable  assets of each of these  segments  and by
geographic  area  is  contained  in  Note  11  to  the  Consolidated   Financial
Statements.  Information  regarding  the  businesses  sold and the  discontinued
operations  is provided  later in this section and is contained in Notes 3 and 4
to the Consolidated Financial Statements.

Fluid Handling
The Fluid  Handling  business  segment is a leading  worldwide  manufacturer  of
rotary screw  pumps.  The three  businesses  that  comprise  the Fluid  Handling
segment -- Imo Pump,  Imo AB, and Warren  Pumps Inc.  -- design and  manufacture
screw-type  fuel,  lube oil and hydraulic pumps for use primarily by the marine,
process,  oil and gas and elevator industries.  The segment's  three-screw pumps
are the leading  low-noise-level pumps used in United States Navy vessels and in
many commercial vessels. These pumps are also used to power hydraulic elevators,
lubricate  diesel engines and fuel gas turbines.  The segment's  two-screw pumps
are used by the pulp and  paper  industry  and in other  high-viscosity  process
applications.

Industrial Positioning
The Industrial  Positioning  business  segment produces speed reducers and loose
gearing,  and precision  mechanical and electronic  control products and systems
that are recognized as leading products in their market niches.  This segment is
comprised  of three units:  Boston  Gear, a leading  producer of gears and speed
reducers, Fincor Electronics,  a producer of adjustable-speed motor controllers,
and Morse Controls, a manufacturer of push-pull cable and control systems. Speed
reducers  are used to reduce the output  speed and  increase the torque of power
trains in numerous  products,  ranging  from  industrial  machinery  to exercise
treadmills. Adjustable-speed motor controllers are used for the accurate control
of electric  motor speed,  torque,  shaft  position and direction of rotation in
applications such as ski lifts,  textile  machinery,  overhead cranes, and large
printing  presses.  These  operations  also produce worm gear sets used as speed
reducers by original  equipment  manufacturers and by oil and gas and industrial
machinery customers. Push-pull cable and control systems are used to control and
actuate functions,  such as steering and valve adjustment,  as an alternative to
electrical systems.  Applications  include throttle control and steering systems
for both off-the-road vehicles and pleasure boats.

Discontinued Operations

In August 1997 and in February  1998, the Company sold its  Instrumentation  and
Roltra Morse  businesses,  respectively.  In accordance with APB Opinion No. 30,
the disposals of these business segments have been accounted for as discontinued
operations and,  accordingly,  their operating  results have been segregated and
reported as Discontinued Operations in the accompanying  Consolidated Statements
of Income.

Roltra Morse
On  February  27,  1998,  the  Company  completed  the sale of its Roltra  Morse
business  to  Magna  International  Inc.  for  cash  of $30  million,  plus  the
assumption of Roltra Morse's debt. The sale price  approximated the recorded net
book value of the  business.  Net proceeds were used to reduce  domestic  senior
debt.

Instrumentation
On August  29,  1997,  the  Company  completed  the sale of its  Instrumentation
business  segment to Danaher  Corporation  for  proceeds of $85  million,  which
approximated  its net book value. Net cash proceeds were used to reduce domestic
senior  debt.  The  majority  shareholders  of the Company are also  substantial
shareholders of Danaher Corporation.

Electro-Optical Systems
On April 28, 1997, the Company completed the sale of the Varo Electronic Systems
division to a small defense  contractor for $12 million in cash, the proceeds of
which were used to reduce its domestic  senior debt.  The sale of this  business
completed the sale of the Electro-Optical  Systems business. On January 3, 1995,
the Company completed the sale of its Baird Analytical  Instruments  division to
Thermo Instruments Systems Inc. for approximately $12.3 million,  which was used
to repay a portion of the Company's  domestic  senior debt. On June 2, 1995, the
Company  completed the sale of the Optical Systems and Ni-Tec  divisions of Varo
Inc. and the Optical Systems division of Baird  Corporation,  which  represented
the major part of its Electro-Optical Systems business, to Litton Industries for
approximately  book value. The proceeds were used to reduce domestic senior debt
and to redeem $40  million  of the  Company's  then  outstanding  12.25%  senior
subordinated debentures.

See Note 3 to the  Consolidated  Financial  Statements  for  additional  details
regarding the discontinued operations.

Cost Reduction Programs

1997 Program
In connection  with the  Acquisition,  the Company  implemented a cost reduction
program.  The cost of this  program  was $18.6  million  and was  accrued for in
accordance  with the  purchase  method of  accounting.  It is comprised of $10.5
million related to severance and  termination  benefits as a result of headcount
reductions at the Company's corporate  headquarters.  In addition,  $1.2 million
and $6.9  million  of costs for the  Company's  Fluid  Handling  and  Industrial
Positioning  segments,  respectively,   related  to  severance  and  termination
benefits  resulting from headcount  reductions and the  consolidation of certain
manufacturing  facilities.  The required cash outlay related to this program was
$8.1 million in 1997,  $7.4 million in 1998 and the expected  cash  requirements
during 1999 are $3.1 million.

Competition 

The  Company's  products and services  are marketed on a worldwide  basis.  Most
markets in which the Company  operates  are highly  competitive.  The  principal
elements of competition  for the products  manufactured in each of the Company's
business segments are design features,  product quality,  customer service,  and
price.  Because the Company  competes in certain narrowly defined niche markets,
there is not any single  company that competes  directly with the Company across
all of the Company's product lines.

Product Distribution and Customers

The Company's  products are sold  primarily  through the Company's  direct sales
forces.   During  1998,   sales  by  the  Company's  direct  sales  forces  were
approximately  78% and 62% of the  Fluid  Handling  and  Industrial  Positioning
segments,   respectively.   The  Company's  remaining  sales  are  made  through
distributors, dealers, and agents.

None  of the  Company's  business  segments  is  dependent  on  any  single
customer  or a few  customers,  the loss of  which  would  have a  material
adverse  effect on the respective  segments,  or on the Company as a whole.
No  customer   accounted  for  10%  or  more  of  consolidated  sales  from
continuing operations in 1998, 1997 or 1996.
Backlog

The Company's continuing  operations' backlog of unfilled orders at February 26,
1999 and 1998, and at December 31, 1998, 1997 and 1996, by business segment, was
as follows:

                                  February 26,         December 31,
                                 1999     1998     1998    1997    1996
                                      (Dollars in millions)
Fluid Handling                 $ 33.0   $ 34.0   $ 32.1  $ 29.5  $ 33.3
Industrial Positioning           29.8     32.5     30.2    31.8    29.0
                                 ----     ----     ----    ----    ----

                               $ 62.8   $ 66.5   $ 62.3  $ 61.3  $ 62.3
                               ======   ======   ======  ======  ======

Backlog is considered significant only to the Fluid Handling segment, given that
the products of that operation  require long lead times for manufacture.  Of the
total  backlog from  continuing  operations  at December  31, 1998,  the Company
believes that all but approximately $1.7 million of its orders will be filled in
1999.

Raw Materials

The Company  obtains raw materials,  component parts and supplies from a variety
of sources,  generally from more than one supplier.  The Company's principal raw
materials  are metals and plastics.  The Company's  suppliers and sources of raw
materials  are based in both the United  States and  foreign  countries  and the
Company  believes  that its sources of raw  materials are adequate for its needs
for the  foreseeable  future.  The  loss of any one  supplier  would  not have a
material  adverse  effect on the  Company's  financial  condition  or results of
operations.

Patents, Licenses and Trademarks

The Company owns numerous  unexpired U.S. patents (currently having a term of 17
years from the date of issuance and expiring at various times in the future) and
foreign  patents  (having an  initial  term that is  governed  by the law of the
country and expiring at various times in the future),  including counterparts of
certain of its U.S.  patents,  in major  industrial  countries of the world. The
Company's  products are marketed under various trade names and  registered  U.S.
and foreign  trademarks  (having an initial  term that is governed by the law of
the country and expiring at various times in the future). The Company,  however,
does not consider any one patent or trademark or any group thereof  essential to
its business as a whole, or to any of its business segments. The Company relies,
to an extent, on proprietary  product  knowledge and manufacturing  processes in
its operations.

Research and Development

The Company's ongoing research and development  programs involve the development
of  new   technologies   to  enhance  the  performance  or  lower  the  cost  of
manufacturing its products, and the redesign of existing product lines either to
increase their efficiency or to lower their manufacturing cost. Expenditures for
research and development  charged against  continuing  operations for 1998, 1997
and 1996 by business segment were as follows:



                            Year Ended December 31,
                           1998       1997      1996
                           ----       ----      ----
                             (Dollars in millions)
Fluid Handling             $2.1       $2.1      $2.1
Industrial Positioning      3.2        3.4       2.3
                            ---        ---       ---

                           $5.3       $5.5     $ 4.4
                           ====       ====     =====

Environmental Matters

In connection with the Company's  separation from Transamerica in 1986, three of
the Company's  properties required compliance with the New Jersey  Environmental
Cleanup  Responsibility  Act, which was amended by the Industrial  Site Recovery
Act  ("ISRA").  ISRA required  that the  Company's  three New Jersey  industrial
establishments  undergo an approved remediation.  Remediation has been completed
at two sites and final closure  approvals  have been sought.  As a result of the
sale of a portion of the third  establishment,  this site has been  divided into
two separate sites for ISRA compliance.  Both sites have undergone cleanup,  but
the New Jersey  Department of Environmental  Protection and Energy has requested
and  received  from the  Company  additional  sampling  information.  If further
cleanup is required,  the Company does not expect it to have a material  adverse
effect on its financial condition.

The Company  has been  identified  in a number of  instances  as a  "Potentially
Responsible  Party"  by the U.S.  Environmental  Protection  Agency,  and in one
instance by the State of  Washington,  with respect to the disposal of hazardous
wastes at a number of facilities  that have been targeted for clean-up  pursuant
to the  Comprehensive  Environmental  Response  Compensation  and  Liability Act
("CERCLA") or similar state law. Similarly, the Company has received notice that
it is one of a number  of  defendants  named in an  action  filed in the  United
States District Court,  for the Southern  District of Ohio Western Division by a
group of plaintiffs who are attempting to allocate a share of cleanup costs, for
which they are responsible,  to a large number of additional parties,  including
the Company.  Although CERCLA and corresponding state law liability is joint and
several,  the  Company  believes  that its  liability  will not have a  material
adverse effect on the financial  condition of the Company since it believes that
it  either  qualifies  as a de  minimis  or  minor  contributor  at  each  site.
Accordingly,  the Company believes that the portion of remediation costs that it
will be responsible for will therefore not be material.

The Company has current and former  operations  in numerous  locations,  some of
which require environmental remediation.  The Company, however, does not know of
or believe that any such matters or the cost of any required corrective measure,
either individually or in the aggregate,  will have a material adverse effect on
the financial condition of the Company. There can be no assurance, however, that
these matters, or other environmental matters not currently known to the Company
will not have such a material adverse effect.

Seasonality

General economic conditions worldwide continue to create business  opportunities
for the  coming  year in many of the  markets  in which  the  Company  operates.
Management  believes that because of the nature of its  industrial  products and
the fact that the Company sells diverse products to many markets, the Company is
not  significantly  affected by the cyclical  behavior,  or seasonality,  of any
particular market that it serves.

Associates

At February  26,  1999,  the Company  employed  approximately  1,900  associates
worldwide.  Approximately  1,200  associates were employed in the United States,
and  approximately  700 associates  were employed  outside of the United States.
There  are  approximately   400  associates   worldwide  covered  by  collective
bargaining  agreements  with various  unions  expiring in 1999 through 2001. The
Company considers its relations with its associates to be satisfactory.



Item 2. Properties.

The location of the Company's manufacturing  facilities at February 26, 1999 are
as follows:

Location                    Product                              Owned/Leased

Fluid Handling
--------------
Monroe, North Carolina     Three-screw and two-screw pumps           Owned
Columbia, Kentucky         Three-screw, gear and                    
                             elevator pumps                          Owned
Warren, Massachusetts      Two-screw, gear and  
                             centrifugal pumps                       Owned
Stockholm, Sweden          Three-screw pumps                         Owned
Paris, France              Three-screw pumps                         Leased

Industrial Positioning
----------------------
Charlotte, North Carolina  Open gearing and clutches                 Owned
Hudson, Ohio               Cables and controls                       Owned
Louisburg, North Carolina  Worm gear speed reducers                  Owned
Sarasota, Florida          Marine hydraulics                         Owned
New Orleans, Louisiana     Replacement marine engine parts           Leased
York, Pennsylvania         Electronic drives                         Owned
Basildon, England          Cables and controls                       Leased
Heiligenhaus, Germany      Cables and controls                       Owned
Paris, France              Cables and controls                       Leased
Marsta, Sweden             Cables and controls                       Owned
Singapore                  Cables, controls and roller chain         Leased
Sydney, Australia          Cables and controls                       Owned
 
The Company believes that its machinery,  plants and offices are in satisfactory
operating  condition  and are  adequate  for the uses to which they are put. The
Company  believes that its properties have sufficient  capacity to substantially
increase  its  current  utilization  without  incurring  significant  additional
capital expenditures.

Item 3. Legal Proceedings.

The Company and one of its  subsidiaries are two of a large number of defendants
in a number of lawsuits brought in various  jurisdictions by approximately 7,000
claimants who allege injury caused by exposure to asbestos. Although neither the
Company nor any of its  subsidiaries has ever been a producer or direct supplier
of asbestos,  it is alleged that the industrial and marine  products sold by the
Company and the subsidiary named in such complaints  contained  components which
contained  asbestos.  Suits  against the Company  and its  subsidiary  have been
tendered to its insurers,  who are defending  under their stated  reservation of
rights.  In  addition,  the  Company  and the  subsidiary  are  named in  cases,
involving   approximately   30,000  claimants,   which  were   "administratively
dismissed" by the U.S.  District Court for the Eastern District of Pennsylvania.
Cases that have been "administratively  dismissed" may be reinstated only upon a
showing  to  the  Court  that  (i)  there  is   satisfactory   evidence   of  an
asbestos-related injury; and (ii) there is probative evidence that the plaintiff
was exposed to products or equipment  supplied by each  individual  defendant in
the case. The Company  believes that it has adequate  insurance  coverage or has
established appropriate reserves to cover potential liabilities related to these
cases.

The Company is a defendant in a lawsuit  brought in the United  States  District
Court  for the  District  of New  Jersey  alleging  failure  in  performance  of
equipment sold in 1986 by the Company's  former Deltex  division.  The complaint
seeks  damages in excess of $12  million.  The Company  believes  that there are
legal and  factual  defenses  to the  claim and  intends  to defend  the  action
vigorously.

The  Company  was a defendant  in a lawsuit in the U.S.  District  Court for the
Western District of Pennsylvania,  which alleged component failures in equipment
sold by its former  diesel engine  division.  The  complaint  sought  damages of
approximately  $3 million.  On September  30, 1997,  the Court granted a summary
judgment  motion filed by the Company  which  effectively  dismissed  all claims
against it. Plaintiffs have appealed this judgment to the United States Court of
Appeals for the Third Circuit.

The Company is a defendant  in a lawsuit in the  Circuit  Court of Cook  County,
Illinois alleging performance  shortfalls in products delivered by the Company's
former  Delaval  Turbine  Division  and  claiming  damages of  approximately  $8
million.  To date the Court has  granted a series of  summary  judgment  motions
filed by the Company which have significantly reduced the scope of damages which
the plaintiff may claim but the court has also permitted additional discovery to
determine  whether any other  damages  exist which  plaintiff may be entitled to
seek at a trial,  but the  Company  believes  that  there are legal and  factual
defenses to the claims and intends to defend the action vigorously.

On June 3, 1997,  the Company was served with a complaint  in a case  brought in
the Superior Court of New Jersey which alleges  damages in excess of $10 million
incurred as a result of losses under a Government  Contract Bid  transferred  in
connection  with  the  sale  of the  Company's  former  Electro-Optical  Systems
business.  The  Electro-Optical  Systems business was sold in a transaction that
closed on June 2, 1995. The sales contract provided certain  representations and
warranties  as to the status of the business at the time of sale.  The complaint
alleges that the Company failed to provide  notice of a "reasonably  anticipated
loss" under a bid that was pending at the time of the  transfer of the  business
and  therefore a  representation  was  breached.  The contract was  subsequently
awarded to the Company's Varo subsidiary and thereafter transferred to the buyer
of the Electro-Optical  Systems business.  The case is in the preliminary stages
of pleading but the Company  believes that there are legal and factual  defenses
to the claims and intends to defend the action vigorously.

The operations of the Company,  like those of other companies engaged in similar
businesses, involve the use, disposal and clean up of substances regulated under
environmental  protection  laws.  In a number of instances  the Company has been
identified  as  a  Potentially  Responsible  Party  by  the  U.S.  Environmental
Protection Agency, and in one instance by the State of Washington,  with respect
to the disposal of  hazardous  wastes at a number of  facilities  that have been
targeted for clean-up  pursuant to CERCLA or similar state law.  Similarly,  the
Company has received notice that it is one of a number of defendants named in an
action filed in the United States District Court,  for the Southern  District of
Ohio Western  Division by a group of plaintiffs who are attempting to allocate a
share of cleanup  costs,  for which they are  responsible,  to a large number of
additional  parties,  including the Company.  Although CERCLA and  corresponding
state  law  liability  is joint  and  several,  the  Company  believes  that its
liability will not have a material adverse effect on the financial  condition of
the Company since it believes that it either  qualifies as a de minimis or minor
contributor at each site. Accordingly,  the Company believes that the portion of
remediation  costs that it will be  responsible  for will not be  material.  For
additional  information see section  entitled  Environmental  Matters in Part I,
Item 1 of this Form 10-K Report.

The Company is also involved in various other pending legal proceedings  arising
out of the  ordinary  course  of the  Company's  business.  None of these  legal
proceedings  is  expected  to have a material  adverse  effect on the  financial
condition of the Company.  With respect to these  proceedings and the litigation
and claims  described in the  preceding  paragraphs,  management  of the Company
believes that it either will  prevail,  has adequate  insurance  coverage or has
established appropriate reserves to cover potential liabilities. There can be no
assurance,  however, as to the ultimate outcome of any of these matters,  and if
all or  substantially  all of  these  legal  proceedings  were to be  determined
adversely  to the  Company,  there  could be a  material  adverse  effect on the
financial condition of the Company.



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

        None

                                  PART II

Item 5. Market for the Registrant's Common Equity and Related Stockholder
        Matters.

The Company  delisted its Common Stock from the New York Stock  Exchange on July
2, 1998. The Common Stock was deregistered under the Securities  Exchange Act of
1934.


Item 6. Selected Financial Data.
(Dollars in millions except per share amounts) (a)

                           Year    Post-Acquis. Pre-Acquis.
                           Ended    Aug. 29,      Jan. 1,        
                           Dec. 31, 1997 to      to Aug.        
                           1998*    Dec. 31,    28, 1997**      Year Ended
                                      1997*                    December 31,
                                                               --------------
                                                          1996**  1995**  1994**
-------------------------------------------------------------------------------
Net sales                  $308.9   $106.7     $210.2   $309.5 $297.1   $288.6
Income (loss) from
  continuing operations        
  before extraordinary
  item                       10.9     (5.7)     (31.3)   (33.1)   7.2     (7.4)
Discontinued operations,    
  net of taxes                ---    (12.2)       2.4    (16.8)  27.0     16.6
Extraordinary item (net    
  of tax)                    (5.2)    (3.3)       ---     (8.5)  (4.4)    (5.3)
Net income (loss)             5.7    (21.2)     (28.9)   (58.4)  29.8      3.9
-------------------------------------------------------------------------------
(Loss) earnings per share, basic and diluted:
Continuing operations
  before extraordinary               
  item                                (.33)     (1.82)   (1.93)   .42     (.44)
Discontinued operations, net                     
  of taxes                            (.71)       .14    ( .99)  1.58      .98
  Extraordinary item                  (.20)       ---     (.49)  (.26)    (.31)
  Net (loss) income                  (1.24)     (1.68)   (3.41)  1.74      .23
Cash dividends per share      ---      ---        ---      ---    ---      ---
-------------------------------------------------------------------------------
Total assets                389.0    463.3               330.9  365.4    510.3
Total long-term debt,       
  including current portion 174.3    223.4               276.0  244.5    383.2
===============================================================================


(a) The notes to the  consolidated  financial  statements  located in Part IV of
this Form 10-K Report as indexed at Item 14(a)(l) should be read in conjunction
with this summary.

*  As a result of the back-end merger on July 2, 1998, earnings per share is not
   presented for 1998.
** Restated to conform to 1998 presentation.


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


The following  discussion and analysis of the Company's  consolidated results of
operations  and  financial  condition  should  be read in  conjunction  with the
audited  Consolidated  Financial Statements included elsewhere in this Form 10-K
Report.

Comparisons  of the results of operations  for the year ended December 31, 1998,
with the  results  for the years ended  December  31,  1997 and 1996,  are being
presented on an historical  basis. The year ended December 31, 1998 and the four
months ended December 31, 1997, include changes in depreciation and amortization
that resulted from the  application of the purchase method of accounting for the
Acquisition.  For further information on the pro forma effect of the Acquisition
on the Company, see Note 2 in the Notes to Consolidated Financial Statements.

Recent Events

Merger:  On  August  28,  1997,  Colfax  Corporation  (previously  known  as  II
Acquisition  Corp.)  acquired  approximately  93% of the  outstanding  shares of
common stock of Imo Industries Inc. ("Imo") pursuant to its tender offer for all
outstanding  shares of the common stock.  The  consideration  paid was $7.05 per
share of common  stock or $112.1  million  in total.  The  acquisition  has been
accounted for under the purchase method of accounting.  On July 2, 1998,  Colfax
Corporation's  wholly-owned  subsidiary,  Imo Merger Corp., merged with and into
Imo, pursuant to a short-form merger under Delaware law ("back-end merger"). Imo
was the surviving  corporation  in the back-end  merger and as a result became a
wholly-owned  subsidiary of Colfax Corporation.  At the merger date, Imo assumed
the capital  structure of Imo Merger Corp.,  of 100 shares of common stock,  par
value $.01 per share.

New York Stock  Exchange:  Imo  delisted  its Common Stock from the New York
Stock  Exchange on July 2, 1998.  The Common  Stock was  deregistered  under
the Securities Exchange Act of 1934.

Consent  Solicitation:  On April  14,  1998,  the  Company  commenced  a consent
solicitation,  seeking  consents from the holders of the Company's 11.75% Senior
Subordinated Notes due 2006 ("the Notes") to certain amendments to the Indenture
governing  the Notes.  The  proposed  amendments  would  permit  the  Company to
complete the back-end  merger with and into a wholly owned  subsidiary of Colfax
Corporation.  On May 6, 1998, the Company received sufficient consents to effect
the proposed amendments,  and entered into a Supplemental Indenture with respect
to such  amendments.  The Company  paid an  aggregate  of $483,650 to holders of
Notes in connection with the solicitation.

Roltra Morse Sale: On February 27, 1998,  the Company  completed the sale of its
Roltra Morse business to Magna  International  Inc. for cash of $30 million plus
the assumption of Roltra Morse's debt. The sale price  approximated the recorded
net book value of the business. Net proceeds were used to reduce domestic senior
debt.


Results of Operations

The Company's former Roltra Morse, Instrumentation,  Electro-Optical Systems and
Turbomachinery   businesses  are  accounted  for  as  discontinued   operations.
Accordingly,  the operating results of these businesses have been segregated and
reported  as  Discontinued  Operations  in the  audited  Consolidated  Financial
Statements  included  elsewhere in this Form 10-K Report.  The  discussion  that
follows  concerns only the results of continuing  operations,  which are grouped
into two business  segments for  management  and financial  reporting  purposes:
Fluid Handling and Industrial Positioning.

1998 Compared to 1997

Sales.  Net sales from  continuing  operations in 1998  decreased 2.5% to $308.9
million, compared with $316.9 million in 1997, as a result of the Fluid Handling
segment's  sales  remaining  flat  and a  decrease  of  4.0%  in the  Industrial
Positioning segment's sales. The decrease in the Industrial  Positioning segment
sales is primarily due to the sale of the Delroyd  product line,  which was sold
on December 31, 1997.

Gross Profit.  Gross profit in 1998  increased as a percentage of sales to 32.5%
compared  with  30.0%  in  1997.  The  higher  gross  profit  was  a  result  of
productivity  improvements  in each segment due to cost reduction and efficiency
initiatives implemented after the Acquisition.

Selling,   General   and   Administrative   Expenses.   Selling,   general   and
administrative  expenses  decreased  to 18.3% of net sales in the twelve  months
ended December 31, 1998, as compared with 21.5% in the 1997 period. The decrease
in expenses,  as a percent of sales in 1998,  was primarily due to the reduction
in  corporate   overhead  expenses  and  Company-wide  cost  reduction  programs
instituted after the Acquisition.

Interest Expense.  Average borrowings in 1998 were approximately  $102.6 million
lower  than in 1997.  Total  interest  expense  of $21.3  million in 1998 was $5
million, or 19.0%, lower than in 1997, due primarily to the reduction of debt as
a result of the sale of Roltra  Morse and the  Instrumentation  business and the
purchase of a portion of the 11.75% senior subordinated debentures during 1998.

Income (Loss) from Continuing Operations. The Company had income from continuing
operations  of  $10.9  million  in  1998.  In 1997,  the  loss  from  continuing
operations was $36.9 million, which included unusual charges of $31.3 million.

Income  (Loss) from  Discontinued  Operations.  Roltra  Morse's net loss of $1.0
million,  which includes $0.2 million of allocated  interest,  was included with
the net  book  value  of the  assets  on the  date of sale  February  27,  1998.
Therefore  there was no income from  discontinued  operations for the year ended
December  31,  1998  compared  with a loss of $9.8  million  for the year  ended
December 31, 1997.


1997 Compared to 1996

Sales.  Net sales from  continuing  operations in 1997  increased 2.4% to $316.9
million,  compared with $309.5 million in 1996, as a result of increases of 4.6%
and  1.1%  in  the  Fluid   Handling  and   Industrial   Positioning   segments,
respectively. Fluid Handling net sales in North America increased due to a 16.8%
volume  increase in sales to the crude oil market,  offset by a 3.3% decrease in
sales to the power generation market.  The net sales of the European  operations
of Fluid  Handling  increased  only 1.4% in 1997  compared  with 1996 due to the
unfavorable effects of a 13% change in exchange rates for the Swedish Krona. Net
sales  increased  in the  Industrial  Positioning  segment  due to a 6.3% volume
increase  in  mechanical  speed  reducers  sales,  a  6.5%  volume  increase  in
electrical  products sales, a 1.4% volume increase in marine sales,  and a 17.5%
increase  in  mobile  equipment  sales,  offset  by a 4%  decrease  in  European
operations sales due to unfavorable effects of exchange rate changes.

Gross Profit.  Gross profit in 1997  increased as a percentage of sales to 30.0%
compared  with  28.7% in  1996,  due in part to the  fact  that the 1996  period
benefited  from  a $2  million  credit  related  to  the  phase-out  of  certain
post-retirement expenses.

Selling,   General   and   Administrative   Expenses.   Selling,   general   and
administrative  expenses  increased  to 21.5% of net sales in the twelve  months
ended December 31, 1997, as compared with 20.2% in the 1996 period. The increase
in expenses,  as a percent of sales in 1997,  was due primarily to the fact that
the 1996 period benefited from a favorable adjustment of $3.9 million related to
the  Company's  phase-out of  accumulated  postretirement  benefit  obligations.
Additionally,  goodwill  amortization  increased  $1.1  million in the last four
months of 1997 as a result of the Acquisition.  The increased  selling,  general
and  administrative  expenses  in 1997 were  partially  offset  by cost  savings
realized from the immediate headcount reductions and other cost cutting measures
implemented after the Acquisition (primarily at the corporate headquarters), and
net reductions of $0.6 million to previously recorded provisions.

Interest Expense.  Average  borrowings in 1997 were  approximately  $6.1 million
lower than in 1996.  Total interest  expense (before  allocation to discontinued
operations)  of $33.6 million in 1997 was $1.5 million,  or 4.3%,  lower than in
1996,  due primarily to the reduction in debt with proceeds from the sale of the
Instrumentation business segment in August 1997.

Income (Loss) from Continuing Operations. The Company had a loss from continuing
operations  of $36.9  million in 1997,which  included  unusual  charges of $31.3
million. In 1996, the loss from continuing  operations was $33.1 million,  which
included  unusual  charges  of $17.4  million  and a  reversal  of a  previously
recognized deferred tax benefit of $10 million.

Income  (Loss)  from  Discontinued  Operations.  The  Company  had a  loss  from
discontinued  operations  of $9.8  million  (net of income  tax  expense of $0.7
million,  in 1997 as  compared  to a loss of $16.8  million  (net of income  tax
expense of $1 million), in 1996.

Operating results from  discontinued  operations were a loss of $1.4 million and
$8.7 million in 1997 and 1996,  respectively.  Results from  operations  for the
discontinued operations include allocations for interest of $2.7 million in 1997
and $4.5 million in 1996.

The losses of $8.4 million  recorded on the sale of  discontinued  operations in
the third  quarter of 1997,  and $8.1  million  recorded in the third and fourth
quarters of 1996, represent charges related to changes in estimates on legal and
other reserve  requirements of retained  liabilities  associated with its former
Electro-Optical and Turbomachinery  businesses. The Company performs a review of
the  assumptions  used in  determining  the  estimated  loss  from  discontinued
operations on a quarterly basis. Management believes that the recorded amount is
adequate.  The amounts of the recorded  liabilities,  which are based on current
estimates, may differ from actual results.

The  Company  did not retain  any  liabilities  with  respect to the sale of the
Instrumentation business. The Company retained certain liabilities upon the 1995
sales  of  the   Electro-Optical   Systems  and  Turbomachinery   businesses  of
approximately $24 million and $33 million,  respectively.  Required cash outlays
in 1998, 1997 and 1996 were $0.9 million, $5.5 million and $6.5 million, related
to the former  Electro-Optical  Systems business, and $0.2 million, $3.1 million
and $4.1 million, related to the former Turbomachinery business.


Other Operating Results

Unusual Items.  During the year ended  December 31, 1997,  the Company  recorded
unusual charges of $31.3 million against income from continuing operations.  The
first nine months of 1997 included an unusual  charge of $10.5 million  relating
to the  settlement of a judgment  against the Company in favor of  International
Insurance Company  ("International").  In addition, the Company recorded unusual
charges of $20.8 million in the third quarter of 1997. Of these  charges,  $15.8
million  related to the sale of the Company and  represent  indirect and general
expenses  incurred by the Company in connection with the sale process which were
paid in 1997, and $5 million related to an additional legal provision concerning
certain litigation matters.

During the fourth quarter of 1996,  the Company  recognized  unusual  charges of
$17.4 million against income from continuing  operations.  Restructuring charges
totaled $0.3 million representing severance benefits.  Additionally, the Company
recognized a charge of $17.1 million  related to the  write-down of other assets
approved for sale and certain  non-operating real estate to net realizable value
(included in Corporate  Expense).  Of the $17.4 million of unusual charges,  the
required cash outlay in 1996 was $0.3 million. There was no required cash outlay
in 1997. The remainder represents non-cash charges.

Extraordinary  Items.  The twelve  months ended  December  31, 1998,  include an
extraordinary charge of $5.2 million net of tax, representing charges related to
the early  extinguishment of the Company's debt under its current senior secured
credit  facilities  (the "New Credit  Agreement")  and its Notes, as well as the
write-off of previously deferred loan costs.

The twelve months ended December 31, 1997,  include an  extraordinary  charge of
$3.3 million,  representing  charges related to the early  extinguishment of the
Company's  debt under its current senior  secured  credit  facilities  (the "New
Credit  Agreement")  and  its  Notes,  as well as the  write-off  of  previously
deferred loan costs.

As a result of the 1996  refinancing of the Company's  domestic debt, the twelve
months ended December 31, 1996 include an  extraordinary  charge of $8.5 million
after-tax,  representing  the  charges  incurred  in  connection  with the early
extinguishment  of debt as well as the  write-off of  previously  deferred  loan
costs.

Provision for Income Taxes.  Income tax expense from  continuing  operations was
$7.0  million,  $1.5  million,  and  $12.7  million  for  1998,  1997 and  1996,
respectively.

Income tax expense for the twelve  months  ended  1998,  represents  current tax
expense of $2.3 million for federal  alternative  minimum tax, foreign and state
income  taxes,  as the Company is utilizing  existing  U.S. net  operating  loss
carryforwards to offset its domestic earnings.

The net  deferred tax benefit  currently  recorded at December 31, 1998 is $41.8
million, a level where management  believes that it is more likely than not that
the tax benefit  will be  realized.  Although the Company has a history of prior
losses,  these losses were  primarily  attributable  to divested  businesses and
unusual items.

The Company establishes  valuation  allowances in accordance with the provisions
of  FASB  Statement  No.  109,   "Accounting  for  Income  Taxes."  The  Company
continually  reviews the adequacy of the valuation  allowance and is recognizing
these  benefits only as  reassessment  indicates that it is more likely than not
that the benefits will be realized. The valuation allowance was $1.7 million and
$53.3  million for December 31, 1998 and  December  31, 1997,  respectively.  In
1998,  the Company  reduced its  valuation  reserve by $51.6  million due to its
belief that it is more likely  than not these tax  benefits  will be realized in
future  years.  The  revision of the  valuation  reserve is due to the change in
purchase accounting estimates during the first year after acquisition.

The Company has net operating loss carryforwards of approximately  $92.3 million
expiring in years 2002 through  2012,  and minimum tax credits of  approximately
$2.8  million,   which  may  be  carried   forward   indefinitely.   Tax  credit
carryforwards  include  foreign  tax  credits  of  approximately  $1.7  million,
expiring beginning in the year 2002. These carryforwards are available to offset
future  taxable  income,  subject  to  Section  382  limitations,   due  to  the
Acquisition.

Taxes have not been provided on the unremitted earnings of foreign  subsidiaries
since it is the Company's  intention to  indefinitely  reinvest  these  earnings
overseas.  The  amount of  foreign  withholding  taxes  that would be payable on
remittance of these earnings is approximately $1.2 million.


Liquidity and Capital Resources

Short-term and Long-term Debt

As of December 31, 1998,  the Company had $15.6 million of  outstanding  standby
letters of credit.  The Company had $6.0  million in foreign  short-term  credit
facilities with amounts outstanding at December 31, 1998 of $0.8 million. Due to
the short-term nature of these debt instruments it is the Company's opinion that
the carrying amounts approximate the fair value.

In addition,  the Company had  outstanding  $78.5  million of its 11.75%  senior
subordinated  notes due in 2006,  $46.5  million  of term loan  borrowings,  $41
million in revolver borrowings, and $5 million due to Ameridrives International,
L.P.,  whose majority  shareholders  are also the majority  shareholders  of the
Company.


Cash Flow

The  Company's  operating  activities  provided  cash of $39.6  million in 1998,
compared with cash used of $30.1  million in 1997.  The cash provided in 1998 is
principally  due to net operating  profits and the decrease in working  capital.
The  use of  cash  in 1997  is due  principally  to the  payment  of (1) a legal
settlement  of $10.5  million,  (2)  approximately  $15.8  million  representing
indirect and general expenses related to the process of selling the Company, and
(3)  approximately  $8.1  million  related to the 1997 cost  reduction  program,
representing severance costs.

The Company's total debt as a percent of its total  capitalization  decreased to
62.6% at December 31,  1998,  compared  with 71.5% at December  31,  1997,  as a
result  of the debt  paid  down  resulting  from the sale of  Roltra  Morse  and
internal cash generation.

Capital  expenditures of continuing  operations decreased to $6 million compared
with the 1997 level of $8.3 million.  In 1998 capital  spending was used for the
purpose of  maintaining  and improving  competitive  advantages at the Company's
operations.  The Company  anticipates  that  capital  expenditures  in 1999 will
increase  over  the  1998  level  primarily  due  to  expenditures   related  to
productivity  improvements  in the  operating  segments.  There were no material
outstanding commitments for the acquisition of property, plant, and equipment at
December 31, 1998.

The  Company's  sale of its  Roltra  Morse  subsidiary  improved  its  liquidity
position.  Management believes that cash flow from operations and cash available
from unused credit  facilities  will be  sufficient  to fund future  anticipated
working  capital  needs,   capital   spending   requirements  and  debt  service
requirements.

Year 2000

The  Company  has  conducted  a review of the  software,  databases,  microcode,
hardware,  systems and devices with  date-related  functionality  (collectively,
"Systems") used in the businesses of Imo (whether used on a stand-alone basis or
in  combination  with other  software,  hardware,  systems or devices),  and has
taken, or is in the process of taking,  all steps that the Company  believes are
necessary  or  appropriate  to ensure that such Systems  accurately  process all
dates,  including  those before,  on or after  January 1, 2000,  without loss of
functionality,  interoperability  or  performance.  The Company has assessed the
impact of the Year 2000 issue on its embedded Systems and is not currently aware
of any material risks. Although all such embedded Systems are not presently Year
2000  compliant,  the  Company  believes  it has  identified  all  non-compliant
embedded  Systems  and is  seeking  solutions  to make  such  systems  Year 2000
compliant. The Company has assessed the impact of the Year 2000 issue upon those
third  parties  with  which the  Company  has a material  relationship,  and the
Company is not currently aware of any material  third-party risks resulting from
the Year 2000 issue.

The Company  estimates that the remaining cost of investigating  and remediating
(where  required) any Year 2000 issues  relating to its businesses  will be less
than $750,000. Due to the nature of its businesses, the Company does not believe
that its  customers or suppliers  will be materially  adversely  affected by the
Year 2000 issue.  Although  the  Company's  Boston Gear  subsidiary  relies to a
significant  extent on online  ordering,  the Company  does not believe that the
Year 2000 issue will  materially  adversely  affect the  Company's  business  or
results of operations.

Seasonality; Customer Concentration; Inflation

General economic conditions worldwide continue to create business  opportunities
for the  coming  year in many of the  markets  in which  the  Company  operates.
Management  believes that because of the nature of its  industrial  products and
the fact that the Company sells diverse products to many markets, the Company is
not  significantly  affected by the cyclical  behavior,  or seasonality,  of any
particular market that it serves.

None of the Company's business segments is dependent on any single customer or a
few  customers,  the loss of which would have a material  adverse  effect on the
respective segments, or on the Company as a whole. No customer accounted for 10%
or more of consolidated sales in 1998, 1997 or 1996.

CAUTIONARY STATEMENT FOR PURPOSES OF THE "SAFE HARBOR" PROVISIONS OF THE PRIVATE
SECURITIES  LITIGATION  REFORM ACT OF 1995. Except for historical  matters,  the
matters discussed in this Form 10-K Report are forward-looking  statements based
on current  expectations  and involve risks and  uncertainties.  Forward-looking
statements  include,  but are not limited  to,  statements  under the  following
headings:  (i) Item 1 "Backlog,  Raw Materials and Environmental  Matters" - the
expected ability to fill existing orders in 1999, the continued  adequacy of the
Company's raw materials sources, and the future impact of environmental  matters
on the financial  condition of the Company;  (ii) Item 3 - "Legal Proceedings" -
the  future  impact  of legal  proceedings  on the  financial  condition  of the
Company.  The  Company  wishes to caution  the reader  that,  in addition to the
matters  described  above,  various factors such as delays in contracts from key
customers,  demand and market  acceptance  risk for new  products,  continued or
increased competitive pricing and the effects of under-utilization of plants and
facilities,  particularly  in  Europe,  and the  impact  of  worldwide  economic
conditions on demand for the Company's  products,  could cause results to differ
materially from those in any forward-looking statement.


Item 7A. Quantitative and Qualitative Disclosures about Market Risk

The Company  periodically enters into foreign exchange contracts for purposes of
hedging its  exposure to foreign  currency  exchange  rate  fluctuations.  These
contracts  hedge  firm  commitments  between  the  Swedish  Krona and the German
Deutschmark and the United States Dollar.  At December 31, 1998, the Company had
foreign currency  contracts with notional amounts  totaling  approximately  $2.4
million with various  expiration  dates through  September  1999.  The amount of
deferred gain or loss associated with these contracts is not material.

All foreign  currency  derivative  agreements are with major  commercial  banks;
therefore the risk of credit loss from nonperformance by the banks is considered
by management to be minimal.  The Company  evaluates its exposure to credit loss
on an ongoing basis.


Item 8. Financial Statements and Supplementary Data.

The consolidated  financial  statements and supplementary  data required by Part
II,  Item 8 of Form 10-K are  included  in Part IV of this  Form 10-K  Report as
indexed at Item 14(a)(1).


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

None



                                  PART III


Item 10. Directors and Executive Officers of the Registrant.

Not Applicable

Item 11. Executive Compensation.

Not Applicable

Item 12. Security Ownership of Certain Beneficial Owners and Management.

Not Applicable

Item 13. Certain Relationships and Related Transactions.

None

                                  PART IV

Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.

(a)  (1)  Financial Statements

      The Financial Statements and Supplementary Data required by Part II,
      Item 8 of Form 10-K are  included in this Part IV of this Form 10-K Report
      as follows:

     Consolidated Financial Statements                                

     Consolidated Statements of Income for Year Ended December 31, 1998,
     the period from January 1, 1997 to August 28, 1997 (pre-Acquisition)
     and the period from August 29, 1997 to December 31, 1997
     (post-Acquisition) and the Year Ended December 31, 1996
      
     Consolidated Balance Sheets at December 31, 1998 and 1997

     Consolidated Statements of Cash Flows for the Year Ended
     December 31, 1998, the period from January 1, 1997 to August 28,
     1997 (pre-Acquisition) and the period from August 29, 1997 to
     December 31, 1997 (post-Acquisition) and the Year Ended December
     31, 1996
            
     Consolidated Statements of Shareholders' Equity (Deficit)
     for the Year Ended  December 31, 1998, the period from January 1, 1997
     to August 28, 1997 (pre-Acquisition) and the period from August 29,
     1997 to December 31, 1997 (post-Acquisition) and for the Year Ended
     December 31, 1996

     Notes to Consolidated Financial Statements

     Reports of Independent Public Accountants

     Quarterly Financial Information (unaudited)


     (2)     Financial Statement Schedules

      The following consolidated financial statement schedule for the year ended
      December  31,  1998,  the period  from  January 1, 1997 to August 28, 1997
      (pre-Acquisition) and the period from August 29, 1997 to December 31, 1997
      (post-Acquisition)  and the year ended  December 31, 1996 is filed as part
      of this  Report  and  should  be read in  conjunction  with the  Company's
      Consolidated Financial Statements.


      Schedule                                                  

         II        Valuation and Qualifying Accounts

       All other  schedules  for which  provision  is made in the  applicable
       regulation of the Securities and Exchange Commission are omitted because
       they are not required  under the  related  instructions or  because  the
       required information is given in the financial statements or notes
       thereto.

     (3)      Exhibits

        The Exhibits listed in the accompanying Index to Exhibits are filed as
        part of this Report.

(b)     Reports on Form 8-K

         None




                                  EXHIBIT INDEX

 Exhibit No.  Note No.         Description

    3(i)        (23)   The Company's Restated Certificate of Incorporation, as
                       amended March 10, 1989 and November 10, 1992 and April
                       30, 1997

    3(ii)       (28)   The Company's Bylaws

    4.1  (A)    (18)   Indenture, dated as of April 15, 1996, between the
                       Company and IBJ Schroder Bank & Trust Company, as Trustee

         (B)    (28)   Second Supplemental Indenture, dated as of August 26,
                       1997, between the Company and IBJ Schroder Bank & Trust
                       Company, as Trustee

    4.3         (18)   Registration Rights Agreement, dated as of April 23,
                       1996, between the Company and the Initial Purchasers

    4.3   (A)   (20)   Rights Agreement dated as of April 30, 1997 between the
                       Company and First Chicago Trust Company of New York,
                       which includes, as Exhibit A thereto, the Certificate of
                       Designation, Preferences and Rights of Series B Junior
                       Participating Preferred Stock of Imo Industries Inc., as
                       Exhibit B thereto, the Form of Rights Certificate and as
                       Exhibit C thereto, the Summary of Rights to Purchase
                       Preferred Stock.

          (B)   (21)   Amendment to Rights Agreement dated June 25, 1997 between
                       the Company and First Chicago Trust Company of New York

          (C)   (22)   Second Amendment to Rights Agreement dated July 25, 1997
                       between the Company and First Chicago Trust Company of
                       New York

          (D)   (24)   Third Amendment to Rights Agreement dated August 21, 1997
                       between the Company and First Chicago Trust Company of
                       New York

          (E)   (29)   Fourth Amendment to Rights Agreement dated April 30, 1998
                       between the Company and First Chicago Trust Company of
                       New York

                      Management Contracts, Compensatory Plans and Arrangements:

   10.1         (14)   Amended and restated Equity Incentive Plan for Key
                       Employees

   10.2         (16)   Amended and restated 1988 Equity Incentive Plan for
                       Outside Directors

   10.3         (15)   1995 Equity Incentive Plan for Outside Directors

   10.4         (17)   The Company's  Supplemental Retirement Income Plan

   10.5          (8)   Change in Control Agreement dated January 9, 1987 between
                       the Company and John J. Carr

   10.6          (8)   Change in Control Agreement dated August 5, 1992 between
                       the Company and William M. Brown

   10.7          (8)   Change in Control Agreement dated August 13, 1992 between
                       the  Company and Thomas J. Bird

   10.8         (10)   Change in Control Agreement dated September 13, 1993
                       between the Company and Donald K. Farrar

   10.9         (19)   Change in Control Agreement dated May 21, 1996 between
                       the Company and Donald N. Rosenberg

   10.10        (19)   Severance Agreement dated February 6, 1997 between Imo
                       Industries (UK) Limited and Brian Lewis

   10.11        (19)   Consultancy Agreement dated February 13, 1997 between
                       Imo Industries Inc. and Brian Lewis

                       Other Material Contracts:

   10.12 (A)  (3),(4)  The Company's Salaried Employees Stock Savings Plan as
                       amended on July 1, 1987 and as amended on June 14, 1988

         (B)     (7)   Amendment dated March 16, 1989 to the Imo Industries Inc.
                       Employees Stock Savings Plan

         (C)     (5)   Amendments dated September 6, 1990 and February 14, 1991
                       to the Imo Industries Inc. Employees Stock Savings Plan

         (D)     (6)   Amendment dated May 9, 1991 to the Imo Industries Inc.
                       Employees Stock Savings Plan

         (E)     (8)   Amendments dated December 30, 1991 and August 3, 1992 to
                       the Imo Industries Inc. Employees Stock Savings Plan

         (F)    (12)   Trust Agreement for the Imo Industries Inc. Employees
                       Stock Savings Plan as of March 1, 1995 between the
                       Company and Eagle Trust Company

   10.13         (1)   Distribution Agreement dated December 18, 1986 between
                       Transamerica Corporation and the Company

   10.14         (1)   Tax Agreement between the Company and Transamerica
                       Corporation

   10.15 (J)     (9)   Warrant dated July 15, 1993 issued by the Company to The
                       Prudential Insurance Company of America

   10.16         (2)   Stock Purchase Agreement dated November 30, 1987 between 
                       the Company and TRIFIN B.V.

   10.17         (5)   Stock Purchase Agreement dated as of May 31, 1990 among
                       United Scientific Holdings PLC, United Scientific Inc.
                       and the Company

   10.18         (10)  Stock Purchase Agreement dated as of October 28, 1993
                       among the Company, Imo Industries GmbH, Mark Controls
                       Corporation and Mark Controls GmbH i. Gr., as amended

   10.19  (A)    (18)  Credit Agreement dated as of April 29, 1996 among the
                       Company, as Borrower, Varo Inc., as Guarantor, Warren
                       Pumps Inc. as Guarantor, the Institutions from time to
                       time party thereto as Lenders and Issuing Banks, and
                       Citicorp USA, Inc., as Agent

          (B)    (19)  First  Amendment dated as of February 19, 1997 to the
                       Credit Agreement dated as of April 29, 1996 among the
                       Company, as Borrower, Varo Inc., as Guarantor, Warren 
                       Pumps, Inc. as Guarantor, the Institutions from time to
                       time party thereto as Lenders and Issuing Banks, and
                       Citicorp USA, Inc., as Agent

   10.20  (A)    (11)  Asset Purchase Agreement dated as of November 4, 1994 by
                       and among the Company, Imo Industries International Inc.
                       and Mannesmann Capital Corporation

          (B)    (12)  Agreement, Amendment and Waiver dated January 17, 1995 by
                       and among the Company and Mannesmann Capital Corporation

   10.21         (12)  Asset and Stock Purchase Agreement dated as of January 1,
                       1995 by and among the Company and Thermo Jarrell Ash
                       Corporation

   10.22         (13)  Purchase and Sale Agreement among Litton Industries,Inc.,
                       and Litton Systems, Inc. and Imo Industries Inc., Baird 
                       Corporation, Optic-Electronic International, Inc. and
                       Varo Inc. dated May 11, 1995 and amended and restated as
                       of June 2, 1995

   10.23  (A)    (19)  Asset Purchase Agreement dated as of September 13, 1996
                       between Varo Inc. and Varo Acquisition Corp.

          (B)    (19)  Reinstatement Agreement dated January 28, 1997 between
                       Varo Inc. and Varo Acquisition Corp.

   10.24         (21)  Agreement and Plan of Merger, dated June 26, 1997, among
                       United Dominion Industries Limited, UD Delaware Corp. and
                       Imo Industries Inc.

   10.25         (22)  Share Purchase Agreement, dated July 25, 1997, between II
                       Acquisition Corp. and the Company

   10.26         (25)  Asset Purchase Agreement dated as of August 29, 1997
                       among the Registrant and certain of its subsidiaries
                       and Danaher Corporation and certain of its subsidiaries

   10.27  (A)    (26)  Credit and Guaranty Agreement dated as of August 29, 1997
                       among the Company, as Borrower, II Acquisition Corp.,
                       as Guarantor, Certain Financial Institutions, as Lenders,
                       The Bank of Nova Scotia, as Administrative and 
                       Documentation Agent and Nationsbanc Capital Markets, 
                       Inc., as Syndication Agent for the Lenders

          (B)     (28) First Amendment to Credit and Guaranty Agreement dated as
                       of November 6, 1997

          (C)     (28) Second Amendment to Credit and Guaranty
                       Agreement dated as of December 2, 1997

          (D)     (28) Third Amendment to Credit and Guaranty
                       Agreement dated as of February 16, 1998

          (E)     (30) Fourth Amendment to Credit and Guaranty
                       Agreement dated as of March 9, 1998

          (F)     (31) Fifth Amendment to Credit and Guaranty
                       Agreement dated as of June 1, 1998

          (G)          Sixth Amendment to Credit and Guaranty Agreement dated as
                       of October 15, 1998

10.28             (27) Stock Purchase Agreement dated as of January  30, 1998
                       between  the Registrant and Magna International Inc.

   21                  Subsidiaries of the Company

   27                  Financial Data Schedule as of December 31, 1998

-----------------------------------------------
NOTES

(1)  Incorporated  by reference to the  Company's  Form 8 Amendment  No. 2 filed
     with the  Commission on December 9, 1986 amending the Company's  Form 10 as
     filed with the Commission on October 15, 1986.
(2)  Incorporated  by  reference  to the  Company's  Form  8-K  filed  with  the
     Commission on February 17, 1987.
(3)  Incorporated  by  reference  to the Imo  Industries  Inc.  Employees  Stock
     Savings Plan Form 11-K filed with the Commission on April 13, 1988.
(4)  Incorporated  by  reference  to the  Company's  Form  10-K  filed  with the
     Commission on March 29, 1990.
(5)  Incorporated  by  reference  to the  Company's  Form  10-K  filed  with the
     Commission on March 28, 1991.
(6)  Incorporated  by  reference  to the  Company's  Form  S-8  filed  with  the
     Commission on June 17, 1991.
(7)  Incorporated  by  reference  to the  Company's  Form  10-K  filed  with the
     Commission on March 26, 1992.
(8)  Incorporated  by  reference  to the  Company's  Form  10-K  filed  with the
     Commission on April 19, 1993.
(9)  Incorporated  by  reference  to the  Company's  Form 10-K/A  filed with the
     Commission on August 6, 1993 amending the Company's Form 10-K as filed with
     the Commission on April 19, 1993.
(10) Incorporated  by  reference  to the  Company's  Form  10-K  filed  with the
     Commission on March 31, 1994.
(11) Incorporated  by  reference  to the  Company's  Form  10-Q  filed  with the
     Commission on November 14, 1994.
(12) Incorporated  by  reference  to the  Company's  Form  10-K  filed  with the
     Commission on March 29, 1995.
(13) Incorporated  by  reference  to the  Company's  Form  8-K  filed  with  the
     Commission on June 19, 1995.
(14) Incorporated  by  reference  to the  Company's  Form S-8 as filed  with the
     Commission on June 23, 1995, Registration No. 33-60533
(15) Incorporated  by  reference  to the  Company's  Form S-8 as filed  with the
     Commission on June 23, 1995, Registration No. 33-60535
(16) Incorporated  by  reference  to the  Company's  Form  10-Q  filed  with the
     Commission on November 13, 1995.
(17) Incorporated  by  reference  to the  Company's  Form  10-K  filed  with the
     Commission on March 28, 1996.
(18) Incorporated  by  reference to the  Company's  Form S-4  (Registration  No.
     333-3477) filed with the Commission on May 10, 1996.
(19) Incorporated  by  reference  to the  Company's  Form  10-K  filed  with the
     Commission on March 27, 1997.
(20) Incorporated by reference to the Company's Form 8-A Registration  Statement
     filed with the Commission on May 2, 1997.
(21) Incorporated    by   reference   to   the    Company's    Schedule    14D-9
     Solicitation/Recommendation  Statement filed with the Commission on July 2,
     1997.
(22) Incorporated    by   reference   to   the    Company's    Schedule    14D-9
     Solicitation/Recommendation Statement filed with the Commission on July 31,
     1997.
(23) Incorporated  by  reference  to the  Company's  Form  10-Q  filed  with the
     Commission on August 14, 1997.
(24) Incorporated  by  reference  to the  Company's  Form  8-K  filed  with  the
     Commission on August 27, 1997.
(25) Incorporated  by  reference  to the  Company's  Form  8-K  filed  with  the
     Commission on September 15, 1997.
(26) Incorporated  by  reference  to the  Company's  Form  10-Q  filed  with the
     Commission on November 14, 1997.
(27) Incorporated  by  reference  to the  Company's  Form  8-K  filed  with  the
     Commission on March 13, 1998.
(28) Incorporated  by  reference  to the  Company's  Form  10-K  filed  with the
     Commission on March 31, 1998.
(29) Incorporated  by  reference  to the  Company's  Form  8-A/A  filed with the
     Commission on May 1, 1998.
(30) Incorporated  by  reference  to the  Company's  Form  10-Q  filed  with the
     Commission on May 13, 1998.
(31) Incorporated  by  reference  to the  Company's  Form  10-Q  filed  with the
     Commission on August 14, 1998.


                                   SIGNATURES


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

Date: March 31, 1999

                                        IMO INDUSTRIES INC.


                                        By: /s/ JOHN A. YOUNG

                                                John A. Young
                                                Vice President and Chief
                                                Financial Officer


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


/s/ PHILIP W. KNISELY    Chief Executive Officer,
Philip W. Knisely        President and Director
                        (principal executive officer)            March 31, 1999


/s/ JOHN A. YOUNG        Vice President and
John A. Young            Chief Financial Officer
                        (principal financial officer)            March 31, 1999


/s/ G. SCOTT FAISON      Corporate Controller     
G. Scott Faison         (principal accounting officer)           March 31, 1999


/s/ STEVEN M. RALES      Director                                March 31, 1999
Steven M. Rales


/s/ MITCHELL P. RALES    Director                                March 31, 1999
Mitchell P. Rales


/s/ NEIL D. COHEN        Director                                March 31, 1999
Neil D. Cohen




Imo Industries Inc. and Subsidiaries
Consolidated Statements of Income and Comprehensive Income
(Dollars in thousands except per share amounts)

                                            Post-Acquis. Pre-Acquis.    
                                              August      January      
                                    Year        29,       1, 1997        Year
                                   Ended       1997 to       to          Ended
                                  December    December     August       December
                                  31, 1998    31, 1997     28, 1997     31, 1996
-------------------------------------------------------------------------------

Net Sales                          $308,870   $106,711     $210,151    $309,511
                                                                
Cost of products sold               208,579     76,597      145,276     220,589
-------------------------------------------------------------------------------

Gross Profit                        100,291     30,114       64,875      88,922

Selling, general and                 
  administrative expenses            56,464     21,411       46,724      62,514
Research and development expenses     5,317      1,913        3,636       4,455
Unusual items                           ---      5,000       26,344      17,440
-------------------------------------------------------------------------------

Income (Loss) From Operations        38,510      1,790      (11,829)      4,513
                                            
Other income                            684        825           22       1,063
  
Income (Loss) From Continuing
  Operations Before                    
  Interest, Income Taxes and
  Extraordinary Item                 39,194      2,615      (11,807)      5,576

Interest expense                     21,293      8,069       18,190      25,981
                                               
Income (Loss) From Continuing
  Operations Before Income                   
  Taxes and Extraordinary Item       17,901     (5,454)     (29,997)    (20,405)
 
Income taxes                          7,008        235        1,254      12,663

Income (Loss) From Continuing
  Operations Before                    
  Extraordinary Item                 10,893     (5,689)     (31,251)    (33,068)

Discontinued operations:
  Income (loss) from operations
  (net of income tax expense of 
  $0, $77, $664 and $1,037)             ---     (3,753)       2,372      (8,705)
  Estimated loss on disposal            ---     (8,430)         ---      (8,142)
-------------------------------------------------------------------------------
Total Income (Loss) from          
  Discontinued Operations               ---    (12,183)       2,372     (16,847)
-------------------------------------------------------------------------------

Extraordinary item - loss on
extinguishment of debt (net of tax)  (5,223)    (3,348)        ---       (8,455)
                                             
-------------------------------------------------------------------------------

Net Income (Loss)                    $5,670   $(21,220)    $(28,879)  $ (58,370)
                                                                        
===============================================================================

Other comprehensive income 
  (loss), net of taxes -
     Minimum pension liability          ---        ---          ---        (702)
     Foreign currency                 
       translation adjustments         (266)     2,122       (3,346)       (483)
-------------------------------------------------------------------------------

Comprehensive Income (Loss)          $5,404   $(19,098)    $(32,225)   $(59,555)
===============================================================================

Earnings (loss) per share, basic and                             
  diluted: (See Note 1)
    Continuing operations              
      before extraordinary item                 $ (.33)      $(1.82)     $(1.93)
    Discontinued operations                       (.71)         .14        (.99)
    Extraordinary item                            (.20)        ---         (.49)
                                               
-------------------------------------------------------------------------------
          Net loss                              $(1.24)      $(1.68)     $(3.41)
-------------------------------------------------------------------------------

Weighted average number of                 
  shares outstanding                         17,127,859   17,126,192  17,100,359
===============================================================================

The accompanying notes are an integral part of these consolidated financial
statements


Imo Industries Inc. and Subsidiaries
Consolidated Balance Sheets
(Dollars in thousands except par value)

December 31,                                       1998       1997
------------------------------------------------------------------
Assets
Current Assets
Cash and cash equivalents                       $ 6,230    $ 3,528
Trade accounts and notes receivable,
  less allowance of $1,058 in 1998                      
  and $1,435 in 1997                             40,125     53,732
Inventories                                      53,114     64,888
Deferred income tax assets                       16,096     10,088
Prepaid expenses and other current assets         2,525      7,568
 
------------------------------------------------------------------
Total Current Assets                            118,090    139,804
------------------------------------------------------------------
Property, plant and equipment
  Land                                            4,450      5,351
  Buildings and improvements                     21,063     22,526
  Machinery and equipment                        41,577     36,734
------------------------------------------------------------------
                                                 67,090     64,611
Less accumulated depreciation and                
  amortization                                   (7,660)    (3,202)
------------------------------------------------------------------
Net property, plant and equipment                59,430     61,409
Intangible assets, principally                  
  goodwill, net                                 177,826    233,054
Investments in and advances to            
  unconsolidated companies                        4,536      4,780
Net assets of discontinued operations               ---     14,927
Deferred income tax assets                       25,680        ---
Other assets                                      3,410      9,326
------------------------------------------------------------------
Total Assets                                  $ 388,972  $ 463,300    
==================================================================
Liabilities and Shareholders' Equity
Current Liabilities
Notes payable                                 $     817  $   3,238
Trade accounts payable                           15,350     22,750
Accrued expenses and other liabilities           43,125     53,744
Accrued costs related to discontinued             
  operations                                      4,289      4,392
Income taxes payable                              5,505      5,929
Current portion of long-term debt                 8,486      6,082
------------------------------------------------------------------
Total Current Liabilities                        77,572     96,135
------------------------------------------------------------------
Long-term debt                                  165,843    217,319
Deferred income tax liabilities                     ---      5,034
Accrued postretirement benefits -        
  long-term                                       9,155     17,092
Accrued pension expense and other       
  liabilities                                    32,136     37,473
------------------------------------------------------------------
Total Liabilities                               284,706    373,053
------------------------------------------------------------------
Shareholders' Equity
Preferred stock:  $1.00 par value;
  authorized and unissued 5,000,000 shares          ---        ---
Common stock:  $1.00 par value;
  authorized 100 and 25,000,000 shares in
  1998 and 1997; issued 100 and           
  17,127,859 in 1998 and 1997                         1     17,128 
Additional paid-in capital                      120,751    106,805
Retained deficit                                (15,550)   (33,016)
Cumulative foreign currency                      
  translation adjustments                          (936)      (670)
------------------------------------------------------------------
Total Shareholders' Equity                      104,266     90,247
------------------------------------------------------------------
                                     
Total Liabilities and Shareholders'
  Equity                                      $ 388,972  $ 463,300
==================================================================

The accompanying notes are an integral part of these consolidated financial
statements.



Imo Industries Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(Dollars in thousands)
                                 

                                            Post-Acquis. Pre-Acquis.    
                                              August      January      
                                    Year        29,       1, 1997        Year
                                   Ended       1997 to       to          Ended
                                  December    December     August       December
                                  31, 1998    31, 1997     28, 1997     31, 1996
--------------------------------------------------------------------------------
OPERATING ACTIVITIES
Net income (loss)                     $5,670  $(21,220)  $ (28,879)    $(58,370)
                                                          
Adjustments to reconcile net income
 (loss) to net cash used by continuing
  operations:
     Discontinued operations             ---    12,183      (2,372)      16,847
     Depreciation                      4,880     3,674       6,747       10,123
     Amortization                      6,872     2,007       1,867        3,275
     Provision for deferred income      
       taxes                           4,668       ---         ---       10,000
     Extraordinary item                5,223     3,348         ---        8,455
     Unusual items                       ---     5,000      26,344       17,440
     Other                                49       369         750        1,592

     Other changes in operating assets and
        liabilities (excluding the effects
        of acquisitions and dispositions):
          Accounts and notes          
            receivable                13,549    (6,467)      1,730       (5,440)
          Inventories                 11,774     1,759      (1,930)       4,300
          Accounts payable and       
            accrued expenses         (21,019)  (17,028)     (9,794)     (16,009)
          Other operating assets     
            and liabilities            9,163    (1,608)     (3,855)       3,038
-------------------------------------------------------------------------------
     Net cash provided by (used       
       by) continuing operations      40,829   (17,983)     (9,392)      (4,749)
     Net cash used by discontinued  
       operations                     (1,219)   (1,342)     (1,377)     (10,353)
-------------------------------------------------------------------------------
Net Cash Provided by (Used by)        
  Operating Activities                39,610   (19,325)    (10,769)     (15,102)
-------------------------------------------------------------------------------
INVESTING ACTIVITIES
Net proceeds from sale of
  businesses and sales of property,
  plant and equipment                 32,726    88,024      25,235       12,570
Purchases of property, plant and    
  equipment                           (6,049)   (3,740)     (4,555)     (10,032)
Acquisitions, net of cash acquired       ---       ---         ---       (7,218)
Net investing activities of          
  discontinued operations             (1,164)   (5,104)     (3,692)      (8,072)
Other                                     80      (497)        141           63
-------------------------------------------------------------------------------
Net Cash  Provided by (Used by)       
  Investing Activities                25,593    78,683      17,129      (12,689)
-------------------------------------------------------------------------------
FINANCING ACTIVITIES
Increase (decrease) in notes        
  payable                             (2,421)  (15,900)     18,786        6,159
Proceeds from long-term borrowings    23,559   129,270         119      266,895
Principal payments on long-term     
  debt                               (71,583) (164,719)    (25,792)    (233,350)
Purchase of minority shares           (6,247)      ---         ---          ---
Payment of debt financing costs          ---    (5,368)       (384)     (14,660)
Premium payment on repurchase of
  long-term debt                      (5,822)      ---         ---          ---
Other                                    (37)      281        (102)          89
-------------------------------------------------------------------------------

Net Cash (Used by) Provided by       (62,551)  (56,436)     (7,373)      25,133
  Financing Activities                          
-------------------------------------------------------------------------------
Effect of exchange rate changes on      
  cash                                    50       453        (253)          80
-------------------------------------------------------------------------------
Increase (Decrease) in Cash and       
  Cash Equivalents                     2,702     3,375      (1,266)      (2,578)
Cash and cash equivalents at         
  beginning of the period              3,528       153       1,419        3,997
-------------------------------------------------------------------------------
Cash and Cash Equivalents at End     
  of the Period                       $6,230   $ 3,528      $  153      $ 1,419
===============================================================================
Supplemental disclosures of cash
flow information:
     Cash paid during the period for:
        Interest                     $22,443  $ 13,344    $ 19,564      $36,664
        Income taxes                 $ 2,725  $  1,263    $  2,006      $ 4,798

The accompanying notes are an integral part of these consolidated financial
statements.

<TABLE>


Imo Industries Inc. and Subsidiaries
Consolidated Statements of Shareholders' Equity
(Dollars in thousands)

<CAPTION>
                                                Cumulative
                                                Foreign     Minimum
                            Additional          Currency    Pension    Unearned
                   Common   Paid-in   Retained  Translation Liabilities Compen-  Treasury
                   Stock    Capital   Deficit   Adjustmen   Adjustment  sation    Stock     Total
----------------------------------------------------------------------------------------------------
<S>               <C>      <C>       <C>         <C>         <C>         <C>      <C>        <C>
Balance at
  January 1, 1996 $18,756  $80,275   $(76,592)   $1,037      $(1,801)    $ ---    $(18,020)  $3,655
                                            
Net loss              ---      ---    (58,370)      ---          ---       ---         ---  (58,370)
Foreign currency
  translation          
  adjustments         ---      ---        ---      (483)         ---       ---         ---     (483)
Minimum pension
  liability             
  adjustment          ---      ---        ---       ---         (702)      ---         ---     (702)
Restricted shares
  issued under          
  the equity           41      191        ---       ---          ---      (166)        ---       66
incentive plans  
Other                 ---      ---        ---       ---          ---      (553)        ---     (553)
----------------------------------------------------------------------------------------------------
Balance at
 December 31, 1996 18,797   80,466   (134,962)      554       (2,503)     (719)    (18,020) (56,387)  
Net loss              ---     ---     (28,879)      ---          ---       ---         ---  (28,879)
Foreign currency
  translation          
  adjustments         ---     ---         ---    (3,346)         ---       ---         ---   (3,346)
Restricted shares
  issued under            
  the equity
  incentive plans       4      11         ---       ---          ---        48         ---       63
---------------------------------------------------------------------------------------------------
Pre-Acquisition     
  Balance at         
  August 28, 1997  18,801  80,477    (163,841)   (2,792)      (2,503)     (671)    (18,020) (88,549)
----------------------------------------------------------------------------------------------------
Adjustment to new
  cost basis of               
  Colfax             
  Corporation on
  August 29, 1997  (1,673) 26,328     152,045     2,792        2,503       671      18,020  200,686
----------------------------------------------------------------------------------------------------
Post-Acquisition
  Balance at         
  August 29, 1997  17,128 106,805    (11,796)       ---          ---       ---        ---   112,137
Net loss             ---      ---    (21,220)       ---          ---       ---        ---   (21,220)
Foreign currency
  translation          
  adjustments        ---      ---        ---       (670)         ---       ---        ---      (670)
---------------------------------------------------------------------------------------------------
Balance at
  December 31,                                                           
  1997            17,128   106,805   (33,016)      (670)         ---       ---        ---    90,247
Net income           ---       ---     5,670        ---          ---       ---        ---     5,670
Purchase of          
  minority interest  ---    (3,181)   11,796        ---          ---       ---        ---     8,615 
New equity   
  structure upon
  merger with Imo 
  Merger Corp.   (17,127)   17,127       ---        ---          ---       ---        ---       ---
Foreign currency
  translation          
  adjustments        ---       ---       ---       (266)         ---       ---        ---      (266)
---------------------------------------------------------------------------------------------------
Balance at
  December 31,       
  1998             $   1  $120,751  $(15,550)    $ (936)       $ ---     $ ---      $ ---  $104,266
===================================================================================================

The  accompanying  notes are an integral  part of these  consolidated  financial statements.

</TABLE>


Notes to Consolidated Financial Statements

Note 1  Significant Accounting Policies

Consolidation: The consolidated financial statements include the accounts of the
Company   and  its   majority-owned   subsidiaries.   Significant   intercompany
transactions have been eliminated in consolidation.  The Company uses the equity
method to account for  investments  in  corporations  in which it does not own a
majority voting interest but has the ability to exercise  significant  influence
over operating and financial policies. Prior year financial statements have been
restated to conform with 1998 presentation.

Translation  of Foreign  Currencies:  Assets and  liabilities  of  international
operations are translated into U.S.  dollars at current  exchange rates.  Income
and  expense  accounts  are  translated  into U.S.  dollars at average  rates of
exchange prevailing during the year. Translation  adjustments are reflected as a
separate component of shareholders' equity and comprehensive income.

Cash Equivalents:  Cash equivalents include investments in government securities
funds and  certificates of deposit.  Investment  periods are generally less than
one month.

Inventories:  Inventories are carried at the lower of cost or market, cost being
determined  principally on the basis of standards which approximate actual costs
on the first-in, first-out method, and market being determined by net realizable
value. Appropriate  consideration is being given to deterioration,  obsolescence
and other factors in evaluating net realizable value.

Revenue Recognition: Revenues are recorded generally when the Company's products
are shipped. Revenue is recorded on unshipped,  completed products only when the
customer  requests to be billed prior to shipment,  in which case title and risk
of loss pass to the customer at the billing date.

Depreciation  and  Amortization:  Depreciation  and  amortization  of plant  and
equipment  are computed  principally  by the  straight-line  method based on the
estimated useful lives of the assets as follows: buildings and improvements,  10
to 40 years and machinery and equipment, 3 to 15 years.

Accounting  Calendar:  Effective  January 1, 1998, the Company adopted a "4-4-5"
accounting calendar, which enables all quarters to be more comparable. The first
two months of each quarter have four weeks,  and the third month of each quarter
has five weeks.

Earnings Per Share:  Basic and diluted net income  (loss) per share for 1997 and
1996 is calculated based on the actual weighted average shares outstanding.  For
1997 and 1996,  outstanding  stock  options and warrants are not  considered  as
their  effect is  antidulutive.  As a result of the  back-end  merger on July 2,
1998,  earnings per share is not presented for 1998.  (See Note 2). Earnings per
share for 1997 and 1996 have not been restated.

Recent Accounting  Pronouncements:  On January 1, 1998, the Company adopted FASB
Statement No. 130, "Reporting Comprehensive Income," which establishes standards
for the reporting and displaying of comprehensive  income. On December 31, 1998,
the Company  adopted FASB Statement No. 131,  "Disclosures  about Segments of an
Enterprise and Related  Information,"  which requires public companies to report
financial and descriptive  information about operating segments. On December 31,
1998, the Company adopted FASB Statement No. 132, "Employers'  Disclosures about
Pensions and Other Postretirement  Benefits," which adds disclosure requirements
on  changes in the  benefit  obligations  and fair  values of plan  assets,  and
eliminates certain disclosures.

Intangible  Assets:  Goodwill of  companies  acquired is being  amortized on the
straight-line  basis over 40 years.  The carrying  value of goodwill is reviewed
when  indicators of impairment are present,  by evaluating  future cash flows of
the associated operations to determine if impairment exists. Goodwill related to
continuing  operations  at  December  31,  1998 and 1997 was $173.1  million and
$217.2 million, respectively, net of respective accumulated amortization of $7.5
million and $1.8  million.  The  reduction in goodwill is  primarily  due to the
change in purchase accounting estimates during the first year after acquisition.
Patents are amortized over the shorter of their legal or estimated useful lives.

Management Estimates: The preparation of financial statements in conformity with
generally accepted  accounting  principles requires management to make estimates
and assumptions  that affect the reported  amounts of assets and liabilities and
disclosure of  contingent  assets and  liabilities  at the date of the financial
statements,  and the  reported  amounts  of  revenues  and  expenses  during the
reporting period. Actual results could differ from those estimates.

Note 2  Acquisition By Colfax Corporation

On August  28,  1997,  Colfax  Corporation  ("Colfax"),  previously  known as II
Acquisition  Corp.,  acquired  approximately  93% of the  Company's  outstanding
shares of common stock pursuant to its tender offer for all  outstanding  shares
of the common stock of the Company (the  "Acquisition").  The consideration paid
was $7.05 per share of common stock or $112.1 million in total. On July 2, 1998,
Imo Merger Corp., a wholly owned subsidiary of Colfax, merged with and into Imo,
pursuant to a short-form  merger under  Delaware law  ("back-end  merger").  The
Company  was the  surviving  corporation  in the  back-end  merger and as result
became a wholly owned subsidiary of Colfax. At December 31, 1998, 886,003 of the
outstanding 1,221,888 common shares held by minority shareholders were converted
to cash.  A payable of $2.4  million was  accrued at  December  31, 1998 for the
remaining  335,885  shares  that  were  not  converted  as of that  date.  Total
consideration for the purchase of Imo was $120.7 million.

The Acquisition has been accounted for under the purchase  method.  The purchase
price  was  allocated  as  follows:  tangible  assets  - $314.5  million;  other
intangible  assets  - $8.4  million;  and  liabilities  -  $382.7  million.  The
allocation was based on the estimated fair values at the date of acquisition and
resulted  in an excess of  purchase  price  over  assets  acquired,  liabilities
assumed, and additional purchase liabilities recorded, for continuing operations
of $180.5 million,  which is being  amortized on a  straight-line  basis over 40
years.

Included in the purchase  liabilities above were approximately $18.6 million for
severance and related costs, and  consolidation of certain acquired  facilities.
At December 31, 1998 and 1997,  approximately  $3.1 million and $10.5 million of
these  liabilities  remained on the balance  sheet,  respectively.  Of the $15.5
million  charged  against  the  liability  to date,  $13.6  million  relates  to
restructuring and $1.9 million relates to severance payments.

In  conjunction  with the  Acquisition,  the Company  recorded a charge of $15.8
million  including  a  $10.0  million  contract  fee  paid  to  United  Dominion
Industries  ("UDI") as a result of the termination of a merger agreement between
UDI and the Company,  $3.4 million of commissions,  advisory and legal fees, and
$2.4 million of employee retention bonuses.
(See Note 7).

Note 3  Discontinued Operations

In  February  1998 and  August  1997,  the  Company  sold its  Roltra  Morse and
Instrumentation businesses,  respectively.  In April 1997, the Company completed
the sale of the Varo Electronic Systems division. In accordance with APB Opinion
No. 30, the  disposals of these  business  segments  have been  accounted for as
discontinued  operations and,  accordingly,  their  operating  results have been
segregated  and  reported  as  Discontinued   Operations  in  the   accompanying
Consolidated  Statements  of Income and  Comprehensive  Income.  Roltra Morse On
February 27, 1998,  the Company  completed the sale of its Roltra Morse business
to Magna  International  Inc. for cash of $30 million,  plus the  assumption  of
Roltra Morse's debt. The sale price  approximated the recorded net book value of
the business. Net proceeds were used to reduce domestic senior debt.

Instrumentation 
On August  29,  1997,  the  Company  completed  the sale of its  Instrumentation
business segment to Danaher  Corporation for  approximately  $85 million,  which
approximated  its net book value.  The majority  shareholders of the Company are
also  substantial  shareholders of Danaher  Corporation.  The purchase price was
determined  on the basis of arms  length  negotiations  between  the Company and
Danaher  Corporation.  A portion  of the  proceeds  was used to reduce  domestic
senior debt by $68.1 million.

Electro-Optical Systems
On April 28, 1997, the Company completed the sale of the Varo Electronic Systems
division to a small defense contractor for $12 million, which was used to reduce
senior  domestic debt.  The sale of this business  completed the disposal of the
Electro-Optical Systems business.

The Company retained certain liabilities related to the Electro-Optical  Systems
business of  approximately  $24 million.  During 1996,  the Company  recorded an
additional  $5.2 million loss on disposal  ($.8 million in the fourth  quarter),
which  related to changes in estimates on legal and other  reserve  requirements
associated with retained  liabilities of this business.  In the third quarter of
1997, the Company  recorded an additional $3.4 million loss on disposal  related
to changes in  estimates on certain  reserve  requirements  associated  with the
retained liabilities of this business.

At  December  31,  1998,  there  are no assets or  liabilities  in  discontinued
operations.  Currently the Company has accruals for liabilities assumed upon the
disposal of the discontinued operations.

Net  assets  and  liabilities  of the  Discontinued  Operations  consist  of the
following:


December 31 (Dollars in thousands)           1998     1997
-----------------------------------------------------------
     Current Assets:
          Cash                               $---   $  843
          Receivables                         ---   13,799       
          Inventories                         ---   12,357
          Other current assets                ---    5,083
-----------------------------------------------------------
                                              ---   32,082
-----------------------------------------------------------
     Current Liabilities:
          Notes payable                       ---   15,694
          Trade accounts payable              ---   22,043
          Other current liabilities           ---    6,522
-----------------------------------------------------------
                                              ---   44,259
-----------------------------------------------------------
     Net Current Assets (Liabilities)         ---  (12,177)
-----------------------------------------------------------
     Long-term Assets:
          Property                            ---   21,758
          Other long-term assets              ---   14,220
-----------------------------------------------------------
                                              ---   35,978
     Long-term Liabilities                    ---    8,874
-----------------------------------------------------------
     Net Long-term Assets                     ---   27,104     
-----------------------------------------------------------
     Net Assets                              $--- $ 14,927
===========================================================

Net assets related to the Roltra Morse and Turbomachinery  businesses were $15.5
million and $0.1 million as of December 31, 1997.  The  Electro-Optical  Systems
business contributed $0.7 million of net liabilities as of December 31, 1997.

Total long-term debt of the Discontinued  Operations amounted to $6.0 million as
of December 31,  1997.  Of this amount,  $1.2  million  represented  the current
portion of long-term debt.

A condensed summary of operations for the Discontinued Operations is as follows:

                                  Post-Acquis. Pre-Acquis.
                                  August 29,   January 1,
                                  1997 to      1997 to
 Year Ended December 31           December 31, August 28,                       
(Dollars in thousands)     1998       1997        1997         1996
---------------------------------------------------------------------
    Net Sales            $14,355     $30,257     $117,730    $181,948
---------------------------------------------------------------------
    Income (loss)
      from operations
      before income        
      taxes and
      minority
      interest               ---      (3,736)       3,025      (7,963)
---------------------------------------------------------------------
    Income taxes             ---          77          664       1,037
    Minority interest        ---         (60)         (11)       (295)
---------------------------------------------------------------------
    Income (loss)         
      from operations      $ ---     $(3,753)     $ 2,372     $(8,705)
=====================================================================

The income (loss) from operations of the Discontinued  Operations for 1998, 1997
and 1996 includes allocated interest expense of $0.2 million, $2.7 million ($2.4
million - pre-Acquisition),  and $4.5 million, respectively.  Allocated interest
expense  an  allocation  of  corporate  interest  expense  to  the  Discontinued
Operations  based  on the  ratio  of net  assets  to be  sold  to the sum of the
Company's  consolidated net assets,  if positive,  plus  consolidated  debt. The
operating  loss of $0.9  million  for  Roltra  Morse  for the two  months  ended
February 28, 1998 was accrued as a portion of the estimated  loss on disposal as
of December 31, 1997.

Roltra Morse
The Roltra Morse business had operating losses of $0.9 million, $6.7 million and
$13.8 million for 1998, 1997 and 1996, respectively.

The  1997   operating   loss   included  an  unusual   charge  of  $0.7  million
(pre-Acquisition)  due to fees incurred related to the previously failed attempt
to sell the Roltra Morse business.  The operating loss in 1996 included  unusual
charges of $6.2 million  consisting of  restructuring  measures  taken to reduce
operating expenses and goodwill write-offs.

Instrumentation
The Instrumentation business had income from operations of $5.3 million and $5.1
million  for 1997 and 1996,  respectively.  Operating  income  in 1996  included
unusual  charges of $0.9  million  related to  restructuring  of  operations  in
Europe.

Electro-Optical Systems
The Electro-Optical  Systems business had income from operations of $0.8 million
and $0.4  million for 1997 and 1996,  respectively.  The income in 1997 and 1996
offset increases in estimated reserve requirements in those respective periods.


Note 4 Restructuring Plans

Asset Sales
1998 Assets  Sales:  On February  27,  1998,  the Company  sold its Roltra Morse
business segment to Magna International. During 1998, the Company also completed
the sales of certain non-operating real estate for net proceeds of $0.6 million.

1997 Asset Sales:  On August 29,  1997,  the Company  completed  the sale of its
Instrumentation  business  segment to Danaher  Corporation  for  proceeds of $85
million,  which  approximated  its net book value.  In April  1997,  the Company
completed the sale of its Varo  Electronic  Systems  division to a small defense
contractor for $12 million.  The sale of this business completed the sale of the
Electro-Optical  Systems business.  In 1997, the Company also completed sales of
certain of its  non-operating  real estate for total  proceeds of  approximately
$14.1 million.

On December 31, 1997,  the Company sold certain  assets of its Delroyd  business
unit to Nuttall  Gear LLC for $2.3  million in cash.  Also on December 31, 1997,
the Company  acquired  certain  assets of the Centric  Clutch  business  unit of
Ameridrives  International,  L.P. for $1.3 million in cash. Nuttall Gear LLC and
Ameridrives  International,  L.P. are  subsidiaries of American  Enterprises MPT
Corp.  Steven M. Rales and  Mitchell P. Rales  collectively  own 75% of American
Enterprises  MPT Corp.  Messrs.  Rales and Rales are  directors  and  beneficial
owners of 92.8% of the Company.  The  transactions  were  negotiated  on an arms
length basis, and were based on the valuations of independent appraisers.

Cost Reduction Programs
1997 Program
In connection  with the  Acquisition,  the Company  implemented a cost reduction
program.  The cost of this  program  was $18.6  million  and was  accrued for in
accordance  with the  purchase  method of  accounting.  It is comprised of $10.5
million related to severance and  termination  benefits as a result of headcount
reductions at the Company's corporate  headquarters.  In addition,  $1.2 million
and $6.9  million  of costs for the  Company's  Fluid  Handling  and  Industrial
Positioning  segments,  respectively,   related  to  severance  and  termination
benefits  resulting from headcount  reductions and the  consolidation of certain
manufacturing  facilities.  The required cash outlay related to this program was
$8.1 million in 1997,  $7.4 million in 1998 and the expected  cash  requirements
during 1999 are $3.1 million.

Note 5 Inventories

Inventories are summarized as follows:

December 31 (Dollars in                    1998           1997
thousands)
---------------------------------------------------------------
Finished products                      $ 18,926       $ 18,823
Work in process                          17,880         23,218
Materials and supplies                   17,545         23,481
---------------------------------------------------------------
                                         54,351         65,522
Less customers' progress payments        (1,237)          (634)
----------------------------------------------------------------
                                       $ 53,114       $ 64,888
===============================================================



Note 6  Accrued Expenses and Other Liabilities

Accrued expenses and other liabilities consist of the following:

December 31 (Dollars in thousands)         1998           1997
---------------------------------------------------------------
Accrued product warranty costs          $ 1,423        $ 1,844
Accrued litigation and claims costs      15,003         16,683
Payroll and related items                 8,845         11,836
Accrued interest payable                  2,014          3,126
Accrued restructuring costs               3,126         11,970
Accrued divestiture costs                 1,502          1,835
Accrued environmental costs               1,934          2,190
Advance customer payments                 1,363            223
Other                                     7,915          4,037
---------------------------------------------------------------
                                       $ 43,125       $ 53,744
===============================================================

Note 7  Unusual Items

1997
During the year ended December 31, 1997, the Company recorded unusual charges of
$31.3 million ($1.83 per share) in income from continuing operations.  The first
eight months of 1997 included an unusual charge of $10.5 million relating to the
judgment  against  the  Company  in favor  of  International  Insurance  Company
("International"),  awarding  International  $11.2  million,  plus interest from
March 1995. The Company recorded a charge to income in the first quarter of 1997
of $12.9  million  as an  unusual  item,  which  represented  the  amount of the
judgment plus interest to date. On July 15, 1997,  the Company  agreed to settle
with  International  by dropping an appeal and paid a reduced amount on July 30,
1997 in  complete  settlement  of all  outstanding  amounts.  As a result of the
settlement,  the Company  recorded a favorable  adjustment of $2.4 million as an
unusual item in the second quarter of 1997.

In addition,  the Company recorded unusual charges of $20.8 million in the third
quarter of 1997.  Of these  charges,  $15.8  million  related to the sale of the
Company and represented indirect and general expenses incurred by the Company in
connection with the sale process which were paid in 1997, and $5 million related
to an additional legal provision concerning certain litigation matters.

1996
During the fourth quarter of 1996,  the Company  recognized  unusual  charges of
$17.4  million  ($1.02 per share) in income from  continuing  operations.  These
charges  include $0.3 million  related to the  restructuring  and cost reduction
programs within the Company's  operating units, and $17.1 million related to the
write-down of certain  businesses being held for sale and certain  non-operating
real estate being held for sale to net realizable value.


Note 8  Income Taxes

The components of income tax expense from continuing operations are:

                                  Post-Acquis.  Pre-Acquis.
                                  August 29,    January 1,
                                  1997 to       1997 to
 Year Ended December 31           December 31,  August 28,    
(Dollars in thousands)     1998       1997         1997         1996
  --------------------------------------------------------------------

Current:
     Federal              $ 233      $ ---       $ ---       $  ---
     Foreign              1,801         94         994        2,386
     State                  306        141         260          277
--------------------------------------------------------------------
                          2,340        235       1,254        2,663
--------------------------------------------------------------------

Deferred:
     Federal              4,668        ---         ---       10,000
     Foreign and State      ---        ---         ---          ---
--------------------------------------------------------------------
                          4,668        ---         ---       10,000
--------------------------------------------------------------------

                         $7,008       $235      $1,254      $12,663
====================================================================

Income  tax  expense  for 1997 and 1996  from  discontinued  operations  was $.7
million,  and $1  million,  respectively.  There was no income tax  expense  for
discontinued operations during 1998.

Deferred  income  taxes  reflect  the net tax effects of  temporary  differences
between the carrying  amounts of assets and liabilities for financial  reporting
purposes and the amounts used for income tax purposes. Significant components of
the Company's  deferred tax assets and  liabilities  as of December 31, 1998 and
1997 are as follows:

December 31
(Dollars in thousands)         1998              1997
------------------------------------------------------------
                       Current Long-term Current Long-term
------------------------------------------------------------
Deferred tax assets:
     Postretirement       
       benefit obligation $  234   $ 3,204  $  595  $ 5,809
     Expenses not        
       currently
       deductible         17,066     7,720  28,911    7,280
     Net operating loss      
       carryover             ---    32,299     ---   35,436 
     Tax credit           
       carryover             ---     4,471     ---    2,783
------------------------------------------------------------
Total deferred tax assets 17,300    47,694  29,506   51,308
Valuation allowance for
  deferred tax assets     (1,204)     (516)(19,418) (33,839)
------------------------------------------------------------
Net deferred tax assets   16,096    47,178  10,088   17,469
------------------------------------------------------------
Deferred tax liabilities:
     Tax over book           
       depreciation          ---    14,487     ---   15,271
     Other                   ---     7,011     ---    7,232
------------------------------------------------------------
Total deferred tax           
liabilities                  ---    21,498     ---   22,503
=============================================================
Net deferred tax                   
  assets (liabilities)   $16,096  $ 25,680 $10,088  $(5,034)
=============================================================

The net  deferred  tax asset  currently  recorded at December  31, 1998 is $41.8
million, a level where management  believes that it is more likely than not that
the tax benefit  will be  realized.  Although the Company has a history of prior
losses,  these losses were  primarily  attributable  to divested  businesses and
unusual items.

The Company establishes  valuation  allowances in accordance with the provisions
of  FASB  Statement  No.  109,   "Accounting  for  Income  Taxes."  The  Company
continually  reviews the adequacy of the valuation  allowance and is recognizing
these  benefits only as  reassessment  indicates that it is more likely than not
that the benefits will be realized. The valuation allowance was $1.7 million and
$53.3  million for December 31, 1998 and  December  31, 1997,  respectively.  In
1998,  the Company  reduced its  valuation  reserve by $51.6  million due to its
belief that it is more likely than not that these tax benefits  will be realized
in future years.  The revision of the valuation  reserve is due to the change in
purchase accounting estimates during the first year after acquisition.

At  December  31,  1998,   unremitted  earnings  of  foreign  subsidiaries  were
approximately $29 million.  Since it is the Company's  intention to indefinitely
reinvest these earnings, no U.S. taxes have been provided.  Determination of the
amount of unrecognized  deferred tax liability on these  unremitted  earnings is
not practicable.  The amount of foreign  withholding taxes that would be payable
upon remittance of those earnings is approximately $1.2 million.

The components of income (loss) from continuing  operations  before income taxes
and extraordinary item:

                                 Post-Acquis.  Pre-Acquis.
                                  August 29,    January 1,
                                  1997 to       1997 to
 Year Ended December 31           December 31,  August 28,   
(Dollars in thousands)     1998       1997         1997         1996
-----------------------------------------------------------------------
United States           $ 7,963    $(7,612)     $(29,023)   $(22,663)
Foreign                   9,938      2,158          (974)      2,258
=======================================================================
                        $17,901    $(5,454)     $(29,997)   $(20,405)
=======================================================================

U.S.  income tax expense  (benefit) at the statutory tax rate is reconciled
below to the overall U.S. and foreign income tax expense.

                                 Post-Acquis.  Pre-Acquis.
                                  August 29,    January 1,
                                  1997 to       1997 to
 Year Ended December 31           December 31,  August 28,     
(Dollars in thousands)     1998       1997         1997         1996
 -------------------------------------------------------------------
Tax at U.S. federal  
  income tax rate       $ 6,265   $ (1,909)    $ (10,499)   $ (7,142)
State taxes, net of
  federal income               
  tax effect                198         92           169         188
Impact  of foreign tax
  rates and credits      (1,677)       228          (660)       (331) 
Net U.S. tax on
  distributions of         
  current foreign
  earnings                   266         355          ---        755
Goodwill amortization  
  and write-off            1,995         458          222      4,276
Change in valuation          ---       1,720        7,472     12,390
  reserve
Nondeductible foreign    
  losses                     ---          89        1,017      1,914
Other                        (39)       (798)       3,533        613
====================================================================
Income tax expense       $ 7,008       $ 235      $ 1,254    $12,663
====================================================================

The Company has net operating loss carryforwards of approximately  $92.3 million
expiring in years 2002 through  2012,  and minimum tax credits of  approximately
$2.8  million,   which  may  be  carried   forward   indefinitely.   Tax  credit
carryforwards  include  foreign tax credits of  approximately  $1.7 million that
expire beginning in the year 2002. These  carryforwards  are available to offset
future federal taxable income,  subject to the Section 382  limitations,  due to
the Acquisition.

Note 9  Long-Term Debt and Notes Payable


Long-Term Debt

Long-term debt of continuing operations consists of the following:

December 31 (Dollars in thousands)               1998       1997
------------------------------------------------------------------
Term Loans     (1) (2)                         $46,538    $59,000
Revolver Loans (1) (2)                          41,000     25,000
Due to Amerdrives International, L.P. (3)        5,000        ---
Senior subordinated notes with interest
  at 11.75%, due May 1, 2006, net of
  unamortized discount of  $0.9 million      
  in 1998 and $1.7 million in 1997              77,591    133,381
Other                                            4,200      6,020
------------------------------------------------------------------
                                               174,329    223,401
Less current portion                            (8,486)    (6,082)
------------------------------------------------------------------
                                              $165,843   $217,319
==================================================================


(1)Quarterly  principal  payments  are as follows:  $1.9  million due  quarterly
   November 29, 1998 to August 29, 1999; $2.2 million due quarterly November 29,
   1999 to August 29,  2000;  $3.2  million due  quarterly  November 29, 2000 to
   August 29, 2001;  and $4.8 million due quarterly  November 29, 2001 to August
   29, 2002. All revolver balances are due on August 29, 2002.
(2)These loans bear interest at prime plus .50%, or LIBOR plus 1.75%.  The prime
   and LIBOR margins are a sliding  scale based on the  Company's  total debt to
   EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortization.)
(3)The majority  shareholders  of Ameridrives  International,  L.P. are also
   the majority  shareholders  of the Company.  This loan bears interest at
   LIBOR + 1.25%.
-------------------------------------------------------------------

On August 29, 1997, the Company completed the refinancing of its domestic senior
debt. Under terms of the refinancing,  the Company entered into an agreement for
$143 million in senior  secured credit  facilities  with a group of lenders (the
"New Credit Agreement").  Initial borrowings under the New Credit Agreement were
approximately $127.1 million.  Proceeds of the New Credit Agreement were used to
refinance all obligations  under the Company's  previous credit  agreement.  The
cost of the  implementation  of the New Credit  Agreement will be amortized over
its term.

The New  Credit  Agreement,  which is  secured  by the  assets of the  Company's
domestic  operations and all or a portion of the stock of certain  subsidiaries,
provided for a five year, $70 million  revolving credit facility (which includes
a $30  million  letter  of credit  sub-facility),  and a $73  million  term loan
facility ("Term Loans") amortizing to August 29, 2002.  Proceeds from the August
29, 1997 sale of the Instrumentation  business were used to repay amounts on the
revolving  credit  facility and Term Loans of $54.2  million and $13.9  million,
respectively  (See Note 3). At the same time,  and in keeping  with the terms of
the New Credit Agreement,  the $73 million term loan facility was reduced to $59
million, which reduced the total facility to $129 million. On February 27, 1998,
the  Company   completed  the  sale  of  its  Roltra  Morse  business  to  Magna
International  Inc. (See Note 3). The net proceeds were used to reduce  domestic
senior debt by $30 million on February  27,  1998,  including  $8 million of the
outstanding  Term  Loans.  The sale of Roltra  Morse and use of the  proceeds to
reduce its domestic senior debt increased the  availability  under its revolving
credit  facility to purchase a portion of its 11.75% senior  subordinated  notes
(the "Notes") on the open market. During the first, third and fourth quarters of
1998, the Company  purchased,  in the open market at a premium, a portion of its
Notes in the face  amount  of  $33.1  million,  $9.5  million  and $14  million,
respectively.  As a result of the early  extinguishment  of these Notes, and the
prepayment  of a portion of the term loan  facility  with the proceeds  from the
Roltra Morse sale,  extraordinary charges of $5.6 million, $1.1 million and $1.3
million were recognized in the first, third and fourth quarters of 1998.


The aggregate annual maturities of long-term debt from continuing operations, in
thousands, for the four years subsequent to 1999 are:

(Dollars in thousands)
------------------------------------------------------------
2000                                                $10,362
2001                                                 14,885
2002                                                 60,814
2003                                                    470
Thereafter                                           79,312
------------------------------------------------------------

Total                                             $ 165,843
============================================================

Total debt of the Discontinued Operations, in thousands,  amounted to $21,652 as
of December 31, 1997. Of this amount,  $4,797  represent the long-term  portion.
There was no remaining debt of Discontinued Operations at December 31, 1998.

The Term Loans have required mandatory prepayments under certain conditions such
as from proceeds from asset sales, specified percentages of net proceeds of debt
or equity  issuances,  and a  percentage  of excess  cash  flow.  The  mandatory
prepayments  will be  applied  to the  Term  Loans  pro  rata,  and  then to the
repayment of the revolving credit facility. Mandatory prepayments applied to the
Term Loans  reduce the  scheduled  quarterly  principal  payments  on a pro rata
basis.  The interest  rates on the Term Loans are based on current market rates.
Consequently, the carrying value of the Term Loans approximates fair value.

The New Credit  Agreement  requires the Company to meet certain  objectives with
respect to financial  ratios.  The New Credit  Agreement  and the Notes  contain
provisions,  which place certain  limitations  on dividend  payments and outside
borrowings.  Under  the most  restrictive  of such  provisions,  the New  Credit
Agreement  requires the Company to maintain certain minimum  interest  coverage,
fixed charge coverage and maximum permitted debt levels and prohibits dividends.
The Company was in  compliance  with all of its  covenants  under the New Credit
Agreement at December 31, 1998.

The Notes are not redeemable  prior to May 1, 2001. On or after May 1, 2001, the
Notes are redeemable at the option of the Company,  in whole or in part, at 106%
of their principal  amount,  plus accrued  interest,  declining to 100% of their
principal  amount plus  accrued  interest  on or after May 1, 2004.  Interest is
payable  semi-annually  on May 1 and  November 1. On September  16,  1997,  as a
result of the  Acquisition,  the Company offered to purchase all of the Notes at
101% of the principal  amount,  as required  under the  indenture  governing the
Notes.  No Notes were tendered in the offer.  On November 25, 1997,  the Company
purchased, through an open market transaction, Notes in the face amount of $19.9
million at a purchase price of 111.47 % of the principal amount.

On February 4, 1999, the Company purchased in the open market at a premium, $3.5
million of the Notes.  The fair value of the  remaining  $75 million of Notes on
February 4, 1999, based on market bid prices, was $79.5 million.

The twelve months ended December 31, 1998,  include an  extraordinary  charge of
$5.2   million  net  of  tax,   representing   charges   related  to  the  early
extinguishment  of the Company's  debt under its current  senior  secured credit
facilities and its Notes,  as well as the write-off of previously  deferred loan
costs.

An  extraordinary  charge of $3.3  million was  recorded  in 1997.  In the third
quarter of 1997, a $0.3 million extraordinary charge consisting of the write-off
of deferred  debt expense was recorded  related to the repayment of a portion of
the Term Loans under the New Credit Agreement with the proceeds from the sale of
the Instrumentation business. An extraordinary charge of $3 million was recorded
in the fourth quarter of 1997, as a result of the open market  purchase of $19.9
million of the Notes in November 1997.  This charge  represents a cash outlay of
$2.3 million incurred in connection with the early extinguishment of the debt as
well as the write-off of previously deferred loan costs.

An  extraordinary  charge of $8.5 million was recorded in the second  quarter of
1996, as a result of the April 1996 refinancing of the Company's domestic senior
debt and its then  outstanding  12% and 12.25% senior  subordinated  debentures.
This charge  represents cash outlays of $5.1 million incurred in connection with
the early  extinguishment  of the debt as well as the  write-off  of  previously
deferred loan costs.


Notes Payable
The Company's continuing  operations had $6 million in foreign short-term credit
facilities with amounts outstanding at December 31, 1998 of $0.8 million. Due to
the short-term nature of these debt instruments it is the Company's opinion that
the carrying  amounts  approximate  the fair value. As of December 31, 1998, the
Company had $15.6 million of outstanding standby letters of credit.

Note 10  Shareholders' Equity

On August 29, 1997, the Board of Directors  accelerated the  exercisability  and
deemed  exercised  for cash all stock  options  outstanding  under the Company's
Equity  Incentive Plan for Key Employees,  the Equity Incentive Plan for Outside
Directors,   and  the  1995  Equity   Incentive  Plan  for  Outside   Directors,
(collectively  the "Plans").  The cash paid for outstanding stock options deemed
exercised  was based upon the greater of the excess of the tender offer price of
Acquisition  Corp. of $7.05 over the per share option  exercise  price and zero.
The cash  payment  of  outstanding  options  resulted  in no  options  remaining
outstanding as of August 29, 1997. In addition, on November 5, 1997, pursuant to
resolution of the Board of Directors, the Plans were terminated effective August
29, 1997.

On July 2, 1998, Colfax Corporation's wholly-owned subsidiary, Imo Merger Corp.,
merged with and into Imo,  pursuant to a short-form  merger  under  Delaware law
("back-end  merger").  Imo was the surviving  corporation in the back-end merger
and as a result became a wholly-owned  subsidiary of Colfax. At the merger date,
Imo assumed the capital  structure of Imo Merger Corp.,  of 100 shares of common
stock, par value $.01 per share.

Employees Stock Savings Plan
Prior to August 1, 1997, up to 1,600,000  shares of the  Company's  common stock
were  reserved for issuance  under the  Company's  Employee  Stock  Savings Plan
("ESSP").  The Committee of the ESSP approved a policy change,  effective August
1, 1997, in that employer  matching  contributions to the ESSP are to be paid in
cash rather than through issuance of Company common stock. As of August 1, 1997,
this plan policy change  effectively  eliminated  the  restriction on the use of
authorized but unissued shares of common stock.

Common Stock Warrants
In July 1993,  the Company  issued  warrants to purchase  200,000  shares of its
common stock at $9.02 per share  (subject to adjustment in certain  events),  to
one of its senior  lenders in connection  with the  restructuring  of its senior
credit facilities. The warrants are exercisable on or before December 31, 1998.

Treasury Stock
On  August  29,  1997,  the  Company  canceled  the  shares  of  treasury  stock
outstanding as of that date totaling  1,672,788  shares of the Company's  common
stock with a cost basis of approximately $18 million.

Note 11  Operations by Industry Segment and Geographic Area

The Company  classifies its continuing  operations  into two business  segments:
Fluid  Handling  and  Industrial  Positioning.  Detailed  information  regarding
products by segment is contained in the section entitled  "Business" included in
Part I, Item 1 of this Form 10-K Report.  Amounts related to pre-Acquisition and
post-Acquisition  have not been  separated,  as the effect of the Acquisition on
the segments was not material.  Information about the business of the Company by
business segment, foreign operations and geographic area is presented below:

Year Ended December 31
(Dollars in thousands)                  1998       1997       1996
-------------------------------------------------------------------
Net Sales                                     
     Fluid Handling                 $112,768   $112,486   $107,567
     Industrial Positioning          196,102    204,376    201,944
------------------------------------------------------------------
Total net sales                     $308,870   $316,862   $309,511
------------------------------------------------------------------
Segment operating income
     Fluid Handling                 $ 21,462    $14,503    $11,229
     Industrial Positioning           26,323     12,984     16,917
------------------------------------------------------------------
Total segment operating income        47,785     27,487     28,146
------------------------------------------------------------------
Equity in income (loss) of               
  unconsolidated companies                31       (519)       (32)
Unallocated corporate expenses (1)    (9,275)   (37,703)   (23,988)
Net interest expense                 (20,640)   (24,716)   (24,531)
------------------------------------------------------------------
Income (loss) from continuing
  operations before income taxes        
  and extraordinary item            $ 17,901   $(35,451)  $(20,405)
==================================================================

A reconciliation of segment operating income to income from operations follows:

Year Ended December 31
(Dollars in thousands)             1998        1997        1996
----------------------------------------------------------------
Segment operating              
  income (1)                   $ 47,785     $27,487     $ 28,146
Unallocated corporate         
  expenses (2)                   (9,275)    (37,703)     (23,988)
Other expense                       ---         177          355
----------------------------------------------------------------
Income (loss) from operations  $ 38,510   $ (10,039)      $4,513
================================================================

(1)Segment  operating  income  includes $0.3 million of unusual items related to
   the Industrial Positioning segment for the year ended December 31, 1996.

(2)Unallocated  corporate  expenses  include  unusual items of $31.3 million and
   $17.1 million for the years ended December 31, 1997 and 1996, respectively.

Year Ended December 31
(Dollars in thousands)          1998        1997       1996
------------------------------------------------------------
Identifiable assets
     Fluid Handling         $ 58,090     $66,932    $73,806
     Industrial Positioning  105,169     116,488    180,674
     Corporate               225,713     264,953     27,766
     Discontinued Operations:
          Electro-Optical        ---        (672)    14,356
          Instrumentation        ---         ---     22,516
          Roltra Morse           ---      15,489     11,331
          Turbomachinery         ---         110        473
------------------------------------------------------------
Total identifiable assets   $388,972    $463,300   $330,922
============================================================
Depreciation and amortization
     Fluid Handling          $ 1,651     $ 3,695    $ 4,114
     Industrial Positioning    2,930       8,485      7,773
     Corporate                 7,171       2,115      1,511
------------------------------------------------------------
Total depreciation and     
  amortization               $11,752     $14,295    $13,398
============================================================
Capital expenditures
     Fluid Handling          $ 2,768     $ 3,706    $ 4,568
     Industrial Positioning    3,233       4,477      5,253
     Corporate                    48         112        211
------------------------------------------------------------
Total capital expenditures   $ 6,049     $ 8,295    $10,032
============================================================

Identifiable  assets of corporate at December 31, 1998 and 1997 include goodwill
of $173.1 million and $217.2 million  related to the  Acquisition,  respectively
(See Note 2). As such,  at December 31,  1997,  the  identifiable  assets of the
segments in  continuing  operations  do not include  goodwill.  The Roltra Morse
discontinued  segment had goodwill of $8 million included in identifiable assets
as of December 31, 1997.

Identifiable assets at December 31, 1996 include $6.7 million and $55 million of
goodwill  for  the  Fluid   Handling  and   Industrial   Positioning   segments,
respectively,   and   goodwill  of  $0.6   million  and  $9.5  million  for  the
Instrumentation and Roltra Morse discontinued segments, respectively.



The continuing operations of the Company on a geographic basis are as follows:

Year Ended December 31
(Dollars in thousands)          1998        1997       1996
------------------------------------------------------------
Net sales
     United States          $203,685    $214,150   $210,196
     Foreign                 105,185     102,712     99,315
------------------------------------------------------------
Total net sales             $308,870    $316,862   $309,511
============================================================
Segment operating income
     United States           $34,522     $25,050    $20,948
     Foreign                  13,262       2,437      7,198
------------------------------------------------------------
Total segment operating      
  income                     $47,784     $27,487    $28,146
============================================================
Identifiable assets
  Continuing Operations:
     United States          $327,720    $380,263   $196,373
     Foreign                  61,252      68,110     85,873
  Discontinued Operations:
     United States               ---        (562)    23,210      
     Foreign                     ---      15,489     25,466       
------------------------------------------------------------
Total identifiable assets   $388,972    $463,300   $330,922
============================================================

Export sales
     Asia                     $5,277     $ 5,011    $ 5,724
     Canada                    3,801       4,878      3,236
     Europe                    3,288       2,745      3,133
     Latin America             1,241         779        906
     Middle East & North         
       Africa                    769         604      1,943
     South America             7,031       7,349      6,739
     Other                     3,440       2,236      3,333
------------------------------------------------------------
Total export sales          $ 24,847     $23,602    $25,014
============================================================



No one customer accounted for 10% or more of consolidated sales in 1998, 1997 or
1996.

Note 12  Pension Plans and Other Postretirement Benefits  

The  Company  and  its   subsidiaries   have  various   pension  plans  covering
substantially  all of their  employees.  Benefits  under these pension plans for
substantially all U.S.  employees ceased to accrue on January 31, 1999, when the
Company froze  benefits  under its primary  pension plan. At the same time,  the
Company  increased the length of service  credit for the pension plan by 20% and
enhanced  its  401k  plan.  Curtailment  of  the  pension  plan  resulted  in  a
curtailment gain of $6.5 million, while the increased length of service resulted
in a loss of $4.9 million.  Both changes were  contemplated  at acquisition  and
have been recorded as purchase accounting adjustments.

It is the general  policy of the Company to fund its pension plans in conformity
with requirements of applicable laws and regulations.  Net Periodic pension cost
was $0.7 million in 1998,  $3.8  million in 1997 and $4.3  million in 1996,  and
includes  amortization of prior service cost and transition  amounts for periods
of 5 to 15 years.  The 1998,  1997 and 1996 expense  includes  costs  related to
retained pension liabilities of discontinued operations.

In addition to providing pension  benefits,  the Company provides certain health
care and life  insurance  benefits  for certain  retired  union  employees.  The
Company's  unionized  retiree  benefits  are  determined  by their  individually
negotiated  contracts.  The Company's  contribution  toward the full cost of the
benefits is based on the retiree's age and continuous unbroken length of service
with the Company. The Company's policy is to pay the cost of medical benefits as
claims are incurred. Life insurance costs are paid as insured premiums are due.

For 1997, amounts related to pre-Acquisition and post-Acquisition  have not been
separated due to materiality and practicality.


                           Pension Benefits   Other Benefits
---------------------------------------------------------------
Year Ended December 31
(Dollars in thousands)      1998     1997      1998     1997
---------------------------------------------------------------

Change in benefit obligation:
Benefit obligation at    
  beginning of year       $208,778  $213,011   $9,345  $10,210
Service cost                 2,190     2,561        9        9
Interest cost               15,169    14,186      674      725
Amendments                     241       ---       85      ---
Actuarial loss (gain)       13,420     6,002    1,027     (463)
Purchase accounting &
  Instrumentation            
  business sale             (7,292)  (9,616)      ---      ---
Benefits paid              (13,432) (17,366)  (1,136)   (1,136)
---------------------------------------------------------------
Benefit obligation at     
  end of year             $219,638  $208,778  $10,004   $9,345
---------------------------------------------------------------

Change in plan assets:
Fair value of plan
  assets at beginning of   
  Year                    $201,638  $197,689      ---      ---
Actual return on plan       
  assets                    25,424    26,242      ---      ---
Employer contribution          830     2,262      ---      ---
Benefits paid              (13,150) (13,595)      ---      ---
Instrumentation business    
  sale                         ---  (10,960)      ---      ---
---------------------------------------------------------------
Fair value of plan       
  assets at end of year   $214,742  $201,638      ---      ---
---------------------------------------------------------------

Funded status             $ (4,896) $(7,140) $(10,004) $(9,345)
Unrecognized actuarial loss   (340)     ---       508      ---
Unrecognized prior             
  service cost                  55      ---        85      ---
----------------------------------------------------------------
Accrued benefit cost      $ (5,181) $(7,140) $ (9,411) $(9,345)
================================================================

                           Pension Benefits   Other Benefits
---------------------------------------------------------------
Year Ended December 31
(Dollars in thousands)      1998     1997      1998     1997
---------------------------------------------------------------
Discount rate                6.75%      7.5%    6.75%    7.25%
Expected return on plan      
  assets                      9.0%      9.0%      ---      ---
Rate of compensation        
  increase                    5.3%      5.3%      ---      ---

For measurement purposes, a 5% annual rate of increase in the per capita cost of
covered health care benefits was assumed for 1999 and in all future years.



                           Pension Benefits   Other Benefits
---------------------------------------------------------------
Year Ended December 31
(Dollars in thousands)      1998     1997      1998     1997
---------------------------------------------------------------
Components of net periodic benefit cost:
Service cost                $2,367    $2,738       $9       $9
Interest cost               15,169    14,711      674      725
Expected return on plan    
  assets                   (16,834)  (25,678)     ---      ---
Amortization of prior          
  service cost                  (8)   11,689      ---     (652)
Curtailment                    ---       369      ---      ---
===============================================================
Net periodic benefit cost     $694    $3,829     $683      $82
===============================================================

The projected benefit obligation, accumulated benefit obligation, and fair value
of plan assets for the pension  plan with  accumulated  benefit  obligations  in
excess of plan assets were $203.4  million,  $203.4 million and $197.8  million,
respectively,  as of December 31, 1998, and $7.8 million,  $7.4 million and $4.8
million, respectively, as of December 31, 1997.

Assumed  health care cost trend rates have a  significant  effect on the amounts
reported  for the health  care plan.  A  one-percentage-point  change in assumed
health care cost trend rates would have the following effects:

                         1-Percentage       1-Percentage
(Dollars in thousands)    Point Increase     Point Decrease
-------------------------------------------------------------
Effect on total of
  service and interest             
  cost components                  $54              ($46)
Effect on the 
  postretirement benefit      
  Obligation                      $744             ($640)


Plan assets at December 31, 1998 are invested in fixed  income  investments  and
equity  securities  whose values are subject to  fluctuations  of the securities
market.

The Company  maintains a defined  contribution  plan covering  substantially all
domestic, non-union employees.  Eligible employees may generally contribute from
1% to 15% of their compensation on a pre-tax basis. Company contributions to the
plan  are  based  on  25%  of  the  first  6%  of  each  participant's   pre-tax
contribution. The Company's expense for 1998, 1997 and 1996 was $.4 million, $.6
million and $.7  million,  respectively.  Effective  February  1, 1999,  company
contributions  are  based on 50% of the first 6% of each  participant's  pre-tax
contribution.  Effective  January 1, 1999, the company will contribute 3% of all
employees' salary (including  non-contribution plan participants) to the defined
contribution plan.


Note 13  Leases

The Company leases certain manufacturing and office facilities,  equipment,  and
automobiles  under long-term  leases.  Future minimum rental  payments  required
under operating  leases of continuing  operations that have initial or remaining
noncancelable lease terms in excess of one year, as of December 31, 1998, are:

 (Dollars in thousands)
------------------------------------------------------------
1999                                                $ 3,686
2000                                                  2,779
2001                                                  2,383
2002                                                  1,890
2003                                                  1,528
Thereafter                                            3,265
------------------------------------------------------------

Total minimum lease payments                       $ 15,531
============================================================

Total  rental  expense  under  operating   leases  charged  against   continuing
operations  was $7.3  million in 1998,  $7.8 million in 1997 and $7.2 million in
1996.

Note 14  Foreign Exchange Contracts

The Company  periodically enters into foreign exchange contracts for purposes of
hedging its  exposure to foreign  currency  exchange  rate  fluctuations.  These
contracts  hedge  firm  commitments  between  the  Swedish  Krona and the German
Deutschmark and the United States Dollar.  At December 31, 1998, the Company had
foreign currency  contracts with notional amounts  totaling  approximately  $2.4
million with various  expiration  dates through  September  1999.  The amount of
deferred gain or loss associated with these contracts is not material.

All foreign  currency  derivative  agreements are with major  commercial  banks;
therefore the risk of credit loss from nonperformance by the banks is considered
by management to be minimal.  The Company  evaluates its exposure to credit loss
on an ongoing basis.

Note 15   Contingencies

The Company and one of its  subsidiaries are two of a large number of defendants
in a number of lawsuits brought in various  jurisdictions by approximately 7,000
claimants who allege injury caused by exposure to asbestos. Although neither the
Company nor any of its  subsidiaries has ever been a producer or direct supplier
of asbestos,  it is alleged that the industrial and marine  products sold by the
Company and the subsidiary named in such complaints  contained  components which
contained  asbestos.  Suits  against the Company  and its  subsidiary  have been
tendered to their insurers,  who are defending under their stated reservation of
rights. In addition, the Company and the subsidiary are named in cases involving
approximately  30,000 claimants which were  "administratively  dismissed" by the
U.S.  District Court for the Eastern District of  Pennsylvania.  Cases that have
been  "administratively  dismissed" may be reinstated only upon a showing to the
Court that (i) there is satisfactory evidence of an asbestos-related injury; and
(ii) there is probative  evidence  that the plaintiff was exposed to products or
equipment  supplied  by each  individual  defendant  in the  case.  The  Company
believes that it has adequate insurance coverage or has established  appropriate
reserves to cover potential liabilities related to these cases.

The Company is a defendant in a lawsuit  brought in the United  States  District
Court  for the  District  of New  Jersey  alleging  failure  in  performance  of
equipment sold in 1986 by the Company's  former Delavel  Turbine  division.  The
complaint  seeks  damages in excess of $12 million.  The Company  believes  that
there are legal and  factual  defenses  to the claim and  intends  to defend the
action vigorously.

The  Company  was a defendant  in a lawsuit in the U.S.  District  Court for the
Western District of Pennsylvania,  which alleged component failures in equipment
sold by its former  diesel engine  division.  The  complaint  sought  damages of
approximately  $3 million.  On  September  30, 1997 the Court  granted a summary
judgment  motion filed by the Company  which  effectively  dismissed  all claims
against it. Plaintiffs have appealed this judgment to the United States Court of
Appeals for the Third Circuit.

The Company is a defendant  in a lawsuit in the  Circuit  Court of Cook  County,
Illinois alleging performance  shortfalls in products delivered by the Company's
former  Delaval  Turbine  Division  and  claiming  damages of  approximately  $8
million.  To date the Court has  granted a series of  Summary  Judgment  motions
filed by the Company which have significantly reduced the scope of damages which
the  Plaintiff  may claim but has  permitted  additional  discovery to determine
whether any other  damages  exist which  plaintiff  may be entitled to seek at a
trial, but the Company believes that there are legal and factual defenses to the
claims and intends to defend the action vigorously.

On June 3, 1997 the Company was served with a complaint in a case brought in the
Superior Court of New Jersey which alleges damages in excess of $10 million plus
interest  incurred  as a  result  of  losses  under a  Government  Contract  Bid
transferred in connection with the sale of the Company's former  Electro-Optical
Systems business. The Electro-Optical Systems business was sold in a transaction
that closed on June 2, 1995. The sales contract provided certain representations
and  warranties  as to the  status  of the  business  at the time of  sale.  The
complaint  alleges that the Company  failed to provide  notice of a  "reasonably
anticipated  loss" under a bid that was  pending at the time of the  transfer of
the business  and  therefore a  representation  was  breached.  The contract was
subsequently awarded to the Company's Varo subsidiary and thereafter transferred
to the buyer. The case is in the preliminary  stages of pleading but the Company
believes that there are legal and factual  defenses to the claims and intends to
defend the action vigorously.

The operations of the Company,  like those of other companies engaged in similar
businesses, involve the use, disposal and clean up of substances regulated under
environmental  protection  laws.  In a number of instances  the Company has been
identified  as  a  Potentially  Responsible  Party  by  the  U.S.  Environmental
Protection Agency, and in one instance by the State of Washington,  with respect
to the disposal of  hazardous  wastes at a number of  facilities  that have been
targeted for clean-up  pursuant to CERCLA or similar state law.  Similarly,  the
Company has received notice that it is one of a number of defendants named in an
action filed in the United States District Court,  for the Southern  District of
Ohio Western  Division by a group of plaintiffs who are attempting to allocate a
share of cleanup  costs,  for which they are  responsible,  to a large number of
additional  parties,  including the Company.  Although CERCLA and  corresponding
state  law  liability  is joint  and  several,  the  Company  believes  that its
liability will not have a material adverse effect on the financial  condition of
the Company  since it  believes  that it either  qualifies  as a de minimis or a
minor  contributor  at each site.  Accordingly,  the Company  believes  that the
portion  of  remediation  costs  that it will be  responsible  for  will  not be
material.

The Company is also involved in various other pending legal proceedings  arising
out of the  ordinary  course  of the  Company's  business.  None of these  legal
proceedings  is  expected  to have a material  adverse  effect on the  financial
condition of the Company.  With respect to these  proceedings and the litigation
and claims  described in the  preceding  paragraphs,  management  of the Company
believes that it either will  prevail,  has adequate  insurance  coverage or has
established appropriate reserves to cover potential liabilities. There can be no
assurance,  however, as to the ultimate outcome of any of these matters,  and if
all or  substantially  all of  these  legal  proceedings  were to be  determined
adversely  to the  Company,  there  could be a  material  adverse  effect on the
financial condition of the Company.

The Company is self-insured  for a portion of its product  liability and certain
other liability  exposures.  Depending on the nature of the liability claim, and
with certain exceptions, the Company's maximum self-insured exposure ranges from
$250,000 to $500,000 per claim with certain maximum  aggregate policy limits per
claim year. With respect to the exceptions,  which relate  principally to diesel
and turbine units sold before 1991, the Company's maximum self-insured  exposure
is $5 million per claim.



                 Report of Independent Public Accountants


To the Shareholders and Board of Directors of
Imo Industries Inc.:

We have audited the accompanying  consolidated  balance sheets of Imo Industries
Inc. (a Delaware corporation) and subsidiaries as of December 31, 1998 and 1997,
and the related  consolidated  statements  of income and  comprehensive  income,
shareholders'  equity and cash flows for the year ended  December 31, 1998,  and
for  the   periods   from   August  29,   1997,   through   December   31,  1997
(post-Acquisition),   and  from  January  1,  1997,   through  August  28,  1997
(pre-Acquisition.)  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 an audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement.  An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements.  An audit also includes
assessing the  accounting  principles  used and  significant  estimates  made by
management,  as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated  financial statements referred to above present
fairly, in all material respects,  the financial position of Imo Industries Inc.
and  subsidiaries  as of December  31,  1998 and 1997,  and the results of their
operations  and their cash flows for the year ended  December 31, 1998,  and for
the periods from August 29, 1997, through December 31, 1997  (post-Acquisition),
and from  January  1,  1997,  through  August  28,  1997  (pre-Acquisition),  in
conformity with generally accepted accounting principles.


                                             ARTHUR ANDERSEN LLP



Richmond, Virginia
March 5, 1999





          Report of Independent Public Accountants on Schedule II



To the Shareholders and Board of Directors of
Imo Industries Inc.:

We have audited in accordance  with generally  accepted  auditing  standards the
consolidated financial statements included in the Form 10-K Annual Report of Imo
Industries  Inc. (a Delaware  corporation)  and  subsidiaries as of December 31,
1998 and 1997,  and for the year ended  December 31,  1998,  and for the periods
from August 29, 1997,  through  December 31, 1997  (post-Acquisition),  and from
January 1, 1997, through August 28, 1997 (pre-Acquisition),  and have issued our
report  thereon  dated  March 5, 1999.  Our audits  were made for the purpose of
forming an opinion on the basic  consolidated  financial  statements  taken as a
whole.  Schedule II filed as a part of the Company's  Form 10-K Annual Report is
the responsibility of the Company's  management and is presented for purposes of
complying with the Securities and Exchange  Commission's rules and is not a part
of the basic consolidated financial statements. This schedule has been subjected
to the  auditing  procedures  applied  in the  audit of the  basic  consolidated
financial  statements  and,  in our  opinion,  fairly  states,  in all  material
respects, the financial data required to be set forth therein in relation to the
basic consolidated financial statements taken as a whole.


                                             ARTHUR ANDERSEN LLP



Richmond, Virginia
March 5, 1999






                         REPORT OF INDEPENDENT AUDITORS


Board of  Directors
Imo  Industries  Inc.

We have audited the consolidated  statement of income,  shareholders equity and
cash flows of Imo Industries Inc. and  subsidiaries  for the year ended December
31, 1996. Our audit also included the financial statement schedule listed in the
Index at Item  14(a)  for this  same  period.  These  financial  statements  and
schedule are the responsibility of the Company's management.  Our responsibility
is to express an opinion on these financial statements and schedule based on our
audit.

We conducted our audit 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
misstatements. 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 audit  provides a reasonable  basis for our opinion.

In our opinion,  the financial  statements  referred to above present fairly, in
all material respects,  the consolidated results of operations and cash flows of
Imo Industries  Inc. and  subsidiaries  for the year ended December 31, 1996, in
conformity with generally accepted accounting principles.  Also, in our opinion,
the related  financial  statement  schedule,  when considered in relation to the
basic financial statements as a whole,  presents fairly in all material respects
the information set forth therein.


                                             ERNST & YOUNG LLP


Princeton, New Jersey
February 19, 1997, except for Note 3 as to which
the date is February 2, 1998




Imo Industries Inc. and Subsidiaries
Quarterly Financial Information (Unaudited)
Quarterly financial information for 1998 and 1997 is as follows:


                                        1st       2nd      3rd      4th
1998 (Dollars in thousands except    Quarter   Quarter   Quarter   Quarter
per share amounts) (a)

Net Sales                            $ 83,031  $81,084  $75,464    $ 69,291
                                                 
Gross profit                           26,745   26,447   24,047      23,052
Income (loss)from continuing
  operations before extraordinary item  3,324    3,842    3,772         (45)
Extraordinary Item                     (5,603)     ---   (1,114)      1,494
Net income (loss)                      (2,279)   3,842    2,658       1,449


                                                   Pre-Acquis. Post-Acquis.
                                                       July    August
                                                       1,      29,
                                       1st      2nd    1997 to 1997 to     4th
                                     Quarter  Quarter  August  September Quarter
                                                       28,     30,
                                                       1997    1997


1997 (Dollars in thousands except
per share amounts) (a)

Net Sales                            $ 78,927  $81,305  $49,919  $26,816 $79,895
Gross profit                           24,628   25,797    14,450   7,316  22,798
Income (loss) before extraordinary
  item:
     Continuing Operations            (14,328)   1,205   (18,128) (5,717)     28
     Discontinued Operations            1,486    1,224      (338) (8,860)(3,323)
Extraordinary Item                        ---      ---       ---    (287)(3,061)
Net income (loss)                     (12,842)   2,429  (18,466) (14,864)(6,356)
Earnings (loss) per share, basic
  and diluted:
     Before extraordinary item:
          Continuing Operations          (.84)     .07    (1.05)    (.33)   ---
          Discontinued Operations         .09      .07     (.02)    (.52)  (.19)
     Extraordinary Item                   ---      ---       ---    (.02)  (.18)
     Net income (loss)                   (.75)     .14    (1.07)    (.87)  (.37)



(a) The notes to the  consolidated  financial  statements  located in Part IV of
this Form 10-K Report as indexed at Item 14(a)(1) should be read in conjunction
with this summary.

                                   SCHEDULE II
                      IMO INDUSTRIES INC. AND SUBSIDIARIES
                        VALUATION AND QUALIFYING ACCOUNTS
                             (Dollars in thousands)
THREE-YEAR PERIOD ENDED DECEMBER 31, 1998
--------------------------------------------------------------------------------

                                             ADDITIONS
                              BALANCE   -------------------
                               AT      CHARGED                           BALANCE
                            BEGINNING  TO COSTS  OTHER -     DEDUCTIONS   AT END
                             OF YEAR   EXPENSES  DESCRIBE   - DESCRIBE   OF YEAR
                                         
YEAR ENDED DECEMBER 31, 1998:
Allowance for doubtful      $ 1,435   $ (158)   $   3   (2)   $  229 (3)  $1,058
 accounts                                                        (7) (1)
                           ========  ========  ========    ========     ========
Inventory valuation         $ 9,508    $  974   $   53  (2)  $ 3,249 (5)  $7,222
  allowance                                                       64 (1)
                           ========  ========  ========    ========     ========
Valuation allowance for    
  deferred  tax assets      $53,257                          $51,537 (7)  $1,720
                           ========  ========  ========    ========     ========
Accrued product warranty    $ 1,844   $ 1,224   $   46       $ 1,691 (4)  $1,423
liability                                        

                           ========  ========  ========    ========     ========

YEAR ENDED DECEMBER 31, 1997:
Allowance for doubtful       
  accounts                   $1,346   $ 1,813   $   32  (2)   $ 295  (3)  $1,435
                                                                 55  (1)
                                                              1,406  (6)
                           ========  ========  ========    ========     ========
Inventory valuation          $9,929   $13,418    $ 360  (2)  $3,613  (5)  $9,508
  allowance                                                     382  (1)
                                                             10,204  (6)
                           ========  ========  ========    ========     ========
Valuation allowance for   
  deferred tax assets       $44,065    $9,192    $  ---      $  ---      $53,257
                           ========  ========  ========    ========     ========
Accrued product warranty     $2,007    $1,815    $  ---       $  28  (1)  $1,844
  liability                                                   1,950  (4)
                           ========  ========  ========    ========     ========

YEAR ENDED DECEMBER 31, 1996:
Allowance for doubtful       
  accounts                   $1,507     $ 252     $  19 (2)   $ 398  (3)  $1,346
                                                                 34  (1)
                           ========  ========  ========    ========     ========
Inventory valuation         
  allowance                  $9,560    $1,136     $ 305 (2)  $1,213  (5)  $9,929
                                                    141 (1)   
                           ========  ========  ========    ========     ========
Valuation allowance for    
  deferred tax assets       $31,675   $12,390    $  ---     $  ---       $44,065
                           ========  ========  ========    ========     ========
Accrued product warranty     $2,159    $2,473    $  ---      $2,458  (4)  $2,007
  liability                                                     143  (2)
                                                                 24  (1)
                           ========  ========  ========    ========     ========



(1) Foreign exchange adjustments.
(2) Reclassifications and adjustments.
(3) Uncollectible accounts written off, net of recoveries.
(4) Product warranty claims honored during the year.
(5) Charges against inventory valuation account during the year. deferred tax
    benefits
(6) In conjunction with the acquisition of the Company and purchase accounting
    adjustments as of August 28, 1997, the reserves were reset to zero.
(7) True up balances and reduce valuation reserve due to management's belief
    that it is more likely than not that deferred tax benefits will be utilized
    in the future.