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, 1997
                                       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:


                                              Name of each exchange on
     Title of each class                        which registered

   Common Stock, $1.00 par value              New York Stock Exchange

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.( )

  Aggregate  market value of the voting  stock held by  non-affiliates of the
Registrant computed by reference to the closing price of such stock on the New
York Stock Exchange, Inc. on March 24, 1998......................$8,171,376

Shares of Registrant's common stock, $1.00 par value, outstanding as of
March 24, 1998 ..................................................17,127,859

                   DOCUMENTS INCORPORATED BY REFERENCE
Identification of Documents          Part into which Incorporated
           None


                    TABLE OF CONTENTS
                          PART I
Item

1.      Business
                General
                History
                Industry Segments
                Discontinued Operations
                Restructuring  Plans  and  Cost  Reduction Programs
                Competition
                Product Distribution and Customers
                Backlog
                Raw Materials
                Patents, Licenses and Trademarks
                Research and Development
                Environmental Matters
                Seasonality
                Working Capital
                Employees
2.      Properties
3.      Legal Proceedings
4.      Submission of Matters to a Vote of Security Holders

                         PART II

5.      Market for the Registrant's Common Equity
             and Related Stockholder Matters
6.      Selected Financial Data
7.      Management's Discussion and Analysis of
             Financial Condition and Results of Operations
7A.     Quantitative and Qualitative Disclosures about
             Market Risk
8.      Financial Statements and Supplementary Data
9.      Changes in and Disagreements with Accountants
             on Accounting and Financial Disclosure

                         PART III

10.     Directors and Executive Officers of the Registrant
11.     Executive Compensation
12.     Security Ownership of Certain Beneficial Owners
             and Management
13.     Certain Relationships and Related Transactions

                         PART IV

14.     Exhibits, Financial Statement Schedules and
             Reports on Form 8-K
Exhibit Index
Signatures








                                     PART I

Item 1. Business.


General

Imo  Industries  Inc.  (hereinafter  with its  subsidiaries  referred  to as the
"Company") is an integrated  multinational  industrial  manufacturer  of a broad
range of engineered  industrial  products through its three business  segments -
Power  Transmission,  Pumps,  and Morse  Controls.  The  Company's  products are
designed to regulate  and control  motion,  and  transfer  liquids.  The Company
markets its  products  on a  worldwide  basis to a diverse  customer  base.  The
Company's three business segments are as follows:

The  Power  Transmission   business  segment  designs  and  produces  electronic
adjustable-speed motor drives, gears and speed reducers.

The Pumps business  segment  designs and produces a broad range of rotary pumps,
including a proprietary line of two and three-screw pumps.

The Morse Controls  business  segment  designs and produces  push-pull cable and
remote control systems.

The  Company's   Roltra-Morse   business,   along  with  its   previously   sold
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 Turbomachinery and most of its
Electro-Optical Systems businesses in 1995. The remainder of the Electro-Optical
Systems business and the Instrumentation business were sold in 1997. On February
2, 1998, the Company announced that it had entered into an agreement to sell its
Roltra-Morse  business.  The  Company  completed  the  sale of its  Roltra-Morse
business on February 27, 1998.  Previously  reported  financial  information has
been  reclassified  to reflect the  Roltra-Morse  and  Instrumentation  business
segments as discontinued operations.

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 as a publicly traded company.

On  August  28,  1997,  II  Acquisition  Corp.  ("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.  This  transaction  was the final  outcome  of the
program  announced  by the Company on March 21,  1997,  pursuant to which it had
retained an investment  banking firm to help it explore strategic  alternatives,
including the possibility of a merger or sale of the Company.

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.

Power Transmission
The Power  Transmission  business  segment  produces  speed  reducers  and loose
gearing that are  recognized as leading  products in their market  niches.  This
segment is comprised of two units:  Boston Gear, a leading producer of gears and
speed reducers,  and Fincor Electronics,  a producer of  adjustable-speed  motor
controllers. 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.

Pumps
The Pumps business segment is the largest worldwide manufacturer of rotary screw
pumps. The three businesses that comprise the Pumps 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.

Morse Controls
The Morse  Controls  business  segment is a leading  worldwide  manufacturer  of
precision  mechanical  and  electronic  control  products  and systems  that are
primarily used for pleasure  marine and industrial  vehicle  applications.  This
segment produces, among other products, push-pull cable and control systems 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  announced  that the Board of
Directors  had  approved  plans to sell  its  Instrumentation  and  Roltra-Morse
businesses,  respectively. In 1995, the Company sold its Turbomachinery and most
of its  Electro-Optical  Systems  businesses,  which sales were  approved by the
Board  of  Directors  in  August  1994 and in  January  1994,  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 $30.7 million, subject to final
adjustment.  Roltra-Morse  retained  $18.4  million of its debt.  The sale price
approximated the recorded net book value of the business. Net proceeds were used
to reduce  domestic  senior  debt.  This  transaction  will be  reflected in the
Company's financial statements in the first quarter of 1998.

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 after the  Acquisition.  Net cash proceeds were
used to reduce domestic senior debt.

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.

Turbomachinery
On January 17, 1995, the Company  completed the sale of its Delaval  Turbine and
TurboCare divisions and its 50% interest in the Dutch partnership Delaval-Stork,
to Mannesmann  Demag.  The final adjusted  purchase  price was $119 million,  of
which $109 million was received at closing,  with the remainder earning interest
to the Company and to be received at specified  future contract dates subject to
adjustment as provided in the sale  agreement.  It is  management's  expectation
that there will be no further adjustment to the purchase price. A portion of the
proceeds  was used by the  Company to pay off its  domestic  senior debt and the
Company redeemed $40 million of its then outstanding 12.25% senior  subordinated
debentures with the remainder of the proceeds.

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

Restructuring Plans and Cost Reduction Programs

Asset Sales
Since the fourth quarter of 1992, the Company has implemented  several  programs
in an  effort  to  de-lever  its  balance  sheet  through  the  sale of  certain
businesses  and  non-operating  real estate and the  application of the proceeds
from such divestitures to reduce outstanding indebtedness.  The Company divested
its Heim Bearings,  Aerospace, and Barksdale Controls businesses in 1993 and its
CEC  Instruments  business in 1994, and sold certain of its  non-operating  real
estate in 1996.  The proceeds from these sales,  net of related  expenses,  were
used to repay  senior debt in the amounts of $81.9  million,  $13.2  million and
$8.6 million in 1993, 1994 and 1996, respectively.

In  connection  with a strategy  adopted in late 1993,  to focus on less capital
intensive  businesses  that  exhibited  strong brand name  recognition,  a broad
customer base and market  leadership  with less  dependence  on U.S.  Government
sales, the Company divested its Turbomachinery  and most of its  Electro-Optical
Systems businesses during 1995. The Company had planned to sell its Roltra-Morse
business in 1996, but was not successful, and withdrew Roltra-Morse from sale in
late 1996. Under the new management  subsequent to the Acquisition,  the Company
successfully  completed  the  sales  of  its  Instrumentation  and  Roltra-Morse
business  segments.  See discussion of these completed sales in the Discontinued
Operations section above.

In 1997, the Company also completed sales of certain of its  non-operating  real
estate for total  proceeds,  net of related  expenses,  of  approximately  $14.1
million. Net proceeds were used to repay domestic senior debt.

Since the  completion  of the sale of the  Roltra-Morse  business in February of
1998 as discussed in the Discontinued  Operations section above, the Company has
substantially  completed its asset sale program.  The only remaining assets held
for  sale  are  certain  non-operating  real  estate  with a net  book  value of
approximately $1 million,  which amount approximates the fair market value, less
costs to sell.  The Company  targets  completion of these sales over the next 12
months.

Cost Reduction Programs
1997 Cost Reduction Program.  In connection with the Acquisition,  the Company's
new management implemented a cost reduction program. The cost of this program is
estimated  to be  $18.6  million  and was  accrued  for in  accordance  with the
purchase  method of  accounting.  The cost is comprised of estimates  related to
severance and termination  benefits resulting from headcount  reductions and the
consolidation of certain manufacturing facilities.

The 1997 cost reduction  program reduced expenses by approximately $3 million in
the 1997 period subsequent to the Acquisition and is expected to reduce expenses
by  approximately  $19 million in 1998 and  approximately  $20 million  annually
thereafter.  This program includes a reduction of 237 employees, or 10.3% of the
total number of Company  employees in  continuing  operations at the date of the
Acquisition.  The required cash outlay  related to this program was $8.1 million
in 1997 and the expected cash requirements during 1998 are $10.5 million.

1996  Program.  The  fourth  quarter  of 1996  includes  a charge to  continuing
operations  of $.3 million for  restructuring  measures  taken at the  Company's
Morse German operation to further reduce operating expenses,  as an extension of
its 1995 program (see 1995 Program  below).  The required cash outlay related to
this program was $.3 million in 1996.

1995 Program.  In the fourth quarter of 1995,  the Company  recorded a charge to
continuing  operations of $3.1 million,  including  severance and other expenses
related to a Company-wide  program to reduce general and  administrative  costs.
This program reduced general and administrative  expenses from the 1995 level by
approximately $2.7 million and $3.2 million in 1996 and 1997, respectively.  The
required  cash outlays  related to this program were $.4 million,  $2.4 million,
and $.3 million in 1995, 1996 and 1997, respectively.

See "Recent  Events,"  "Restructuring  Plans and Cost  Reduction  Programs"  and
"Liquidity  and Capital  Resources"  sections of  "Management's  Discussion  and
Analysis of Financial  Condition and Results of  Operations" in Part II, Item 7,
and Note 4 to the  Consolidated  Financial  Statements  for  additional  details
regarding the asset divestiture and restructuring programs.

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  1997,   sales  by  the  Company's  direct  sales  forces  were
approximately  29%,  79% and 88% of the  Power  Transmission,  Pumps  and  Morse
Controls 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 1997, 1996 or 1995.

Backlog

The Company's continuing  operations' backlog of unfilled orders at February 28,
1998 and 1997, and at December 31, 1997, 1996 and 1995, by business segment, was
as follows:

                           February 28,            December 31,
                          1998      1997      1997      1996     1995
                                  (Dollars in millions)

Power Transmission      $  8.3    $  8.2    $  7.8    $  7.7   $  8.5
Pumps                     34.0      37.9      29.5      33.3     35.3
Morse Controls            24.2      21.8      24.0      21.3     21.9
                          ----     -----      ----      ----     ----
                        $ 66.5    $ 67.9    $ 61.3    $ 62.3   $ 65.7
                        ======    ======    ======    ======   ======

Backlog is considered significant only to the Warren Pumps business of the Pumps
segment,  given that the products of that operation  require long lead times for
manufacture.  Of the total  backlog from  continuing  operations at December 31,
1997, the Company believes that all but approximately $2.5 million of its orders
will be filled in 1998.

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.

Following  the  removal  of the  distinctive  modifier  "Transamerica"  from the
corporate name prior to the  Distribution,  the Company changed its name to "Imo
Delaval Inc." in 1986 and to "Imo Industries Inc." in 1989. The Company's use of
the  name  "Delaval"  is  restricted  as a result  of a  contract  by which  the
Company's  assets were  acquired from their former  Swedish owner  preceding the
acquisition  of the  Company by  Transamerica.  In  January  1995,  the  Company
transferred  its rights to use the  "Delaval"  name in  connection  with certain
products  of the  Turbomachinery  segment  to  Mannesmann  Demag  as part of the
divestiture of its Turbomachinery business.

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 1997, 1996
and 1995 by business segment were as follows:






                                  Year Ended December 31,
                                1997        1996        1995
                                ----        ----        ----
                                   (Dollars in millions)

Power Transmission             $  .6       $  .6       $  .7
Pumps                            2.1         2.1         1.5
Morse Controls                   2.8         1.7         1.7
                                 ---         ---         ---
                                $5.5       $ 4.4       $ 3.9
                                ====       =====       =====


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 by the New Jersey Department of
Environmental  Protection  and  Energy  (the  "NJ  DEP").  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 NJ DEP 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.

Working Capital

Working  capital at  December  31, 1997 was $18.7  million,  a decrease of $25.5
million  from  the end of 1996,  due  principally  to the sale of the  Company's
Instrumentation and its remaining  Electro-Optical  Systems business, and to the
additional  liabilities recorded in conjunction with the Acquisition.  The ratio
of current assets to current  liabilities was 1.2 at December 31, 1997, compared
with 1.5 at December  31,  1996.  The  Company's  total debt as a percent of its
total  capitalization  decreased to 71.5% at December 31,  1997,  compared  with
125.4% at December 31, 1996, as a result of the accounting  for the  Acquisition
and the reduction in debt with proceeds from the 1997 asset sales.

Employees

At  February  28,  1998,  the  Company  employed   approximately  2,100  persons
worldwide.  Approximately  1,300 persons were employed in the United States, and
approximately 800 persons were employed outside of the United States.  There are
approximately 400 persons worldwide covered by collective  bargaining agreements
with various  unions  expiring in 1998 through 2000.  The Company  considers its
relations with its employees to be satisfactory.


Item 2. Properties.

The location of the Company's manufacturing  facilities at February 28, 1998 are
as follows:

Location                      Product                       Owned/Leased

Power Transmission
Charlotte, North Carolina     Open gearing, shaft           Owned
                              couplings and mounted
                              bearings
Louisburg, North Carolina     Worm gear speed reducers      Owned
York, Pennsylvania            Electronic drives             Owned
Woodbridge, New Jersey(1)     Mechanical and                Leased
                              pneumatic clutches

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

Morse Controls
Hudson, Ohio                  Cables and controls           Owned
Sarasota, Florida             Marine hydraulics             Owned
New Orleans, Louisiana        Replacement marine            Leased
                              engine parts
Basildon, England             Cables and controls           Leased
Heiligenhaus, Germany         Cable, controls and           Owned
                              conveyer products
Paris, France                 Cables and controls           Leased
Marsta, Sweden                Cables and controls           Owned
Singapore                     Cables, controls and          Leased
                              roller chain
Sydney, Australia             Cables and controls           Owned

(1)The  Company  plans to close this  facility  during  fiscal  year  1998,  and
   consolidate  its  clutch  manufacturing  at  the  Charlotte,  North  Carolina
   facility.

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 6,900
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 22,000 claimants,  which in 1996 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  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.

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 Company is one of five  defendants in an action brought in the United States
District  Court  for the  Middle  District  of  Louisiana.  In April  1991,  the
Company's former Deltex division performed a repair of a turbine.  Following the
repair,  the turbine was included in a spare parts pool until January 1995.  The
plaintiff  alleges  that  following   installation  in  its  plant  the  turbine
experienced  severe  vibrations  requiring  the  turbine  to be run at less than
optimal speed. They further allege that the shortfall in performance caused them
to incur repair costs, and  consequential  damages in excess of $5 million.  The
lawsuit is in the early  discovery  stage;  however,  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.

See Note 15 to the Consolidated  Financial Statements located in Part IV of this
Form 10-K Report as indexed at Item 14(a)(1) for additional  details relating to
Contingencies.



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

No matter was submitted to a vote of the Company's  security  holders during the
fourth quarter of 1997.



                                   PART II

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

The Company's  common stock (the "Common Stock") is listed on the New York Stock
Exchange  (stock symbol IMD). The following  table sets forth,  for the quarters
indicated,  the high and low  closing  price per share for the  Common  Stock as
reported on the New York Stock Exchange Composite Tape.


                           High      Low

1996:
1st Quarter                 7-5/8   5-3/4
2nd Quarter                 8-1/8   5-3/8
3rd Quarter                 5-7/8   4-7/8
4th Quarter                 5-1/2   2-3/4

1997:
1st Quarter                 3-7/8   2-7/8
2nd Quarter                 5-7/8   2-3/4
3rd Quarter                 7       5-13/16
4th Quarter                 6-1/4   4-1/2

1998:
1st Quarter               6-11/16   4-1/2
  (through March 24, 1998)


The last sale price for the  Company's  Common Stock as reported by the New York
Stock Exchange on March 24, 1998, was $6-11/16 per share.  As of March 24, 1998,
there were 12,978 shareholders of record of the Company's Common Stock.

The  Acquisition  reduced the number of shares  traded  publicly and reduced the
number of holders of shares.  On March 16, 1998,  the Company  received a letter
dated March 9, 1998, from the New York Stock Exchange,  Inc. ("NYSE") indicating
the NYSE's  determination  that the Company had fallen below  certain  continued
listing   criteria,   and  that  the  NYSE   was   carefully   considering   the
appropriateness  of the  continued  listing of the Company's  Common Stock.  The
Company is  preparing a response to the NYSE taking the  position  that the NYSE
should maintain the listing of the Company's Common Stock. The Company will seek
to persuade  the NYSE to continue  such  listing,  but there can be no assurance
that the NYSE will not attempt to delist the Company's Common Stock. Even if the
NYSE  maintains  such listing for now, the  Company's  Common Stock may, at some
future time, no longer meet the requirements for the NYSE for continued  listing
and may be delisted from the NYSE and  deregistered  under the provisions of the
Securities  Exchange Act of 1934, as amended (the "Exchange Act"). A decision by
the NYSE to  delist  the  Company's  Common  Stock or  deregistration  under the
Exchange  Act could  adversely  affect the  liquidity  and  market  value of the
remaining shares held by the public.

There were no dividends declared during 1996, 1997 or the first quarter of 1998.
Two of the Company's long-term debt agreements contain,  among other provisions,
a restriction on retained earnings available for payment of dividends. Under the
most  restrictive  provisions the Company is prohibited from declaring or paying
cash  dividends  through  at least  August  29,  2002.  Furthermore,  one of the
long-term debt agreements  contains  restrictions on the declaration and payment
of dividends based upon certain financial ratios through May 1, 2006.

<TABLE>

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

<CAPTION>

                               Post-Acquisi- Pre-Acquisi-
                                tion August  tion January 1,
                                 29, 1997 to   1997 to            Year Ended December 31,
                                   December    August     --------------------------------------
                                    31, 1997   28, 1997      1996*     1995*     1994*    1993*
-----------------------------------------------------------------------------------------------
<S>                                   <C>         <C>      <C>       <C>       <C>      <C>
Net sales                             $106.7      $210.2   $309.5    $297.1    $288.6   $344.1
Gross profit                            30.1        64.9     88.9      84.3      82.8    101.8
Selling, general and
  administrative expenses               21.4        46.7     62.5      60.5      59.9     83.7
Research and development expenses        1.9         3.6      4.5       3.9       3.9      6.7
Unusual items                            5.0        26.3     17.4       8.1       ---     13.4
Income (loss) from continuing
  operations before interest expense,
  income taxes and extraordinary item    2.6       (11.8)     5.6      14.7      20.2      (.8)
Interest expense                         8.1        18.2     26.0      22.6      25.9     28.1
Income (loss) from continuing
  operations before extraordinary item  (5.7)      (31.2)   (33.1)      7.2      (7.4)   (41.9)
Discontinued operations, net of taxes  (12.2)        2.4    (16.8)     27.0      16.6   (210.6)
Extraordinary item                      (3.3)        ---     (8.5)     (4.4)     (5.3)   (18.1)
Net income (loss)                      (21.2)      (28.9)   (58.4)     29.7       3.9   (270.6)
------------------------------------------------------------------------------------------------
Earnings (loss) per share, basic and diluted:
 Continuing operations before
   extraordinary item                   (.33)      (1.82)   (1.93)      .42      (.44)   (2.48)
 Discontinued operations, net of taxes  (.71)        .14    ( .99)     1.58       .98   (12.47)
 Extraordinary item                     (.20)        ---     (.49)     (.26)     (.31)   (1.07)
 Net income (loss)                     (1.24)      (1.68)   (3.41)     1.74       .23   (16.02)
Cash dividends per share                 ---         ---      ---       ---       ---      ---
-----------------------------------------------------------------------------------------------
Capital expenditures                     3.7         4.6     10.0      13.2       4.8      5.3
Depreciation and amortization expense    5.7         8.6     13.4      13.4      17.1     20.5
Working capital                         18.7                 44.1      62.8     135.2    107.1
Total assets:
  Continuing operations                448.4                282.2     306.9     319.4    351.2
  Discontinued operations               14.9                 48.7      58.5     190.9    184.1
      Total assets                     463.3                330.9     365.4     510.3    535.3
Total long-term debt, including
  current portion                      198.4                256.7     226.3     383.2    348.3
Shareholders' equity (deficit)          90.2                (56.4)      3.7     (28.3)   (34.7)
===============================================================================================

(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.

*Restated to conform to 1997 presentation.

</TABLE>


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, 1997,
with the  results  for the years ended  December  31,  1996 and 1995,  are being
presented  on an  historical  basis.  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

Roltra-Morse  Sale: On February 27, 1998, the Company  completed the sale of its
Roltra-Morse  business to Magna  International  Inc. for cash of $30.7  million,
subject to final  adjustment.  Roltra-Morse  retained $18.4 million of its debt.
The sale price  approximated  the recorded net book value of the  business.  The
proceeds  were  used  to  reduce  domestic  senior  debt  by $30  million.  This
transaction will be reflected in the Company's financial statements in the first
quarter of 1998.

The sale of  Roltra-Morse  and the use of the  proceeds  to reduce its  domestic
senior debt  increased the  Company's  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  quarter 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. As a result of the early extinguishment of these Notes,
and a portion of the term loan facility with the proceeds from the  Roltra-Morse
sale,  an  extraordinary  charge of $5.6 million will be recognized in the first
quarter of 1998.

Restructuring Plans and Cost Reduction Programs

Asset Sales
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. The Company used a portion of
the proceeds to reduce domestic senior debt by $68.1 million.

In April 1997,  the Company  completed the sale of its Varo  Electronic  Systems
division to a small defense contractor for $12 million, which was used to reduce
its domestic  senior debt.  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. Net proceeds were used
to repay domestic senior debt.

On  February  27,  1998,  the  Company  successfully  completed  the sale of its
Roltra-Morse business segment. See "Recent Events" above.

Remaining Asset Sales: The completion of the sale of the  Roltra-Morse  business
in February of 1998,  substantially  completes the Company's asset sale program.
The only remaining  assets held for sale are certain  non-operating  real estate
with a net book value of approximately $1 million, which amount approximates the
fair market value,  less costs to sell. The Company targets  completion of these
sales over the next 12 months.

Background:  Since the  fourth  quarter of 1992,  the  Company  has  implemented
several  programs in an effort to de-lever its balance sheet through the sale of
certain businesses and the application of the proceeds from such divestitures to
reduce outstanding indebtedness. Pursuant to this decision, the Company divested
its Heim Bearings,  Aerospace, and Barksdale Controls businesses in 1993 and its
CEC Instruments  business in 1994. In connection with a strategy adopted in late
1993 to focus on less capital  intensive  businesses that exhibited strong brand
name  recognition,  a broad  customer  base  and  market  leadership  with  less
dependence on U.S. Government sales, the Company divested its Turbomachinery and
most of its  Electro-Optical  Systems  businesses  during 1995.  The Company had
planned to sell its Roltra-Morse  business in 1996, but was not successful,  and
withdrew  Roltra-Morse from sale in late 1996. As described above,  Roltra-Morse
was sold in February 1998.

Cost Reduction Programs

1997 Cost Reduction Program.  In connection with the Acquisition,  the Company's
new management implemented a cost reduction program. The cost of this program is
estimated  to be  $18.6  million  and was  accrued  for in  accordance  with the
purchase method of accounting. The cost is comprised of $10.5 million related to
severance  and  termination  benefits,  and other  cost  savings  as a result of
headcount reductions at the Company's corporate headquarters.  In addition, $1.7
million,  $1.2 million and $5.2 million of costs are estimated for the Company's
Power Transmission, Pumps, and Morse Controls segments, respectively, related to
severance and termination  benefits resulting from headcount  reductions and the
consolidation of certain manufacturing facilities.

The 1997 cost reduction  program reduced expenses by approximately $3 million in
the 1997 period subsequent to the Acquisition and is expected to reduce expenses
by  approximately  $19 million in 1998 and  approximately  $20 million  annually
thereafter.  This program includes a reduction of 237 employees, or 10.3% of the
total number of Company  employees in  continuing  operations at the date of the
Acquisition.  The required cash outlay  related to this program was $8.1 million
in 1997 and the expected cash requirements during 1998 are $10.5 million.

1996  Program.  The  fourth  quarter  of 1996  includes  a charge to  continuing
operations  of $.3 million for  restructuring  measures  taken at the  Company's
Morse German operation to further reduce operating expenses,  as an extension of
its 1995 program (see 1995 Program  below).  The required cash outlay related to
this program was $.3 million in 1996.

1995 Program.  In the fourth quarter of 1995,  the Company  recorded a charge to
continuing  operations of $3.1 million,  including  severance and other expenses
related to a Company-wide  program to reduce general and  administrative  costs.
This program  included a reduction of 56 employees,  or 2.4% of the total number
of Company  employees in continuing  operations at the end of 1995,  including a
reduction of the  corporate  headquarters  staff by 20%.  This  program  reduced
general and  administrative  expenses  by  approximately  $2.7  million and $3.2
million in 1996 and 1997, respectively.

Results of Operations

The  Company's   Roltra-Morse   business,   along  with  its   previously   sold
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 three  business  segments for management and
segment reporting purposes: Power Transmission, Pumps, and Morse Controls.

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 3.0%
and 4.6% in the Power  Transmission  and  Pumps  segments,  respectively.  Morse
Controls segment net sales remained flat year over year. See "Segment  Operating
Results" below.

Gross  Profit.  Gross  profit  in 1997  increased  slightly  to 30.0% of sales
compared with 28.7% in 1996. See "Segment Operating Results" below.

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 $.6  million to  previously  recorded  provisions.  See also
discussion  of Pensions  and Retiree  Medical and Life  Insurance  under  "Other
Operating Results" below.

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. Interest expense for continuing
operations  excludes  interest  expense of the  discontinued  operations of $7.4
million in 1997 and $9.1 million in 1996.

Income (Loss) from Continuing Operations. The Company had a loss from continuing
operations of $36.9 million, or $2.15 per share, in 1997, which included unusual
charges of $31.3 million. In 1996, the loss from continuing operations was $33.1
million, or $1.93 per share, which included unusual charges of $17.4 million and
a reversal of a previously  recognized deferred tax benefit of $10 million.  See
"Other Operating  Results" for discussion  regarding Unusual Items and Provision
for Income Taxes.

Income  (Loss)  from  Discontinued  Operations.  The  Company  had a  loss  from
discontinued  operations  of $9.8  million  (net of income  tax  expense  of $.7
million), or $.57 per share, in 1997 as compared to a loss of $16.8 million (net
of income tax expense of $1 million), or $.99 per share, 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 1997,  1996 and 1995  were $ 5.5  million,  $6.5  million  and $5.7  million,
related to the former  Electro-Optical  Systems business, and $3.1 million, $4.1
million and $14.1 million,  related to the former Turbomachinery  business.  The
expected  1998  cash  requirements  for both  the  Electro-Optical  Systems  and
Turbomachinery liabilities, are expected to approximate the 1998 cash inflows.

Net Income  (Loss).  The net loss in 1997 was $50.1 million  compared with a net
loss of $58.4  million  in 1996.  Net loss per share in 1997 was $2.92  compared
with net loss per share of $3.41 in 1996. See "Other Operating Results" below.

1996 Compared to 1995

Sales.  Net sales from  continuing  operations in 1996  increased 4.2% to $309.5
million,  compared with $297.1  million in 1995.  Increases of 14.0% and 4.5% in
the Company's Pumps and Morse Controls  business  segments,  respectively,  were
partially offset by a 5.9% decrease in sales from the Power Transmission segment
compared with 1995. See "Segment Operating Results" below.

Gross  Profit.  The  gross  profit in 1996  remained  relatively  constant  at
28.7% of sales  compared with 28.4% in 1995. See "Segment  Operating  Results"
below.

Selling,   General   and   Administrative   Expenses.   Selling,   general   and
administrative  expenses remained relatively constant at 20.2% of sales in 1996,
compared with 20.3% of sales in 1995. The 1996 period  benefited from a decrease
in expenses of $2.7 million  associated with the cost reduction  program adopted
in the fourth quarter of 1995 and net reductions of  approximately  $1.2 million
to  previously  recorded  provisions.  These  favorable  items were  offset by a
planned  increase  in  1996  in  selling  expenses  in the  Pumps  segment,  and
approximately $1 million in costs  associated with the  unsuccessful  attempt to
sell the  Roltra-Morse  business in 1996.  See also  discussion  of Pensions and
Retiree Medical and Life Insurance under "Other Operating Results" below.

Interest Expense.  Average  borrowings in 1996 were  approximately  $2.8 million
higher than in 1995. Total interest  expense (before  allocation to discontinued
operations)  of $35.1  million in 1996 was $1.3 million,  or 3.6%,  less than in
1995, principally due to the refinancing of the corporate debt at more favorable
interest rates.  Interest expense for continuing  operations  excludes  interest
expense of the discontinued operations of $9.1 million and $13.7 million in 1996
and 1995, respectively.

Income (Loss) from Continuing Operations. The Company had a loss from continuing
operations of $33.1 million, or $1.93 per share, in 1996, which included unusual
charges of $17.4 million and a reversal of a previously  recognized deferred tax
benefit of $10 million.  In 1995,  income from  continuing  operations  was $7.2
million, or $.42 per share, which included unusual charges of $8.1 million and a
deferred  tax  benefit  of  $17  million.  See  "Other  Operating  Results"  for
discussion regarding Unusual Items and Provision for Income Taxes.

Income  (Loss)  from  Discontinued  Operations.  The  Company  had a  loss  from
discontinued  operations  of $16.8  million  (net of income  tax  expense  of $1
million), or $.99 per share, in 1996 as compared to income of $26.9 million (net
of income tax expense of $6.5 million), or $1.58 per share, in 1995.

Operating results from  discontinued  operations were a loss of $8.7 million and
income of $5.4 million in 1996 and 1995,  respectively.  Results from operations
for the discontinued operations include allocations for interest of $4.5 million
in 1996 and $10.3 million in 1995.

The loss on sale of  discontinued  operations of $8.1 million in 1996 represents
charges recorded by the Company in the third and fourth quarters of 1996 related
to changes in  estimates  on legal and other  reserve  requirements  of retained
liabilities  associated  with  its  former  Electro-Optical  and  Turbomachinery
businesses.  The  gain on  sale  of  discontinued  operations  recorded  in 1995
includes an  aggregate  net gain of $21.6  million on the sale of the  Company's
former   Turbomachinery   business   and   substantially   all  of  its   former
Electro-Optical Systems business.

Net Income  (Loss).  The net loss in 1996 was $58.4  million  compared  with net
income of $29.7 million in 1995.  Net loss per share in 1996 was $3.41  compared
with net income per share of $1.74 in 1995.

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 $.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 $.3 million.  There was no required cash outlay
in 1997. The remainder represents non-cash charges.

During the fourth quarter of 1995,  the Company  recognized  unusual  charges of
$8.1 million in income from  continuing  operations.  These charges include $3.1
million in  severance  benefits  and other  expenses  related to a  Company-wide
program to reduce general and administrative costs ($1.5 million included in the
Morse Controls  segment,  and $1.6 million  included in Corporate  Expense).  In
addition,  the unusual  charges  include $5 million related to the write-down of
non-operating  real  estate  to net  realizable  value  (included  in  Corporate
Expense).  Of the $8.1 million of unusual charges,  the required cash outlays in
1995,   1996  and  1997  were  $.4  million,   $2.4  million  and  $.3  million,
respectively. The remainder represents non-cash charges.

Extraordinary  Items.  The twelve  months ended  December  31, 1997,  include an
extraordinary charge of $3.3 million after-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.

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.

The twelve  months ended  December 31, 1995 include an  extraordinary  charge of
$4.4 million after-tax, representing charges related to the early extinguishment
of portions of the  Company's  debt under its previous  credit  facility and its
formerly outstanding 12.25% senior subordinated debentures.

Provision for Income Taxes.  Income tax expense from  continuing  operations was
expense of $1.5  million  for 1997,  expense of $12.7  million  for 1996,  and a
benefit of $15.2 million for 1995.

Income tax expense for the twelve  months  ended  1997,  represents  current tax
expense of $1.5  million for foreign and state income  taxes,  as the Company is
utilizing  existing  U.S. net  operating  loss  carryforwards  with its domestic
earnings.

The net  deferred  tax benefit  currently  recorded at December 31, 1997 is $5.1
million, a level where management  believes that it is more likely than not that
the tax benefit will be realized.  In 1995,  the Company  reduced the  valuation
allowance  applied against the net operating loss  carryforwards  by $17 million
based upon  reasonable  and prudent tax planning  strategies  and future  income
projections  including  the  planned  sale  of  Roltra-Morse.  As  a  result  of
withdrawing  Roltra-Morse from sale in 1996, the Company recorded a provision of
$10 million  against  deferred tax benefits  previously  recognized  based on an
anticipated  taxable gain on this sale. This reduced the deferred tax benefit to
$5.3 million at December 31, 1996, to a level where management  believed that it
was more  likely  than not that the tax  benefit  would be  realized.  The total
amount of future  taxable  income in the U.S.  necessary to realize the asset is
approximately  $14.5  million.  The  Company  expects to  generate  this  income
principally through the sale of the Roltra-Morse  business completed in February
1998.  See "Recent  Events"  above.  Although the Company has a history of prior
losses,  these losses were  primarily  attributable  to divested  businesses and
unusual  items.  The  remaining  valuation  allowance  is  necessary  due to the
uncertainty of future income estimates.

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 Company has net operating loss  carryforwards of approximately  $101 million
expiring in years 2002 through  2011,  and minimum tax credits of  approximately
$2.8 million,  which may be carried  forward  indefinitely.  Included in the net
operating  loss  carryforwards  are foreign tax  credits of  approximately  $7.4
million,  expiring through 2001, which for financial and tax reporting purposes,
are reflected as deductible foreign taxes. 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 $.9 million.

The year ended  December 31, 1996  includes  current tax expense of $2.7 million
representing  foreign  and  state  income  taxes.  Additionally,  as a result of
withdrawing  Roltra-Morse from sale in 1996, the Company recorded a provision of
$10 million  against  deferred tax benefits  previously  recognized  based on an
anticipated gain on this sale.

The 1995  amount  includes  current  tax  expense of $1.8  million  representing
foreign and state income  taxes,  as the Company is utilizing  existing U.S. net
operating loss carryforwards on its domestic earnings.  This amount is offset by
a deferred tax benefit in 1995 of $17 million,  representing a reduction,  taken
when  Roltra-Morse  was  approved  to be held  for  sale,  in the  deferred  tax
valuation allowance against U.S. net operating loss carryforwards.

Pensions  and Retiree  Medical and Life  Insurance.  In March 1994,  the Company
amended its policy  regarding  retiree  medical and life insurance  plans.  This
amendment,  which affects some current retirees and all future retirees,  phased
out the  Company  subsidy  for  retiree  medical  and  life  insurance  over the
three-year  period ended December 31, 1996. The Company amortized the associated
reserves to income from  continuing  operations over the phase-out  period.  The
pre-tax amount  amortized to income from continuing  operations was $3.9 million
in both 1996 and 1995. The Company did not experience a significant  increase or
decrease  in cash  requirements  related to this  change in policy  during  this
phase-out period.

Effective  with the  December 31, 1997  measurement  date,  the Company  revised
certain assumptions  including the discount rate, the expected long-term rate of
return on assets  and  mortality  assumptions  to  reflect  current  market  and
demographic conditions. These changes are not expected to have a material effect
on future year's pension expense or Company  expenses related to retiree medical
and life insurance.

Segment Operating Results

The comparisons of 1997 segment  operating income to 1996 and 1995 are adversely
affected by the phase out of certain postretirement  employee benefits ("OPEB"),
completed in December 1996. This non-cash gain,  which resulted when the Company
amended its policy  regarding  retiree  medical and life  insurance  benefits in
early 1994,  was  amortized to income  during the  phase-out  years 1994 through
1996.  The twelve months ended December 31, 1996 and 1995 each benefited by $3.9
million from this  phase-out  adjustment.  Excluding  this  adjustment  in 1996,
segment  operating  income of $27.5 million in 1997 increased  13.4% as compared
with 1996.

Operating  results by business  segment for the years 1997,  1996 and 1995 are
summarized below:

Power Transmission:         1997         1996        1995
-------------------         ----         ----        ----
                                    (in millions)
Net Sales                  $92.1        $89.5       $95.1
Segment Operating Income     8.6          8.6        10.7

Power Transmission  segment net sales increased 3.0% in 1997 compared with 1996.
Sales increases in small center gearbox, shaft accessories,  freight hauling and
electrical products,  were partially offset by lower sales of standard products.
Although gross profit was up 4% in 1997,  segment operating income remained flat
compared  with the prior year,  due to the fact that the 1996  period  benefited
from a $2 million credit related to the OPEB phase-out. Excluding this credit in
the 1996 period, segment operating income for 1997 increased 29.3% compared with
the 1996 period.

Power  Transmission  segment net sales and operating  income  decreased 5.9% and
19.2%, respectively, in 1996 compared with 1995. The sales decrease was due to a
market  shift  from DC to AC drives and a downturn  in the U.S.  gear  market in
1996,  resulting in major customers'  adjusting their inventory levels,  after a
relatively  strong year in 1995. The 19.2% decrease in segment  operating income
resulted from the sales decrease and the higher  unabsorbed costs experienced at
the decreased volumes.

In 1996,  the segment  successfully  launched two compact new AC variable  speed
drives for controlling  electric motors from  1/6-to-1-horsepower,  a range that
covers 40% of the total market for packaged  drives in North  America.  Designed
primarily for use on pumps and  ventilator  fans,  the new "micro"  inverter has
more features and a lower price than competitive units.


Pumps:                      1997         1996        1995
------                      ----         ----        ----
                                    (in millions)
Net Sales                 $112.5       $107.6       $94.4
Segment Operating Income    14.5         11.2         9.2


Pumps  segment  net  sales  and  operating  income  increased  4.6%  and  29.2%,
respectively, in 1997 compared with the prior year. Excluding the OPEB phase-out
credit in 1996, segment operating income increased 46.1% compared with 1996.

The segment's  North  American  operations,  which are comprised of its U.S. and
Canadian  operations,  experienced  increased sales and operating income of 5.8%
and 50.5%,  respectively.  Although the segment's U.S operations  sales remained
flat year-over-year,  the turnaround at the Warren Pumps facility as a result of
certain restructuring measures taken in early 1997 made a strong contribution to
profitability,  as well as the fact that the segment is starting to benefit from
the cost reduction  program  implemented  in the fourth  quarter of 1997.  These
favorable  items were partially  offset by the elimination of the OPEB phase-out
credit at the end of 1996. The segment's  Canadian  operations  sales  increased
subsequent to the sale of the Instrumentation  segment,  since the Pumps segment
became a distributor for certain products of the former Instrumentation segment;
however, the contribution to operating profit was insignificant.

The segment's  European  operations sales remained flat in 1997 as compared with
1996, while segment operating income decreased  approximately 16% when comparing
the same periods.  The decrease in segment operating income was primarily due to
the  unfavorable  effects of a 13% change in the  exchange  rate for the Swedish
Krona.

Pumps segment net sales increased 14.0% and operating  income increased 21.8% in
1996  compared  with 1995.  The  results  of Imo  Pompes  SA, a French  licensee
acquired in March 1996,  contributed  5.7% and 9.7% to the net sales and segment
operating  income increases in 1996.  Additionally,  the segment is experiencing
continued growth in its U.S. industrial markets and strong export demand, driven
by products  in crude oil  transfer,  power  generation  and general  industrial
markets, as well as increased demand in the U.S. marine market.


Morse Controls:              1997        1996        1995
---------------            ------        ----        ----
                                    (in millions)
Net Sales                  $112.2      $112.5      $107.7
Segment Operating Income(1)   4.4         8.3         4.7


(1) The Morse Controls  segment's  operating  income includes unusual charges of
$.3 million and $1.5 million in 1996 and 1995, respectively.

Morse Controls  segment net sales of $112.2 million  remained flat compared with
1996 net sales. A sales  increase in the segment's  U.S.  operations of 3.9% was
due to a slight  increase in marine  product  sales in 1997,  and an increase in
mobile  equipment sales of 17.5% as a result of growth in the  agricultural  and
construction markets.  These increases were offset by a decrease in the European
operations  sales  of 3.8%  due to the  unfavorable  effects  of  exchange  rate
changes,  which were only  partially  offset by  increases  in the  aviation and
mobile equipment businesses in Germany and France,  respectively.  Excluding the
effects of exchange rate  changes,  European  operations  sales  increased  2.1%
compared with 1996.

Segment operating income decreased 47.4% in 1997 as compared with 1996. The 1996
period  benefited  from a $.7  million  credit  related  to the OPEB  phase-out.
Excluding  this credit in the 1996  period,  segment  operating  income for 1997
decreased 42.8% compared with the 1996 period. Other factors contributing to the
decreased  profitability  in 1997 were  additional  warranty costs in Europe and
increased selling expenses at all locations.

Morse  Controls  segment net sales of $112.5  million were up 4.5% for 1996,  as
compared with 1995 net sales.  Segment operating income increased 74.8% compared
to the 1995 period. Excluding unusual charges in both periods,  operating income
increased 37.8% in 1996. The segment has been favorably  affected in 1996 by the
acquisition of a Swedish manufacturer of specialized electronic controls,  which
was  completed in late  December  1995,  and accounted for 4.9% of the net sales
increase and 18.0% of the segment  operating income increase of 37.8% (excluding
unusual charges).  Operating income also started to experience  benefits in 1996
from improvements at the segment's operation in Germany,  which was restructured
to consolidate  facilities and reduce costs as part of the restructuring program
adopted in late 1995.

Company-Wide Fourth Quarter Results

Net sales from  continuing  operations in the fourth  quarter of 1997 were $79.9
million,  a 5.6% increase,  compared with $75.7 million in the fourth quarter of
1996. The Company had breakeven income from continuing  operations in the fourth
quarter  of 1997  compared  with a loss  from  continuing  operations  of  $20.8
million, or $1.21 per share, in the comparable 1996 period.

Average  borrowings  in the  fourth  quarter  of 1997 were  approximately  $62.3
million lower than the 1996 period. Total interest expense (before allocation to
discontinued  operations) of $8.1 million in the fourth quarter of 1997 was $1.1
million,  or  12.0%,  lower  than in 1996,  due to the  reduction  in debt  with
proceeds from the sale of the  Instrumentation  business segment in August 1997.
Interest expense for continuing  operations was $5.9 million in the 1997 period,
compared with $6.5 million in the fourth quarter of 1996, and excludes  interest
expense  incurred  by  the  discontinued  operations,  as  well  as an  interest
allocation to the discontinued operations. Fourth quarter 1996 results were also
severely impacted by unusual charges of $17.4 million.

Power  Transmission  segment net sales of $23.1 million  increased 3.0% compared
with the fourth quarter of 1996,  largely driven by an 18%  improvement in small
center  distance  gearbox sales offset by decreases in  electrical  products and
large  center  distance  gearboxes.  Segment  operating  income of $2.4  million
increased 13.4% compared with last year's fourth quarter.  The fourth quarter of
1996  benefited  from  a $.5  million  credit  related  to the  OPEB  phase-out.
Excluding  this  credit in the 1996  period,  segment  operating  income for the
fourth quarter of 1997 increased 47.4% compared with 1996.

Pumps segment net sales of $30.6 million were up 11.2% in the fourth  quarter of
1997  compared to the same period in 1996.  In the fourth  quarter of 1997,  the
segment  experienced  increases in its North  American  operations  sales to the
crude oil market,  offset  slightly by decreased  sales to the power  generation
market, as well as in its European operations.

Segment  operating income of $4.6 million more than doubled when compared to the
1996 fourth quarter,  despite the fact that the 1996 period benefited from a $.3
million credit related to the OPEB phase-out. The turnaround at the Warren Pumps
facility as a result of certain restructuring  measures taken in early 1997 made
a strong contribution to profitability in the fourth quarter of 1997 as compared
with the 1996 period.

 Morse  Controls  segment  net sales in the  fourth  quarter  of 1997 were $26.2
million,  an increase of 1.9%  compared with the 1996 period;  however,  segment
operating  income  decreased to $.5 million for the three months ended  December
31, 1997,  compared  with $1.1 million in the fourth  quarter of 1996.  The 1996
period benefited from a $.3 million credit related to the OPEB phase-out.


Liquidity and Capital Resources

Short-term and Long-term Debt

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  of $3 million will be
amortized over its term.

The New Credit Agreement  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.  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.

As of December 31, 1997, the  availability  under the revolving  credit facility
was $31.1  million,  as the Company had  borrowings  of $25 million  outstanding
under the revolving  credit  facility,  as well as $13.9 million of  outstanding
standby  letters  of  credit  under  the New  Credit  Agreement.  The  Company's
continuing  operations had $8 million in foreign  short-term  credit  facilities
with amounts outstanding at December 31, 1997 of $1.9 million.

At December 31,  1997,  the Company  also had  outstanding  under the New Credit
Agreement $59 million Term Loans  amortizing  to 2002. In addition,  the Company
had outstanding $135.1 million of its Notes.


Cash Flow

The Company's operating  activities used cash of $30.1 million in 1997, compared
with  cash  used  of  $15.1  million  in  1996.  The  use of cash in 1997 is due
principally  to the  payment of (1) a legal  settlement  of $10.5  million  with
International, (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 use of cash in 1996 is due  primarily  to cash used by  discontinued
operations  and  other  divested  businesses.  Net cash  provided  by  investing
activities  was $95.8 million in 1997,  compared with cash used of $12.7 million
in 1996.  Investing  activities included net proceeds of $113.3 million from the
sale of the Company's  Instrumentation  business, the remaining  Electro-Optical
systems  business  and certain of its  non-operating  real  estate in 1997.  Net
proceeds  from  the sale of  properties  held  for  sale in 1996  yielded  $12.6
million;  however,  this was more than  offset by 1996  investments  in  capital
equipment  and  acquisitions.  Cash and cash  equivalents  were $3.5  million at
December 31, 1997, a slight increase from $1.4 million at December 31, 1996.

Working  capital at  December  31, 1997 was $18.7  million,  a decrease of $25.5
million  from  the end of 1996,  due  principally  to the sale of the  Company's
Instrumentation and its remaining  Electro-Optical  Systems business, and to the
additional  liabilities recorded in conjunction with the Acquisition.  The ratio
of current assets to current  liabilities was 1.2 at December 31, 1997, compared
with 1.5 at December  31,  1996.  The  Company's  total debt as a percent of its
total  capitalization  decreased to 71.5% at December 31,  1997,  compared  with
125.4% at December 31, 1996, as a result of the accounting  for the  Acquisition
and the reduction in debt with proceeds from the 1997 asset sales.

Capital expenditures of continuing operations decreased slightly to $8.3 million
compared with the 1996 level of $10 million.  In 1997 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 1998
will  increase  over the 1997 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, 1997.

The Company's sale of its Roltra-Morse and Instrumentation business segments and
the  refinancing  of its domestic  senior debt have  significantly  improved the
liquidity  position.  Management  believes that cash flow from operations,  cash
available from unused credit  facilities and cash generated by additional  asset
sales will be sufficient to meet the Company's foreseeable liquidity needs.

Year 2000

Many computer systems in use today were designed and developed using two digits,
rather than four, to specify the year. As a result,  such systems will recognize
the year 2000 as "00."  This  could  cause many  computer  applications  to fail
completely or to create erroneous results unless corrective  measures are taken.
The Company utilizes  software and related computer  technologies  (essential to
its operations)  that will be affected by this year 2000 issue.  The Company has
established  plans for  evaluating  and managing the risks and costs  associated
with this problem.  The computing portfolio has been identified at each business
unit and an initial  assessment has been  completed.  The cost of achieving year
2000 compliance is not expected to materially exceed the cost of normal software
upgrades and  replacements and will be incurred through fiscal 1999. The Company
expects to be compliant by the year 2000.



Impact of Recently Issued Accounting Standards

In June 1997,  the FASB  issued  Statement  No.  130,  "Reporting  Comprehensive
Income," which establishes  standards for reporting and display of comprehensive
income and its components in a full set of general purpose financial statements.
The  impact  on the  Company's  financial  statements  compared  to  information
presently  available is not expected to be  significant.  Also in June 1997, the
FASB issued 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. The statement intends to align
reportable  segments and certain disclosures with how the operations are managed
internally.  The impact of this  statement on the  Company's  disclosure  is not
expected to be significant. In February 1998, the FASB issued 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  that are no longer
useful. These statements will be adopted by the Company in fiscal year 1998.

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 1997, 1996 or 1995.

Approximately  31.0% of the  property,  plant  and  equipment  of the  Company's
continuing  operations  has been  acquired  over the past  five  years and has a
remaining  useful life ranging from five years to fifteen years for equipment to
forty years for  buildings.  In addition,  property,  plant and equipment of the
businesses  acquired by the Company have been adjusted to fair value at the time
of  acquisition.  Assets  acquired in prior years are expected to be replaced at
higher  costs,  but this will take place over many years.  The newer assets will
result in higher  depreciation  charges but, in many cases, due to technological
improvements,  there  will be  operating  cost  savings  as  well.  The  Company
considers these matters in establishing its pricing policies.

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 - "Restructuring  Plans and Cost Reduction Programs" - the
impact of various cost  reduction  programs;  and  "Backlog,  Raw  Materials and
Environmental  Matters" - the expected  ability to fill existing orders in 1998,
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; and, (iii) Item 7 - "Restructuring Plans and
Cost Reduction  Programs" - the impact of various cost reduction  programs;  and
"Segment Operating Results" - the future performance of various programs in each
segment and the impact of such programs on future sales and on operating income.
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

Not applicable.


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.

The  Company  has  chosen  Arthur  Andersen  LLP  as  its   independent   public
accountants. Results for the periods ended August 28, 1997 and December 31, 1997
have been audited by Arthur Andersen LLP.

Before the Acquisition, the Company engaged Ernst & Young LLP as its independent
public  accountants.  Results  for the years ended  December  31, 1996 and 1995,
respectively, have been audited by Ernst & Young LLP.



                                    PART III

Item 10. Directors and Executive Officers of the Registrant.

Election of Directors

The Company's Restated Certificate of Incorporation and its Amended and Restated
By-Laws  provide that the  directors of the Company  shall be divided into three
classes,  designated as Class I, Class II and Class III, and that at each annual
meeting of stockholders of the Company, successors to the directors, whose terms
expire at that annual meeting will be elected for a three-year term. The classes
are staggered so that the term of one class of directors  expires each year. The
terms of the Class I directors  expire in 1999, and each third year  thereafter;
the  terms of the  Class  II  directors  expire  in 2000  and  each  third  year
thereafter;  and the term of the Class  III  director  expires  in 1998 and each
third year thereafter.  The number of directors constituting the entire Board of
Directors is determined by the vote of a majority of the members of the Board of
Directors and is currently fixed at five members.

Under the Company's Amended and Restated By-Laws,  no stockholder may nominate a
candidate  for  election  as  a  director  unless  information  concerning  such
candidate  equivalent  to the  information  contained  herein about the Board of
Directors'  nominees  has been  submitted  to the Board of Directors at least 45
days  before  the  date of the  meeting  of  stockholders  for the  election  of
directors at which such nomination is proposed to be made. Any vacancy occurring
on the Board of Directors  for any reason may be filled by a vote of majority of
the  directors  then in office until the  expiration of the term of the class of
directors in which the vacancy exists.

Directors of the Registrant

The following table sets forth information concerning the names, ages, principal
occupations and terms of office of the directors of the Company:


Name                Age     Class    Principal Occupation       Term of Office

Philip W. Knisely    43      III    Chairman, Chief               1997-1998
                                     Executive Officer and
                                     President of the Company
Steven M. Rales      46      I      Chairman of the Board of      1997-1999
                                     Directors of Danaher
                                     Corporation
Mitchell P. Rales    41      II     Chairman of the               1997-2000
                                     Executive Committee of
                                     the Board of Directors
                                     of Danaher Corporation
Neil D. Cohen        43      II     President of District         1997-2000
                                     Photo, Inc.
K. David Boyer, Jr.  45      I      President and Chief           1997-1999
                                     Executive Officer of
                                     TROY Systems, Inc.

Philip W. Knisely  became a director,  Chief  Executive  Officer and President
of the  Company  in  August  1997.  He was  named  Chairman  of the  Board  in
November  1997.  Mr.  Knisely  has been  President  of  Constellation  Capital
Partners  ("Constellation"),  LLC since  September  1995.  Prior to employment
with Constellation, Mr. Knisely was President of AMF Industries.

Steven M. Rales became a director of the Company in August 1997. During the past
five years he has been a principal in a number of private business entities with
interests in  manufacturing  companies,  media  operations  and publicly  traded
securities.  Mr. Rales is also  Chairman of the Board of  Directors  and a major
shareholder of Danaher Corporation.

Mitchell P. Rales  became a director of the Company in August  1997.  During the
past five years he has been a principal in a number of private business entities
with interests in manufacturing companies,  media operations and publicly traded
securities.  Mr. Rales is also Chairman of the Executive  Committee of the Board
of Directors and a major shareholder of Danaher Corporation.

Neil D. Cohen became a director of the Company in August  1997.  During the past
five years he has been the President of District Photo,  Inc., a  photofinisher.
He is also a member of the Board of Trustees of the Photo Marketing  Association
International, Inc., a trade association for the photo finishing industry.

K. David Boyer, Jr. became a director of the Company in August 1997.  During the
past five years he has been the  President and Chief  Executive  Officer of TROY
Systems Inc., a provider of high  technology  business  solutions.  He is also a
director of Franklin National Bank.

Steven M. Rales and Mitchell P. Rales are brothers.

Mr.  Cohen and Mr. Boyer are  Continuing  Directors as defined in Article X of
the Company's Restated Certificate of Incorporation.

Executive Officers of the Registrant

The  following  table  sets forth  information  concerning  the names,  ages and
principal occupations of the executive officers of the Company:

Name                    Age                 Principal Occupation

Philip W. Knisely       43         Chairman, Chief Executive Officer and
                                    President
John A. Young           32         Vice President, Treasurer, Chief Financial
                                    Officer, and Assistant Secretary
G. Scott Faison         36         Corporate Controller
Michael G. Ryan         45         Vice President
Joseph O. Bunting, III  36         Vice President and Secretary

Philip W. Knisely joined the Company as a director,  Chief  Executive  Officer
and  President  in  August  1997.  He  was  named  Chairman  of the  Board  in
November  1997.  Mr.  Knisely  has  been  President  of  Constellation   since
September  1995.  Prior to  employment  with  Constellation,  Mr.  Knisely was
President of AMF Industries.

John A. Young joined the Company as Vice  President  and  Assistant  Secretary
in  August  1997.  He was  named  Treasurer  and Chief  Financial  Officer  in
November  1997.  Mr. Young has been a Vice  President of  Constellation  since
September  1995.  Prior  to  employment  with  Constellation,  Mr.  Young  was
Director, Corporate Development at AMF Industries.

G. Scott Faison  joined the Company as Corporate  Controller  in December  1997.
Prior to joining the Company,  Mr. Faison was Chief Financial Officer of Bullets
Corporation  of America.  Before  employment  with Bullets,  Mr. Faison spent 10
years at AMF Bowling in various  management  roles.  Among them,  Mr. Faison was
Controller  of AMF's United  Kingdom  subsidiary,  Divisional  Controller of AMF
Consumer Products Business and also served as Corporate Controller.

Michael G. Ryan joined the Company as Vice  President in August  1997.  Mr. Ryan
has been a Vice President of Constellation since September 1995. During the past
five years he has been an officer in a number of private business  entities with
interests in  manufacturing  companies,  media  operations  and publicly  traded
securities.

Joseph O. Bunting,  III joined the Company as Vice  President in August 1997 and
became  Secretary in November  1997.  Mr.  Bunting has been a Vice  President of
Constellation  since September  1995.  During the past five years he has been an
officer in a number of private business entities with interests in manufacturing
companies, media operations and publicly traded securities.

Each of these executive  officers will hold office until his successor is chosen
and qualifies or until his earlier  resignation  or removal.  Any officer may be
removed at any time by the Board of Directors  without prejudice to any contract
rights that he may have.

Section 16(a) Beneficial Ownership Reporting Compliance

Section  16(a) of the  Securities  Exchange Act of 1934  requires the  Company's
officers and directors,  and persons who own more than 10% of a registered class
of the Company's equity securities,  to file reports of ownership and changes in
ownership with the Securities and Exchange Commission. A review of the Company's
records  indicates that all reports  required under the Section 16(a) rules were
filed in a timely  manner  during  the year,  except for the Form 3 for G. Scott
Faison. A report has now been filed.


Item 11. Executive Compensation.

Summary Compensation Table

The following table sets forth certain  information with respect to compensation
paid or accrued by the  Company  during  each of the three  fiscal  years  ended
December 31, 1997,  1996 and 1995 to (i) the present and former chief  executive
officers of the company and (ii) the two  individuals who did not hold executive
officer  positions as of December 31, 1997, but held such positions  during 1997
and whose  compensation  during  1997  placed  them  among the four most  highly
compensated   executive   officers.   All  other  current  executive   officers'
compensation for 1997 is below the $100,000 disclosure threshold.



                                                      Long-Term Compensation
                                                              Awards
                             Annual Compensation    ---------------------------
                                              Restricted Securities   All Other
Name and Principal           -----------------   Stock   Underlying Compensation
 Position              Year   Salary($) Bonus($) Awards($) Options(#)      ($)


Philip W. Knisely (1)  1997  $    ---  $   ---  $  ---         ---  $     ---
Chairman, President
and Chief Executive
Officer

Donald K. Farrar       1997   337,500      ---     ---         ---  2,334,881(3)
Former Chairman,       1996   450,000   80,000 196,875(2)  115,000     10,350
President and Chief    1995   450,000   90,000     ---      70,000      8,359
Executive Officer

John J. Carr           1997   254,833      ---     ---         ---  1,201,781(4)
Former Executive       1996   260,000   60,000     ---      25,000      9,270
Vice President         1995   240,000   65,000     ---      25,000        245

William M. Brown       1997   178,000      ---     ---         ---  1,056,774(5)
Former Chief           1996   255,000   50,000     ---      20,000      9,135
Financial Officer and  1995   230,000   55,000     ---      20,000      7,105
Corporate Controller

(1)Philip W. Knisely became Chief  Executive  Officer,  President and a Director
   in August 1997. Mr. Knisely did not receive any form of compensation from the
   Company during fiscal year 1997.

(2)None of the 35,000  shares  subject to Mr.  Farrar's  1996  restricted  stock
   award were outstanding on December 31, 1997. While  outstanding  during 1997,
   there were no dividends paid on the shares of restricted stock. The severance
   in Note (3) below includes any payment for vested shares of restricted stock.
   All  other  shares  were  canceled  upon his  termination  of  employment  in
   September 1997.

(3)Includes  $2,292,797 in severance,  $2,375 contribution by the Company to the
   Employees Stock Savings Plan account,  $5,738 of life insurance premiums paid
   by the  Company on his  behalf and  $33,971  in other  fringe  benefits.  The
   severance  payment was (i) paid during the  post-Acquisition  taxable year in
   which Mr.  Farrar was  neither  an  executive  officer  or a director  of the
   Company and (ii) made  pursuant to a contract  dated  September  13, 1993 and
   includes all amounts due from the Company  under the  Restricted  Stock Plan,
   Supplemental Pension Plan, and Stock Option Plan.

(4)Includes  $1,183,715 in severance,  $2,375 contribution by the Company to the
   Employees Stock Savings Plan account,  $4,174 of life insurance premiums paid
   by the  Company on his  behalf and  $11,517  in other  fringe  benefits.  The
   severance  payment was (i) paid during the  post-Acquisition  taxable year in
   which Mr. Carr was neither an executive  officer or a director of the Company
   and (ii) made  pursuant to a contract  dated January 9, 1987 and includes all
   amounts due from the Company under the  Restricted  Stock Plan,  Supplemental
   Pension Plan, and Stock Option Plan.

(5)Includes  $1,037,898 in severance,  $2,375 contribution by the Company to the
   Employees Stock Savings Plan account,  $3,267 of life insurance premiums paid
   by the  Company on his  behalf and  $13,234  in other  fringe  benefits.  The
   severance  payment was (i) paid during the  post-Acquisition  taxable year in
   which Mr. Brown was neither an executive officer or a director of the Company
   and (ii) made  pursuant to a contract  dated  August 5, 1992 and includes all
   amounts due from the Company under the  Restricted  Stock Plan,  Supplemental
   Pension Plan, and Stock Option Plan.


Option Grants in Last Fiscal Year

There  were no  options  granted  during  fiscal  1997  to any of the  executive
officers listed in the Compensation Table.

Aggregated  Option  Exercises in Last Fiscal Year and Fiscal  Year-End  Option
Values

There  were  no  options  outstanding  at  fiscal  year-end.  All  options  were
accelerated,  vested and paid out in fiscal 1997 as a result of the  Acquisition
of the Company in August 1997.

Pension Plans

The  following  table shows the estimated  maximum  annual  retirement  benefits
payable to a covered  participant  under the Imo Industries  Inc. U.S.  Salaried
Plan (the "Salaried Plan").  Benefits were calculated assuming  participants and
their spouses elect a straight-life  annuity rather than a joint and survivor or
other form of annuity,  in which case  benefits  would  generally  be lower than
shown in the  table.  Benefits  are not  subject  to any  deduction  for  Social
Security or other offset amounts.


                                Pension Plan Table

                                Years of Service
             ------------------------------------------------------------------
       Final
     Average
    Earnings    10 Years  15 Years   20 Years    25 Years  30 Years   35 Years
    $100,000     $16,089   $24,134    $32,178     $40,223   $43,635    $47,047
     150,000      25,089    37,634     50,178      62,723    68,135     73,547
     200,000      26,889    40,334     53,778      67,223    73,035     78,847
     250,000      26,889    40,334     53,778      67,223    73,035     78,847
     300,000      26,889    40,334     53,778      67,223    73,035     78,847
     350,000      26,889    40,334     53,778      67,223    73,035     78,847
     400,000      26,889    40,334     53,778      67,223    73,035     78,847
     450,000      26,889    40,334     53,778      67,223    73,035     78,847
     500,000      26,889    40,334     53,778      67,223    73,035     78,847
     550,000      26,889    40,334     53,778      67,223    73,035     78,847

Final  average  earnings  are based upon the  highest 60 months of  compensation
during the  participant's  last 120 months of service.  The annual  compensation
taken into account  under the  Salaried  Plan is the actual  monthly  salary and
bonus earned in that year.

As of December 31, 1997, the persons named in the Summary Compensation Table had
the following  years of benefit  service as defined  under the Salaried  Pension
Plans: Mr. Knisely,  0 years;  Mr. Farrar,  4.0 years; Mr. Carr, 31.0 years; and
Mr. Brown, 5.3 years. To be vested in the Salaried Plan benefits,  a participant
must have over four years and six months of service.

While the Company was a wholly owned subsidiary of Transamerica Corporation, the
Company's employees participated in the Pension Plan for Salaried U.S. Employees
of Transamerica  Corporation and Affiliates (the  "Transamerica  Pension Plan").
The  Transamerica  Pension Plan provides  that,  as long as the Company  remains
independent,  employees of the Company will  continue to vest in their  benefits
accrued prior to December 31, 1986, as calculated under the Transamerica Pension
Plan, taking into account only benefit service credited and compensation  earned
prior to December  31,  1986,  and will  continue to receive  credit  toward the
service  requirement for subsidized early retirement benefits and pre-retirement
death  benefits,  based upon their service with the Company  after  December 31,
1986.  Accrued  benefits  under the  Salaried  Plan will be offset by any vested
benefits under the Transamerica Pension Plan.

The benefits shown in the Pension Plan Table reflect the applicable  limitations
imposed by Sections 415 and 401(a)(17) of the Code. Benefits payable pursuant to
the Salaried Plan are restricted in accordance  with the limitations of Sections
415 and  401(a)(17) of the Code. The  Supplemental  Plan under which the Company
made  supplemental  pension  payments  to  employees  whose  benefits  under the
Salaried  Plan were reduced by the  limitations  imposed  under  Section 415 and
401(a)(17)  of  the  Code  was  terminated  in  November  1997.  There  were  no
contributions  in fiscal year 1997 to the  Supplemental  Plan.  As part of their
severance packages with the Company,  Messrs.  Farrar, Carr and Brown waived any
and all claims to any benefits due to them under the Supplemental Plan.

Compensation Committee

The members of the  Compensation  Committee  are Steven M. Rales and  Mitchell
P. Rales.

Executive Compensation

Total executive  compensation is comprised of two principal  components:  annual
salary and annual incentive  compensation.  The Committee endeavors to establish
total  compensation  packages for each  executive  officer equal to the value of
that executive's  services determined by both what other companies have or might
pay the  executive  for his services  and his  relationship  to other  executive
positions  within the Company,  as negotiated at the date of hire.  This base is
then  adjusted  annually  based  on the  Committee's  assessment  of  individual
performance.

A fundamental element of the Company's compensation policy is that a substantial
portion of each  executive's  compensation be directly related to the success of
the Company.  This is  accomplished  in two ways.  First,  the annual  incentive
compensation  program requires that the Company, or the Company's businesses for
which the executive is directly responsible,  achieve certain minimum targets in
sales,  profitability,  working capital  management and economic value added. If
performance  for  the  year  is  below  minimum   targeted   levels   (generally
approximately  three-quarters  of the sales  and  profitability  target  must be
achieved and working  capital  management  must exceed prior year levels)  there
would be no payment. If the minimum targets are met or exceeded,  each executive
receives a  formula-based  payout  taking  into  account  the  Company's  or the
Company's businesses for which the executive is directly responsible performance
and the successful completion of defined personal objectives.

CEO Compensation

Mr.  Knisely did not receive any  compensation  from the Company during fiscal
year 1997.

Compensation of Directors

Independent  directors,  currently Mr. Boyer and Mr. Cohen,  receive  attendance
fees of $1,000 per  meeting,  excluding  telephonic  meetings,  together  with a
quarterly retainer of $2,500.

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

Certain Beneficial Owners

The following  table sets forth, as of March 24, 1998, the amount and percentage
of the Company's Common Stock  beneficially owned by each person or group who is
known to the Company to be the beneficial owner of more than 5% of the Company's
outstanding common stock.


                                          Shares          Percentage of
       Name and Address                   Beneficially    Outstanding
                                          Owned           Common Stock

II Acquisition Corp.                      15,905,971           92.8%
9211 Forest Hill Avenue
Suite 109
Richmond, Virginia 23235

Steven M. Rales (1)                       15,905,971           92.8%
1250 24th Street, N.W.
Suite 800
Washington, DC  20037

Mitchell P. Rales (1)
1250 24th Street, N.W.                    15,905,971           92.8%
Suite 800
Washington, DC  20037

(1)Steven M. Rales and  Mitchell P. Rales  beneficially  own the Shares  through
   their controlling equity interest in Acquisition Corp.



Ownership by Directors and Executive Officers

The  following  table  sets forth the amount  and  percentage  of the  Company's
outstanding  Common Stock  beneficially owned on March 24, 1998 by each director
and executive officer and the directors and executive officers as a group.


                                          Shares          Percentage of
Name of Individual or Identity            Beneficially    Outstanding
of Group                                  Owned           Common Stock

Philip W. Knisely                                ---             ---
Steven M. Rales (1)                       15,905,971            92.8%
Mitchell P. Rales (1)                     15,905,971            92.8%
Neil D. Cohen                                    ---             ---
K. David Boyer, Jr.                              ---             ---
John A. Young                                    ---             ---
G. Scott Faison                                  ---             ---
Michael G. Ryan                                  ---             ---
Joseph O. Bunting, III                           ---             ---
All    directors    and   executive       15,905,971            92.8%
officers as a group

(1)Steven M. Rales and  Mitchell P. Rales  beneficially  own the Shares  through
   their controlling equity interest in Acquisition Corp.

Item 13. Certain Relationships and Related Transactions.

On  August  28,  1997,  Acquisition  Corp.,  acquired  92.8% of the  Company's
outstanding  shares  of  common  stock.  The  consideration  paid was $7.05 in
cash per  share of common  stock or $112.1  million  in total.  Messrs.  Rales
and Rales are directors and  controlling  stockholders  of  Acquisition  Corp.
Messrs.  Knisely,  Young,  Ryan and Bunting are all executive  officers of the
Company  and are all  officers  and  stockholders  and  executive  officers of
Acquisition Corp.  Mr. Knisely is also a director of the Company.

On  August  29,  1997,  the  Company  and  certain  of  its  subsidiaries   sold
substantially  all of the  assets of its  Instrumentation  Business  Segment  to
Danaher Corporation,  a NYSE listed company, and certain of its subsidiaries for
a purchase  price of $85  million  in cash and the  assumption  of  liabilities.
Steven M. Rales and Mitchell P. Rales,  directors and beneficial owners of 92.8%
of the Company, are major shareholders of Danaher  Corporation.  Steven M. Rales
is Chairman of the Board of  Directors  of Danaher  Corporation  and Mitchell P.
Rales is  Chairman  of the  Executive  Committee  of the Board of  Directors  of
Danaher  Corporation.  The  transaction  was  negotiated at arm's length and the
Company  received  the  opinion  of an  independent  investment  bank  as to the
fairness to the Company, from a financial standpoint,  of the financial terms of
the transaction taken as a whole.

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  Enterprise MPT
Corporation.  Steven M.  Rales and  Mitchell  P. Rales  collectively  own 76% of
American Enterprise MPT Corporation.  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.



                                    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                                       Page

      Consolidated  Statements  of  Income  for  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 Years Ended December 31, 1996 and 1995........F-1
      Consolidated   Balance  Sheets  at  December  31,  1997  and
       1996...............................................................F-2
      Consolidated Statements of Cash Flows for 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 Years Ended December 31, 1996 and 1995........F-3
      Consolidated Statements of Shareholders' Equity (Deficit)
       for 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 for the
       Years Ended December 31, 1996 and 1995.............................F-4
      Notes to Consolidated Financial Statements..........................F-5
      Reports of Independent Public Accountants...........................F-32
      Quarterly Financial Information (unaudited).........................F-35

    (2) Financial Statement Schedules

      The following  consolidated  financial  statement  schedule for 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 years
      ended  December  31,  1996 and 1995 is  filed as part of this  Report  and
      should be read in conjunction  with the Company's  Consolidated  Financial
      Statements.


    Schedule II                                                          Page

    Valuation and Qualifying Accounts.....................................S-1

     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

     On November 12,  1997,  the Company  filed a report on Form 8-K,  reporting
     under Item 4,  disclosing  that on November  5, 1997 the Company  dismissed
     Ernst & Young LLP as its  principal  independent  accountants,  and engaged
     Arthur Andersen LLP as its principal  independent  accountants to audit and
     report on the  financial  statements  of the  company  for the fiscal  year
     ending December 31, 1997.

     On February  3, 1998,  the  Company  filed a report on Form 8-K,  reporting
     under Item 5, disclosing Company's announcement on February 2, 1998 that it
     had entered into an agreement to sell its Roltra Morse S.p.A. subsidiary to
     Magna International Inc.

     On March 24, 1998, the Company filed a report on Form 8-K,  reporting under
     Items 2 and 7,  disclosing  that on February 27, 1998, the Company had sold
     all  outstanding  shares  of  capital  stock  of its  Roltra  Morse  S.p.A.
     subsidiary to Magna International Inc.


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)                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)              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

                      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

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

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

         (D)            Third Amendment to Credit and Guaranty Agreement
                        dated as of February 16, 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, 1997

-----------------------------------------------
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.



                                    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 27, 1998

                                             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 27, 1998


/s/ JOHN A. YOUNG         Vice President and
John A. Young             Chief Financial Officer
                          (principal financial officer)          March 27, 1998


/s/ G. SCOTT FAISON       Corporate Controller
G. Scott Faison           (principal accounting officer)         March 27, 1998


/s/ STEVEN M. RALES       Director                               March 27, 1998
Steven M. Rales


/s/ MITCHELL P. RALES     Director                               March 27, 1998
Mitchell P. Rales


/s/ NEIL D. COHEN         Director                               March 27, 1998
Neil D. Cohen


/s/ K. DAVID BOYER, JR.   Director                               March 27, 1998
K. David Boyer, Jr.

<TABLE>


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


<CAPTION>



                                      Post-Acquisition Pre-Acquisition
                                           August      January 1,
                                          29, 1997 to   1997 to  Year Ended December 31,
                                          December       August    -------------------
                                           31, 1997     28, 1997      1996*     1995*
-------------------------------------------------------------------------------------
<S>                                        <C>        <C>        <C>        <C>
Net Sales                                   $106,711     $210,151 $309,511  $297,114
Cost of products sold                         76,597      145,276  220,589   212,787
-------------------------------------------------------------------------------------

Gross Profit                                  30,114       64,875   88,922    84,327

Selling, general and administrative expenses  21,411       46,724   62,514    60,457
Research and development expenses              1,913        3,636    4,455     3,930
Unusual items                                  5,000       26,344   17,440     8,124
-------------------------------------------------------------------------------------

Income (Loss) From Operations                  1,790      (11,829)   4,513    11,816

Interest expense                               8,069       18,190   25,981    22,648
Interest income                                 (622)        (921)  (1,450)   (2,169)
Other (income) expense                          (336)         513      355      (370)
Equity in loss (income) of unconsolidated
 companies                                       133          386       32      (302)
-------------------------------------------------------------------------------------

Income (Loss) From Continuing Operations
Before Income Taxes and Extraordinary Item    (5,454)     (29,997) (20,405)   (7,991)

Income taxes (benefit):
          Current                                235        1,254    2,663     1,831
          Deferred                               ---          ---   10,000   (17,000)
-------------------------------------------------------------------------------------
     Total Income Taxes (Benefit)                235        1,254   12,663   (15,169)
-------------------------------------------------------------------------------------

Income (Loss) From Continuing Operations
Before Extraordinary Item                     (5,689)     (31,251) (33,068)    7,178

Discontinued operations:
  Income (loss) from operations (net of
   income tax expense of  $77, $664, $1,037
   and $1,256)                                (3,753)       2,372   (8,705)    5,351
  Estimated (loss) gain on disposal (net
   of income taxes of $5.2 million in 1995)   (8,430)         ---   (8,142)   21,625

-------------------------------------------------------------------------------------
Total Income (Loss) from
  Discontinued Operations                    (12,183)       2,372  (16,847)   26,976
-------------------------------------------------------------------------------------

Extraordinary Item - Loss on
  Extinguishment of Debt                      (3,348)         ---   (8,455)   (4,444)

-------------------------------------------------------------------------------------
Net Income (Loss)                          $ (21,220)   $ (28,879)$(58,370) $ 29,710
=====================================================================================

Earnings (loss) per share, basic and diluted:
  Continuing operations before
   extraordinary item                        $  (.33)     $ (1.82) $ (1.93)   $  .42
  Discontinued operations                       (.71)         .14     (.99)     1.58
  Extraordinary item                            (.20)         ---     (.49)     (.26)
-------------------------------------------------------------------------------------
          Net income (loss)                  $ (1.24)     $ (1.68) $ (3.41)   $ 1.74
-------------------------------------------------------------------------------------


Weighted average number of shares         17,127,859  17,126,192 17,100,359 17,048,622
 outstanding
=====================================================================================

The  accompanying  notes are an integral  part of these  consolidated  financial
statements.
*Restated to conform to 1997 presentation.

                                      F-1

</TABLE>

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

December 31,                                      1997     1996*
-----------------------------------------------------------------
Assets
Current Assets
Cash and cash equivalents                     $  3,528  $  1,419
Trade accounts and notes receivable, less
  allowance of $1,435 in 1997
  and $1,346 in 1996                            53,732    47,088
Inventories-net                                 64,888    68,465
Deferred income taxes                           10,088     9,165
Net assets of discontinued operations - current    ---    11,749
Prepaid expenses and other current assets        7,568     2,992
-----------------------------------------------------------------
Total Current Assets                           139,804   140,878
-----------------------------------------------------------------
Property, Plant and Equipment
Land                                             5,351     7,757
Buildings and improvements                      22,526    34,068
Machinery and equipment                         36,734    94,146
-----------------------------------------------------------------
                                                64,611   135,971
Less allowances for depreciation and
amortization                                   (3,202)   (69,225)
------------------------------------------------------------------
Net Property, Plant and Equipment               61,409    66,746
Intangible Assets, Principally Goodwill        233,054    58,670
Investments in and Advances to
  Unconsolidated Companies                       4,780     5,704
Net Assets of Discontinued Operations -
  Noncurrent                                    14,927    36,927
Other Assets                                     9,326    21,997
-----------------------------------------------------------------
Total Assets                                 $ 463,300 $ 330,922
=================================================================
Liabilities and Shareholders' Equity
Current Liabilities
Notes payable                                $  28,238 $  21,998
Trade accounts payable                          22,750    18,765
Accrued expenses and other liabilities          53,744    28,379
Accrued costs related to discontinued
  operations                                     4,392     8,586
Income taxes payable                             5,929     7,359
Current portion of long-term debt                6,082    11,666
-----------------------------------------------------------------
Total Current Liabilities                      121,135    96,753
-----------------------------------------------------------------
Long-Term Debt                                 192,319   245,007
Deferred Income Taxes                            5,034     3,890
Accrued Postretirement Benefits - Long-Term     17,092    17,418
Accrued Pension Expense and Other Liabilities   37,473    24,241
-----------------------------------------------------------------
Total Liabilities                              373,053   387,309
-----------------------------------------------------------------
Shareholders' Equity (Deficit)
Preferred stock:  $1.00 par value;
 authorized and unissued 5,000,000 shares          ---       ---
Common stock:  $1.00 par value; authorized
 25,000,000 shares; issued 17,127,859 in 1997
 and 18,796,897 in 1996                         17,128    18,797
Additional paid-in capital                     106,805    80,466
Retained earnings (deficit)                    (33,016) (134,962)
Cumulative foreign currency translation
  adjustments                                     (670)      554
Minimum pension liability adjustment               ---    (2,503)
Unearned compensation                              ---      (719)
Treasury stock at cost - 1,672,788 shares in 1996  ---   (18,020)
------------------------------------------------------------------
Total Shareholders' Equity (Deficit)            90,247   (56,387)
------------------------------------------------------------------
Total Liabilities and Shareholders' Equity
(Deficit)                                    $ 463,300 $ 330,922
==================================================================

The  accompanying  notes are an integral  part of these  consolidated  financial
statements.
* Restated to conform to 1997 presentation.

                                      F-2

<TABLE>


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

<CAPTION>


                                       Post-Acquisition Pre-Acquisition
                                          August        January
                                          29, 1997 to   1, 1997 to  Year Ended December 31,
                                          December      August      -------------------
                                          31, 1997      28, 1997      1996*       1995*
---------------------------------------------------------------------------------------
OPERATING ACTIVITIES
<S>                                        <C>         <C>        <C>         <C>
Net income (loss)                          $ (21,220)  $ (28,879) $ (58,370)  $ 29,710

Adjustments to reconcile net income
(loss) to net cash used by continuing operations:
     Discontinued operations                  12,183      (2,372)    16,847     (5,351)
     Depreciation                              3,674       6,747     10,123     10,287
     Amortization                              2,007       1,867      3,275      3,095
     Provision (benefit) for deferred
      income taxes                               ---         ---     10,000    (17,000)
     Extraordinary item                        3,348         ---      8,455      4,444
     Gain on sale of segment                     ---         ---        ---    (21,625)
     Unusual items                             5,000      26,344     17,440      8,124
     Other                                       369         750      1,592         94

Other changes in operating assets and liabilities:
     (Increase) decrease in accounts and
       notes receivable                       (6,467)      1,730     (5,440)       566
     Decrease (increase) in inventories        1,759      (1,930)     4,300     (6,253)
     Decrease in accounts payable and accrued
      expenses                               (17,028)     (9,794)   (16,009)   (14,078)
     Other operating assets and liabilities   (1,608)     (3,855)     3,038     (3,338)
--------------------------------------------------------------------------------------
 Net cash used by continuing operations      (17,983)     (9,392)    (4,749)   (11,325)
 Net cash used by discontinued operations     (1,342)     (1,377)   (10,353)   (20,008)
--------------------------------------------------------------------------------------

Net Cash Used by Operating Activities        (19,325)    (10,769)   (15,102)   (31,333)
--------------------------------------------------------------------------------------
INVESTING ACTIVITIES
Net proceeds from sale of businesses and
 sales of property, plant and equipment       88,024      25,235     12,570    174,920
Purchases of property, plant and equipment    (3,740)     (4,555)   (10,032)   (13,155)
Acquisitions, net of cash acquired               ---         ---     (7,218)    (5,247)
Net investing activities of discontinued
 operations                                   (5,104)     (3,692)    (8,072)   (10,858)
Other                                           (497)        141         63       (133)
--------------------------------------------------------------------------------------

Net Cash  Provided by (Used by)
 Investing Activities                         78,683      17,129    (12,689)   145,527
--------------------------------------------------------------------------------------
FINANCING ACTIVITIES
(Decrease) increase in notes payable         (15,900)     18,786      6,159     23,607
Proceeds from long-term borrowings           129,270         119    266,895      5,257
Principal payments on long-term debt        (164,719)    (25,792)  (233,350)  (166,196)
Payment of debt financing costs               (5,368)       (384)   (14,660)      (401)
Proceeds from stock options exercised            ---         ---        ---        535
Other                                            281        (102)        89         59
-------------------------------------------------------------------------------------

Net Cash (Used by) Provided by Financing
  Activities                                 (56,436)     (7,373)    25,133   (137,139)
-------------------------------------------------------------------------------------
Effect of exchange rate changes on cash          453        (253)        80        222
-------------------------------------------------------------------------------------
Increase (Decrease) in Cash and Cash
  Equivalents                                  3,375      (1,266)    (2,578)   (22,723)
Cash and cash equivalents at beginning
  of the period                                  153       1,419      3,997     26,720
=====================================================================================
Cash and Cash Equivalents at End of the
  Period                                     $ 3,528      $  153    $ 1,419   $  3,997
=====================================================================================
Supplemental disclosures of cash flow information:
     Cash paid during the period for:

       Interest                             $ 13,344     $ 19,564   $ 36,664   $ 39,519
       Income taxes                         $  1,263     $  2,006   $  4,798   $  6,341

The  accompanying  notes are an integral  part of these  consolidated  financial
statements.
*Restated to conform to 1997 presentation.

                                      F-3

</TABLE>

<TABLE>


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

<CAPTION>
                                                 Cumulative
                                                 Foreign     Minimum
                              AdditionalRetained Currency    Pension     Unearned
                       Common  Paid-in  Earnings Translation Liability   Compen  Treasury
                        Stock  Capital  (Deficit)Adjustment  Adjustment  sation  Stock    Total
-------------------------------------------------------------------------------------------------
<S>                   <C>      <C>     <C>        <C>       <C>        <C>    <C>       <C>
Balance at
  January 1, 1995  *  $18,680  $79,789 $(106,302) $ (1,549) $  (853)   $  --- $(18,020) $(28,255)
Net income                ---      ---    29,710       ---      ---       ---      ---    29,710
Foreign currency
 translation adjustments  ---      ---       ---     2,586      ---       ---      ---     2,586
Minimum pension
 liability adjustment     ---      ---       ---       ---     (948)      ---      ---      (948)
Shares issued under
 stock option plan         73      462       ---       ---      ---       ---      ---       535
Restricted shares
 issued under the equity
 incentive plans            3       24       ---       ---      ---       ---      ---        27
------------------------------------------------------------------------------------------------
Balance at
  December 31, 1995 *  18,756   80,275   (76,592)    1,037   (1,801)      ---  (18,020)    3,655
Net income (loss)         ---      ---   (58,370)      ---      ---       ---      ---   (58,370)
Foreign currency
 translation adjustments  ---      ---       ---      (483)     ---       ---      ---      (483)
Minimum pension
 liability adjustment     ---      ---       ---       ---     (702)      ---      ---      (702)
Restricted shares
 issued under the equity
 incentive plans           41      191       ---       ---      ---      (166)     ---        66
Other                     ---      ---       ---       ---      ---      (553)     ---      (553)
-------------------------------------------------------------------------------------------------
Balance at
  December 31, 1996 *  18,797   80,466  (134,962)      554   (2,503)     (719) (18,020)  (56,387)
Net income (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  II Acquisition
  Corp. 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 income (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
================================================================================================

The  accompanying  notes are an integral  part of these  consolidated  financial
statements.
* Restated to conform to current year presentation.

                                      F-4

</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.

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.

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.

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,  10 to 40 years and
machinery and equipment, 3 to 15 years.

Earnings  Per Share:  At  December  31,  1997,  the  Company  adopted  Financial
Accounting  Standards  Board ("FASB")  Statement No. 128,  "Earnings Per Share,"
which specifies the computation,  presentation,  and disclosure requirements for
earnings per share. Basic and diluted net income (loss) per share for 1997, 1996
and 1995 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. In 1995, after the inclusion of 75,453 incremental
shares from dilutive stock options,  the diluted  earnings per share is the same
as basic earnings per share, due to rounding.

Impact of Recently Issued  Accounting  Standards:  In June 1997, the FASB issued
Statement No. 130, "Reporting Comprehensive Income," which establishes standards
for reporting and display of  comprehensive  income and its components in a full
set of  general  purpose  financial  statements.  The  impact  on the  Company's
financial statements compared to information presently available is not expected
to be  significant.  Also in June  1997,  the FASB  issued  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.  The  statement  intends to align  reportable  segments and
certain disclosures with how the operations are managed  internally.  The impact
of this statement on the Company's disclosure is not expected to be significant.
In February 1998,  the FASB issued  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  that are no longer useful.  These
statements will be adopted by the Company in fiscal year 1998.

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, 1997 and 1996 was $226 million and $48.2
million,  respectively,  net of  respective  accumulated  amortization  of  $1.8
million and $12.3 million. 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.

Restatements:  The Consolidated Financial Statements and the notes thereto, have
been restated to reflect the Company's Roltra-Morse and Instrumentation business
segments  in  discontinued  operations.  Certain  prior year  amounts  have been
reclassified to conform to the current year presentation.


Note 2  Acquisition By II Acquisition Corp.

On  August  28,  1997,  II  Acquisition  Corp.  ("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.  The Acquisition has been accounted for
under  the  purchase  method.  The  purchase  price was  allocated  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 $228 million, which
is being  amortized on a straight-line  basis over 40 years.  The purchase price
allocation  has  been  completed  on a  preliminary  basis,  and  as  a  result,
adjustments to the carrying value of assets and liabilities may occur.

Additional purchase  liabilities  recorded included  approximately $18.6 million
for  severance  and  related  costs,  and   consolidation  of  certain  acquired
facilities.  At December 31, 1997,  approximately  $10.5  million of these costs
remained on the balance sheet.  The Company  expects to complete its termination
of employees and  consolidation of facilities in 1998. See Note 4 for additional
discussion of the 1997 cost reduction program.

The historical financial information presented in the Consolidated Statements of
Income reflect the results of the pre-Acquisition period from January 1, 1997 to
August 28, 1997 and the post-Acquisition period from August 29, 1997 to December
31, 1997, and the years ended December 31, 1996 and 1995. Due to the application
of the purchase method of accounting for the  Acquisition,  the  pre-Acquisition
period is not comparative to the post-Acquisition period.

The unaudited pro forma  information for the periods set forth below give effect
to the Acquisition,  the refinancing of the Company's  domestic senior debt (See
Note 9) and the sale of the Instrumentation  business segment (See Note 3) as if
they had occurred on January 1, 1997 and January 1, 1996, respectively.  The pro
forma results  include  additional  expense  related to the  amortization of the
increased  goodwill,  and the reduction in interest  expense  resulting from the
refinancing  of the domestic  senior debt and  repayments  with the net proceeds
from the sale of  Instrumentation.  The pro forma  information  is presented for
informational  purposes only and is not necessarily indicative of the results of
operations  that actually would have been achieved had these  transactions  been
consummated at the beginning of the periods presented.


Year Ended December 31                            1997           1996
(Dollars in  thousands, except per share amounts)     (Unaudited)
-------------------------------------------------------------------------

Net Sales                                        $ 316,862     $ 309,511
Net Income (Loss) from Continuing Operations
   before Extraordinary Item                     $ (35,595)    $ (31,604)

Earnings (Loss) Per Share, Basic and Diluted:
   Continuing Operations before
   Extraordinary Item                               $(2.08)       $(1.85)
-------------------------------------------------------------------------


In conjunction with the  Acquisition,  the Company recorded a third quarter 1997
charge of $15.8  million  including  a $10 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).

The  Acquisition  reduced the number of shares  traded  publicly and reduced the
number of holders of shares.  On March 16, 1998,  the Company  received a letter
dated March 9, 1998, from the New York Stock Exchange,  Inc. ("NYSE") indicating
the NYSE's  determination  that the Company has fallen below  certain  continued
listing   criteria,   and  that  the  NYSE   was   carefully   considering   the
appropriateness  of the  continued  listing of the Company's  common stock.  The
Company is  preparing a response to the NYSE taking the  position  that the NYSE
should maintain the listing of the Company's  common stock. The Company seeks to
persuade the NYSE to continue such listing,  but there can be no assurance  that
the NYSE will not attempt to delist the Company's common stock. Even if the NYSE
maintains  such listing for now, the Company's  common stock may, at some future
time, no longer meet the requirements for the NYSE for continued listing and may
be  delisted  from  the  NYSE  and  deregistered  under  the  provisions  of the
Securities  Exchange Act of 1934, as amended (the "Exchange Act"). A decision by
the NYSE to  delist  the  Company's  common  stock or  deregistration  under the
Exchange  Act could  adversely  affect the  liquidity  and  market  value of the
remaining shares held by the public.


Note 3  Discontinued Operations

In August 1997 and in February  1998,  the Company  announced  that the Board of
Directors  had  approved  plans to sell  its  Instrumentation  and  Roltra-Morse
businesses,  respectively. In 1995, the Company sold its Turbomachinery and most
of its  Electro-Optical  Systems  businesses,  which sales were  approved by the
Board  of  Directors  in  August 1994 and  in  January 1994,  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.

Discontinued  operations include management's best estimates of amounts expected
to be realized at the time of disposal.  The amounts the Company will ultimately
realize  could  differ  materially  in the near  term from the  amounts  used to
determine the gain or loss on disposal of the discontinued operations.

Roltra-Morse
On  February  27,  1998,  the  Company  completed  the sale of its  Roltra-Morse
business to Magna International Inc. for cash proceeds of $30.7 million, subject
to final adjustment.  Roltra-Morse  retained $18.4 million of its debt. The sale
price  approximated  the recorded net book value of the  business.  Net proceeds
were used to reduce  domestic  senior debt.  See Note 9 for further  information
regarding the use of the  proceeds.  This  transaction  will be reflected in the
Company's financial statements in the first quarter of 1998.

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 after the Acquisition. 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. 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 outstanding under a previous credit facility.  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
amounts  outstanding  under its  previous  credit  facility by $8 million and to
redeem $40 million of the Company's then outstanding 12.25% senior  subordinated
debentures.

The Company retained certain liabilities related to the Electro-Optical  Systems
business of  approximately  $24  million.  At  December  31,  1993,  the Company
provided for estimated  losses on disposal of this segment in the amount of $168
million,  which included a provision for anticipated  operating  losses prior to
disposal.  During 1995, the Company  recognized an additional $13.3 million loss
on disposal. The additional loss included $6.8 million related to the resolution
of  contingencies  associated  with the sale of the business and charges of $6.5
million recorded primarily to write down remaining  non-operating real estate to
net  realizable  value.  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.

Turbomachinery
On January 17, 1995, the Company  completed the sale of its Delaval  Turbine and
TurboCare divisions and its 50% interest in Delaval-Stork,  to Mannesmann Demag.
The final purchase price was $119 million, of which $109 million was received at
closing,  with the remainder  earning interest to the Company and to be received
at specified  future  contract  dates  subject to  adjustment as provided in the
agreement.  It is  management's  expectation  that  there  will  be  no  further
adjustment  to the  purchase  price.  A portion of the  proceeds was used by the
Company  to pay  off its  domestic  senior  debt  and $40  million  of its  then
outstanding 12.25% senior subordinated debentures.

The Company retained certain liabilities related to the Turbomachinery  business
of approximately $33 million.  As a result of the sale of this business in 1995,
the Company  recognized  an estimated  gain on disposal of $35  million,  net of
income  taxes of $5.2  million.  During  1996 and  1997,  the  Company  recorded
additional losses on disposal of $2.9 million and $5 million,  respectively. The
additional  losses included charges related to changes in estimates on legal and
other  reserve  requirements   associated  with  retained  liabilities  of  this
business.

The Company reviews  quarterly the assumptions used in determining the estimated
gain or loss from  discontinued  operations  and the  adequacy  of the  recorded
liabilities.   Management   believes  that  the  recorded  amount  of  estimated
liabilities  related to the  Discontinued  Operations  at  December  31, 1997 is
adequate, however, the amounts estimated may differ from actual results.

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



December 31 (Dollars in thousands)                  1997       1996
--------------------------------------------------------------------

     Current Assets:
          Cash                                  $    843   $  3,125
          Receivables                             13,799     33,816
          Inventories                             12,357     33,705
          Other current assets                     5,083      6,762
--------------------------------------------------------------------
                                                  32,082     77,408
--------------------------------------------------------------------
     Current Liabilities:
          Notes payable                           15,694     21,340
          Trade accounts payable                  22,043     25,690
          Other current liabilities                6,522     18,629
--------------------------------------------------------------------
                                                  44,259     65,659
--------------------------------------------------------------------

     Net Current Assets (Liabilities)            (12,177)    11,749
--------------------------------------------------------------------

     Long-term Assets:
          Property                                21,758     35,053
          Other long-term assets                  14,220     21,490
--------------------------------------------------------------------
                                                  35,978     56,543
--------------------------------------------------------------------

     Long-term Liabilities                         8,874     19,616
--------------------------------------------------------------------

     Net Long-term Assets                         27,104     36,927
--------------------------------------------------------------------

     Net Assets                                $  14,927  $  48,676
====================================================================

Net assets related to the Roltra-Morse and  Turbomachinery  businesses are $15.5
million and $.1  million,  and $11.3  million and $.5 million as of December 31,
1997 and 1996, respectively.  Net assets related to the Instrumentation business
are $22.5 million as of December 31, 1996. The Electro-Optical  Systems business
contributed $.7 million of net liabilities and $14.4 million of net assets as of
December 31, 1997 and 1996, respectively.

Total long-term debt of the Discontinued  Operations  amounted to $6 million and
$11.7 million as of December 31, 1997 and 1996, respectively.  Of these amounts,
$1.2 million and $3.4 million  represent the current  portions of long-term debt
as of December 31, 1997 and 1996, respectively.

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


                         Post-Acquisition Pre-Acquisition
                             August 29,      January 1,
                              1997 to        1997 to
 Year Ended December 31     December 31,     August 28,
(Dollars in thousands)          1997            1997       1996     1995
------------------------------------------------------------------------
    Net Sales                   $30,257       $117,730 $181,948 $235,452
------------------------------------------------------------------------

    Income (loss) from
     operations before income
     taxes and minority
     interest                    (3,736)         3,025   (7,963)   5,882
------------------------------------------------------------------------

    Income taxes                     77            664    1,037    1,256
    Minority interest               (60)           (11)    (295)    (725)
------------------------------------------------------------------------

    Income (loss) from
     operations               $  (3,753)       $ 2,372 $ (8,705) $ 5,351
========================================================================

The income (loss) from operations of the Discontinued  Operations for 1997, 1996
and 1995  includes  allocated  interest  expense of $2.7 million ($2.4 million -
pre-Acquisition),  $4.5  million,  and $10.3  million,  respectively.  Allocated
interest expense includes interest on debt of the Discontinued  Operations to be
assumed  by the  buyers of these  operations,  and 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.

Roltra-Morse
The Roltra-Morse business had operating losses of $6.7 million and $13.8 million
for 1997 and 1996, respectively, and operating income of $.5 million in 1995.

The  1997   operating   loss   included   an  unusual   charge  of  $.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.  Included in the 1995  operating
income was an unusual charge of $1.2 million  related to the shutdown of a plant
in southern Italy and the related loss on the sale of that building.

Instrumentation
The  Instrumentation  business had income from operations of $5.3 million,  $5.1
million and $4.9 million for 1997, 1996 and 1995, respectively.

Operating  income in both 1996 and 1995 included  unusual charges of $.9 million
related to restructuring of operations in Europe.

Electro-Optical Systems
The  Electro-Optical  Systems business had income from operations of $.8 million
and $.4  million  for 1997 and 1996,  respectively.  The income in 1997 and 1996
offset increases in estimated reserve  requirements in those respective periods.
The 1995 loss of $1 million,  including allocated interest,  was charged against
the reserve for anticipated losses previously established by the Company.


Note 4 Restructuring Plans

Asset Sales
The  Company  divested  its   Turbomachinery   and   substantially  all  of  its
Electro-Optical  Systems businesses in 1995. The Company used the proceeds,  net
of  related  expenses,  to repay  domestic  senior  debt in the  amount of $89.7
million  and to  redeem  $80  million  of its  then  outstanding  12.25%  senior
subordinated debentures. During 1996, the Company completed the sales of five of
its  non-operating  real estate  holdings for net proceeds of $8.6 million.  The
proceeds were used to repay the Company's domestic senior debt.

On April 28, 1997 the Company completed the sale of its Varo Electronic  Systems
division, the remaining portion of its former Electro-Optical  Systems business.
Proceeds  of $12  million  were used to reduce  senior  domestic  debt under its
previous credit agreement.

On  August  29,  1997 the  Company  completed  the  sale of its  Instrumentation
business segment to Danaher Corporation for proceeds of $85 million. The Company
used a portion of the proceeds to reduce domestic senior debt by $68.1 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  Enterprise MPT
Corporation.  Steven M.  Rales and  Mitchell  P. Rales  collectively  own 76% of
American Enterprise MPT Corporation.  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.

In 1997, the Company  completed the sales of certain of its  non-operating  real
estate for total  proceeds of $14.1  million.  Net  proceeds  were used to repay
domestic senior debt.

On February 27,  1998,  the Company sold its  Roltra-Morse  business  segment to
Magna International for cash subject to final adjustment. The sale resulted in a
cash  transfer to the Company of $30.7  million.  Net proceeds have been used by
the Company to reduce domestic senior debt.

Cost Reduction Programs
1997 Program
In connection  with the  Acquisition,  the Company  implemented a cost reduction
program.  The cost of this  program is  estimated  to be $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,  $1.7 million,  $1.2 million,  and $5.2 million of costs are estimated
for the  Company's  Power  Transmission,  Pumps,  and Morse  Controls  segments,
respectively,  related to severance  and  termination  benefits  resulting  from
headcount reductions and the consolidation of certain manufacturing facilities.

The 1997 cost reduction  program reduced expenses by approximately $3 million in
the 1997 period subsequent to the Acquisition and is expected to reduce expenses
by approximately  $19.5 million in 1998 and $20.6 million  annually  thereafter.
The program includes a reduction of 237 employees,  or 10.3% of the total number
of Company  employees in continuing  operations at the date of the  Acquisition.
The  required  cash outlay  related to this program was $8.1 million in 1997 and
the expected cash requirements during 1998 are $10.5 million.

1996 Program
The fourth  quarter  of 1996  includes  a charge of $.3  million  to  continuing
operations  for  restructuring  measures  taken at the  Company's  Morse Germany
operation.

1995 Program
In the  fourth  quarter of 1995,  the  Company  recorded a charge to  continuing
operations of $3.1 million,  including severance and other expenses related to a
company-wide  program to reduce general and  administrative  costs. This program
included a reduction  of 56  employees,  or 2.4% of the total  number of Company
employees in continuing  operations at the end of 1995, including a reduction of
the  corporate  headquarters  staff by 20%.  The  program  reduced  general  and
administrative  expenses by approximately  $2.7 million and $3.2 million in 1996
and 1997,  respectively,  and is expected to reduce  general and  administrative
expenses from the 1995 level by approximately  $4.1 million in 1998 and annually
thereafter.  The required cash outlays related to this program were $.4 million,
$2.4 million, and $.3 million in 1995, 1996 and 1997 respectively.


Note 5 Inventories

Inventories are summarized as follows:

December 31 (Dollars in thousands)                1997              1996
-------------------------------------------------------------------------

Finished products                             $ 18,823          $ 23,537
Work in process                                 23,218            25,828
Materials and supplies                          23,481            21,810
-------------------------------------------------------------------------
                                                65,522            71,175
Less customers' progress payments                  634             2,710
-------------------------------------------------------------------------

                                              $ 64,888          $ 68,465
=========================================================================


Note 6  Accrued Expenses and Other Liabilities

Accrued expenses and other liabilities consist of the following:

December 31 (Dollars in thousands)                1997              1996
-------------------------------------------------------------------------

Accrued product warranty costs               $   1,844         $   2,007
Accrued litigation and claims costs             16,683             2,132
Payroll and related items                       11,836            12,109
Accrued interest payable                         3,126             3,641
Accrued restructuring costs                     11,970               445
Accrued divestiture costs                        1,835             2,460
Other                                            6,450             5,585
-------------------------------------------------------------------------

                                              $ 53,744          $ 28,379
=========================================================================


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 $.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.

1995
During the fourth quarter of 1995,  the Company  recognized  unusual  charges of
$8.1  million  ($.48 per  share) in income  from  continuing  operations.  These
charges include $3.1 million in severance benefits and other expenses related to
a Company-wide  program to reduce general and administrative  costs (See Note 4)
and $5 million related to the write-down of certain non-operating real estate to
net realizable value.



Note 8  Income Taxes

The components of income tax expense (benefit) from continuing operations are:


                       Post-Acquisition Pre-Acquisition
                           August 29,    January 1,
                             1997          1997
Year  Ended  December 31  to December    to August
(Dollars in thousands)     31, 1997      28, 1997     1996       1995
----------------------------------------------------------------------

Current:
     Federal               $   ---       $   ---   $   ---    $   ---
     Foreign                    94           994     2,386      1,528
     State                     141           260       277        303
----------------------------------------------------------------------
                               235         1,254     2,663      1,831
----------------------------------------------------------------------

Deferred:
     Federal                   ---           ---    10,000    (17,000)
     Foreign and State         ---           ---       ---        ---
-----------------------------------------------------------------------
                               ---           ---    10,000    (17,000)
-----------------------------------------------------------------------

                            $  235        $1,254   $12,663   $(15,169)
=======================================================================

Income tax expense for 1997, 1996 and 1995 from discontinued  operations was $.7
million, $1 million and $1.3 million, respectively.

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, 1997 and
1996 are as follows:

December 31
(Dollars in thousands)              1997                1996
---------------------------------------------------------------------
                            Current   Long-term  Current  Long-term
---------------------------------------------------------------------
Deferred tax assets:
 Postretirement benefit
  obligation                 $   595    $  5,809   $  595  $   6,367
 Expenses not currently
  deductible                  28,911       7,280   21,516      7,185
 Net operating loss carryover    ---      35,436      ---     37,269
 Tax credit carryover            ---       2,783      ---      2,133
---------------------------------------------------------------------
Total deferred tax assets     29,506      51,308   22,111     52,954
Valuation allowance for
 deferred tax assets         (19,418)   (33,839)  (12,946)   (31,119)
---------------------------------------------------------------------

Net deferred tax assets       10,088      17,469    9,165     21,835
---------------------------------------------------------------------
Deferred tax liabilities:
 Tax over book depreciation      ---      15,271      ---     18,289
 Other                           ---       7,232      ---      7,436
---------------------------------------------------------------------
Total deferred tax liabilities   ---      22,503      ---     25,725
=====================================================================
Net deferred tax assets
 (liabilities)              $ 10,088     $(5,034)  $9,165   $ (3,890)
=====================================================================

At  December  31,  1997,   unremitted  earnings  of  foreign  subsidiaries  were
approximately $21.4 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 $.9 million.

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

                     Post-Acquisition Pre-Acquisition
                         August 29,     January 1,
                            1997           1997
Year Ended December 31  to December     to August
(Dollars in thousands)    31, 1997       28, 1997      1996      1995
----------------------------------------------------------------------
United States               $(7,612)     $(29,023) $(22,663) $(14,722)
Foreign                       2,158          (974)    2,258     6,731
======================================================================

                            $(5,454)     $(29,997) $(20,405)  $(7,991)
======================================================================

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

                         Post-Acquisition Pre-Acquisition
                             August 29,     January 1,
                                1997          1997
 Year Ended December 31      to December     to August
(Dollars in thousands)        31, 1997       28, 1997       1996       1995
----------------------------------------------------------------------------

Tax at U.S. federal income
 tax rate                     $ (1,909)    $ (10,499)   $ (7,142)  $ (2,797)
State taxes, net of federal
 income tax effect                  92           169         188        197
Impact of foreign tax rates and
 credits                           228          (660)       (331)      (828)
Net U.S. tax on distributions of
 current foreign earnings          355           ---         755        586
Goodwill amortization and
 write-off                         458           222       4,276        643
Change in valuation reserve      1,720         7,472      12,390    (21,685)
Nondeductible foreign losses        89         1,017       1,914        ---
Other                             (798)        3,533         613      8,715
----------------------------------------------------------------------------
Income tax expense (benefit)   $   235     $   1,254   $  12,663  $ (15,169)
============================================================================

The Company has net operating loss  carryforwards of approximately  $101 million
expiring in years 2002 through  2012,  and minimum tax credits of  approximately
$2.8 million,  which may be carried  forward  indefinitely.  Included in the net
operating  loss  carryforwards  are foreign tax  credits of  approximately  $7.4
million, expiring through 2001, which, for financial and tax reporting purposes,
are reflected as deductible foreign taxes. These  carryforwards are available to
offset future federal taxable income, subject to the Section 382 limitations.

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.

In 1995, the Company  reduced the valuation  allowance  applied  against the net
operating loss  carryforwards  by $17 million based upon  reasonable and prudent
tax planning strategies and future income projections including the planned sale
of Roltra-Morse.  As a result of withdrawing Roltra-Morse from potential sale in
1996,  the Company  recorded a provision  of $10 million  against  deferred  tax
benefits  previously  recognized based on an anticipated gain on this sale. This
reduced the deferred  tax benefit to $5.3  million at December  31,  1996,  to a
level  where  management  believes  that it is more likely than not that the tax
benefit will be realized.  The total amount of future taxable income in the U.S.
necessary to realize the asset is approximately $14.5 million.  The Company will
generate this income  principally  through the completed sale of Roltra-Morse in
February 1998. Although the Company has a history of prior losses,  these losses
were  primarily  attributable  to divested  businesses  and unusual  items.  The
remaining  valuation  allowance is necessary  due to the  uncertainty  of future
income estimates.


Note 9  Notes Payable and Long-Term Debt

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). This  transaction  will be
reflected in the  Company's  financial  statements in the first quarter of 1998.
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 quarter 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.
As a result of the early  extinguishment  of these  Notes,  and a portion of the
term  loan  facility  with  the  proceeds   from  the   Roltra-Morse   sale,  an
extraordinary  charge of $5.6 million will be recognized in the first quarter of
1998.

Notes Payable
As of  December  31,  1997,  the  Company  had under the New  Credit  Agreement,
borrowings of $25 million  outstanding  under the revolving credit facility,  as
well as $13.9 million of outstanding  standby  letters of credit.  The Company's
continuing  operations had $8 million in foreign  short-term  credit  facilities
with  amounts  outstanding  at  December  31, 1997 of $1.9  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. The weighted average interest rate
on  short-term  notes  payable  was  8.03% and 8.35% at  December  31,  1997 and
December 31, 1996, respectively.


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

December 31 (Dollars in thousands)                1997         1996
--------------------------------------------------------------------

Term Loans                   (1) (2)        $   59,000      $   ---
Term Loan A, $1.25 million due quarterly
 July 31, 1996 to April 30, 2001                   ---       22,500
Term Loan B, $2.2 million due quarterly
 July 31, 1997 to April 30, 2001                   ---       28,122
Term Loan C, $.125 million due quarterly
 July 31, 1996 to April 30, 2001 and
 $5.3 million due quarterly July 31,
 2001 to April 30, 2003                            ---       44,750
Senior subordinated notes with interest
 at 11.75%, due May 1, 2006, net of
 unamortized discount of  $1.7 million
 in 1997 and $2.1 million in 1996              133,381      152,858
Other                                            6,020        8,443
--------------------------------------------------------------------
                                               198,401      256,673
Less current portion                             6,082       11,666
--------------------------------------------------------------------
                                              $192,319     $245,007
====================================================================

(1)Quarterly principal payments  commencing May 29, 1998 are as follows:  $1.475
   million due  quarterly  May 29,  1998 to August 29,  1998;  $2.2  million due
   quarterly  November 29, 1998 to August 29, 1999;  $2.58 million due quarterly
   November 29, 1999 to August 29, 2000;  $3.69 million due  quarterly  November
   29, 2000 to August 29, 2001;  and $5.53  million due  quarterly  November 29,
   2001 to August 29, 2002.
(2) These loans bear interest at prime plus 1.25%, or LIBOR plus 2.5%.  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.)
-------------------------------------------------------------------

The aggregate annual maturities of long-term debt from continuing operations, in
thousands,  for the four years  subsequent  to 1998 are:  1999 - $9,690;  2000 -
$11,770; 2001 - $17,018; and 2002 - $16,927.

Total debt of the Discontinued Operations, in thousands, amounted to $21,652 and
$33,012 as of December 31, 1997 and 1996, respectively. Of these amounts, $4,797
and $8,295 represent the long-term portion.

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 Notes are not  redeemable  prior to May 1, 2001,  except that,  until May 1,
1999, the Company may redeem,  at its option,  up to an aggregate of $55 million
of the  principal  amount of the Notes at 110% of their  principal  amount  plus
accrued  interest with the net proceeds of one or more public  equity  offerings
provided that at least $100 million of the principal amount of the Notes remains
outstanding  after each such redemption.  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,  the Company
offered  to  purchase  all of the  Notes  at 101% of the  principal  amount,  as
required under the indenture governing the Notes as a result of the Acquisition.
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.  The fair value
of the $135.1  million of these  instruments  outstanding  at December 31, 1997,
based on market bid prices, was $152.3 million.

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, 1997.

An  extraordinary  charge of $3.3 million ($.20 per share) was recorded in 1997.
In the third quarter of 1997, a $.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 $8.5  million  ($.49 per share) 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.

In connection  with the early  repayment and redemption of domestic  senior debt
and $80 million of the then outstanding 12.25% senior subordinated debentures in
1995,  the  Company  recorded  a $4.4  million  ($.26  per  share)  charge as an
extraordinary  item.  The charge  consisted of the  write-off  of deferred  debt
expense  associated  with  portions of the  domestic  senior debt repaid and the
12.25% senior subordinated debentures redeemed.


Note 10  Shareholders' Equity

Equity Incentive Plans

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.

Stock  options  granted  during 1997 under the Plans have been valued based upon
the difference  between the exercise price on the date of grant and  Acquisition
Corp.'s  tender  offer  price of $7.05.  The  Company  has  followed  Accounting
Principles  Board  Opinion No. 25,  "Accounting  for Stock Issued to  Employees"
("APB 25") in  accounting  for its stock option  plans,  but has  disclosed  the
supplemental  information as required under FASB Statement No. 123,  "Accounting
for  Stock-Based  Compensation"  ("Statement  123").  Under APB 25,  because the
exercise  price of the Company's  employee stock options equals the market price
of the  underlying  stock on the  date of  grant,  no  compensation  expense  is
recognized other than for restricted stock awards.

Under the Company's  Equity  Incentive Plan for Key  Employees,  up to 3,050,000
shares of the Company's  $1.00 par value common stock were issuable  pursuant to
the granting of stock  options,  stock  appreciation  rights,  restricted  stock
awards and restricted  unit awards to key employees.  Options were granted at no
less than 100 percent of the fair market value of the Company's  common stock on
the date of grant or on the  prospective  date fixed by the Board of  Directors.
None of these options were  exercisable  for at least a one-year period from the
date of grant.  After this  waiting  period,  25 percent  of each  option,  on a
cumulative  basis,  could be  exercised  in each of the  following  four  years.
Additionally,  each  option  terminated  no later than 10 years from the date of
grant.

The Equity Incentive Plan for Key Employees permitted awards of restricted stock
to key employees subject to a restricted period and a purchase price, if any, to
be paid by the employee as determined by the committee  administering the Equity
Incentive Plan. The vesting of restricted  stock awards was subject to a defined
vesting period and to the Company's common stock achieving  certain  performance
levels during such period.  No grants of  restricted  stock were made in 1997 or
1995.  Grants  of 35,000  shares  of  restricted  stock  were made in 1996.  All
employees, who held vested restricted stock as August 29, 1997, were compensated
for the stock in cash at the Acquisition  Corp.  tender offer price of $7.05. No
restricted stock was outstanding as of December 31, 1997.

A summary of the Company's stock option activity under the Equity Incentive Plan
for Key Employees and related information is as follows:

                              Weighted        Weighted       Weighted
                             -Average        -Average       -Average
Year Ended December 31        Exercise        Exercise       Exercise
(Shares in thousands)   1997  Price     1996  Price   1995   Price
--------------------------------------------------------------------
Options:
     Granted              15    $3.00    254   $4.08   250    $6.00
     Exercised          (455)   $4.77    ---     ---   (73)   $7.32
     Forfeited          (101)   $8.30   (292)  $8.12  (210)  $10.27
     Canceled           (885)   $8.44    ---     ---   ---      ---
Outstanding at end
  of year                ---     ---   1,426   $7.32 1,464    $8.02
Exercisable at end
  of year                ---     ---     718   $8.15   691    $8.24
Available for grant
  at end of year         ---             868           865
Weighted-average fair
  value of options granted
  during the year      $4.05           $2.50         $3.53
---------------------------------------------------------------------

At December  31,  1997,  the Company had no options  outstanding  under the plan
pursuant to the termination of the plan by the Board of Directors on November 5,
1997, effective August 29, 1997.

During  1988,  the  Company  adopted  the  Equity  Incentive  Plan  for  Outside
Directors. This plan provided for the granting of non-qualified stock options of
up to 360,000  shares of the Company's  common stock to directors of the Company
who are not employees of the Company or any of its affiliates.  Pursuant to this
plan,  options  could be granted at no less than 100  percent of the fair market
value of the  Company's  common  stock on a date five  business  days  after the
option was granted and no option  granted  could be  exercised  during the first
year after its grant. After this waiting period, 25 percent of each option, on a
cumulative  basis,  could be exercised in each of the following four years. Each
option  terminated  no later than 10 years from the date of grant.  In  February
1988,  320,000 stock options were granted at $16.19 per share. In December 1990,
40,000 stock options were granted at $10.375 per share.  In June 1995,  the plan
was amended to reduce the number of shares  issuable to an  aggregate of 360,000
and to  provide  that  no  future  options  could  be  granted  thereunder.  All
outstanding stock options under the plan were canceled effective August 29, 1997
pursuant to resolution of the Company's Board of Directors. On November 5, 1997,
the plan  was  terminated  pursuant  to  resolution  of the  Board of  Directors
effective August 29, 1997.

In June 1995,  the Company  adopted the 1995 Equity  Incentive  Plan for Outside
Directors.  This plan provided for the granting of  restricted  stock awards and
non-qualified  stock  options of up to 240,000  shares of the  Company's  common
stock to outside  directors of the Company who are not  employees of the Company
or any of its  affiliates.  Pursuant to this plan,  each  outside  director  was
granted,  on an annual basis,  options to purchase 4,000 shares of the Company's
common  stock.  The  exercise  price of the  options was 100 percent of the fair
market  value of the common  stock at the date of grant and no  options  granted
could be exercised during the first year after its grant subject to certain plan
provisions.  After this waiting period,  the options became  exercisable in four
equal annual installments of 1,000 shares. Additionally,  each option terminated
no later than 10 years from the date of grant.  This plan also  provided for the
granting of an annual  restricted  stock award of 1,000 shares of the  Company's
common stock.  Each award was made in four quarterly  installments of 250 shares
beginning July 1, 1995. The shares  comprising the restricted stock awards could
not be sold or otherwise  transferred by the outside director until  termination
from service.  Restricted  stock awards of 3,750 shares,  5,500 shares and 3,000
shares were granted during 1997, 1996 and 1995, respectively.

A summary of the Company's stock option activity under the 1995 Equity Incentive
Plan for Outside Directors and related information is as follows:

                               Weighted        Weighted       Weighted
                              -Average        -Average       -Average
 Year Ended December 31        Exercise        Exercise       Exercise
(Shares in thousands)   1997   Price    1996   Price   1995   Price
---------------------------------------------------------------------
Options:
     Granted              20    $2.87     20    $7.88    24    $8.00
     Exercised           (20)   $2.87    ---     ---    ---      ---
     Canceled            (44)   $7.83    ---     ---    ---      ---
Outstanding at end
  of year                ---      ---     44    $7.94    24    $8.00
Exercisable at end
  of year                ---      ---      6    $8.00   ---      ---
Available for grant
  at end of year         ---             188            213
Weighted-average fair
  value of options granted
  during the year      $4.18           $5.58          $5.61
---------------------------------------------------------------------

At December  31,  1997,  the Company had no options  outstanding  under the plan
pursuant to the termination of the plan by the Board of Directors on November 5,
1997, effective August 29, 1997.

Pro forma net income (loss) and earnings  (loss) per share  determined as if the
Company has  accounted  for its employee  stock  options  granted  subsequent to
December 31, 1994 under the fair value method of Statement 123 follows:


                       Post-Acquisition Pre-Acquisition
                           August 29,    January 1,
                            1997 to        1997 to
                          December 31,   August 28,
                              1997          1997        1996      1995
-----------------------------------------------------------------------
Net income (loss) - as
  reported                  $(21,220)     $(28,879) $(58,370)  $29,710
Net income (loss) - pro
  forma                     $(21,220)     $(28,879) $(58,643)  $29,668
Earnings (loss) per share -
  as reported                 $(1.24)       $(1.68)   $(3.41)    $1.74
Earnings (loss) per share -
  pro forma                   $(1.24)       $(1.68)   $(3.42)    $1.74
-----------------------------------------------------------------------


The fair value for options and restricted  stock awards granted in 1996 and 1995
was estimated at the date of grant using a  Black-Scholes  option  pricing model
with the following weighted-average assumptions for the Equity Incentive Plans:


                                         1996              1995
 Equity Incentive Plan          ---------------------     ------
  for Key Employees              Stock     Restricted     Stock
                                 Options   Stock Awards   Options
-------------------------------------------------------------------
Expected stock price volatility    0.528        0.510      0.495
Risk-free interest rate             6.16%        6.26%      5.93%
Expected life of equity
  instrument                     7 years      5 years    7 years
Expected dividend yield                0%           0%         0%
-------------------------------------------------------------------

Stock options granted under the plan during 1997 have been valued based upon the
difference  between  the  exercise  price on the date of grant  and  Acquisition
Corp.'s tender offer price of $7.05.

During 1995,  there were no restricted  stock awards under the Equity  Incentive
Plan for Key Employees.


                                        1996                 1995
  1995 Equity Incentive Plan    --------------------  ----------------------
  for Outside Directors         Stock    Restricted   Stock     Restricted
                                Options  Stock Awards Options   Stock Awards
----------------------------------------------------------------------------
Expected stock price volatility   0.522      0.523      0.512        0.497
Risk-free interest rate            6.31%      5.93%      6.31%        5.93%
Expected life of equity
  instrument                    7 years    4 years    7 years      5 years
Expected dividend yield               0%         0%         0%           0%
----------------------------------------------------------------------------

For 1996 and 1995,  the expected life of the  restricted  stock awards under the
plan  represents the  weighted-average  of the remaining years until each of the
members of the Board of Directors  attains the mandatory  retirement  age of 72.
This assumed that each of the directors would continue their directorships until
the mandatory retirement age.

The risk-free  interest  rates are based on U.S.  Treasury  Notes on the date of
grant with maturities  equal to the respective stock option and restricted stock
award expected lives.

The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options and restricted stock awards.  Option and restricted
stock  valuation  models  require  the  input of highly  subjective  assumptions
including the expected stock price volatility.

For purposes of pro forma  disclosures,  the estimated fair value of the options
and  restricted  stock awards is amortized to expense over the options'  vesting
period.  Total compensation  expense related to stock-based  compensation awards
under  Statement 123 for 1996 and 1995 was  approximately  $300,000 and $48,000,
respectively. In 1997, actual compensation expense is included in the net income
pro forma disclosures table.  Compensation expense recorded by the Company under
APB 25 in 1997,  1996 and  1995  for  awards  granted  during  those  years  was
approximately $1.2 million, $27,000 and $6,000, respectively.

Preferred Stock Purchase Rights
On April 30,  1997,  the  Board of  Directors  declared  a  distribution  of one
Preferred Stock Purchase Right (a "Right") for each outstanding share of Company
common stock to  shareholders of record at the close of business on May 4, 1997.
Each Right  entitles the  registered  holder to purchase from the Company a unit
consisting  of 1/100  of a share (a  "Unit")  of  Series B Junior  Participating
Preferred  Stock, par value $1.00 per share at a purchase price of $15 per Unit,
subject to  adjustment.  The Rights will  separate  from the common  stock and a
Distribution  Date will occur upon the earlier of (i) 10 days following a public
announcement  that a person or group of  affiliated  or  associated  persons has
acquired, or obtained the right to acquire,  beneficial ownership of 15% or more
of the outstanding shares of Company common stock (the "Stock Acquisition Date")
or (ii) 10  business  days  following  the  commencement  of a  tender  offer or
exchange offer that would result in a person or group beneficially owning 15% or
more of such outstanding  shares of common stock. In the event that, at any time
following the Distribution Date, (i) the Company is the surviving corporation in
a merger and its common stock is not changed or  exchanged,  or (ii) a person or
beneficial  owner of more  than 15 % of the then  outstanding  shares  of common
stock other than pursuant to an offer for all outstanding shares of common stock
that the  independent  directors  determines to be fair to, and otherwise in the
best  interests of  stockholders,  each holder of a Right will have the right to
receive  Company  common  stock  having a value equal to two times the  exercise
price  of  the  Right.  If the  Company  is  acquired  subsequent  to the  Stock
Acquisition Date in which the Company is not the surviving corporation or 50% or
more of the  Company's  assets or  earning  power is sold or  transferred,  each
holder of a Right shall  thereafter  have the right to receive,  upon  exercise,
common  stock of the  acquiring  company  having a value  equal to two times the
exercise  price of the  Right.  At any time  until 10 days  following  the Stock
Acquisition  Date, the Company may redeem the Rights in whole,  but not in part,
at a price of $.01 per  Right,  payable in cash or stock.  After the  redemption
period has expired,  the Company's  right of redemption  may be reinstated if an
acquiring  person  reduces  his  beneficial  ownership  to  10% or  less  of the
outstanding  shares of common stock in a transaction  or series of  transactions
not involving the Company.  The Rights have certain  antitakeover  effects.  The
Rights  should  not  interfere  with any  merger or other  business  combination
approved by the Board of Directors  of the Company  since the Board of Directors
may, at its option, at any time prior to 10 days following the Stock Acquisition
Date  redeem  all but not  less  than  all of the then  outstanding  Rights.  In
addition,  as a result of an amendment to the agreement governing the Rights, in
certain  circumstances,  the  Rights by their  terms will not  interfere  with a
merger between the Company and Acquisition Corp. or any affiliate of Acquisition
Corp.  Pursuant to the agreement governing the Rights, the Board of Directors of
the Company may in general further amend the terms of the Rights. The Rights are
not  exercisable  until the  Distribution  Date and will  expire at the close of
business on May 4, 2007.

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 three business segments:
Power Transmission,  Pumps, and Morse Controls.  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.  The 1996 and 1995 amounts have been restated to
reflect  Instrumentation and Roltra-Morse  segments as discontinued  operations.
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)                1997         1996         1995
---------------------------------------------------------------------
Net Sales
     Power Transmission          $  92,130    $  89,456   $   95,075
     Pumps                         112,486      107,567       94,375
     Morse Controls                112,246      112,488      107,664
---------------------------------------------------------------------

Total net sales                   $316,862     $309,511     $297,114
---------------------------------------------------------------------
Segment operating income
     Power Transmission         $    8,617   $    8,618    $  10,673
     Pumps                          14,503       11,229        9,219
     Morse Controls                  4,367        8,299        4,748
---------------------------------------------------------------------
Total segment operating
  income                            27,487       28,146       24,640
---------------------------------------------------------------------
Equity in income (loss) of
  unconsolidated companies           (519)         (32)          302
Unallocated corporate expenses(1) (37,703)     (23,988)      (12,454)
Net interest expense              (24,716)     (24,531)      (20,479)
---------------------------------------------------------------------
Income (loss) from continuing
 operations before income
 taxes and extraordinary item   $ (35,451)   $ (20,405)    $  (7,991)
=====================================================================

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

Year Ended December 31
(Dollars in thousands)                1997        1996          1995
---------------------------------------------------------------------
Segment operating income         $  27,487     $ 28,146     $ 24,640
Unallocated corporate expenses(1)  (37,703)     (23,988)     (12,454)
Other (income) expense                 177          355         (370)
---------------------------------------------------------------------
Income (loss) from operations    $ (10,039)    $  4,513     $ 11,816
=====================================================================

(1) Unallocated corporate expenses include unusual items of $31.3 million, $17.1
million and $6.6 million for the years ended  December 31, 1997,  1996 and 1995,
respectively.

Segment  operating income includes $.3 million and $1.5 million of unusual items
related to the Morse Controls  segment for the years ended December 31, 1996 and
1995, respectively.

Year Ended December 31
(Dollars in thousands)                1997         1996         1995
---------------------------------------------------------------------

Identifiable assets
     Power Transmission          $  41,903    $  70,533    $  86,343
     Pumps                          66,932       73,806       69,347
     Morse Controls                 74,585      110,141      111,482
     Corporate                     264,953       27,766       39,767
     Discontinued Operations:
          Electro-Optical             (672)      14,356       11,893
          Instrumentation              ---       22,516       24,003
          Roltra-Morse              15,489       11,331       21,534
          Turbomachinery               110          473          983
---------------------------------------------------------------------
Total identifiable assets        $ 463,300    $ 330,922    $ 365,352
---------------------------------------------------------------------
Depreciation and amortization
     Power Transmission          $   4,412    $   4,438    $   4,618
     Pumps                           3,695        4,114        3,972
     Morse Controls                  4,073        3,335        3,392
     Corporate                       2,115        1,511        1,400
---------------------------------------------------------------------
Total depreciation and
  amortization                   $  14,295    $  13,398    $  13,382
---------------------------------------------------------------------
Capital expenditures
     Power Transmission          $   1,333    $   2,699    $   3,384
     Pumps                           3,706        4,568        7,367
     Morse Controls                  3,144        2,554        2,131
     Corporate                         112          211          273
---------------------------------------------------------------------

Total capital expenditures       $   8,295    $  10,032    $  13,155
=====================================================================

Identifiable  assets of corporate at December 31, 1997 include  goodwill of $226
million related to the Acquisition  (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 $26.5 million, $6.7 million and
$28.5 million of goodwill for the Power Transmission,  Pumps, and Morse Controls
segments,  respectively,  and  goodwill of $.6 million and $9.5  million for the
Instrumentation and Roltra-Morse discontinued segments, respectively.

Identifiable assets at December 31, 1995 include $27.4 million, $5.3 million and
$29.6 million of goodwill for the Power Transmission,  Pumps, and Morse Controls
segments,  respectively,  and goodwill of $.8 million and $12.1  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)                1997         1996         1995
---------------------------------------------------------------------

Net sales
     United States                $214,150     $210,196     $205,717
     Foreign (principally Europe)  102,712       99,315       91,397
---------------------------------------------------------------------
Total net sales                   $316,862     $309,511     $297,114
---------------------------------------------------------------------
Segment operating income
     United States               $  25,050    $  20,948    $  20,572
     Foreign                         2,437        7,198        4,068
---------------------------------------------------------------------
Total segment operating income   $  27,487    $  28,146    $  24,640
---------------------------------------------------------------------
Identifiable assets
  Continuing Operations:
     United States                $380,263     $196,373     $221,449
     Foreign                        68,110       85,873       85,490
  Discontinued Operations:
     United States                    (562)      23,210       21,219
     Foreign                        15,489       25,466       37,194
---------------------------------------------------------------------

Total identifiable assets         $463,300     $330,922     $365,352
=====================================================================

Export sales
     Asia                       $    5,011   $    5,724   $    3,469
     Canada                          4,878        3,236        4,641
     Europe                          2,745        3,133        2,590
     Latin America                     779          906          470
     Middle East & North Africa        604        1,943          231
     South America                   7,349        6,739        2,678
     Other                           2,236        3,333        2,208
---------------------------------------------------------------------

Total export sales               $  23,602    $  25,014    $  16,287
=====================================================================

No one customer accounted for 10% or more of consolidated sales in 1997, 1996 or
1995.


Note 12  Pension Plans

The  Company  and  its   subsidiaries   have  various   pension  plans  covering
substantially  all of their  employees.  Benefits  are based on either  years of
service  or  years  of  service  and  average   compensation  during  the  years
immediately  preceding  retirement.  It is the general  policy of the Company to
fund its pension plans in conformity  with  requirements  of applicable laws and
regulations.  Effective  December 31, 1996, all domestic  pay-related plans were
merged into the Imo Industries Inc. Retirement Plan for U.S. Salaried Employees.
Pension benefits were not affected by the merger.  For 1997,  amounts related to
pre-Acquisition and post-Acquisition  have not been separated due to materiality
and practicality.

Pension  expense was $3.8 million in 1997, $4.3 million in 1996 and $4.2 million
in 1995, and includes  amortization of prior service cost and transition amounts
for periods of 5 to 15 years.  The 1997,  1996 and 1995 expense  includes  costs
related to retained pension liabilities of discontinued operations.  The Company
included $2 million of curtailment and settlement losses in its gain on disposal
related to the discontinued operations in 1995. Net pension expense is comprised
of the following:

Year Ended December 31
(Dollars in thousands)                    1997       1996       1995
---------------------------------------------------------------------

Service cost                            $3,107  $   4,282  $   4,297
Interest cost on projected benefit
  obligation                            14,711     14,471     13,429
Actual return on plan assets           (25,678)   (20,868)   (17,797)
Net amortization and deferral           11,689      6,374      4,274
=====================================================================
Net pension expense                     $3,829  $   4,259  $   4,203
=====================================================================

Assumptions  used to determine the net pension expense of the  Company-sponsored
defined benefit plans are as follows:

Year Ended December 31                    1997       1996       1995
---------------------------------------------------------------------

Weighted average discount rate            7.5%       7.5%       8.5%
Rate of increase in compensation levels   5.3%       5.3%       5.3%
Expected long-term rate of return on
  assets                                  9.0%       9.0%       9.0%
=====================================================================


The following  table sets forth the funded status and amounts  recognized in the
consolidated balance sheets for the defined benefit pension plans using discount
rates of 7.25% and 7.75% at  December  31,  1997,  and 1996,  respectively.  The
assumed rate of increase in compensation levels was 5.3% in both years.

Year Ended December 31
(Dollars in thousands)                     1997                  1996
-------------------------------------------------------------------------------
                                    Assets    Accumulated  Assets   Accumulated
                                    Exceed     Benefits    Exceed    Benefits
                                  Accumulated   Exceed   Accumulated  Exceed
                                   Benefits     Assets    Benefits    Assets
-------------------------------------------------------------------------------
Actuarial present value of benefit
 obligations:
  Vested benefit obligation          $186,675     $7,417   $163,375  $  29,395
-------------------------------------------------------------------------------
  Accumulated benefit obligation     $191,421     $7,849   $166,927  $  29,783
-------------------------------------------------------------------------------
Projected benefit obligation         $200,929     $7,849   $182,288  $  30,723
Plan assets at fair value             196,807      4,831    180,889     16,800
-------------------------------------------------------------------------------
Plan assets in excess of (less than)
  projected benefit obligation         (4,122)    (3,018)    (1,399)   (13,923)
Unrecognized net (gain) or loss           ---        ---     (2,908)     2,734
Prior service cost not yet recognized
  in net periodic pension cost            ---        ---      2,884      1,097
Unrecognized net (asset) obligation
   at transition                          ---        ---      1,836          4
Adjustment required to recognize
  minimum liability                       ---        ---        ---     (3,797)
================================================================================
Pension asset (liability) recognized
  in the balance sheet               $ (4,122)  $ (3,018)    $  413  $ (13,885)
================================================================================


Effective  with the  December 31, 1996  measurement  date,  the  discount  rate,
expected  long-term  rate of return on assets  and  mortality  assumptions  were
revised to reflect  current market and  demographic  conditions.  As a result of
these changes,  the December 31, 1996 projected benefit obligation  increased by
approximately  $11  million.  These  changes  had no effect on the 1996  pension
expense and are not expected to have a material effect on future year's expense.

Plan  assets at  December  31,  1997 are  invested  in fixed  dollar  guaranteed
investment  contracts,  U.S. Government  obligations,  fixed income investments,
guaranteed  annuity  contracts and equity securities whose values are subject to
fluctuations of the securities market.

The Company maintains two defined contribution plans 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
plans are based on a percentage  of employee  contributions.  In July 1995,  the
Company  restored  its  matching  contribution  at 25% of the  first  6% of each
participant's  pre-tax  contribution.  The Company's  expense for 1997, 1996 and
1995 was $.6 million, $.7 million and $.3 million, respectively.


Note 13  Postretirement Benefits

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.

In March  1994,  the  Company  amended its policy  regarding  non-union  retiree
medical and life insurance. This amendment, which affects all current and future
non-union retirees,  phased out the Company subsidy for retiree medical and life
insurance over the three-year period ended December 31, 1996. The pre-tax amount
amortized to income from  continuing  operations was $3.9 million in 1996 and in
1995. The amendment did not result in a significant increase or decrease in cash
requirements during the phase-out period.

The following  tables set forth the plans' combined  status  reconciled with the
amounts included in the consolidated balance sheet:

December 31 (Dollars in thousands)                     1997
----------------------------------------------------------------------
                                                         Life
                                             Medical  Insurance
                                              Plans     Plans    Total
----------------------------------------------------------------------
Accumulated postretirement benefit obligation:
  Retirees                                  $ 7,165    $1,869   $9,034
  Fully eligible active plan participants        76        49      125
  Other active plan participants                144        42      186
----------------------------------------------------------------------
                                              7,385     1,960    9,345
Plan assets                                     ---       ---      ---
Unrecognized prior service cost                 ---     1,459    1,459
Unrecognized net gain                         6,555       705    7,260
======================================================================
Postretirement benefit liability
  recognized in the balance sheet           $13,940    $4,124  $18,064
======================================================================


December 31 (Dollars in thousands)                     1996
----------------------------------------------------------------------
                                                       Life
                                            Medical  Insurance
                                             Plans     Plans    Total
----------------------------------------------------------------------
Accumulated postretirement benefit obligation:
  Retirees                                  $ 7,551    $1,965 $  9,516
  Fully eligible active plan participants       206        46      252
  Other active plan participants                395        47      442
----------------------------------------------------------------------
                                              8,152     2,058   10,210
Plan assets                                     ---       ---      ---
Unrecognized prior service cost                 ---     1,605    1,605
Unrecognized net gain                         6,502       801    7,303
======================================================================
Postretirement benefit liability
  recognized in the balance sheet           $14,654    $4,464  $19,118
======================================================================


The 1997 accrued  postretirement  benefits amount is classified as follows: $1.1
million current  liabilities and $17 million  long-term  liabilities.  For 1996,
these amounts are $1.7 million current  liabilities and $17.4 million  long-term
liabilities.

Effective  January 1, 1997, the Company  subsidy for medical  coverage under the
Warren  Pump  Union  plan  was  terminated.   This  termination  resulted  in  a
curtailment gain of $.6 million for the year ended December 31, 1996.

Net periodic postretirement benefit cost included the following components:

Year Ended December 31
(Dollars in thousands)                            1997
---------------------------------------------------------------------
                                                   Life
                                      Medical   Insurance
                                       Plans      Plans       Total
---------------------------------------------------------------------

Service cost                           $   7        $   2      $   9
Interest cost                            571          154        725
Amortization of prior service cost       ---         (146)      (146)
Amortization of gain                    (466)         (40)      (506)
---------------------------------------------------------------------
Net periodic postretirement benefit
  cost                                 $ 112        $ (30)     $  82
=====================================================================


Year Ended December 31
(Dollars in thousands)                            1996
---------------------------------------------------------------------
                                                  Life
                                      Medical   Insurance
                                       Plans     Plans        Total
---------------------------------------------------------------------

Service cost                          $    24    $     2     $    26
Interest cost                             650        157         807
Amortization of prior service cost     (3,110)    (2,318)     (5,428)
Amortization of gain                     (449)       (44)       (493)
----------------------------------------------------------------------
Net periodic postretirement benefit
  cost                                $(2,885)   $(2,203)    $(5,088)
======================================================================




Year Ended December 31
(Dollars in thousands)                            1995
---------------------------------------------------------------------
                                                   Life
                                      Medical    Insurance
                                       Plans      Plans        Total
---------------------------------------------------------------------

Service cost                           $    59   $      5   $     64
Interest cost                            1,057        415      1,472
Amortization of prior service cost      (3,110)    (2,319)    (5,429)
Amortization of (gain) loss               (166)       102        (64)
======================================================================
Net periodic postretirement benefit
  cost                                 $(2,160)  $ (1,797)  $ (3,957)
======================================================================

Actual  negotiated  health care premiums were used in calculating 1997, 1996 and
1995 health care costs. It is expected that the annual increase in medical costs
will be 6.0% from 1997 to 1998,  grading  down to 5% general  medical  inflation
level in  future  years.  The  health  care cost  trend  rate  assumption  has a
significant  effect on the amounts reported.  For example,  a 1% increase in the
health care trend rate would  increase the  accumulated  postretirement  benefit
obligation  at December 31, 1997 by $.6 million and the net periodic cost by $.1
million for the year. Effective January 1, 1995, the Company changed its medical
inflation rate to reflect actual experience. Such change resulted in a reduction
of the 1995 net periodic cost of $.8 million. The weighted average discount rate
used in determining the accumulated  postretirement benefit obligation was 7.75%
in 1997 and 1996.


Note 14  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, 1997, are:

 (Dollars in thousands)
---------------------------------------------------------------------
1998                                                        $  4,975
1999                                                           3,477
2000                                                           2,532
2001                                                           2,176
2002                                                           1,973
Thereafter                                                     5,230
---------------------------------------------------------------------

Total minimum lease payments                                 $20,363
=====================================================================

Total  rental  expense  under  operating   leases  charged  against   continuing
operations  was $7.8  million in 1997,  $7.2 million in 1996 and $6.7 million in
1995.


Note 15   Contingencies

LILCO  Insurance  Litigation.  In January  1993,  the  Company was served with a
complaint in a case brought in the U.S. District Court for the Northern District
of  California by  International  alleging  that  International  was entitled to
recover $10 million in defense  costs,  and $1.2 million of a judgment,  each of
which was paid on behalf of the Company in connection  with  litigation  between
the Company and Long Island  Lighting  Company  ("LILCO") which was concluded in
October 1993.  International's  principal  contention was that the International
policies did not cover the matters in question in the LILCO case.  In June 1995,
the  Court  entered  a  judgment  in favor of  International  awarding  it $11.2
million,  plus  interest  from March 1995 (the  "International  Judgment").  The
International  Judgment,  however,  was not  supported by an order,  and in July
1995, the Court vacated the  International  Judgment as being premature  because
certain outstanding issues of recoverability of the $10 million in defense costs
had not been finally  determined.  On May 8, 1997, the Company was informed that
the Court had  reinstated  the  International  Judgment.  The Company  therefore
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 (See Note 7).

Additional  Litigation and Claims.  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  6,900  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 22,000 claimants which
in 1996 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  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.

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 Company is one of five  defendants in an action brought in the United States
District Court for the Middle District of Louisiana. In April 1991 the Company's
former Deltex Division performed a repair of a turbine. Following the repair the
turbine was included in a spare parts pool until  January  1995.  The  plaintiff
alleges that following  installation in its plant the turbine experienced severe
vibrations  requiring  the turbine to be run at less than  optimal  speed.  They
further  allege that the  shortfall in  performance  caused them to incur repair
costs, and consequential  damages in excess of $5 million. The lawsuit is in the
early discovery  stage,  however,  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.

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 sheet of Imo Industries
Inc. (a Delaware  corporation) and subsidiaries as of December 31, 1997, and the
related consolidated  statements of income,  shareholders' equity and cash flows
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, 1997, and the results of their  operations
and their cash flows 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 20, 1998


                                      F-32





             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,
1997,  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 20, 1998. 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 20, 1998


                                      F-33


                         REPORT OF INDEPENDENT AUDITORS


Board of Directors,
Imo Industries Inc.

We have audited the  accompanying  consolidated  balance sheet of Imo Industries
Inc. and  subsidiaries  as of December 31,  1996,  and the related  consolidated
statements of income,  shareholders'  equity, and cash flows for each of the two
years in the period  ended  December  31,  1996.  Our audits also  included  the
financial  statement  schedule  listed in the Index at Item 14(a) for these same
periods.  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 audits.

We  conducted  our  audits  in  accordance  with  generally   accepted  auditing
standards.  Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatements.  An audit also  includes  examining,  on a test  basis,  evidence
supporting  the amounts and  disclosures in the financial  statements.  An audit
also includes assessing the accounting principles used and significant estimates
made by  management,  as well as  evaluating  the  overall  financial  statement
presentation.  We believe  that our audits  provide a  reasonable  basis for our
opinion.  In our opinion,  the  financial  statements  referred to above present
fairly, in all material  respects,  the consolidated  financial  position of Imo
Industries  Inc. and  subsidiaries  at December 31, 1996,  and the  consolidated
results  of their  operations  and their cash flows for each of the two years in
the period 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 taken 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

                                      F-34


<TABLE>


Imo Industries Inc. and Subsidiaries
Quarterly Financial Information (Unaudited)
Quarterly financial information for 1997 and 1996 is as follows:
<CAPTION>


                                                  Pre-Acquisition  Post-Acquisition
                                                         July 1,        August
                                                         1997 to     29, 1997 to
1997 (Dollars in thousands              1st       2nd     August       September    4th
except per share amounts) (a)          Quarter   Quarter  28, 1997     30, 1997    Quarter
<S>                                    <C>         <C>    <C>          <C>          <C>
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)


                                           1st*      2nd*      3rd*     4th*
1996 (Dollars in thousands except per    Quarter   Quarter   Quarter   Quarter
share amounts) (a)

Net Sales                              $ 80,062  $ 78,299  $ 75,498  $ 75,652
Gross profit                             23,517    22,460    20,444    22,501
Income (loss) before extraordinary item:
     Continuing Operations                  749      (494)  (12,525)  (20,798)
     Discontinued Operations              1,191     1,350    (7,241)  (12,147)
Extraordinary Item                          ---    (8,455)      ---       ---
Net income (loss)                         1,940    (7,599)  (19,766)  (32,945)
Earnings (loss) per share, basic and
diluted:
     Before extraordinary item:
          Continuing Operations             .04      (.03)     (.73)    (1.21)
          Discontinued Operations           .07       .08      (.43)     (.71)
     Extraordinary Item                     ---      (.49)      ---       ---
     Net income (loss)                      .11      (.44)    (1.16)    (1.92)

*     Restated to conform to 1997 full year presentation.

(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.

                                      F-35

</TABLE>


<TABLE>



                                   SCHEDULE II
                      IMO INDUSTRIES INC. AND SUBSIDIARIES
                        VALUATION AND QUALIFYING ACCOUNTS
                             (Dollars in thousands)
THREE-YEAR PERIOD ENDED DECEMBER 31, 1997
-----------------------------------------------------------------------------------------------
<CAPTION>

                                                  ADDITIONS
                                BALANCE   ----------------------
                                  AT        CHARGED                                  BALANCE
                                BEGINNING   TO COSTS       OTHER     DEDUCTIONS      AT END
                                 OF YEAR    EXPENSES    - DESCRIBE   - DESCRIBE      OF YEAR
                                 -------    --------    ----------   ----------      -------

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

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

YEAR ENDED DECEMBER 31, 1995: *
       Allowance for doubtful   $  1,696    $    314   $      30 (1)  $    545 (3)   $  1,507
       accounts                                               12 (6)
                                =========   =========  ==========     =========      =========
       Inventory valuation      $  9,582    $  2,125   $     273 (1)  $     74 (2)   $  9,560
       allowance                                              30 (6)     2,376 (5)
                                =========   =========  ==========     =========      =========
       Valuation allowance for   $68,910    $    ---   $     ---      $ 15,550 (2)    $31,675
       deferred  tax assets                                             17,000 (7)
                                                                         4,685 (8)
                                =========   =========  ==========     =========      =========
       Accrued product          $  1,925    $  1,121   $     404 (2)  $  1,342 (4)   $  2,159
       warranty liability                                     42 (1)
                                                               9 (6)
                                =========   =========  ==========     =========      =========

*    Restated to conform to the 1997 presentation (continuing operations).

(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.
(6) Opening balance of companies acquired during the year.
(7) Adjustment due to revaluation of realizable tax benefit.
(8) Utilization of net operating loss  carryforwards by
    discontinued  operations.
(9) In  conjunction  with the  Acquisition of the Company and purchase
    accounting adjustments as of August 28, 1997, the reserves were reset
    to zero.

                                      S-1

</TABLE>