SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 Form 10-K [X] ANNUAL REPORT PURSUANT TO SECTION 13 or 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Fiscal Year Ended: December 31, 2001 OR [ ]TRANSITION REPORT PURSUANT TO SECTION 13 or 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934

WASHINGTON, D.C. 20549

Form 10-K

[X] ANNUAL REPORT PURSUANT TO SECTION 13 or 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Fiscal Year Ended: December 31, 2000 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 No.: 33-62598

Fairfield Manufacturing Company, Inc.

(Exact name of Registrant as specified in its charter)

	Delaware		63-0500160
	(State of incorporation)		(I.R.S. Employer Identification No.)

	U. S. 52 South, Lafayette, IN		47909
	(Address of principal executive offices)		(Zip Code)

Registrant's telephone number, including area code: (765) 772-4000

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

Securities registered pursuant to Section 12(g) of the Act:

$100,000,000 9-5/8% Senior Subordinated Notes due 2008 $5055,~~000~~783,~~000~~203 11-1/4% Series A Cumulative Exchangeable Preferred Stock

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 (~~section~~ 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [___]

State the aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was sold, or the average bid and ask price of such common equity, as of a specified date within the past 60 days. Not applicable.

At December 31, ~~2000~~2001 there were 9,117,000 shares of the Company's Common Stock issued and outstanding.

FAIRFIELD MANUFACTURING COMPANY, INC. Annual Report on Form 10-K December 31, 2000 Table of Contents

Item Number			Page Number
		PART I
1		Business	1
2		Properties	6
3		Legal Proceedings	6
4		Submission of Matters to a Vote of Security Holders	6
		PART II
5		Market for the Registrant's Common Equity and Related Stockholder Matters	7
6		Selected Financial Data	8
7		Management's Discussion and Analysis of Financial Condition and Results of Operations	9
7	(a)	Quantitative and Qualitative Disclosures About Market Risk	13
8		Financial Statements and Supplementary Data	13
9		Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	13
		PART III
10		Directors and Executive Officers of the Registrant	14
11		Executive Compensation	16
12		Security Ownership of Certain Beneficial Owners and Management	19
13		Certain Relationships and Related Transactions	20
		PART IV
14		Exhibits, Financial Statement Schedules, and Reports on Form 8-K	22
		Signatures	25
		Index to Consolidated Financial Statements and Financial Statement Schedule	F-1

FAIRFIELD MANUFACTURING COMPANY, INC.

Annual Report on Form 10-K

December 31, 2001

Table of Contents

Item Number			Page Number
		PART I
1		Business	1
2		Properties	6
3		Legal Proceedings	6
4		Submission of Matters to a Vote of Security Holders	6

		PART II
5		Market for the Registrant's Common Equity and Related Stockholder Matters	7
6		Selected Financial Data	8
7		Management's Discussion and Analysis of Financial Condition and Results of Operations	9
7	(a)	Quantitative and Qualitative Disclosures About Market Risk	14
8		Financial Statements and Supplementary Data	15
9		Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	15

		PART III
10		Directors and Executive Officers of the Registrant	16
11		Executive Compensation	19
12		Security Ownership of Certain Beneficial Owners and Management	22
13		Certain Relationships and Related Transactions	23

		PART IV
14		Exhibits, Financial Statement Schedules, and Reports on Form 8-K	25
		Signatures	29
		Index to Consolidated Financial Statements and Financial Statement Schedule	F-1

FAIRFIELD MANUFACTURING COMPANY, INC.

Form 10-K

Fiscal Year Ended December 31, ~~2000~~2001

PART I

Item 1.

BUSINESS

General

Fairfield Manufacturing Company, Inc. (the "Company") believes that it is the leading independent manufacturer (based on sales) of high precision custom gears and assemblies and planetary gear systems in North America. In each of the North American "custom ~~products~~product" and "planetary gear system" markets in which the Company participates, the Company estimates that its market share is twice that of any other independent manufacturer. The majority of the Company's custom gears and assemblies and planetary gear systems are used by original equipment manufacturers ("OEMs") as components in various kinds of heavy mobile equipment. The Company's has manufacturing operations in North America ~~are located~~ in Lafayette, Indiana and in Asia in Belgaum, India.

Custom gears and assemblies accounted for $7679.97 million (or 4757.76%) of the Company's ~~2000~~2001 net sales. Custom gears are components of larger systems such as axles, drive differentials and transmission units and are generally produced by the Company for large OEMs. Custom assemblies are differentials, wheel drives, power transmissions and conveyer/tram drives that are generally produced as a complete unit. The Company's custom gear and assembly customers consist primarily of OEMs of ~~rail~~mining, ~~mining~~rail, ~~agricultural,~~ ~~industrial~~on-highway, ~~construction~~agricultural and ~~materials-handling~~industrial equipment. The Company is a major independent supplier of selected gear products for many of these OEMs.

Planetary gear systems, which accounted for $8458.26 million (or 5242.34%) of the Company's ~~2000~~2001 net sales, are integrated, self-contained power transmission and torque conversion systems that provide propulsion, swing and/or rotation to wheels, and other components in applications where the use of axles would otherwise present design difficulties. The Company markets its planetary gear systems under its Torque-HubÒ name. The Company believes that, as a result of the performance history and reputation for quality of the Company's Torque-HubÒ products, the Torque-HubÒ name has become closely identified with planetary gear systems. Customers for the Company's Torque-HubÒ products include OEMs of access platform, road rehabilitation, ~~construction~~agricultural, ~~forestry,~~marine ~~agricultural~~ and ~~marine~~construction equipment.

The Company ~~has~~believes ~~been~~that ~~granted~~its ~~"preferred~~strong ~~supplier"~~market ~~status~~position byin athe ~~majority~~custom gear and planetary gear systems markets is the result of its ~~customers~~(i) ~~based~~breadth onand quality of product offerings, (ii) longstanding relationships (in many cases of 20 years or more) with its ~~ability~~major tocustom ~~meet~~gear ~~their~~and ~~business~~planetary ~~requirements. The~~gear ~~Company~~system iscustomers, ~~also~~(iii) ~~certified~~state-of-the-art asengineering ~~meeting~~and ~~"ISO~~manufacturing technology, including in-~~9001"~~house ~~standards~~heat treating facilities, ~~which~~computer-aided ~~are~~design ~~increasingly~~and ~~being~~manufacturing ~~used~~systems byand ~~OEMs in~~computer ~~lieu~~numerically-controlled ofmachine ~~individual~~tools ~~certification~~and ~~procedures. In~~gear ~~addition~~grinders, (iv) cost competitiveness, (v) experienced engineering staff, which together with the Company's issales ~~certified~~force, aswork ~~meeting~~closely ~~"QS-9000"~~with ~~standards~~customers in designing and developing products to meet customers' needs, ~~which~~and is(vi) ~~the~~stable, ~~standard~~knowledgeable ~~level~~sales force, many of ~~certification~~whose ~~required~~members byhave ~~automotive~~engineering ~~OEMs. The~~degrees ~~Company~~and ~~believes~~have ~~that~~worked ~~certification~~with ~~provides~~the itsame ~~with~~customers ~~a competitive~~for ~~advantage~~many ~~because~~years. In aaddition, ~~number~~the ofCompany's ~~OEMs~~management ~~require~~team ~~certification~~has asan aaverage ~~condition~~of toover ~~doing~~20 ~~business~~years of experience in general manufacturing.

~~The~~On ~~Company~~October ~~believes~~3, ~~that~~2000, ~~its~~the ~~strong~~Company ~~market~~acquired ~~position~~75.77% inof ~~the~~Atlas ~~custom~~Gears ~~gear~~Limited ~~and~~for ~~planetary~~$4.5 ~~gear~~million. Atlas ~~systems~~Gears ~~markets~~Limited ischanged ~~the result of~~ its ~~(i)~~name ~~breadth~~to ~~and~~Fairfield ~~quality~~Atlas ofLimited ~~product offerings,~~ (ii"FAL") ~~longstanding relationships (~~in ~~many~~the ~~cases~~first quarter of 202001. FAL ~~years~~manufactures ~~or more) with its major~~ custom ~~gear~~gears ~~and~~primarily ~~planetary~~for ~~gear~~the ~~system customers~~agricultural, ~~(iii) state~~off-~~of-the-art~~road, ~~engineering~~ and ~~manufacturing~~light ~~technology,~~commercial ~~including~~vehicle markets in~~-house~~ ~~heat~~India. FAL ~~treating~~is ~~facilities,~~headquartered ~~computer-aided~~in ~~design~~Mumbai, ~~and~~India ~~manufacturing systems~~ and ~~computer~~has ~~numerically-controlled machine~~its ~~tools~~manufacturing ~~and~~facilities ~~gear~~near ~~grinders~~Belgaum, ~~(iv)~~India. The ~~cost~~Company ~~competitiveness,~~acquired ~~(v)~~FAL ~~experienced~~to ~~engineering~~gain ~~staff,~~a ~~which~~low ~~together~~cost ~~with~~manufacturing ~~the~~and ~~Company's~~procurement ~~sales~~base. FAL ~~force,~~is ~~work~~QS-9000 ~~closely~~and ~~with~~ISO-9002 ~~customers in~~ certified.

1The Company was founded in 1919 as a manufacturer of custom gear products and has been wholly owned by Lancer Industries Inc. ("Lancer") since 1989. The Company's principal executive offices are located at U.S. 52 South, Lafayette, Indiana 47909. The Company's telephone number is (765) 772-4000.

designing and developing products to meet customers' needs, and (vi) stable, knowledgeable sales force, many of whose members have engineering degrees and have worked with the same customers for many years. In addition, the Company's management team, has an average of over 20 years of experience in general manufacturing.
On October 3, 2000, the Company acquired 75.77% of Atlas Gears Limited ("Atlas") for $4.5 million. Atlas manufactures custom gears primarily for the agricultural, off-road, and light commercial vehicle markets in India. Atlas is headquartered in Mumbai, India and has its manufacturing facilities near Belgaum, India. The Company acquired Atlas to gain a low cost manufacturing and procurement base. Atlas is ISO-9002 certified and pursuing its QS-9000 certification. Atlas changed its name to Fairfield Atlas Limited in the first quarter of 2001.
The Company was founded in 1919 as a manufacturer of custom gear products and has been wholly-owned by Lancer Industries Inc. ("Lancer") since 1989. The Company's principal executive offices are located at U.S. 52 South, Lafayette, Indiana 47909. The Company's telephone number is (765) 772-4000.
Products
Custom Products.
Custom gears and assemblies accounted for approximately $79.7, $76.9 and $104.6 million of the Company's net sales in 2001, 2000 and 1999, respectively. The Company manufactures a wide variety of custom gears, ranging in type (e.g. helical, spiral bevel, spur and HYPOIDÒ ) and size (from one inch to five feet in diameter), and has manufacturing capabilities which the Company believes are the broadest in the custom gear business. The Company manufactures custom gears and assemblies to customers' specifications, which are often developed by or with the assistance of the Company. Custom gears and assemblies are used in a wide variety of applications and markets, ranging from off-highway heavy equipment to high-speed precision gears for industrial purposes.

Historically, the Company has focused on severe application custom business. These custom products, which are design and engineering intensive, are used in mining, rail, ~~mining~~on-highway, agricultural, ~~construction,~~and ~~materials-handling~~industrial and other equipment demanding a high degree of product quality and reliability. Many customers in these markets do not have the necessary engineering and/or manufacturing facilities, and/or personnel to design and manufacture their gear requirements in-house. In addition, the trend among OEMs to focus on their core competencies (final assembly and system integration) rather than produce gears and gear related assemblies in-house appears to be continuing.

Planetary Gear Systems.
The Company markets its planetary gear systems under the Torque-HubÒ name. Torque-HubÒ products accounted for approximately $58.6, $84.2 and $104.3 million of the Company's net sales in 2001, 2000 and 1999, respectively. The Company believes that the Torque-HubÒ name has become closely identified with planetary gear systems, which provide drive, swing, and/or rotation to the equipment in which they are used and are primarily employed in cases where the use of axles present design difficulties. The Company produces a broad line of planetary gear systems under its Torque-HubÒ trade name, including wheel drives (used to propel off-highway equipment), shaft outputs (used to power remote in-plant machinery like mixers as well as mobile access platforms and cranes) and spindle outputs (which power the drive wheels of vehicles with small diameter wheels such as small lift trucks and mowers).

The Company has introduced a number of new Torque-HubÒ products in recent years, including two-speed drives (Torque IIÒ series) and compact drives (CW and CT series) for wheeled or tracked vehicles. The Company believes that the two-speed drive is ideal for machinery requiring low- and high-speed settings, such as road paving equipment. The compact drive incorporates the brakes and hydraulic drive systems into a single compact unit, which the Company believes allows for better flexibility and is well-suited for a variety of applications. These products are used in a wide range of industrial and construction equipment, including excavators, crawler dozers and loaders, rubber-tired pavers and multi-speed winches.

2
incorporates the brakes and hydraulic drive systems into a single compact unit, which the Company believes allows for better flexibility and is well-suited for a variety of applications. These products are used in a wide range of industrial and construction equipment, including excavators, crawler dozers and loaders, rubber-tired pavers and multi-speed winches.
Marketing and Distribution

The Company's customers are almost exclusively OEMs and include many industry leaders with whom the Company has had relationships of 20 years or more. Sales to ~~three~~General ~~customers~~Electric accounted for approximately 11.6% of the Company's net sales in 2001. Sales to JLG, General Electric and Genie accounted for approximately 12.6%, 10.1% and 10.0%, respectively, of the Company's net sales in 2000. Sales to ~~two~~General ~~customers~~Electric and JLG accounted for approximately 13.6% and 10.8%, respectively, of the Company's net sales in 1999. ~~Sales~~A todeterioration ~~one~~in ~~customer~~the ~~accounted~~financial ~~for~~condition ~~approximately~~of ~~10.6%~~any of the Company's ~~net~~material ~~sales~~customers inmay ~~1998~~have an adverse impact on the financial condition and operating results of the Company.

The Company has been granted "preferred supplier" status by a majority of its customers ~~based on its ability to meet their business requirements~~. The Company has also been certified as meeting "ISO-9001" standards, which are increasingly being used by OEMs in lieu of individual certification procedures. In addition, the Company has been certified at both its Lafayette, Indiana and its Belgaum, India facilities as meeting "QS-9000" standards, which ~~has~~is ~~become~~ the standard level of certification required by automotive OEMs. The Company believes that certification provides it with a competitive advantage because a number of OEMs require certification as a condition to doing business.

The Company believes its stable, experienced sales force is a primary reason for the Company's success in maintaining customer loyalty and building new customer relationships. The Company's sales department is organized geographically and consists primarily of sales engineers, who have an average of over 1112 years of experience with the Company and many of whom have worked with the same customers for many years. In addition, each sales engineer has substantial expertise concerning the Company's products and product applications. Application engineers work closely with the Company's sales department and provide customers with guidance concerning product applications and specific design problems. By becoming a part of the ~~customer~~customers's purchasing and design decisions, the Company has developed close working relationships with many of its customers. Customer loyalty to the Company is further enhanced by the development, tooling and production costs associated with changing gear sources, as such costs are typically borne by the customer.

All of the Company's custom gear products and approximately 7475% of its Torque-HubÒ products are sold directly to OEMs. Since Torque-HubÒ products can be sold to more than one customer, the Company uses distributors to increase its penetration of the planetary gear systems market. The Company sells approximately 2625% of its Torque-HubÒ line through a network of approximately 40 distributors located in the United States and abroad.

International sales, principally Canada, accounted for approximately $811.82, $118.98 and $1611.29 million of the Company's net sales in ~~2000~~2001, ~~1999~~2000 and ~~1998~~1999, respectively.

Design and Manufacturing

The Company believes that its state-of-the-art technology and experienced engineering ~~staff~~staffs provide it with a competitive advantage.

The Company has selectively invested in state-of-the-art manufacturing technology in recent years to improve product quality and price competitiveness, and to reduce lead time. The Company's manufacturing technology includes the latest computer-aided design and manufacturing (CAD/CAM) systems, and over 270 computer numerically controlled (CNC) lathes, machine tools and gear grinders.

3The Company's engineering departments consists of over 80 engineers and technicians, including specialists in product, tool, manufacturing, and industrial engineering. In addition, the Company has metallurgy laboratories in Lafayette and Belgaum which determine the appropriate metallurgy for a specific gear application. These engineering groups, with their distinct specialties, work together as a team to develop solutions to specific customer requirements. These capabilities enable the Company to service clients who demand high quality and creative solutions to their product needs.

The Company's engineering department consists of over 80 engineers and technicians, including specialists in product, tool, manufacturing, and industrial engineering. In addition, the Company has a metallurgy laboratory which determines the appropriate metallurgy for a specific gear application. These engineering groups, with their distinct specialties, work together as a team to develop solutions to specific customer requirements. These capabilities enable the Company to service clients who demand high quality, creative solutions to their product needs.

The Company's engineers and designers are skilled in the use of, and have available, certain of the latest tools and techniques to create cost efficient designs. Procedures such as finite element analysis are routinely used by the Company's engineers and designers to optimize material content and ensure functional reliability of components designed. This type of analysis and simulation allows many aspects of a design to be evaluated prior to production, resulting in lower tooling costs, reduced testing requirements and quicker time to market. In addition, the Company's CNC gear cutting machines allow for many different styles and sizes of gears to be run quickly in small lot sizes with a high degree of accuracy.

The Company has its own comprehensive heat treating facilities. These in-house facilities allow the Company to control the annealing and carburizing processes that determine the load-carrying capacity of the final product. The Company's heat treating operations help ensure proper development and maintenance of gear tooth characteristics. As a result, the Company believes that it is able to provide its customers with improved quality and reduced lead times in filling orders.

Materials and Supply Arrangements

The Company generally manufactures its custom and Torque-HubÒ products to its customers' specifications and, as a result, does not generally contract for or maintain substantial inventory in raw materials or components. The Company purchases its three principal raw material needs (steel forgings, steel bars and castings) on a spot basis based on specific customer orders. Raw material purchases from ~~one~~The ~~supplier~~Timken Company represented approximately 10.54% of raw material purchases in ~~2000~~2001, 1410.25% in ~~1999~~2000 and 1314.92% in ~~1998~~1999. Alternative sources are available to fulfill each of the Company's major raw material requirements. The Company has never experienced a delay in production as a result of a supply shortage of a major raw material.

Competition

The North American/Indian custom gear business is highly competitive but very fragmented. Competition can be broken down into four principal groups: major domestic manufacturers, regional domestic manufacturers, foreign producers and captive gear manufacturers. Although captive gear manufacturers supply all or a portion of their internal gear requirements and constitute a significant portion of the custom gear market, the Company believes there is a trend among such manufacturers to outsource, or purchase their gears from independent manufacturers such as the Company. The North American planetary gear market is also highly competitive and is concentrated among several large domestic and foreign competitors, with the remaining market divided among a large number of relatively small suppliers. The Company competes with other manufacturers based on a number of factors, including delivery capability, quality and price. The Company believes that its breadth of manufacturing, engineering and technological capabilities provide it with a competitive advantage.

4
Employees

At December 31, ~~2000~~2001, the Company had 1,~~412~~308 employees, ~~1,038~~874 and ~~374~~434 at its Lafayette and Belgaum, India facilities, respectively. Approximately 8885% were employed in manufacturing. The Company's North American production and maintenance employees, representing approximately 7977% of the Company's North American employees, became members of the United Auto Workers (UAW) union in October 1994. In October ~~1998~~2001 a new ~~three~~five ~~labor~~ year labor agreement was ratified ~~by the Company's union employees~~. The Company considers its relations with its employees to be satisfactory.

Backlog

The Company had ~~total~~ order backlog ~~of approximately $63.4 and $70.4 million as of December 31, 2000 and 1999, respectively,~~ for shipments due to be delivered ~~by the Company~~ for the six-month period following ~~such~~December ~~dates~~31, 2001 and 2000 of approximately $51.2 and $63.4 million, respectively. The lower backlog at December 31, ~~2000~~2001 is due to reduced orders~~. The~~, ~~Company~~as ~~has~~most ~~experienced~~of ~~pricing~~the ~~pressure~~markets ~~due~~the toCompany aserves ~~strong~~remain ~~dollar in 2000 along with lower than expected custom orders as the rail~~weak, ~~mining~~ and ~~agricultural~~shorter ~~markets~~lead ~~remained flat to depressed~~times.

Environmental Matters

The Company's operations and properties are subject to a wide variety of increasingly complex and stringent environmental laws. As such, the nature of the Company's operations exposes it to the risk of claims with respect to such matters and there can be no assurance that material costs or liabilities will not be incurred in connection with such claims. The Company believes its operations and properties are in substantial compliance with such environmental laws. Based upon its experience to date, the Company believes that the future cost of compliance with existing environmental laws, and liability for known environmental claims pursuant to such environmental laws, will not have a material adverse effect on the Company's business, financial condition or operating results. However, future events, such as changes in existing environmental laws or their interpretation and more vigorous enforcement policies of regulatory agencies, may give rise to additional expenditures or liabilities that could be material.

Susceptibility to General Economic Conditions

The Company's revenues and results of operations are subject to fluctuations based upon general economic conditions. During economic downturns and recessions in the United States or certain other markets, the Company's customers generally reduce or delay their demand for the Company's products. Most of the factors that might influence customers and prospective customers to reduce their capital budgets under these circumstances are beyond the Company's control. ~~During~~The ~~prior recessionary periods, the~~ Company's operating ~~performance~~results ~~has~~over the last two years have been ~~negatively~~adversely affected, ~~and~~by ~~there~~the ~~can~~general beslowdown noin ~~assurance~~the ~~that~~economy ~~any~~and ~~future~~the ~~economic~~current ~~downturn~~recession, ~~would~~and ~~not~~the ~~materially~~Company ~~and~~cannot ~~adversely~~make ~~affect~~predictions on when the ~~Company's~~economy ~~business,~~will ~~financial~~recover ~~condition~~or ~~and~~the ~~operating~~extent ~~results~~of any economic recovery. In addition, in the event of an economic recovery, there can be no assurance that growth in the markets ~~from~~of the Company's products will occur or that such growth will result in increased demand for the Company's products.

Intellectual Property

The trade names Torque-HubÒ

and Torque IIÒ are registered trademarks. The Company's planetary gear systems are sold under the Torque-HubÒ trade name. The Company, through its wholly-owned subsidiary, T-H Licensing, Inc., owns numerous patents worldwide. None of such patents is individually considered material to the Company's business.

Item 2.

PROPERTIES

The Company owns and operates a facility in Lafayette, Indiana consisting of 39 acres of land, approximately 540,000 square feet of manufacturing space and approximately 60,000 square feet of office space. With the acquisition of ~~Atlas~~FAL, the Company acquired additional manufacturing space of approximately 50,000 square feet, located near Belgaum, India. During 2001 the Company expanded its FAL operations to 170,000 square feet covering approximately 14 acres of land.

In June 1999, the Company experienced a fire at its manufacturing plant in Lafayette, Indiana. The fire damaged a portion of the facility and some of its equipment. By January 2000, the Company had restored its physical capabilities to the same level as before the fire. The damages of the fire, including the costs of clean-up and business interruption, were covered by ~~current~~ insurance ~~policies~~ and, during the quarter ended June 30, 2000, the Company and its insurance carrier agreed to a final settlement of the resulting claims.

Direct costs associated with the clean-up and repair portion of the claim were $8.9 million, all of which was reimbursed by the insurance carrier by the third quarter of 2000. The business interruption portion of the claim was $16.5 million, all of which was reimbursed by the insurance carrier by the third quarter of 2000.

Prior to final settlement with its insurance carrier, the Company had determined its minimum probable recovery for business interruption at the end of each quarter and had recorded those amounts as other income. The amounts recorded by quarter are as follows: June 30, 1999 - $1.0 million, September 30, 1999 - $3.3 million, December 31, 1999 - $2.7 million and March 31, 2000 - $3.0 million. The Company recognized $6.5 million of business interruption insurance recovery during the second quarter of 2000 in conjunction with the final settlement of business interruption losses.

Item 3.

LEGAL PROCEEDINGS

The Company is a party to routine litigation incidental to the conduct of its business, much of which is covered by insurance and none of which is expected to have a material adverse effect on the Company.

On or about February 26, 2002, Peter Joseph, a director and Vice President of the Company, commenced a lawsuit against the Company, the Company's sole shareholder, Lancer, and Paul Levy (also a director, Chairman of the Board and Vice President of the Company) in the Delaware Chancery court, challenging certain corporate actions by Lancer and the Company. Both Messrs. Levy and Joseph are also directors, officers and shareholders of Lancer. The Company does not expect that the lawsuit will have a material adverse effect on the Company.

On or about March 8, 2002, Kaydon Corporation ("Kaydon") commenced a lawsuit against the Company and several of the Company's employees who were formerly employed by Kaydon. Kaydon alleges that the Company and certain of its employees have appropriated Kaydon trade secrets, induced Kaydon employees to leave their employment at Kaydon, and are now competing with Kaydon unfairly. The Company believes that the lawsuit is without merit and does not expect it to have a material adverse effect on the Company.

Item 4.

SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

No matters were submitted to a vote of the Company's security holders during the fourth quarter of the fiscal year ended December 31, ~~2000~~2001.

6
PART II

Item 5.

MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS

Market Information

There is currently no trading market for the Company's common stock which is wholly owned by Lancer.

Dividends

The Company did not declare or pay any dividends on its common stock in ~~2000~~2001 or ~~1999~~2000. There are restrictions on the Company's ability to pay dividends under the loan agreement for the Company's Credit Facility, the Indenture for the Company's 9-5/8% Senior Subordinated Notes due 2008 and the Certificate of Designation for the Company's 11-1/4% Series A Cumulative Exchangeable Preferred Stock.

Issuance of Common Stock

The Company issued 166,000, 120,000, 103,000, and 37,000 additional shares of its common stock on March 31, June 30, September 30, and December 31, 2000, respectively, to Lancer in consideration of certain capital contributions made by Lancer to the Company pursuant to the Tax Sharing Agreement (see Item 13, "Certain Relationships and Related Transactions"). No shares were issued in 2001 due to the Company's losses.

The Company issued 74,000, 58,000, 58,000 and 21,000 additional shares of its common stock on March 31, June 30, September 30, and December 31, 1999, respectively, to Lancer in consideration of certain capital contributions made by Lancer to the Company pursuant to the Tax Sharing Agreement (see Item 13, "Certain Relationships and Related Transactions").

Item 6.

SELECTED FINANCIAL DATA

The following selected financial data for the Company for the five years ended December 31, ~~2000~~2001 has been derived from the audited consolidated financial information for the Company for such periods. The following selected financial data should be read in connection with Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations," and is qualified in its entirety by reference to the Consolidated Financial Statements and Notes thereto of the Company contained in Item 8 to this Form 10-K.

($ in millions)	Year Ended December 31,
	2000	1999	1998	1997	1996
	2001	2000	1999	1998	1997
Income Statement Data:
Net sales	$~~161~~138.13	$~~208~~161.91	$~~220~~208.39	$~~192~~220.3	$~~195~~192.23
Cost of sales	~~135~~124.25	~~164~~135.92	~~178~~164.9	~~157~~178.79	~~158~~157.67
Selling, general and administrative expenses (1)	1314.47	1913.34	1619.83	1716.08	1617.90
Operating income	12(.59)	2412.75	24.67	1724.6	1917.76
Interest expense, net	911.82	119.38	1211.73	12.7	1112.97
Net income (2)	6(8.94)	116.49	611.14	26.21	32.92
Preferred stock dividends and discount accretion	(56.82)	(5.8)	(5.8)	(45.78)	--(4.7)
Net income (loss) available to common stockholder	1(14.15)	51.61	05.36	(20.5)3	3(2.95)
Balance Sheet Data:
Working capital	$ 3026.79	$ 2330.97	$ 1523.9	$ 715.89	$ 127.18
Total assets	~~182~~172.78	~~180~~182.37	~~175~~180.13	~~173~~175.21	~~176~~173.42
Total debt (3)	~~112~~118.69	~~110~~112.06	~~112~~110.20	~~114~~112.02	~~118~~114.0
Long-term obligations (4)	~~161~~173.03	~~158~~161.20	~~160~~158.2	~~157~~160.92	~~115~~157.09
Stockholder's equity (deficit)	(3650.29)	(3936.53)	(4939.05)	(5249.20)	(452.62)
Other Data:
EBITDA (5)	$ 3411.74	$ 4734.27	$ 3747.12	$ 3037.1	$ 3230.01
Depreciation	1110.16	11.01	11.0	11.0	1011.80
Amortization (6)	2.23	2.32	2.3	2.3	2.3
Cash interest expense, net (7)	910.37	109.73	1210.07	12.0	1112.30
Capital expenditures, net (8)	37.9	113.79	1011.57	10.95	1110.29

Includes a $2.3 million non-cash charge related to the Incentive Plan for Senior Management in 1999 and a $2.3 million reversal in 2000 related to the Incentive Plan for Senior Management.

Includes ~~pretax~~pre-tax business interruption insurance income of $9.5 million in 2000, a net, pre-tax gain on the involuntary conversion of assets of $2.9 million and pre-tax business interruption insurance income of $7.0 million in 1999 related to the fire described in Item 2, "Properties". Also during 1999 and 1998, the Company recorded an extraordinary loss of $1.4 million and $0.4 million, respectively, net of tax, relating to the early extinguishment, of $67.1 million and $17.9 million, respectively, of 11-3/8% Senior Subordinated Notes due 2001.

Includes current maturities of $4.0 ~~and~~million ~~$3.0~~ for 1997 ~~and 1996, respectively~~.

Includes long-term portion of total debt and redeemable preferred stock.

EBITDA represents income (loss) before income taxes, preferred stock dividends and discount accretion, extraordinary item, cumulative effect of a change in accounting principle, interest expense, net, depreciation and amortization. EBITDA is not presented herein as an alternative measure of operating results or cash flow but rather to provide additional information related to debt service capability.

Includes the amortization of both deferred financing costs and the excess of investment over net assets acquired.

Cash interest expense, net includes interest income, but excludes amortization of deferred financing costs of $0.65, $0.6, $0.76, $0.7 and $0.67 million for fiscal years 2001, 2000, 1999, 1998, ~~1997~~ and ~~1996~~1997, respectively.

Includes a net pre-tax gain on the involuntary conversion of assets of $2.9 million in 1999.

8Item 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Management's discussion and analysis, as set forth below, of the Company's financial condition and results of operations should be read in conjunction with, and is qualified by reference to, the Company's audited consolidated financial statements and related notes thereto and the description of the Company's business which are found under Items 8 and 1 of this Form 10-K, respectively.

Results of Operations

The Company's net sales and profits have been adversely affected in the past two years by the general slowdown in the economy and the current recession, as well as a result of pricing pressure from foreign competitors, principally due to the strong U.S. dollar. This decrease in sales and profits has strained the Company's liquidity and capital resources, and the present market conditions are expected to continue for the foreseeable future.

Fiscal Year 2001 Compared with Fiscal Year 2000

Net sales for 2001 decreased $22.8 million to $138.3 million compared to $161.1 million in 2001, a 14.2% decrease. The market downturn began in the second half of 2000 and continued throughout all of 2001 for many of the Company's markets. The most severe market downturn occurred in the access platform market. Additional softness continued in the road rehabilitation and agriculture markets. Market demand for rail was higher in the first half of 2001 but declined during the second half of 2001 compared to 2000. Although the on-highway market continues to remain depressed, the Company has new programs in this market resulting in higher on-highway sales during the second half of 2001 versus 2000. The Company believes the downturn in its markets is a direct result of the slowdown in the U.S. economy, tight lending and capital policies, and pricing pressure from foreign competition, principally due to the strong U.S. dollar. In addition, while the Company continues to execute its expansion plans at FAL to gain access to new markets and to develop a low cost manufacturing and procurement base for certain products, those operations are growing slower than anticipated and recent world and regional events will likely delay and/or disrupt the expansion plans. Continuation of the FAL expansion plans requires further capital resources.

Cost of sales for 2001 decreased $10.7 million to $124.5 million, or 90.0% of net sales, compared to $135.2 million, or 83.9% of net sales in 2000. The decrease in cost of sales resulted primarily from the decrease in sales volume whereas the increase in cost of sales as a percentage of sales resulted from production inefficiencies due to the lower sales volume, unfavorable product mix, and pricing pressure.

Selling, general and administrative expenses ("SG&A"), including goodwill amortization, increased to $14.7 million in 2001, compared to $13.4 million in 2000. SG&A in 2000 includes $1.0 million of incentive compensation expense and a credit of $2.3 million related to the Incentive Plan for Senior Management recorded in 1999.

Operating income decreased $13.4 million, to $(0.9) million compared to $12.5 million in 2000 due to the reasons discussed above.

Interest expense, including amortization of deferred financing costs, was $11.2 million for 2001 compared to $9.8 million in 2000. The increase reflects higher borrowings due to the FAL expansion, reduced short term interest rates on lower cash balances and increased margins over LIBOR on the Company's senior credit facility due to weaker results (see "Liquidity and Capital Resources" below).

The effective tax rates for 2001 and 2000 were 27.8% and 43.5% respectively. See Note 10 to the Consolidated Financial Statements for a further discussion of income taxes.

The Company's net income decreased $15.3 million to an $8.4 million loss for 2001 compared to $6.9 million for 2000 due to the reasons discussed above. Net income available to common stockholder for 2001 decreased $15.6 million to $(14.5) million compared to $1.1 million net income available to common stockholder for 2000.

Recent Accounting Pronouncements

On June 29, 2001, the Financial Accounting Standards Board approved Statement of Financial Accounting Standards No. 141 (FAS 141), Business Combinations, and No. 142 (FAS 142), Goodwill and Other Intangible Assets.

FAS 141 requires the purchase method of accounting be used for all business combinations initiated after June 30, 2001, establishes specific criteria for the recognition of intangible assets separately from goodwill and requires unallocated negative goodwill to be written off immediately as an extraordinary gain. The Company believes the adoption of FAS 141 will have no impact on its results of operations and financial position.

FAS 142 requires that goodwill and indefinite lived intangible assets no longer be amortized, goodwill and indefinite life intangibles be tested for impairment at least annually (or more frequently if impairment indicators arise) and that the amortization period of intangible assets with finite lives no longer be limited to forty years. The Company is currently evaluating the adoption of FAS 142 and its impact on its results of operations and financial position. The unamortized goodwill balance was $46.5 and $48.2 million at December 31, 2001 and 2000, respectively. Goodwill amortization reflected in the Company's financial statements was $1.7, $1.6, and $1.6 million for the years ended December 31, 2001, 2000 and 1999, respectively.

Fiscal Year 2000 Compared with Fiscal Year 1999

Net sales for 2000 decreased $47.8 million to $161.1 million compared to $208.9 million in 1999. This 22.8% decrease was due to lower sales volume as the Company believes customers have remained cautious regarding the Company's restoration of its physical operations to pre-fire capabilities (see Item 2, "Properties"). By the end of 1999, the Company had completely restored its plant and operations to pre-fire capabilities and continues to work with customers to regain their business as well as identify new markets for growth. In the second half of 2000, the Company's results were negatively impacted due to an economic downturn in several of its markets including mining, agriculture and rail. The Company has also experienced pricing pressure due to the depreciation of the Euro and other foreign currencies against the dollar.

Cost of sales for 2000 decreased $29.7 million to $135.2 million, or 83.9% of net sales, compared to $164.9 million, or 78.9% of net sales in 1999. The decrease in cost of sales resulted primarily from the decrease in sales volume whereas the increase in cost of sales as a percentage of sales resulted from production inefficiencies due to the lower sales volume, unfavorable product mix, and pricing pressure.

~~Selling, general and administrative expenses ("~~SG&A"), including goodwill amortization, decreased to $13.4 million in 2000, compared to $19.2 million in 1999. The reduction in SG&A, reflects a lower employee incentive compensation provision and a credit of $2.3 million related to the Incentive Plan for Senior Management recorded in 2000.

Operating income decreased 49.3%, to $12.5 million compared to $24.7 million in 1999 due to the reasons discussed above.

Interest expense, including amortization of deferred financing costs, was $9.8 million for 2000 compared to $11.3 million in 1999. This decrease reflects lower average interest rates as a result of the May 19, 1999 refinancing of senior subordinated notes (see "Liquidity and Capital Resources" below) and a higher level of short-term investments.

Other (income) expense includes $9.5 million from business interruption insurance income recorded in the first and second quarters of 2000 in final settlement of the insurance claim relating to the fire in the Company's facilities (see Item 2, "Properties"). In 1999 the Company recorded $7.0 million related to business interruption insurance recovery and $2.9 million for the net gain on involuntary conversion of certain equipment destroyed in the June 12, 1999 fire.

The effective tax rates for 2000 and 1999 were 43.5% and 44.9% respectively. See Note 10 to the Consolidated Financial Statements for a further discussion of income taxes.

The Company's net income decreased $4.5 million to $6.9 million for 2000 compared to $11.4 million for 1999 due to the reasons discussed above. Net income available to common stockholder for 2000 decreased $4.5 million to $1.1 million compared to $5.6 million net income available to common stockholder for 1999.

9
Net income available to common stockholder for 2000 decreased $4.5 million to $1.1 million compared to $5.6 million net income available to common stockholder for 1999.
Fiscal Year 1999 Compared with Fiscal Year 1998
Net sales for 1999 decreased $11.4 million to $208.9 million compared to $220.3 million in 1998. This 5.2% decrease was due to lower sales volume because of the loss of key manufacturing equipment in the June, 1999 fire used to meet customer requirements in the rail, mining and off highway industries. Additionally, the company believes that customers remained cautious regarding the Company's restoration of its physical operations to pre-fire capabilities (see Item 2, "Properties"). By the end of 1999, the Company's plant and equipment had been restored to pre-fire capabilities. Net sales of the Company's Torque HubÒ products increased 2.5% to $104.3 million compared to 1998 primarily due to strong demand in the access platform and road rehabilitation markets. Net sales of custom gears and assemblies decreased 11.7% to $104.6 million compared to 1998.
Cost of sales for 1999 decreased $14.0 million to $164.9 million, or 78.9% of net sales, compared to $178.9 million, or 81.2% of net sales in 1998. Cost of sales decreased during 1999 in conjunction with the decrease in sales. The 2.3% improvement in cost of sales, as a percentage of net sales, was due to operating efficiencies gained from capital investments coupled with favorable pricing and sales mix.
Selling, general and administrative expenses ("SG&A"), including goodwill amortization, increased to $19.2 million in 1999, compared to $16.8 million in 1998. SG&A expenses for 1999 included a non-cash charge of $2.3 million related to the incentive plan for senior management (see Note 11 to the Consolidated Financial Statements).
Operating income increased 0.7%, to $24.7 million compared to $24.6 million in 1998 due to the reasons discussed above.
Interest expense, including amortization of deferred financing costs, was $11.3 million for 1999 compared to $12.7 million in 1998. This decrease reflects lower debt, lower average interest rates and a higher level of short-term investments.
Other (income) expense, net includes $7.0 million from business interruption insurance income and $2.9 million for the net gain on involuntary conversion of certain equipment destroyed in the June 12, 1999 fire (see Item 2, "Properties").
The effective tax rates for 1999 and 1998 were 44.9%. See Note 10 to the Consolidated Financial Statements for a further discussion of income taxes.
The Company recorded a loss on early extinguishment of debt, net of tax, of $1.4 million in 1999 related to the redemption of the Company's Senior Subordinated Notes due 2001 (see "Liquidity and Capital Resources" below and Note 12 to the Consolidated Financial Statements).
The Company's net income increased $5.3 million to $11.4 million for 1999 compared to $6.1 million for 1998 due to the reasons discussed above.
Net income available to common stockholder for 1999 increased $5.3 million to $5.6 million compared to $0.3 million net income available to common stockholder for 1998.
Liquidity and Capital Resources

~~The~~Net ~~Company~~cash ~~uses funds~~ provided by operations ~~and~~decreased ~~short-term~~$15.5 ~~borrowings~~million ~~under~~for ~~its~~the ~~revolving~~year ~~credit~~ended ~~facility~~December ~~(described~~31, ~~below)~~2001 compared to ~~meet liquidity requirements~~2000. Net cash provided by operations was $(2.2), $13.3 and $30.1 million for the years ended December 31, 2001, 2000 and 1999, respectively. This decrease reflects lower sales volume, lower profitability, and lower inventory turnover. Working capital less cash at December 31, 2001 decreased slightly to $14.1 million from $14.4 million at December 31, 2000.

10Net capital expenditures for various machine tools, equipment and building improvement items totaled $7.9, $3.9 and $11.7 million for the fiscal years ended December 31, 2001, 2000 and 1999, respectively, of which $1.1, $0.8, and $2.3 million was funded by accounts payable at the respective period end in 2001, 2000 and 1999. The $7.9 million and $3.9 million of capital expenditures for 2001 and 2000, respectively, have been primarily for the FAL expansion. The FAL expansion is not yet complete and will require further capital expenditures during 2002. The $11.7 million of capital expenditures in 1999 include a net gain of $2.9 million on the involuntary conversion of assets.

~~decreased~~Net cash provided by financing activities was $166.85, ~~million~~$(6.7) ~~for~~and ~~the~~$(7.5) ~~year~~million ~~ended~~in ~~December 31~~2001, 2000 ~~compared~~and to 1999, respectively. ~~Net~~The ~~cash~~Company ~~provided~~elected byto ~~operations~~pay ~~was~~the ~~$13.3~~March 15, ~~$30.1~~2001 and $September 15, 2001 Exchangeable Preferred Stock dividends in kind and, in connection therewith, issued 2,812.45 ~~million~~and ~~for~~2,970.7 shares of Exchangeable Preferred Stock to the ~~years~~holders ~~ended~~of ~~December~~record ~~31,~~as ~~2000~~of March 1, ~~1999~~2001 and ~~1998~~September 1, 2001, respectively. ~~This~~The ~~decrease~~net ~~reflects~~cash ~~lower~~provided ~~sales volume,~~in ~~lower~~2001 ~~profitability,~~resulted ~~and~~primarily ~~lower~~from ~~inventory~~the ~~turnover~~preferred ~~due~~stock todividends paid in kind and the ~~lower~~proceeds ~~sales~~from ~~volume~~the issuance of long-term debt. The ~~lower~~net ~~inventory~~use ~~turnover~~in is2000 ~~also~~resulted ~~attributed~~primarily tofrom ancash ~~increase~~dividends inon preferred stock and the ~~investment~~refinancing of FAL's debt offset by capital contributions in ~~work~~accordance with a tax sharing agreement. The net use in ~~process~~1999 resulted primarily from cash payment of dividends on the Company's outstanding preferred stock, redemption of the 11-3/8% Senior Subordinated Notes, and ~~finished~~payment ~~goods~~of ~~inventory~~outstanding toamounts ~~capture~~under ~~short~~its ~~lead~~Credit ~~time opportunities~~Facility.

~~Working~~The ~~capital~~Company ~~less~~satisfies its liquidity needs from cash atflow ~~December~~from 31operations and short-term borrowings under its Credit Facility (described below). To date, ~~2000~~the ~~increased~~Company has relied principally on cash flow from operations to pay operating expenses, capital expenditures, interest and other expenses, and has not had to rely on borrowings under its Credit Facility. Due to 2001 losses, resulting in $14(2.42) million of cash from operations, and lower 2000 cash flow ($1013.23 million atin ~~December~~2000 ~~31,~~compared with $30.1 million in 1999), the Company may not be able to continue to rely on operating cash and may be required to borrow under its Credit Facility. The ~~increase~~Company's inability ~~working~~to ~~capital~~borrow ~~from~~under ~~December~~the 31Credit Facility is subject to certain conditions, ~~1999~~including the Company's compliance with certain financial covenants and borrowing base availability. The Company expects to ~~December~~continue 31to meet these financial covenants and other conditions to borrowing during 2002, ~~2000~~although isno ~~attributed~~assurance can be given. If the Company does not meet them and its senior lender does not agree to adjustments to the ~~increase~~covenants, the Company will not be able to borrow under the Credit Facility and, as a result, may have liquidity concerns. In addition, if the Company fails to satisfy its financial and other covenants in ~~inventory~~its ~~offset~~Credit ~~by additional~~Facility, ~~amounts~~the ~~received~~senior lender may accelerate the Company's obligations, in ~~final~~which ~~settlement~~case ofall loans under the ~~business~~Credit ~~interruption~~Facility ~~portion~~would ofbe immediately due and payable. If the ~~claim~~senior lender so accelerates its loans, the Company's Senior Subordinated Notes and the Exchangeable Preferred Stock (described below) would also be immediately due and payable.

Net capital expenditures for various machine tools, equipment and building improvement items totaled $3.9, $11.7 and $10.5 million for the fiscal years ended December 31, 2000, 1999 and 1998, respectively, of which $0.8, $2.3, and $0.8 million was funded by accounts payable at the respective period end in 2000, 1999 and 1998. The $3.9 million of capital expenditures for 2000 have been primarily for replacement equipment. The $11.7 million of capital expenditures in 1999 include a net gain of $2.9 million on the involuntary conversion of assets.

Net cash used by financing activities was $6.7, $7.5 and $5.1 million in 2000, 1999 and 1998, respectively. The net use in 2000 resulted primarily from cash dividends on preferred stock and the refinancing of Atlas' debt offset by capital contributions in accordance with a tax sharing agreement. The net use in 1999 resulted primarily from cash payment of dividends on the Company's outstanding preferred stock, redemption of the 11-3/8% Senior Subordinated Notes, and payment of outstanding amounts under its Credit Facility. The net use in 1998 resulted primarily from cash payment of dividends on the Company's outstanding preferred stock.

The Company and its affiliates, including Lancer, may from time to time, purchase in open-market transactions 9-5/8% Senior Subordinated Notes due 2008 and/or the 11-1/4% Cumulative Exchangeable Preferred Stock.

Under the Tax Sharing Agreement (as defined hereinafter), Lancer made capital contributions to the Company of $2.1, $3.9 and $2.7 million in 2000, 1999 and 1998, respectively. See Note 10 to the Consolidated Financial Statements for a further discussion of capital contributions made pursuant to the Tax Sharing Agreement.

Management expects to use cash flows from operations to fund the Company's planned capital requirements for 2001, including capital expenditures and interest. The Company's Credit Facilities, as discussed below, may also be utilized to meet additional liquidity needs.

Credit Facilities

The Company has a Credit Facility provided to it by General Electric Capital Corporation ("GE Capital"). Under the Credit Facility, the Company has $10.0 million of term loans outstanding at December 31, ~~2000~~2001. In addition, the Credit Facility provides for $20.0 million of revolving loans byto the Company, including up to $2.0 million under a letter of credit subfacility, subject to borrowing base availability. At December 31, ~~2000~~2001, the Company ~~had~~has $1916.68 million of availability under the revolver. The Company has the option of increasing the revolver availability by up to $2010.0 million, subject to the satisfaction of certain conditions. Also, the Company may incur up to an additional $12.0 million of loans under the Credit Facility in the event it is required, under its guarantee, to repay GE Capital any loans made by GE Capital to FAL (see below). Commitments under the revolver terminate on July 1, 2005. The $10.0 million of term loans currently outstanding are payable in a single principal payment on July 1, 2005.

In connection with the ~~Atlas~~FAL acquisition in 2000, GE Capital extended a Credit Facility to FAL in India and, in June 2001, agreed to allow FAL to obtain multiple disbursements term loans and a working capital facility. Pursuant to the Credit Facilities, FAL is allowed to borrow up to $12.0 million, all of which borrowings are guaranteed by the Company. As ~~amended~~of December 31, 2001, FAL has approximately $8.9 million of loans outstanding. At June 30, 2001, the Company was in default of a financial covenant in its ~~credit~~senior debt agreement. The ~~with~~senior ~~General~~lender ~~Electric~~waived ~~Capital~~such ~~Corporation~~default, ~~among~~and, ~~other~~in ~~things~~connection with such waiver, tothe ~~obtain~~Company and its ~~consent~~senior lender entered into an amendment to its Credit Facility on August 14, 2001, principally to adjust the ~~acquisition~~financial covenants. In ~~addition~~connection with the amendment, ~~General~~the ~~Electric~~interest ~~Capital~~rates ~~Corporation~~on ~~guaranteed~~the Company's borrowings under the Credit Facility were increased, and a $7.0 million ~~credit~~block ~~facility~~was ~~extended~~made toagainst the Company's borrowing base, reducing the Company's revolver availability.

11Due to continued liquidity pressures, the Company and its senior lender, subsequent to December 31, 2001, entered into an amendment to its Credit Facility on March 18, 2002 to adjust the financial covenants for the quarter ending December 31, 2002. In accordance with the amendment, one of the financial covenants has been revised to include two performance measurements for the quarter ending December 31, 2002. If the higher measurement is not achieved, the block against the Company's borrowing base will be increased from $7.0 million to $10.0 million, further reducing the Company's revolver availability.

~~Atlas~~Indebtedness under the Credit Facility is collateralized by a pledge of the Company's common stock owned by Lancer and a lien on, and security interest in, ~~India~~substantially all of the Company's assets, including, without limitation, all capital stock of subsidiaries, real estate, equipment, inventory, accounts receivable and cash. ~~Pursuant~~The toCredit Facility contains certain restrictive covenants limiting among other things, additional debt, additional liens, transactions with affiliates, mergers and consolidations, liquidations and dissolutions, sales of assets, dividends, capital expenditures, sales and leaseback transactions, operating leases, investments, loans and advances, prepayment and modification of debt instruments, the ~~amendment~~taking toor the ~~credit~~failure ~~agreement~~to take, ~~the~~certain ~~Company~~actions iswith ~~obligated~~respect to ~~repay~~the ~~any~~Tax ~~amounts~~Sharing ~~paid~~Agreement inand ~~respect~~other ofmatters ~~this~~customarily ~~guaranty~~restricted in such agreements. AsThe ofCredit ~~December~~Facility ~~31,~~also ~~2000~~requires that the Company maintain compliance with certain specified financial ratios and tests including ratios with respect to fixed charges, ~~Atlas~~interest ~~has~~coverage ~~approximately~~and $2working capital.6 In ~~million~~addition, ofthe ~~loans~~Credit ~~outstanding~~Facility contains certain customary affirmative covenants and events of default.

~~Indebtedness~~9-5/8% ~~under~~Senior ~~the~~Subordinated ~~Credit~~Notes ~~Facility~~due is secured by a pledge of the Company's common stock owned by Lancer and a lien on, and security interest in, substantially all of the Company's assets, including, without limitation, all capital stock of subsidiaries, real estate, equipment, inventory, accounts receivable and cash. The Credit Facility contains certain restrictive covenants limiting among other things, additional debt, additional liens, transactions with affiliates, mergers and consolidations, liquidations and dissolutions, sales of assets, dividends, capital expenditures, sales and leaseback transactions, operating leases, investments, loans and advances, prepayment and modification of debt instruments, the taking or the failure to take, certain actions with respect to the Tax Sharing Agreement and other matters customarily restricted in such agreements. The Credit Facility also requires that the Company maintain compliance with certain specified financial ratios and tests including ratios with respect to fixed charges, interest coverage and working capital. In addition, the Credit Facility contains certain customary affirmative covenants and events of default.2008

Issuance of 9-5/8% Senior Subordinated Noes due 2008

On May 19, 1999, the Company issued $100 million of 9-5/8% Senior Subordinated Notes due 2008. The proceeds of the offering were used by the Company as follows; 1) approximately $68.6 million was used to redeem the 11-3/8% Senior Subordinated Notes due 2001; 2) approximately $27.7 million was used to reduce outstanding amounts under its Credit Facility and; 3) approximately $3.7 million was used to pay the fees and expenses of the offering. During 1998, the Company repurchased $17.9 million of its 11-3/8% Senior Subordinated Notes due 2001 in open market transactions. The deferred financing costs associated with the 11-3/8% Senior Subordinated Notes due 2001 were written off as part of the loss on the early extinguishment of debt, which was approximately $1.4 million net of tax in 1999 and $0.4 million net of tax in 1998.

Exchangeable Preferred Stock

On March 12, 1997 the Company issued 50,000 shares of 11-1/4% Cumulative Exchangeable Preferred Stock, liquidation preference $1,000 per share, representing an aggregate liquidation preference of $50.0 million. The Exchangeable Preferred Stock is exchangeable at the option of the Company, in whole but not in part, for 11-1/4% Subordinated Exchange Debentures ~~Due~~due 2009 (the "Exchange Debentures"), in aggregate principal amount equal to the liquidation preference of the Exchangeable Preferred Stock following the redemption of the Existing Notes, subject to the satisfaction of certain conditions.

The Company is required, subject to certain conditions, to redeem all of the Exchangeable Preferred Stock outstanding on March 15, 2009 at a redemption price equal to 100% of the liquidation preference thereof plus, without duplication, accumulated and unpaid dividends to the date of redemption. The maturity date of the Exchange Debentures is March 15, 2009.

The Exchangeable Preferred Stock pays dividends at a rate equal to 11-1/4% per annum of the liquidation preference per share, payable semiannually on each March 15 and September 15 in cash, or, on or prior to March 15, 2002, in kind on each March 15 and September 15. Interest on the Exchange Debentures is also 11-1/4% per annum. The Company elected to pay the March 15, 2001 and September 15, 2001 Exchangeable Preferred Stock ~~dividend~~dividends in kind and, in connection therewith, issued 2,812.5 and 2,970.7 shares of Exchangeable Preferred Stock to the holders of record as of March 1, 2001 and September 1, 2001, respectively. In addition, subsequent to December 31, 2001, the Company elected to pay the March 15, 2002 Exchangeable Preferred Stock dividend in kind and, in connection therewith, issued 3,137.8 shares of Exchangeable Preferred Stock to the holders of record as of March 1, 2002.

12Open Market Purchases and Shareholder Contributions

The Company and its affiliates, including Lancer, may from time to time, purchase in open-market transactions the 9-5/8% Senior Subordinated Notes due 2008 and/or the 11-1/4% Cumulative Exchangeable Preferred Stock.

Under the Tax Sharing Agreement (as defined hereinafter), Lancer made capital contributions to the Company of $0, $2.1 and $3.9 million in 2001, 2000 and 1999, respectively. No contributions were made in 2001 because the Company did not generate any income. See Note 10 to the Consolidated Financial Statements for a further discussion of capital contributions made pursuant to the Tax Sharing Agreement.

Inflation

The impact of inflation on the Company's operations has not been significant to date. However, there can be no assurance that a high rate of inflation in the future would not have an adverse effect on the Company's operating results.

Information Concerning Forward-Looking Statements

This report contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933. Statements that are not simply statements of historical fact (such as when the Company describes what it believes, expects or anticipates will occur, and other similar statements), may not be correct, even though the Company currently believes they are reasonable. The Company does not guarantee that the transactions and events described in this report will happen as described (or that they will happen at all). This report should be read completely and with the understanding that actual future results may be materially different from what the Company expects. The Company will not update these forward-looking statements, even though its situation will change in the future. Whether actual results will conform ~~with~~to the Company's expectations and predictions is subject to a number of risks and uncertainties, including:

the Company's outstanding indebtedness and leverage;
restrictions imposed by the terms of the Company's indebtedness;, and the acceleration of all of the Company's indebtedness in the event the senior lender accelerates amounts due under the Credit Facility,
the high degree of competition in the Company's business;
the strength of the U.S. dollar against foreign currencies;
the susceptibility of the Company's business to general economic conditions;
the cyclical nature of the Company's business;
future modifications of existing environmental laws and human health regulations;
discovery of unknown contingent liabilities, including environmental contamination at the Company's ~~facility~~facilities;
the Company's dependence on suppliers of raw materials and major customers;
the ~~Company's~~effect ~~ability~~of totightened ~~manage~~liquidity ~~and~~markets ~~execute~~on ~~its strategy with regard to~~ the ~~Atlas~~Company's ~~acquisition,~~customers;
the Company's ability to manage and execute its strategy with regard to the FAL acquisition,
the control of Lancer, the Company's sole shareholder; and
future capital requirements.

Item 7 (a). ~~Quantitative~~QUANTITATIVE ~~and~~AND ~~Qualitative~~QUALITATIVE ~~Disclosures~~DISCLOSURES ~~About~~ABOUT ~~Market~~MARKET ~~Risk~~RISK

The Company does not own any interest in derivative financial or commodity instruments as of December 31, ~~2000~~2001. The effect of reasonably possible market movements in interest rates is not expected to have a material impact on the Company's future cash flows or earnings.

Item 8.

FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Reference is made to the Consolidated Financial Statements beginning at page F-1 herein.

Item 9.

CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE

None.

13
PART III

Item 10.

DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

The following table sets forth certain information with respect to the directors and executive officers of the Company, including their respective ages as of December 31, ~~2000~~2001.

Name	Age	Position
Paul S. Levy	5354	Chairman of the Board, Vice President and Assistant Secretary
Peter A. Joseph	4849	Director, Vice President and Secretary
Stephen K. Clough	4748	Director, President and Chief Executive Officer
Jess C. Ball	59	Director
W. B. Lechman	69	Director
W. B. Lechman	68	Director
Andrew R. Heyer	44	Director
Andrew R. Heyer	43	Director
Leonard Green	75	Director
Richard A. Bush	43	Vice President and Chief Financial Officer
Joshua J. Angel	65	Director
James R. Dammon	57	Vice President Engineering
Richard A. Bush	44	Vice President and Chief Financial Officer
Mark D. Gustus	41	Vice President Operations
James R. Dammon	58	Vice President Engineering
William V. Lewis	53	Vice President Human Resources
Mark D. Gustus	42	Vice President Operations
Thomas C. Sorrells	36	Vice President Business Development
William V. Lewis	54	Vice President Human Resources
Clement L. Strimel	38	Vice President International Business Development
Kenneth A. Russell	43	Vice President Manufacturing Engineering
Paul M. Schlueter	46	Vice President Sales North America
Clement L. Strimel	39	Vice President International Business Development

Mr. Levy was elected Chairman of the Board effective August 1998. Mr. Levy has been Vice President and Assistant Secretary and a Director of the Company since 1989. Mr. Levy has been a General Partner of Joseph Littlejohn & Levy since its inception in 1988. Mr. Levy has served as Chief Executive Officer and Chairman of the Board of Directors of Lancer since July 1989. Mr. Levy is also on the Board of Directors of Hayes Lemmerz International, Inc., New World Pasta Company, AdvancePCS, IASIS Healthcare, Motor Coach Industries International and Builders FirstSource, Inc.

Mr. Joseph has been Vice President, Director and Secretary of the Company since 1989. Mr. Joseph has served as President of Lancer since April 1992 and as Secretary and Director of Lancer since July 1989. Mr. Joseph has been a principal of Palladium Equity Partners, LLC since 1998. Prior to that, he was a ~~founding~~ partner of Joseph Littlejohn & Levy.

Mr. Clough was appointed President and Chief Executive Officer and elected to the Board of Directors effective August 1998. Prior to his appointment, Mr. Clough was employed by Kaydon Corporation where he served as the President and Chief Executive Officer from June 1996 to June 1998 and the President and Chief Operating Officer from September 1989 to June 1996. Mr. Clough is on the Board of Directors of Lancer.

Mr. ~~Ball~~Lechman has been a Director of the Company since ~~1991~~1989. Mr. ~~Ball~~Lechman ~~was~~served as Chairman of the Board from October 1994 to July 1997 and as President and Chief Executive Officer of the Company from 1989 to October 1994. Mr. toLechman ~~May~~serves ~~1996~~on the Board of Directors of Lafayette Junior Achievement and The Salvation Army, and he is President Emeritus of the American Gear Manufacturers Association.

Mr. ~~Lechman~~Heyer ~~has~~is ~~been~~ a ~~Director~~founder of ~~the~~Trimaran ~~Company~~Capital ~~since~~Partners, ~~1989~~a private asset management firm. Mr. ~~Lechman~~Heyer ~~served~~is asalso a Vice Chairman of ~~the~~CIBC ~~Board~~World ~~from~~Markets ~~October~~Corp., ~~1994~~co-head toof ~~July~~CIBC ~~1997~~Argosy ~~and~~Merchant asBanking ~~President~~Funds, and ~~Chief~~a ~~Executive~~member ~~Officer~~ of ~~the~~CIBC's ~~Company~~U.S. ~~from~~Management ~~1989~~Committee. Prior to ~~October~~joining ~~1994~~CIBC in 1995, Mr. Heyer was a founder and managing director or The Argosy Group L.P. Mr. ~~Lechman~~Heyer serves onas ~~the Board~~a ofdirector ~~Directors~~ of ~~Bank~~Lancer, ~~One~~eLink ~~Lafayette~~Communications, ~~Lafayette~~Inc., ~~Community~~Niagara ~~Foundation~~Corporation, ~~Lafayette~~The ~~Junior~~Hain ~~Achievement,~~Celestial ~~The~~Food ~~Salvation~~Group, ~~Army~~Inc., ~~and~~Millennium isDigital ~~President~~Media ~~Emeritus~~Holdings, ofL.L.C., ~~the~~and ~~American~~Village ~~Gear~~Voice ~~Manufacturers~~Media, ~~Association~~LLC.

14Mr. Green was elected as a Director of the Company on March 15, 2002. Mr. Green has been the Chief Executive Officer of HFA Consulting Company and the President and Chief Executive Officer of Green Management and Investment Company since 1990 and 1985, respectively. Mr. Green is on the Board of Directors of Lancer.

Mr. ~~Heyer~~Angel iswas ~~Managing~~elected ~~Director~~as ~~and~~a ~~co-head~~Director of the ~~High~~Company ~~Yield~~on ~~Group~~March of15, ~~CIBC World Markets~~2002. ~~Prior to joining the firm,~~ Mr. ~~Heyer~~Angel ~~was~~has abeen ~~founding~~the ~~partner~~Senior ~~and~~Managing ~~managing~~Shareholder ~~director~~ of ~~The~~Angel ~~Argosy~~& ~~Group~~Frankel, L.P.C., ~~which~~a ~~was~~New ~~acquired~~York bybased ~~CIBC~~law ~~World~~firm ~~Markets~~which ~~(formerly CIBC~~has ~~Wood~~specialized ~~Gundy)~~ in ~~August~~commercial ~~1995. Before~~insolvency ~~Argosy,~~for ~~Mr.~~over ~~Heyer~~40 ~~was a managing director in the Corporate Finance Department of Drexel Burnham Lambert Incorporated~~years. Mr. ~~Heyer~~Angel ~~serves~~is ason athe ~~director~~Board of ~~the~~Directors ~~Hain~~of ~~Celestial Food Group, Inc., Niagara Corporation, Hayes Lemmerz International, Inc.,~~ Lancer, ~~NSP~~Dynacore Holdings, ~~LLC,~~Corporation ~~E-Link~~ and ~~Millennium~~Cellular ~~Digital~~Technical ~~Media~~Services ~~Capital~~Company, LInc.~~L.C.~~

Mr. Bush was appointed Vice President and Chief Financial Officer effective January 2000. Mr. Bush was the Vice President of Finance of the Company since November 1994. From 1990 to 1994, Mr. Bush was Controller for two ~~different~~ aerospace units of Abex Inc. From 1980 to 1990, Mr. Bush was with Arthur Andersen & Co. in the audit and financial consulting practice.

Mr. Dammon has been Vice President of Engineering since 1987. Prior to his present position, Mr. Dammon was Director of Engineering, Manager of New Product Development, Manager of Customer Engineering Service and Gear Design Engineer. Mr. Dammon has been with the Company for over 30 years.

Mr. Gustus has been Vice President Operations since July 1997. Prior to his present position, Mr. Gustus was Director of Materials and Assembly. Mr. Gustus has been with the Company for over 1520 years.

Mr. Lewis has been Vice President Human Resources since July 1999. Prior to his present position, Mr. Lewis was Vice President, Human Resources, Manufacturing and Distribution for PolyGram and Universal Music Group from 1993 to June 1999. From 1972 to 1992, Mr. Lewis was with Aluminum Company of America (ALCOA) where he served in various human resource positions.

Mr. ~~Sorrells~~Russell has been Vice President ~~Business~~Manufacturing ~~Development~~Engineering since ~~March~~September ~~2000~~2001. Prior to his present position, Mr. ~~Sorrells~~Russell was ~~Vice~~with ~~President~~Kaydon ~~Business~~Corporation ~~Development~~for of22 ~~Lancer Industries from November 1999 to February 2000. Prior to that he was President of Kaydon Fluid Power~~years, amost ~~division~~recently ofas ~~Kaydon~~Plant ~~Corporation~~Manager from ~~September~~July ~~1995~~1993 to ~~November~~September ~~1999~~2001.

Mr. ~~Strimel~~Schlueter has been ~~the~~ Vice President ~~International~~Sales ~~Business~~North ~~Development~~America since ~~November~~March ~~2000~~2001. Prior to his present position, Mr. ~~Strimel~~Schlueter was Vice President of Sales ~~from~~and ~~March~~Marketing ~~1999~~for toNueweb ~~October~~Interactive ~~2000. Prior to that, Mr. Strimel was the Director of Custom Sales~~ from ~~October~~July ~~1996~~2000 to ~~March~~February ~~1999~~2001. Prior to ~~joining~~Nueweb ~~Fairfield,~~he ~~Mr. Strimel~~ was with ~~United~~Kaydon ~~Defense~~Corporation for ~~nine~~12 years where he served as aVice ~~Program~~President ~~Manager~~Sales and Marketing for the Electo-Tec Division from ~~1991~~1994 to ~~October 1996~~2000.

Mr. Strimel has been Vice President International Business Development since November 2000. Prior to his present position, Mr. Strimel was Vice President of Sales from March 1999 to October 2000. Prior to that, Mr. Strimel was the Director of Custom Sales from October 1996 to March 1999. Prior to joining Fairfield, Mr. Strimel was with United Defense for nine years where he served as a Program Manager from 1991 to October 1996.

Compensation of Directors

~~Messrs~~Mr. ~~Ball and~~ Lechman ~~each~~received ~~receive~~ an annual fee of $30,000 ~~per~~for ~~year~~services as a director in 2001. Mr. Jess Ball, a director of the Company in 2001, also received this annual fee of $30,000 for services as a director in 2001. Mr. Lechman entered into a consulting agreement with the Company in August 1997 that expired July 2001. Beginning January 1, 2002, Mr. Lechman entered into a new consulting agreement with the Company (see Note 3 to the Consolidated Financial Statements and Item 11, "Employment and Consulting Agreements") ~~in August 1997~~. No other directors receive any additional compensation for services performed as a director or for serving on committees of the Board of Directors of the Company or for meeting attendance.

Item 11.

EXECUTIVE COMPENSATION

The following table sets forth for each of the fiscal years ending December 31, ~~2000~~2001, ~~1999~~2000 and ~~1998~~1999, the compensation paid to or accrued by the Company for the Chief Executive Officer ("CEO") of the Company and each of the four most highly compensated executive officers other than the CEO (the "Named Executive Officers").

Summary Compensation Table

Name and	~~Annual Compensation~~		Annual Compensation		~~All Other~~	All Other
Principal Position	Year	Salary		~~Bonus(1)~~	~~Compensation~~Bonus(21)	Compensation(2)
Stephen K. Clough	~~2000~~2001	$416,~~200~~031		~~$203,174~~	$~~19,190~~0	$20,175
President and Chief Executive	~~1999~~2000	~~406~~416,~~862~~200		~~505,440~~	18203,~~706~~174	19,190
Officer	~~1998~~1999	~~154~~406,~~872~~862		~~155,600~~	18505,~~869~~440	18,706
Richard A. Bush	~~2000~~2001	$~~150~~157,~~031~~531		~~$45,753~~	$~~7,998~~0	$7,590
Vice President and Chief	~~1999~~2000	~~118~~150,~~364~~031		~~85,800~~	745,~~093~~753	7,578
Financial Officer	~~1998~~1999	~~107~~118,~~500~~364		~~44,000~~	685,~~038~~800	7,093
James R. Dammon	~~2000~~2001	$~~123~~130,~~334~~258		~~$29,389~~	$~~6,529~~0	$6,529
Vice President Engineering	~~1999~~2000	~~120~~123,~~172~~334		~~88,161~~	629,~~574~~389	6,529
	1998	118,560		47,424	6,852
	1999	120,172			88,161	6,574
Mark D. Gustus	~~2000~~2001	$~~118~~132,~~226~~551		~~$38,602~~	$~~7,567~~0	$7,418
Vice President Operations	~~1999~~2000	~~113~~118,~~239~~226		~~82,582~~	438,~~657~~602	7,567
	1998	110,000		44,000	3,698
	1999	113,239			82,582	4,657
Thomas C. Sorrells	2000	$175,031	(3)	$60,054	$3,855
William V. Lewis	2001	$124,831			$0	$5,794
Vice President Business
Vice President Human	2000	122,774			29,752	7,481
Development
Resources	1999	60,330		(3)	42,900	23,240

(1)	Amounts shown were earned under the Fairfield Manufacturing Company, Inc. Management Incentive Compensation Plan.
(2)	Amounts shown include contributions by the Company to The Savings Plan For Employees of Fairfield Manufacturing Company, Inc. ("Savings Plan") for the benefit of the Named Executive Officers, imputed income on life insurance provided by the Company. ~~Included in the 1998 other compensation amount shown for Mr. Clough is $10,000 for moving expenses reimbursed.~~ Other compensation for Mr. Clough also includes the value of other fringe benefits provided by the Company.
(3)	Amount shown represents compensation from ~~March~~July, ~~2000~~1999 through December, ~~2000~~1999.

16
Incentive Plan for Senior Management

The Company has established an Incentive Plan for Senior Management (the "Plan") to provide incentive compensation for the Company's executive officers designated by the Board. Under the Plan, the Board grants Performance Units, at its discretion, to the Company's executive officers, and such Performance Units may vest in six equal annual installments on the last day of each of the six fiscal years of the Company beginning with the year ended December 31, 1998. Under the Plan, the holders of the Performance Units are entitled to share in the increase of the Company's equity value in the event the Performance Units vest. The Plan terminates after redemption and satisfaction of all then outstanding Performance Units at December 31, 2003 or upon a change of control. The non-cash provision under this Plan was $0 in 2001, ($2,300) in 2000 and $2,300 in 1999.

Pension Plan Table

The Company maintains the Retirement Plan for Employees of Fairfield Manufacturing Company, Inc., a qualified defined benefit pension plan intended to be qualified under the Internal Revenue Code (the "Pension Plan").

	Estimated Annual Benefits for Years of Benefit Service Indicated(2)
Average Annual Compensation (1)	5	10	15	20	25	30	35
$100,000	$6,~~636~~599	$13,~~272~~198	$19,~~907~~796	$26,~~543~~395	$3332,~~179~~994	$39,~~815~~593	$4140,~~065~~843
$125,000	8,~~448~~411	16,~~897~~823	25,~~345~~234	33,~~793~~645	42,~~241~~056	50,~~690~~468	52,~~252~~030
$150,000	10,~~261~~224	20,~~522~~448	30,~~782~~671	4140,~~043~~895	51,~~304~~119	61,~~565~~343	63,~~440~~218
$170,000 and over	11,~~711~~674	23,~~422~~348	35,~~132~~021	46,~~843~~695	58,~~554~~369	70,~~265~~043	72,~~390~~168

(1) The preceding table illustrates the pension benefits provided by the Pension Plan, calculated on a straight life annuity basis, for an eligible employee retiring at age 65 in ~~2000~~2001. Average annual compensation covered under the Pension Plan is the highest average annual total compensation received from the Company for any 5 calendar years during the 10 years immediately preceding the participant's separation from service. Annual total compensation for Pension Plan purposes includes the base salary and bonus components of compensation as disclosed in the Summary Compensation Table. In order to comply with the terms of the Pension Plan and the requirements of the Internal Revenue Code, the compensation used in calculating a participant's pension is limited. This limit was $170,000 for ~~2000~~2001.

(2) At December 31, ~~2000~~2001 Messrs. Clough, Bush, Dammon, Gustus and ~~Sorrells~~Lewis had 23, 67, 3536, 1920 and 13 years of credited service, respectively, for purposes of calculating their benefits under the Pension Plan.

Employment and Consulting Agreements

Effective July 31, 1997, W. B. Lechman resigned as Chairman of the Company's Board of Directors (the "Board") but continues as a member of the Board. Effective August 1, 1997, Mr. Lechman entered into a consulting agreement (the "Agreement") with the Company. In consideration for services to be rendered under the Agreement, Mr. Lechman received quarterly payments through July 31, 2001 ("the consulting period") totaling $1.0 million. Due to the provisions of the Agreement, the Company recognized the entire $1.0 million as expense in 1997. Beginning January 1, 2002, Mr. Lechman entered into a new consulting agreement with the Company. The compensation under this agreement to Mr. Lechman is $20,000 per year and is renewable annually.

Effective August 1, 1997, Mr. Lechman entered into a consulting agreement (the "Agreement") with the Company. In consideration for services to be rendered under the Agreement, Mr. Lechman will receive quarterly payments through July 31, 2001 ("the consulting period") totaling $1.0 million. In the event that Mr. Lechman dies prior to the end of the consulting period or is unable to perform the services requested due to mental or physical disabilities, the Company shall pay to his legal representatives or beneficiaries the remaining unpaid balance under the Agreement. Due to the provisions of the Agreement, the Company has recognized the entire $1.0 million as expense in 1997.

The Company entered into an employment agreement with Stephen K. Clough, effective August 12, 1998 in connection with his appointment as President and Chief Executive Officer of the Company. The original agreement, which would have expired on August 12, 2001, was amended during 1999 extending the agreement to August 31, 2003. The agreement provides for Mr. Clough to receive a base salary of $400,000 or such greater amount as may be determined by the Board of Directors of the Company upon periodic review. In addition, Mr. Clough is eligible to receive bonuses in each fiscal year covered by the agreement based on the achievement of target performance objectives for himself and the Company as established by the Board of Directors. Mr. Clough is eligible to participate in any other benefit plan that the Company provides to its executives and employees from time to time.

Item 12.

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The following table sets forth information regarding the beneficial ownership of the common stock of the Company as of December 31, ~~2000~~2001 by (i) each person known by the Company to beneficially own in excess of 5% of the outstanding shares of the Company's common stock, (ii) each director of the Company and (iii) the directors and executive officers of the Company as a group, as listed in Item 10, "Directors and Executive Officers of the Registrant."

Name	Shares of Common Stock		Percent of Class
Lancer Industries Inc. (1) 450 Lexington Avenue, Suite 3350 New York, New York 10017	9,117,000		100%
Paul S. Levy	--	(2)	--
Peter A. Joseph	--	(2)	--
Andrew R. Heyer	--	(2)	--
All directors and executive officers as a group (12 persons)	--	(2)	--
All directors and executive officers as a group (14 persons)	--	(2)	--

(1)	100% of the capital stock of the Company is owned by Lancer. Lancer has pledged such shares to the lender under the GE Credit Agreement (as defined) as collateral for the Company's obligations thereunder.

(2)	Lancer has one class of common stock, Class B Common Stock, with a par value of $478.44 per share. Lancer's common stock is held as follows: (i) Canadian Imperial Bank of Commerce ("CIBC"), through affiliates, beneficially owns approximately 23% of Lancer's common stock, (ii) certain entities affiliated with Mutual Series Fund (the "Mutual Entities") own approximately 27% of Lancer's common stock, (iii) Mr. Paul S. Levy, the Chairman of the Board and Chief Executive Officer of the Company, directly and through his participation in the Lancer Employee Stock Ownership Plan (the "ESOP") beneficially owns approximately 22% of Lancer's common stock, and through a proxy in his favor to vote the shares of Lancer's common stock beneficially owned by CIBC and others, has the right to direct the voting of over 50% of Lancer's common stock, and (iv) Mr. Peter A. Joseph, a Vice President and a Director of the Company, directly, through a trust and through his participation in the ESOP, beneficially owns and has the right to direct the voting of approximately 16% of Lancer's common stock. Mr. Levy, the Mutual Entities and an affiliate of CIBC are parties to a stockholders' arrangement relating to the composition of the Board of Directors of Lancer and certain other matters. Mr. Levy is the Chairman of the Board and Chief Executive Officer of Lancer. Mr. Joseph is the President and a Director of Lancer. Mr. Heyer, a Director of the Company, is a Director of Lancer and a Managing Director of an affiliate of CIBC.

Item 13.

CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

Control by Lancer Industries Inc.

The Company is wholly owned by Lancer, a Delaware corporation. As a result, Lancer is able to direct and control the policies of the Company and its subsidiaries. Certain stockholders of Lancer are Directors and officers of the Company. Certain stockholders of Lancer are parties to a stockholders' arrangement relating to the composition of the Board of Directors of Lancer and certain other matters. See Item 12, "Security Ownership of Certain Beneficial Owners and Management." Circumstances could occur in which the interests of Lancer could be in conflict with the interests of the Company. In addition, Lancer may have an interest in pursuing acquisitions, divestitures or other transactions that Lancer believes would enhance its equity investment in the Company, even though such transactions might involve risks to the Company.

Tax Sharing Agreement

The Company is included in the affiliated group of which Lancer is the common parent, and the Company's federal taxable income and loss will be included in such group's consolidated federal tax return filed by Lancer. The Company and Lancer have entered into a tax sharing agreement (the "Tax Sharing Agreement") pursuant to which the Company has agreed to pay to Lancer amounts equal to the taxes that the Company would otherwise have to pay if it were to file a separate federal tax return (including amounts determined to be due as a result of a redetermination of the tax liability of Lancer). In addition, pursuant to the Tax Sharing Agreement, to the extent that the Company's separate return liability is absorbed by net operating losses or other credits and deductions of Lancer or its subsidiaries (other than the Company and its subsidiaries), Lancer will make a capital contribution to the Company in an amount equal to 50% of such separate return liability. Under certain circumstances, however, such as the Company ceasing to be a member of the Lancer consolidated group or the disallowance by the IRS of the use of Lancer's net operating losses, Lancer no longer would be required to make capital contributions under the Tax Sharing Agreement. See ~~Note~~Notes 10 and 14 to the Consolidated Financial Statements for a further discussion of income taxes.

Management Services

Stephen Clough, the Company's President and Chief Executive Officer, has been providing management services to Motor Coach Industries, Inc. ("MCI"), which is controlled and majority-owned by Joseph Littlejohn & Levy Fund III. Tom Sorrells, ~~its~~the Company's former Vice President Business Development, ~~have~~also ~~been~~provided ~~providing~~similar ~~management~~ services ~~for~~to aMCI ~~company~~in (the ~~"Fund~~first ~~III~~half ~~Company")~~of ~~controlled~~2001 ~~and~~at ~~majority-owned~~the direction of Mr. Clough. byMr. ~~Joseph Littlejohn~~Sorrells &resigned ~~Levy~~from ~~Fund~~the ~~III~~Company ~~("Fund~~effective ~~III")~~June 30, 2001 to become the President and Chief Operating Officer of MCI. Messrs. Levy and Joseph have an interest in ~~Fund III~~MCI. An affiliate of CIBC, in which Mr. Heyer is a general partner, has an equity interest in ~~the Fund III Company~~MCI. See Item 10, "Directors and Executive Officers of the Registrant" and Item 12, "Security Ownership of Certain Beneficial Owners and Management."

~~Messrs~~Mr. Clough ~~and Sorrels~~ began rendering ~~such~~ management services in January ~~2001and~~2001 ~~will continue to do so until such time as the Fund III Company hires a president~~ and ~~chief~~is ~~executive~~continuing ~~officer. Mr.~~to ~~Clough~~provide ~~devotes~~them ~~most of his professional time~~ to ~~the~~ ~~Company, and Mr~~MCI. ~~Sorrells allocates his time between the Company and the Fund III Company, at the direction of Mr. Clough.~~ ~~The~~MCI ~~Fund~~is ~~III~~obligated ~~Company~~to ~~will~~ reimburse the Company for all expenses related to such services, including the ~~salaries~~salary of, and other compensation to, ~~Messrs~~Mr. Clough ~~and Sorrells~~ (based on the portion of ~~their~~his time spent on ~~the~~MCI). In ~~Fund~~2001, ~~III~~MCI paid the Company) $0. ~~The~~1 ~~disinterested~~and ~~directors~~$0.1 million as reimbursement of the Company's ~~have~~expenses ~~approved~~related to the provision of such services by ~~Messrs~~Mr. Clough and, ~~Sorrells~~for to the ~~Fund~~first ~~III~~six ~~Company~~months of 2001, Mr. Sorrells, respectively.

20
Other Arrangements with Lancer

From time to time, Lancer incurs legal, accounting and miscellaneous other expenses on behalf of the Company. In fiscal ~~2000~~2001, ~~1999~~2000 and ~~1998~~1999, Lancer incurred reimbursable expenses on the Company's behalf of approximately $0.2, $0.42 and $0.84 million, respectively.

21
PART IV

Item 14.

EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.

(a) (1) and (2):

See Index to Consolidated Financial Statements and Financial Statement Schedule appearing on page F-1. (3) The following is a list of exhibits hereto required to be filed by Item 601 of Regulation S-K of the Securities and Exchange Commission:

(3) The following is a list of exhibits hereto required to be filed by Item 601 of Regulation S-K of the Securities and Exchange Commission:

Exhibit No.	Description
(3) (a)	Restated Certificate of Incorporation of Fairfield Manufacturing Company, Inc. ("Fairfield or the Company"), together with the Certificate of Amendment, dated March 7, 1997, and filed on March 11, 1997, incorporated by reference from Exhibit 3(a) to the Registration Statement on Form S-4 (file no. 333-24823) of the Company, as filed with the Securities and Exchange Commission on April 9, 1997 (the "1997 Form S-4").
(3) (b)	By-Laws of Fairfield, incorporated by reference from Exhibit 3(c) to the Company's Form 10-K as filed with the Securities and Exchange Commission on March 22, 1995 (the "1994 Form 10-K").
(4) (a)	Indenture, dated as of March 12, 1997, between Fairfield and United States Trust Company of New York as Trustee, incorporated by reference from Exhibit 4(c) to the 1997 Form S-4.
(4) (b)	Certificate of Designation, dated March 12, 1997, for the 11-1/4% Cumulative Exchangeable Preferred Stock, incorporated by reference from Exhibit 4(d) to the 1997 Form S-4.
(4) (c)	Indenture, dated as of May 1999, between Fairfield and First Union National Bank, a trustee, incorporated by reference from Exhibit 4.01 to the Registration Statement on Form S-4 (file no. 333-80431) of the Company filed with the Commission on July 2, 1999.
(10) (a)	The Amended and Restated Loan Agreement, dated as December 30, 1999, among Fairfield, as borrower, the financial institutions party thereto as lenders, and General Electric Capital Corporation ("GECC"), as agent.
(10) (b)	Security Agreement, dated as of July 7, 1993, between T-H Licensing, Inc. ("T-H Licensing") and GECC, as agent, incorporated by reference from Exhibit 10(d) to the Company's Form 10-Q as filed with the Securities and Exchange Commission on August 16, 1993 (the "1993 Second Quarter Form 10-Q").
(10) (c)	Stock Pledge Agreement, dated as of July 7, 1993, between Fairfield and GECC, as agent, incorporated by reference from Exhibit 10(e) to the 1993 Second Quarter Form 10-Q.
(10) (d)	Trademark Security Agreement, dated as of July 7, 1993, between Fairfield and GECC, as agent, incorporated by reference from Exhibit 10(g) to the 1993 Second Quarter Form 10-Q.
(10) (e)	Trademark Security Agreement, dated as of July 7, 1993, between T-H Licensing and GECC, as agent, incorporated by reference from Exhibit 10(h) to the 1993 Second Quarter Form 10-Q.
(10) (f)	Patent Security Agreement, dated as of July 7, 1993, between Fairfield and GECC, as agent, incorporated by reference from Exhibit 10(i) to the 1993 Second Quarter Form 10-Q.
(10) (g)	Patent Security Agreement, dated as of July 7, 1993, between T-H Licensing and GECC, as agent, incorporated by reference from Exhibit 10(j) to the 1993 Second Quarter Form 10-Q.
(10) (h)	Subsidiary Guaranty, dated as of July 7, 1993, between T-H Licensing and GECC, as agent, incorporated by reference from Exhibit 10(k) to the 1993 Second Quarter Form 10-Q.
(10) (i)	Mortgage, Assignment of Leases, Rents and Profits, Security Agreement and Fixture Filing, dated as of July 7, 1993, between Fairfield and GECC, as agent, incorporated by reference from Exhibit 10(l) to the 1993 Second Quarter Form 10-Q.
(10) (j)	Collection Account Agreement, dated as of July 7, 1993, among Fairfield and GECC, and acknowledged by Bank One, Lafayette, N.A., incorporated by reference from Exhibit 10(m) to the 1993 Second Quarter Form 10-Q.
(10) (k)	Used Machinery Account Agreement, dated as of July 7, 1993, among Fairfield and GECC, and acknowledged by Bank One, Lafayette, N.A., incorporated by reference from Exhibit 10(n) to the 1993 Second Quarter Form 10-Q.
(10) (l)	Quitclaim Grant of Security Interest, dated as of July 7, 1993, between Fairfield and GECC, as agent, incorporated by reference from Exhibit 10(o) to the 1993 Second Quarter Form 10-Q.
(10) (m)	Supplemental Quitclaim Grant of Security Interest (Patents only), dated as of July 7, 1993, between Fairfield and GECC, as agent, incorporated by reference from Exhibit 10(p) to the 1993 Second Quarter Form 10-Q.
(10) (n)	First Amendment to Mortgage Assignment of Leases, Rents and Profits, Security Agreement and Fixture Filing, dated as of March 31, 1995, between Fairfield and GECC, as agent, incorporated by reference from Exhibit 10(t) to the 1994 Form 10-K.
(10) (o)	Stock Pledge Agreement, dated as of March 31, 1995, between Lancer Industries Inc. ("Lancer") and GECC, as agent, incorporated by reference from Exhibit 10(u) to the 1994 Form 10-K.
(10) (p)	Amended and Restated Security Agreement, dated as of March 31, 1995, between Fairfield and GECC, as agent, incorporated by reference from Exhibit 10(v) to the 1994 Form 10-K.
(10) (q)	The Tax Sharing Agreement, dated as of July 18, 1990, between Fairfield and Lancer, incorporated by reference from Exhibit 10(z) to the Company's Form 10-K as filed with the Securities and Exchange Commission on March 15, 1996 (the "1995 Form 10-K").
(10) (r)	The Fairfield Manufacturing Company, Inc. (1992) Supplemental Executive Retirement Plan incorporated by reference from Exhibit 10(aa) to the 1995 Form 10-K.
(10) (s)	Letter Agreement, dated December 29, 1989, granting exclusive license from T-H Licensing to Fairfield incorporated by reference from Exhibit 10(bb) to the 1995 Form 10-K.
(10) (t)	Second Amendment to Mortgage Assignment of Leases, Rents and Profits, Security Agreement and Fixture Filing, dated as of December 5, 1996, between Fairfield and GECC, as agent, incorporated by reference from Exhibit 10(dd) to the Company's From 10-K as filed with the Securities and Exchange Commission on February 25, 1997 (the "1996 Form 10-K").
(10) (u)	Consent and Amendment, dated as of March 27, 1997, among Fairfield and GECC, as sole lender and agent, incorporated by reference from Exhibit 10(gg) to the 1997 Form S-4.
(10) (v)	Consulting Agreement, dated August 1, 1997, between Fairfield and Wolodymyr B. Lechman, incorporated by reference from Exhibit 10(hh) to the Company's Form 10-Q as filed with the Securities and Exchange Commission on November 12, 1997.
(10) (w)	Third Amendment to Mortgage Assignment of Leases, Rents and Profits, Security Agreement and Fixture Filing, dated as of October 12, 1998 between Fairfield and GECC, as agent, incorporated by reference from Exhibit 10(hh) to the Company's Form 10-Q as filed with the Securities and Exchange Commission on November 13, 1998 (the "1998 Third Quarter Form 10-Q").
(10) (x)	Employment Agreement dated as of August 4, 1998, between Fairfield and S. K. Clough, incorporated by reference from Exhibit 10(ii) to the 1998 Third Quarter Form 10-Q.
(10) (y)	Fairfield Manufacturing Company, Inc. Incentive Plan for Senior Management, incorporated by reference from Exhibit 10 (y) to the 1999 Form 10-K.
(10) (z)	First Amendment, dated as of October 6, 2000, an Amended and Restated Loan Agreement, dated as of December 30, 1999, between Fairfield Manufacturing Company, Inc., the financial institutions party as lenders and General Electric Capital Corporation as administrative agent, incorporated by reference from Exhibit 10.1 to the 2000 Third Quarter 10-Q.
(10) (aa)	Second Amendment, dated as of June 12, 2001, an Amended and Restated Loan Agreement, dated as of December 30, 1999 between Fairfield Manufacturing Company, Inc., the financial institutions party as lenders and General Electric Capital Corporation as administrative agent, incorporated by reference from Exhibit 10.1 to the 2001 Third Quarter 10-Q.
(10) (bb)	Third Amendment, dated as of August 14, 2001, an Amended and Restated Loan Agreement, dated as of December 30, 1999 between Fairfield Manufacturing Company, Inc., the financial institutions party as lenders and General Electric Capital Corporation as administrative agent, incorporated by reference from Exhibit 10.2 to the 2001 Third Quarter 10-Q.
(10) (cc)	Fourth Amendment, dated as of March 18, 2002, an Amended and Restated Loan Agreement, dated as of December 30, 1999 between Fairfield Manufacturing Company, Inc., the financial institutions party as lenders and General Electric Capital Corporation as administrative agent.
(21)	Subsidiaries of Fairfield Manufacturing Company, Inc. T-H Licensing, Inc. Fairfield Atlas Limited

Exhibit No.	Description
(3) (a)	Restated Certificate of Incorporation of Fairfield Manufacturing Company, Inc. ("Fairfield or the Company"), together with the Certificate of Amendment, dated March 7, 1997, and filed on March 11, 1997, incorporated by reference from Exhibit 3(a) to the Registration Statement on Form S-4 (file no. 333-24823) of the Company, as filed with the Securities and Exchange Commission on April 9, 1997 (the "1997 Form S-4").
(3) (b)	By-Laws of Fairfield, incorporated by reference from Exhibit 3(c) to the Company's Form 10-K as filed with the Securities and Exchange Commission on March 22, 1995 (the "1994 Form 10-K").
(4) (a)	Indenture, dated as of March 12, 1997, between Fairfield and United States Trust Company of New York as Trustee, incorporated by reference from Exhibit 4(c) to the 1997 Form S-4.
(4) (b)	Certificate of Designation, dated March 12, 1997, for the 11-1/4% Cumulative Exchangeable Preferred Stock, incorporated by reference from Exhibit 4(d) to the 1997 Form S-4.
(4) (c)	Indenture, dated as of May 1999, between Fairfield and First Union National Bank, a trustee, incorporated by reference from Exhibit 4.01 to the Registration Statement on Form S-4 (file no. 333-80431) of the Company filed with the Commission on July 2, 1999.
(10) (a)	The Amended and Restated Loan Agreement, dated as December 30, 1999, among Fairfield, as borrower, the financial institutions party thereto as lenders, and General Electric Capital Corporation ("GECC"), as agent.
(10) (b)	Security Agreement, dated as of July 7, 1993, between T-H Licensing, Inc. ("T-H Licensing") and GECC, as agent, incorporated by reference from Exhibit 10(d) to the Company's Form 10-Q as filed with the Securities and Exchange Commission on August 16, 1993 (the "1993 Second Quarter Form 10-Q").
(10) (c)	Stock Pledge Agreement, dated as of July 7, 1993, between Fairfield and GECC, as agent, incorporated by reference from Exhibit 10(e) to the 1993 Second Quarter Form 10-Q.
(10) (d)	Trademark Security Agreement, dated as of July 7, 1993, between Fairfield and GECC, as agent, incorporated by reference from Exhibit 10(g) to the 1993 Second Quarter Form 10-Q.

(10) (e)	Trademark Security Agreement, dated as of July 7, 1993, between T-H Licensing and GECC, as agent, incorporated by reference from Exhibit 10(h) to the 1993 Second Quarter Form 10-Q.
(10) (f)	Patent Security Agreement, dated as of July 7, 1993, between Fairfield and GECC, as agent, incorporated by reference from Exhibit 10(i) to the 1993 Second Quarter Form 10-Q.
(10) (g)	Patent Security Agreement, dated as of July 7, 1993, between T-H Licensing and GECC, as agent, incorporated by reference from Exhibit 10(j) to the 1993 Second Quarter Form 10-Q.
(10) (h)	Subsidiary Guaranty, dated as of July 7, 1993, between T-H Licensing and GECC, as agent, incorporated by reference from Exhibit 10(k) to the 1993 Second Quarter Form 10-Q.
(10) (i)	Mortgage, Assignment of Leases, Rents and Profits, Security Agreement and Fixture Filing, dated as of July 7, 1993, between Fairfield and GECC, as agent, incorporated by reference from Exhibit 10(l) to the 1993 Second Quarter Form 10-Q.
(10) (j)	Collection Account Agreement, dated as of July 7, 1993, among Fairfield and GECC, and acknowledged by Bank One, Lafayette, N.A., incorporated by reference from Exhibit 10(m) to the 1993 Second Quarter Form 10-Q.
(10) (k)	Used Machinery Account Agreement, dated as of July 7, 1993, among Fairfield and GECC, and acknowledged by Bank One, Lafayette, N.A., incorporated by reference from Exhibit 10(n) to the 1993 Second Quarter Form 10-Q.
(10) (l)	Quitclaim Grant of Security Interest, dated as of July 7, 1993, between Fairfield and GECC, as agent, incorporated by reference from Exhibit 10(o) to the 1993 Second Quarter Form 10-Q.
(10) (m)	Supplemental Quitclaim Grant of Security Interest (Patents only), dated as of July 7, 1993, between Fairfield and GECC, as agent, incorporated by reference from Exhibit 10(p) to the 1993 Second Quarter Form 10-Q.
(10) (n)	First Amendment to Mortgage Assignment of Leases, Rents and Profits, Security Agreement and Fixture Filing, dated as of March 31, 1995, between Fairfield and GECC, as agent, incorporated by reference from Exhibit 10(t) to the 1994 Form 10-K.
(10) (o)	Stock Pledge Agreement, dated as of March 31, 1995, between Lancer Industries Inc. ("Lancer") and GECC, as agent, incorporated by reference from Exhibit 10(u) to the 1994 Form 10-K.
(10) (p)	Amended and Restated Security Agreement, dated as of March 31, 1995, between Fairfield and GECC, as agent, incorporated by reference from Exhibit 10(v) to the 1994 Form 10-K.
(10) (q)	The Tax Sharing Agreement, dated as of July 18, 1990, between Fairfield and Lancer, incorporated by reference from Exhibit 10(z) to the Company's Form 10-K as filed with the Securities and Exchange Commission on March 15, 1996 (the "1995 Form 10-K").

(10) (r)	The Fairfield Manufacturing Company, Inc. (1992) Supplemental Executive Retirement Plan incorporated by reference from Exhibit 10(aa) to the 1995 Form 10-K.
(10) (s)	Letter Agreement, dated December 29, 1989, granting exclusive license from T-H Licensing to Fairfield incorporated by reference from Exhibit 10(bb) to the 1995 Form 10-K.
(10) (t)	Second Amendment to Mortgage Assignment of Leases, Rents and Profits, Security Agreement and Fixture Filing, dated as of December 5, 1996, between Fairfield and GECC, as agent, incorporated by reference from Exhibit 10(dd) to the Company's From 10-K as filed with the Securities and Exchange Commission on February 25, 1997 (the "1996 Form 10-K").
(10) (u)	Consent and Amendment, dated as of March 27, 1997, among Fairfield and GECC, as sole lender and agent, incorporated by reference from Exhibit 10(gg) to the 1997 Form S-4.
(10) (v)	Consulting Agreement, dated August 1, 1997, between Fairfield and Wolodymyr B. Lechman, incorporated by reference from Exhibit 10(hh) to the Company's Form 10-Q as filed with the Securities and Exchange Commission on November 12, 1997.
(10) (w)	Third Amendment to Mortgage Assignment of Leases, Rents and Profits, Security Agreement and Fixture Filing, dated as of October 12, 1998 between Fairfield and GECC, as agent, incorporated by reference from Exhibit 10(hh) to the Company's Form 10-Q as filed with the Securities and Exchange Commission on November 13, 1998 (the "1998 Third Quarter Form 10-Q").
(10) (x)	Employment Agreement dated as of August 4, 1998, between Fairfield and S. K. Clough, incorporated by reference from Exhibit 10(ii) to the 1998 Third Quarter Form 10-Q.
(10) (y)	Fairfield Manufacturing Company, Inc. Incentive Plan for Senior Management, incorporated by reference from Exhibit 10 (y) to the 1999 Form 10-K.
(10) (z)	First Amendment, dated as of October 6, 2000, an Amended and Restated Loan Agreement, dated as of December 30, 1999, between Fairfield Manufacturing Company, Inc., the financial institutions party as lenders and General Electric Capital Corporation as administrative agent, incorporated by reference from Exhibit 10.1 to the 2000 Third Quarter 10-Q.
(21)	Subsidiaries of Fairfield Manufacturing Company, Inc. T-H Licensing, Inc. Fairfield Atlas Limited

(b)	No reports on Form 8-K have been filed during the last quarter of the period covered by this report.

24
SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized on March 2126, ~~2001~~2002.

FAIRFIELD MANUFACTURING COMPANY, INC.

	By	/s/ Richard A. Bush
		Richard A. Bush Vice President and Chief Financial Officer (Principal Financial and Accounting 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 the registrant and in the capacities indicated on ~~March~~ 21March 26, ~~2001~~2002.

/s/ Paul S. Levy /s/ Stephen K. Clough Paul S. Levy Chairman of the Board, Vice President and Assistant Secretary Stephen K. Clough Director, President and Chief Executive Officer /s/ W. B. Lechman /s/ Andrew R. Heyer W. B. Lechman Director Andrew R. Heyer Director /s/ ~~Jess~~Leonard C.Green ~~Ball~~Leonard ~~Jess~~Green ~~C. Ball~~ Director

25
FAIRFIELD MANUFACTURING COMPANY, INC.

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND
FINANCIAL STATEMENT SCHEDULE

		Page
Report of Independent Accountants		F - 2
Consolidated Balance Sheets, December 31, 2000 and 1999		F - 3
Consolidated Balance Sheets, December 31, 2001 and 2000		F - 3
Consolidated Statements of Operations for the three years
Consolidated Statements of Operations for the three years ended December 31, 2001		F - 4
ended December 31, 2000		F - 4
Consolidated Statements of Stockholder's Equity (Deficit) for the three years ended December 31, 2001		F - 5
Consolidated Statements of Stockholder's Equity (Deficit) for
Consolidated Statements of Cash Flows for the three years ended December 31, 2001		F - 6
the three years ended December 31, 2000		F - 5
Consolidated Statements of Cash Flows for the three years
ended December 31, 2000		F - 6
Notes to Consolidated Financial Statements		F - 7
Financial Statement Schedule:
Schedule II - Valuation and Qualifying Accounts and Reserves,
Schedule II - Valuation and Qualifying Accounts and Reserves, for the three years ended December 31, 2001		F - 20
for the three years ended December 31, 2000		F - 20

F - 1

Report of Independent Accountants

To the Board of Directors and Stockholder

of Fairfield Manufacturing Company, Inc.

In our opinion, the consolidated financial statements listed in the accompanying index on page F-1, present fairly, in all material respects, the financial position of Fairfield Manufacturing Company, Inc. and its subsidiaries at December 31, ~~2000~~2001 and ~~1999~~ 2000, and the results of their operations and cash flows for each of the three years in the period ended December 31, ~~2000~~2001 in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedule listed in the accompanying index presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. These financial statements and financial statement schedule are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States of America, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for ~~the~~our opinion ~~expressed above~~.

/s/ PricewaterhouseCoopers LLP

Indianapolis, Indiana ~~January 31, 2001, except as to Note 17, which is as of~~ March 1518, ~~2001~~2002

F - 2
FAIRFIELD MANUFACTURING COMPANY, INC.

CONSOLIDATED BALANCE SHEETS
December 31, 2001 and 2000
(In thousands, except share data)

CONSOLIDATED BALANCE SHEETS December 31, 2000 and 1999


	2001	2000
ASSETS
Current assets:
Cash and cash equivalents	$12,817	$16,378
Trade receivables, less allowance of $1,176 in 2001 and 2000	17,488	18,214
Inventory	27,752	29,518
Other current assets	1,155	32
Total current assets	59,212	64,142

Property, plant and equipment, net	65,066	67,831

Other assets:
Excess of investment over net assets acquired, less accumulated amortization of $20,038 and $18,323 in 2001 and 2000, respectively	46,451	48,166
Deferred financing costs, less accumulated amortization of $1,514 and $970 in 2001 and 2000, respectively	2,101	2,550
Total other assets	48,552	50,716

Total assets	$172,830	$182,689

LIABILITIES AND STOCKHOLDER'S EQUITY (DEFICIT)
Current liabilities:
Accounts payable	$10,526	$8,906
Accrued liabilities	17,803	21,769
Due to parent	2,154	708
Deferred income taxes	1,784	2,013
Total current liabilities	32,267	33,396

Accrued retirement costs	16,423	17,032
Deferred income taxes	1,352	6,823
Long-term debt	118,914	112,575
Minority interest	336	733
Commitments and contingencies (Note 16)

11-1/4% Cumulative exchangeable preferred stock	54,400	48,426

Stockholder's equity (deficit):
Common stock: par value $.01 per share, 10,000,000 shares authorized, 9,117,000 and 9,117,000 issued and outstanding in 2001 and 2000, respectively	91	91
Additional paid-in capital	48,386	48,386
Accumulated deficit	(99,234)	(84,716)
Cumulative translation adjustment	(105 )	(57 )
Total stockholder's deficit	(50,862 )	(36,296 )

Total liabilities and stockholder's deficit	$172,830	$182,689

2000 1999
ASSETS
Current assets:
Cash and cash equivalents $16,378 $13,639
Trade receivables, less allowance of $1,176 and $700 in 2000 and 1999, respectively 18,214 19,664
Inventory 29,518 22,507
Other current assets 32 3,348
Total current assets 64,142 59,158
Property, plant and equipment, net 67,831 70,426
Other assets:
Excess of investment over net assets acquired, less accumulated amortization of $18,323 and $16,689 in 2000 and 1999, respectively 48,166 47,670
Deferred financing costs, less accumulated amortization of $970 and $1,226 in 2000 and 1999, respectively 2,550 3,024
Total other assets 50,716 50,694
Total assets $182,689 $180,278
LIABILITIES AND STOCKHOLDER'S EQUITY (DEFICIT)
Current liabilities:
Accounts payable $8,906 $8,801
Due to parent 708 750
Accrued liabilities 21,769 24,384
Deferred income taxes 2,013 1,367
Total current liabilities 33,396 35,302
Accrued retirement costs 17,032 16,526
Deferred income taxes 6,823 7,393
Other long-term liabilities -- 2,300
Long-term debt 112,575 110,000
Minority interest 733 --
Commitments and contingencies (Note 16)
11-1/4% Cumulative exchangeable preferred stock 48,426 48,234
Stockholder's equity (deficit):
Common stock: par value $.01 per share, 10,000,000 shares authorized, 9,117,000 and 8,691,000 issued and outstanding in 2000 and 1999, respectively 91 87
Additional paid-in capital 48,386 46,250
Accumulated deficit (84,716) (85,814)
Cumulative translation adjustment (57) --
Total stockholder's deficit (36,296) (39,477)
Total liabilities and stockholder's deficit $182,689 $180,278
The accompanying notes are an integral part of these consolidated financial statements.
F - 3
FAIRFIELD MANUFACTURING COMPANY, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS
For the Three Years Ended December 31, 2001
(In thousands)

CONSOLIDATED STATEMENTS OF OPERATIONS For the Three Years Ended December 31, 2000


	2001	2000	1999

Net sales	$138,285	$161,159	$208,852
Cost of sales	124,482	135,204	164,877
Selling, general and administrative expenses	14,684	13,412	19,245

Operating income (loss)	(881)	12,543	24,730

Interest expense, net	11,215	9,833	11,317
Other (income) expense, net (Note 15)	23	(9,487 )	(9,880 )

Income (loss) before income taxes and minority interest	(12,119)	12,197	23,293

Provision (benefit) for income taxes	(3,372)	5,307	10,462

	(8,747)	6,890	12,831

Minority interest in net loss of Consolidated subsidiary	396	25	--

Net income (loss) before extraordinary item	(8,351)	6,915	12,831

Loss on early extinguishment of debt, net of tax	--	--	(1,401 )

Net income (loss)	$(8,351 )	$6,915	$11,430

Preferred stock dividends and discount accretion	(6,167 )	(5,817 )	(5,817 )

Net income (loss) available to common stockholder	$(14,518 )	$1,098	$5,613

2000 1999 1998
Net sales $161,159 $208,852 $220,316
Cost of sales 135,204 164,877 178,933
Selling, general and administrative expenses 13,412 19,245 16,816
Operating income 12,543 24,730 24,567
Interest expense, net 9,833 11,317 12,697
Other (income) expense, net (Note 15) (9,487) (9,880) 70
Income before income taxes and minority interest 12,197 23,293 11,800
Provision for income taxes 5,307 10,462 5,300
6,890 12,831 6,500
Minority interest in net income of consolidated subsidiary 25 -- --
Net income before extraordinary item 6,915 12,831 6,500
Loss on early extinguishment of debt, net of tax -- (1,401) (426)
Net income $6,915 $11,430 $6,074
Preferred stock dividends and discount accretion (5,817) (5,817) (5,817)
Net income available to common stockholder $1,098 $5,613 $257
The accompanying notes are an integral part of these consolidated financial statements.
F - 4
FAIRFIELD MANUFACTURING COMPANY, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY (DEFICIT)
For the Three Years Ended December 31, 2001
(In thousands)

CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY (DEFICIT) For the Three Years Ended December 31, 2000

	Common Stock	Additional Paid-in Capital	Accumulated Deficit	Accumulated Other Comprehensive Income	Stock- Holder's Equity (Deficit)
Balance, January 1, 1999	$ 85	$42,322	$(91,427)	$ --	$(49,020)
Capital contribution	$2	$3,928	$--	$ --	$3,930
Preferred stock dividends	--	--	(5,625)	--	(5,625)
Preferred stock discount accretion	--	--	(192)	--	(192)
Net income	--	--	11,430	--	11,430
Balance, December 31, 1999	$ 87	$ 46,250	$(85,814 )	$ --	$(39,477 )
Capital contribution	$ 4	$ 2,136	$ --	$ --	$2,140
Preferred stock dividends	--	--	(5,625)	--	(5,625)
Preferred stock discount accretion	--	--	(192)	--	(192)
Comprehensive income:
Net income	--	--	6,915	--	6,915
Foreign currency translation	--	--	--	(57 )	(57 )
Total comprehensive income	--	--	6,915	(57)	6,858
Balance, December 31, 2000	$ 91	$ 48,386	$(84,716 )	$ (57 )	$(36,296 )
Capital contribution	$ --	$ --	$ --	$ --	$ --
Preferred stock dividends	--	--	(5,975)	--	(5,975)
Preferred stock discount accretion	--	--	(192)	--	(192)
Comprehensive income:
Net income	--	--	(8,351)	--	(8,351)
Foreign currency translation	--	--	--	(48 )	(48 )
Total comprehensive income	--	--	(8,351)	(48)	(8,399)
Balance, December 31, 2001	$ 91	$48,386	$(99,234)	$ (105 )	$(50,862 )

Accumulated
Additional Other Stock-
Common Paid-in Accumulated Comprehensive Holder's
Stock Capital Deficit Income Equity (Deficit)
Balance, January 1, 1998
$82 $39,414 $(91,684) $ -- $(52,188)
Capital contribution $ 3 $ 2,908 $ -- $ -- $ 2,911
Preferred stock dividends -- -- (5,625) -- (5,625)
Preferred stock discount accretion -- -- (192) -- (192)
Net income -- -- 6,074 -- 6,074
Balance, December 31, 1998 $85 $42,322 $(91,427) $ -- $(49,020)
Capital contribution $ 2 $ 3,928 $ -- $ -- $3,930
Preferred stock dividends -- -- (5,625) -- (5,625)
Preferred stock discount accretion -- -- (192) -- (192)
Net income -- -- 11,430 -- 11,430
Balance, December 31, 1999 $87 $46,250 $(85,814) $ -- $(39,477)
Capital contribution $ 4 $ 2,136 $ -- $ -- $2,140
Preferred stock dividends -- -- (5,625) -- (5,625)
Preferred stock discount accretion -- -- (192) -- (192)
Comprehensive income:
Net income -- -- 6,915 -- 6,915
Foreign currency translation -- -- -- (57) (57)
Total comprehensive income -- -- -- -- 6,858
Balance, December 31, 2000 $91 $48,386 $(84,716) $(57) $(36,296)
The accompanying notes are an integral part of these consolidated financial statements.
F - 5
FAIRFIELD MANUFACTURING COMPANY, INC.

	2000	1999	1998
Operating Activities:
Net income	$6,915	$11,430	$6,074
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	13,288	13,252	13,267
Minority interest	(25)	--	--
Deferred income taxes	76	(747)	(2,097)
Increase in accrued retirement costs	506	248	687
(Decrease)increase in other long-term liabilities	(2,300)	2,300	--
Loss on early extinguishment of debt	--	1,401	426
Changes in working capital:
Trade receivables	1,517	7,704	(5,085)
Inventory	(6,065)	3,012	(1,644)
Prepaid expenses	3,494	(2,979)	679
Accounts payable	(28)	(6,640)	3,595
Due to parent	(42)	268	(1,726)
Accrued liabilities	(4,069)	803	1,188
Net cash provided by operating activities	13,267	30,052	15,364
Investing Activities:
Additions to property, plant and equipment	(3,908)	(8,810)	(10,536)
Proceeds from involuntary conversion	--	(2,903)	--
Acquisition Atlas Gears Limited	123	--	--
Net cash used by investing activities	(3,785)	(11,713)	(10,536)
Financing Activities:
Capital contributions, principally under tax sharing agreement	2,140	3,930	2,911
Proceeds from issuance of long-term debt	2,457	97,750	19,000
Repayment of long-term debt	(5,604)	(101,150)	(20,218)
Net change in revolving credit facility	--	(1,000)	(1,000)
Payment of debt issuance costs/amendment fees	(70)	--	(133)
Premium paid on early retirement of bonds	--	(1,427)	--
Payment of preferred stock dividends	(5,625)	(5,625)	(5,625)
Net cash used by financing activities	(6,702)	(7,522)	(5,065)
Effect of changes in exchange rates	(41)	--	--
Cash and Cash Equivalents:
Increase (decrease) in cash and cash equivalents	2,739	10,817	(237)
Beginning of year	13,639	2,822	3,059
End of year	$16,378	$13,639	$2,822
Supplemental Disclosures:
Cash paid for:
Interest	$10,377	$13,560	$13,442
Federal taxes to parent under tax sharing agreement (Note 10)	5,190	8,482	7,710
State taxes	933	1,304	1,550
Non-cash investing and financing activities:
Additions to property, plant and equipment included in accounts payable at end of period	$812	$2,319	$845
Preferred stock dividends accrued	1,677	1,677	1,677

CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Three Years Ended December 31, 2001

(In thousands)

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


	2001	2000	1999
Operating Activities:
Net income	$ (8,351)	$ 6,915	$ 11,430
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	12,875	13,288	13,252
Minority interest	(397)	(25)	--
Deferred income taxes	(5,700)	76	(747)
Increase (decrease) in accrued retirement costs	(609)	506	248
Increase (decrease) in other long-term liabilities	--	(2,300)	2,300
Loss on early extinguishment of debt	--	--	1,401
Changes in working capital:
Trade receivables	707	1,517	7,704
Inventory	1,724	(6,065)	3,012
Prepaid expenses	(1,128)	3,494	(2,979)
Accounts payable	1,414	(28)	(6,640)
Due to parent	1,446	(42)	268
Accrued liabilities	(4,143)	(4,069 )	803

Net cash provided (used) by operating activities	(2,162 )	13,267	30,052

Investing Activities:
Additions to property, plant and equipment	(7,862)	(3,908)	(8,810)
Proceeds from involuntary conversion	--	--	(2,903)
Acquisition	--	123	--
Net cash used by investing activities	(7,862 )	(3,785 )	(11,713 )

Financing Activities:
Capital contributions, under tax sharing agreement	--	2,140	3,930
Proceeds from issuance of long-term debt	6,567	2,457	97,750
Repayment of long-term debt	--	(5,604)	(101,150)
Net change in revolving credit facility	--	--	(1,000)
Payment of debt issuance costs/amendment fees	(95)	(70)	--
Premium paid on early retirement of bonds	--	--	(1,427)
Payment of preferred stock dividends	--	(5,625 )	(5,625 )

Net cash provided (used) by financing activities	6,472	(6,702 )	(7,522 )

Effect of changes in exchange rates	(9)	(41 )	--

Cash and Cash Equivalents:
Increase (decrease) in cash and cash equivalents	(3,561)	2,739	10,817
Beginning of year	16,378	13,639	2,822

End of year	$ 12,817	$ 16,378	$ 13,639

Supplemental Disclosures:
Cash paid for:
Interest	$ 10,955	$ 10,377	$ 13,560
Federal taxes to parent under tax sharing agreement (Note 10)	708	5,190	8,482
State taxes	565	933	1,304

Non-cash investing and financing activities:
Additions to property, plant and equipment included in accounts payable at end of period	$ 1,081	$ 812	$ 2,319
Preferred stock dividends accrued	1,871	1,677	1,677
Preferred stock dividends paid in kind	5,783	--	--

F - 6

1. Summary of Significant Accounting Policies

Organization

Fairfield Manufacturing Company, Inc. ("Fairfield") is wholly owned by Lancer Industries Inc. ("Lancer"). Fairfield has one wholly owned subsidiary, T-H Licensing, Inc. ("T-H Licensing"). Through its ownership in T-H Licensing, Fairfield ~~acquired~~ owns a 75.77% majority interest in Fairfield Atlas ~~Gears~~ Limited ("FAL"). Fairfield, T-H Licensing and Lancer are all Delaware corporations, while ~~Atlas~~FAL ~~Gears Limited~~ is organized and operated as a corporation under the laws of India.

Fairfield manufactures high precision custom gears and assemblies and planetary gear systems at its Lafayette, Indiana and Belgaum, India facilities. Customers consist of original equipment manufacturers serving diverse markets which include access platform, mining, rail, on-highway, industrial, ~~construction~~agricultural, road rehabilitation, ~~mining~~construction, materials handling, ~~forestry,~~ and ~~agricultural~~forestry. T-H Licensing owns certain intangible assets including various patents and trademarks.

Principles of Consolidation

These consolidated financial statements include the accounts of Fairfield, T-H Licensing and ~~Atlas~~FAL ~~Gears Limited~~ (collectively the "Company"). All significant intercompany accounts and transactions have been eliminated.

Revenue Recognition

Sales are recognized at the time of shipment to the customer.

Cash and Cash Equivalents

The Company considers all highly liquid debt instruments with original maturities of three months or less to be cash equivalents.

Inventory

Inventory is valued at the lower of last-in, first-out (LIFO) cost or market and on a first-in, first out (FIFO) basis for domestic and foreign operations, respectively.

Property, Plant and Equipment, Net

Property, plant and equipment, net are carried at cost less accumulated depreciation. Depreciation is computed on the straight-line method over the estimated useful lives of the assets which range from 15 to 30 years for land improvements, 5 to 40 years for buildings and improvements, and 3 to 2015 years for machinery and equipment. Generally, when property is retired from service or otherwise disposed of, the cost and related amount of depreciation or amortization are eliminated from the asset and reserve accounts, respectively. The difference, if any, between the net asset value and the proceeds is charged or credited to income.

Income Taxes

Income taxes are provided based on the liability method of accounting. The liability method measures the expected tax impact of future taxable income or deductions resulting from differences in the tax and financial reporting bases of assets and liabilities reflected in the consolidated balance sheets and the expected tax impact of carryforwards for tax purposes.

Excess of Investment Over Net Assets Acquired

Excess of investment cost over net assets acquired is amortized using the straight-line method over 40 years, while excess of investment cost over net assets acquired is amortized using the straight-line method over 20 years with regard to the ~~Atlas~~ ~~acquisition~~FAL acquisition. The Company's criteria for periodically evaluating the carrying value of the excess of investment over net assets acquired includes evaluation of products and markets as well as current and expected levels of undiscounted cash flow from operations. The Company has concluded the excess of investment over net assets acquired is not impaired and the products and markets continue to support the assigned lives.

F - 7

periodically evaluating the carrying value of the excess of investment over net assets acquired includes evaluation of products and markets as well as current and expected levels of undiscounted cash flow from operations. The Company has concluded the excess of investment over net assets acquired is not impaired and the products and markets continue to support the assigned lives.

Deferred Financing Costs

Debt issuance costs are being amortized by the use of the effective interest method over the expected term of the related debt agreement.

Translation of Foreign Currencies

The financial statements of FAL, the Company's India operation, are measured in its local currency and then translated into U.S. dollars. All balance sheet accounts have been translated using the current rate of exchange at the balance sheet date. Results of operations have been translated using the average rates prevailing from the date of acquisition. Translation gains or losses resulting from the changes in the exchange rates from year-to-year are accumulated in a separate component of stockholder's equity.

Comprehensive Income

In 1997, the Company adopted SFAS No. 130, Reporting Comprehensive Income. This statement establishes rules for the reporting of comprehensive income and its components. Comprehensive income consists of net income and foreign currency translation adjustments and is presented in the Consolidated Statements of Stockholder's Equity.

Recent Accounting Pronouncements

~~Staff~~On June 29, 2001, the Financial Accounting ~~Bulletin~~Standards Board approved Statement of Financial Accounting Standards No. 141 (~~SAB~~FAS 141), Business Combinations, and No. ~~101~~142 (FAS 142), ~~"Revenue~~Goodwill ~~Recognition~~and inOther ~~Financial~~Intangible ~~Statements~~Assets. FAS 141 requires the purchase method of accounting be used for all business combinations initiated after June 30," ~~was~~2001, ~~issued~~establishes byspecific criteria for the ~~Securities~~recognition of intangible assets separately from goodwill and ~~Exchange~~requires ~~Commission~~unallocated ~~(SEC)~~negative ~~staff~~goodwill into ~~December~~be ~~1999~~written off immediately as an extraordinary gain. The Company ~~has~~believes ~~determined~~the ~~that~~adoption itof isFAS in141 ~~compliance~~will ~~with~~have ~~the~~no ~~revenue~~impact on its results of operations and financial position. ~~recognition~~ FAS ~~provisions~~142 requires that goodwill and ~~criteria~~indefinite ~~set~~lived ~~forth~~intangible inassets ~~SAB~~no ~~No.~~longer ~~101~~be amortized, goodwill and indefinite life intangibles be tested for impairment at least annually (or more frequently if impairment indicators arise) and that the amortization period of intangible assets with finite lives no ~~modifications~~longer ~~are~~be ~~necessary~~limited to forty years. The Company is currently evaluating the adoption of FAS 142 and its impact on its results of operations and financial position. The unamortized goodwill balance was $46.5 and $48.2 million at December 31, 2001 and 2000, respectively. Goodwill amortization reflected in the Company's ~~current~~financial ~~revenue~~statements ~~recognition~~was ~~policies~~$1.7, $1.6 and ~~procedures~~$1.6 million for the years ended December 31, 2001, 2000 and 1999, respectively. Effective January 1, 2001, the Company adopted Statement of Financial Accounting Standard No. 133, "Accounting for Derivative Investments and Hedging Activities," which requires that a Company record all derivatives at their fair value. The statement also requires that changes in the derivative instruments fair value be recognized currently in earnings unless specific hedge accounting criteria are met. The Company does not currently engage in any hedging strategies nor does it have any embedded derivatives within its external agreements.

In June 1998, the Financial Accounting Standards Board issued Statement No. 133, "Accounting for Derivative Investments and Hedging Activities," which requires that a Company record all derivatives at their fair value. The statement also requires that changes in the derivative instruments fair value be recognized currently in earnings unless specific hedge accounting criteria are met. The Company does not currently engage in any hedging strategies nor does it have any embedded derivatives within its external agreements.

Use of Estimates

The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that ~~effect~~affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities and the reported amounts of revenues and expenses. Actual results could differ from those estimates.

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Fair Value of Financial Instruments

The fair value of financial assets held by the Company approximate their carrying value. The fair value of financial liabilities, other than Senior Subordinated Notes ("Notes") and Cumulative Exchangeable Preferred Stock, also approximate their carrying value. The estimated fair ~~values~~value of the Notes and Cumulative Exchangeable Preferred Stock at December 31, ~~2000~~2001 were approximately 7747.0% and 6920.0% of their carrying value, respectively, based on quoted market prices and recent trades of similar issues.

Reclassifications

Certain prior year amounts have been reclassified to conform with the current presentation.

2. Concentrations of Risk

The Company grants credit without collateral to most of its customers. Sales to ~~three~~General ~~customers~~Electric accounted for approximately 11.6% of the Company's net sales in 2001. Sales to JLG, General Electric and Genie accounted for approximately 12.6%, 10.1% and 10.0% of the Company's net sales in 2000, respectively. Sales to ~~two~~General ~~customers~~Electric and JLG accounted for approximately 13.6% and 10.8% of the Company's net sales in 1999. ~~Sales~~Raw tomaterial ~~one~~purchases ~~customer~~from ~~accounted~~The ~~for~~Timken Company represented approximately 10.64% of raw material purchases in 2001, 10.5% in 2000 and 14.2% in 1999. Alternative sources are available to fulfill each of the Company's ~~net~~major ~~sales~~raw inmaterial ~~1998~~requirements.

3. Related Party Transactions

~~Effective~~Consulting ~~August 1, 1997, Mr. Lechman, former Chairman of the Board, and Director, entered into a consulting agreement (the "~~Agreement") with the Company. In consideration for services to be rendered under the Agreement, Mr. Lechman will receive quarterly payments through July 31, 2001 ("the consulting period") totaling $1.0 million. In the event that Mr. Lechman dies prior to the end of the consulting period or is unable to perform the services requested due to mental or physical disabilities, the Company shall pay to his legal representatives or beneficiaries the remaining unpaid balance under the Agreement. Due to the provisions of the Agreement, the Company recognized the entire $1.0 million as expense in 1997.

Effective August 1, 1997, W.B. Lechman, former Chairman of the Board, and Director, entered into a consulting agreement (the "Agreement") with the Company. In consideration for services to be rendered under the Agreement, Mr. Lechman received quarterly payments through July 31, 2001 ("the consulting period") totaling $1.0 million. Due to the provisions of the Agreement, the Company recognized the entire $1.0 million as expense in 1997. Beginning January 1, 2002, Mr. Lechman entered into a new consulting agreement with the Company. The compensation under this agreement to Mr. Lechman is $.02 million per year and is renewable annually.

Management Services

Stephen Clough, the Company's President and Chief Executive Officer, has been providing management services to Motor Coach Industries, Inc. ("MCI"), which is controlled and majority-owned by Joseph Littlejohn & Levy Fund III. Tom Sorrells, the Company's former Vice President Business Development, also provided similar services to MCI in the first half of 2001 at the direction of Mr. Clough. Mr. Sorrells resigned from the Company effective June 30, 2001 to become the President and Chief Operating Officer of MCI. Messrs. Levy and Joseph have an interest in MCI. An affiliate of CIBC, in which Mr. Heyer is a general partner, has an equity interest in MCI. See Item 10, "Directors and Executive Officers of the Registrant" and Item 12, "Security Ownership of Certain Beneficial Owners and Management."

Mr. Clough began rendering management services in January 2001 and is continuing to provide them to MCI. MCI is obligated to reimburse the Company for all expenses related to such services, including the salary of, and other compensation to, Mr. Clough (based on the portion of his time spent on MCI). In 2001, MCI paid the Company $0.1 and $0.1 million as reimbursement of the Company's expenses related to the provision of such services by Mr. Clough and, for the first six months of 2001, Mr. Sorrells, respectively.

Other Arrangements with Parent

From time to time, Lancer incurs legal, accounting and miscellaneous other expenses on behalf of the Company. In fiscal 2001, 2000 and 1999, Lancer incurred reimbursable expenses on the Company's behalf of approximately $0.2, $0.2 and $0.4 million, respectively.

4. Acquisition

On October 3, 2000, the Company, through its wholly owned subsidiary T-H Licensing, acquired newly issued shares representing 75.77% of Atlas Gears Limited for $4.5 million. Atlas Gears Limited changed its name to Fairfield Atlas Limited (FAL) in the first quarter of 2001. FAL, headquartered in Mumbai, India with manufacturing facilities located near Belgaum, India, manufactures ~~customer~~custom gears primarily for the agricultural, off-road, and light commercial vehicle markets in India. The Company acquired ~~Atlas~~FAL to gain a low cost manufacturing and procurement base. ~~Atlas Gears Limited changed its name to Fairfield Atlas Limited in the first quarter of 2001.~~

The acquisition has been accounted for as a purchase and the results of the operations of the acquired business have been included in the consolidated financial statements since the date of acquisition on a one month lag. The excess of the purchase price over the fair value of net assets acquired was approximately $2.1 million and has been recorded as goodwill, which is being amortized on a straight-line basis over 20 years.

F5. Operations -by 9Geographic Area

Operations by Geographic Area

Revenues, income from operations and total assets by domestic and foreign operations are as follows:

		Income from
	Sales	Operating Income (Loss)	Assets
	Sales	Operations	Assets
U.S. operations	$133,667	$ 46	$163,264
U.S. operations	$160,077	$12,470	$174,562
Foreign operations, net of eliminations	4,618	(927)	9,566
Foreign operations	1,082	73	8,127
Consolidated total	$138,285	$ (881)	$172,830
Consolidated total	$161,159	$12,543	$182,689

International sales, as determined by ship to location, accounted for $811,~~752~~193, $118,~~879~~752 and $1611,~~195~~879 of the Company's net sales in ~~2000~~2001, ~~1999~~2000 and ~~1998~~1999, respectively, and were primarily to Canada.

Custom gears and assemblies accounted for approximately $7679,~~900~~700, $~~104~~76,~~600~~900 and $~~118~~104,~~500~~600 of the Company's ~~2000~~2001, ~~1999~~2000 and ~~1998~~1999 net sales, respectively. Planetary gear systems accounted for approximately $8458,~~200~~600, $~~104~~84,~~300~~200 and $~~101~~104,~~800~~300 of the Company's ~~2000~~ 2001, ~~1999~~2000 and ~~1998~~1999 net sales, respectively.

6. Inventory

Inventory at December 31, consists of:

	2000		1999
	2001		2000
Raw materials		$ 34,~~751~~259	$ 23,~~421~~751
Work in process		1210,~~478~~907	912,~~102~~478
Finished products		1312,~~337~~586	1013,~~984~~337
		29,566	22,507
		27,752	29,566
Less: Excess of FIFO cost over LIFO cost		~~(48)~~--	--(48)
		$29,518	$22,507
		$27,752	$29,518

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7. Property, Plant and Equipment, Net

Property, plant and equipment, net at December 31, includes the following:

	2000	1999
	2001	2000
Land and improvements	$ 1,~~765~~825	$ 1,~~346~~765
Buildings and improvements	2324,~~071~~782	23,~~868~~071
Machinery and equipment	~~153~~156,~~942~~941	~~148~~153,~~774~~942
	178,778	173,988
	183,548	178,778
Less: Accumulated depreciation	(~~110~~118,~~947~~482)	(~~103~~110,~~562~~947)
	$ 67,831	$ 70,426
	$ 65,066	$ 67,831

Depreciation expense was ~~approximately~~$10,604, $11,109 and $11,000 for the ~~year~~years ended December 31, ~~2000~~2001, ~~and~~2000 ~~$11,000 for 1999~~ and ~~1998~~1999, respectively.

8. Accrued Liabilities

Accrued liabilities at December 31, are as follows:

	2000	1999
	2001	2000
Compensation and employee benefits	$ 54,~~982~~616	$ 75,~~738~~982
Accrued retirement and post-employment	32,~~671~~577	3,~~667~~671
Interest payable	2,~~163~~448	2,~~097~~163
Accrued warranties	1,565	1,809
Accrued preferred stock dividends	1,871	1,677
Other	86,~~388~~291	98,~~073~~276
	$21,769	$24,384
	$17,803	$21,769

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9. Employee Benefit Plans

The following table presents information in regard to the Company's domestic defined benefit plans.

	Pension Benefits		Other Postretirement Benefits
	2000	1999	2000	1999
	2001	2000	2001	2000
Change in benefit obligation
Benefit obligation at beginning of year	$4950,~~736~~396	$5149,~~009~~736	$1011,~~830~~171	$10,~~155~~830
Service cost	21,~~062~~853	2,~~024~~062	~~435~~437	~~490~~435
Interest cost	3,~~656~~763	3,~~261~~656	~~801~~845	~~726~~801
Participant contributions	--	--	~~343~~563	~~259~~343
Amendments	~~512~~492	--512	--	--
Actuarial loss (gain)	(32,~~517)~~718	(43,~~867~~517)	~~109~~1,043	~~353~~109
Benefits paid	(2,~~053~~358)	(12,~~691~~053)	(1,~~347~~636)	(1,~~153~~347)
Benefit obligation at end of year	5056,~~396~~864	4950,~~736~~396	1112,~~171~~423	1011,~~830~~171
Change in plan assets
Fair value of plan assets at beginning of year	3845,~~615~~343	3638,~~583~~615	--	--
Actual return on plan assets	6(3,~~285~~334)	16,~~836~~285	--	--
Company contribution	23,~~496~~526	12,~~887~~496	1,~~004~~073	~~894~~1,004
Participant contributions	--	--	~~343~~563	~~259~~343
Benefits paid	(2,~~053~~358)	(12,~~691~~053)	(1,~~347~~636)	(1,~~153~~347)
Fair value of plan assets at end of year	4543,~~343~~177	3845,~~615~~343	--	--
Funded status	(513,~~053~~688)	(115,~~121~~053)	(1112,~~171~~423)	(1011,~~830~~171)
Unrecognized actuarial loss (gain)	(72,~~536)~~741	(17,~~354~~536)	3,~~038~~900	3,~~125~~038
Unrecognized prior service cost (benefit)	2,~~290~~502	2,~~058~~290	861	~~(44)~~8
Accrued benefit	$(10,299)	$(10,417)	$(8,125)	$(7,749)
Contribution during fourth quarter	333	--	--	--
Accrued benefit	$(8,112)	$(10,299)	$(8,462)	$(8,125)
Weighted average assumptions as of December 31:
Discount rate	7.7525%	7.5075%	7.7525%	7.5075%
Expected return on plan assets	9.00%	9.00%
Rate of compensation increase	4.50%	4.50%

Other postretirement benefits provided by the Company include limited health care and life insurance benefits for certain retired employees. The health care cost trend rate is not a factor in the calculation of the other postretirement benefit obligation as the plan limits per capita benefits to a fixed level. Claims in excess of this amount are the responsibility of the retiree.

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	Pension Benefits			Other Postretirement Benefits
Components of net periodic benefit cost:	2001	2000	1999	2001	2000	1999
Service cost	$1,853	$2,062	$2,024	$ 437	$435	$490
Interest cost	3,763	3,656	3,261	845	801	726
Expected return on plan assets	(4,063)	(3,620)	(3,309)	--	--	--
Recognized actuarial loss	(162)	--	--	181	196	282
Amortization of prior service cost (benefit)	280	280	243	(53 )	(53 )	(53 )

Net periodic benefit cost	$1,671	$2,378	$2,219	$1,410	$1,379	$1,445

	Pension Benefits			Other Postretirement Benefits
Components of net periodic benefit cost:	2000	1999	1998	2000	1999	1998
Service cost	$2,062	$2,024	$1,622	$435	$490	$362
Interest cost	3,656	3,261	3,099	801	726	658
Expected return on plan assets	(3,620)	(3,309)	(2,861)	--	--	--
Recognized actuarial loss	--	--	--	196	282	151
Amortization of prior service cost (benefit)	280	243	189	(53)	(53)	(63)
Net periodic benefit cost	$2,378	$2,219	$2,049	$1,379	$1,445	$1,108

As discussed above, healthcare benefits provided by the Company are set at a fixed per capita amount. Consequently, changes in health care rates have no effect on the other postretirement benefit obligation, service cost or interest cost.

The Company has a contributory defined contribution savings plan which covers all of its eligible employees. Eligibility in the plan is obtained the month following hire with no minimum age requirement. A participant may make a basic contribution to the plan ranging from 2% to 6% of the participant's salary and a supplemental contribution of 2%, 4%, or 6% of the participant's salary. The Company matches 70% of the participant's basic contribution. Expense recognized each of the years ended December 31, ~~2000~~2001, ~~1999~~2000 and ~~1998~~1999 was $1,~~417~~294, $1,~~529~~417 and $1,~~510~~529, respectively.

The Company provides postemployment benefits to certain former and inactive employees. Net periodic postemployment benefit cost for years ended December 31, included the following components:

	2000	1999	1998
	2001	2000	1999
Service cost	$~~153~~137	$~~168~~153	$~~153~~168
Interest cost	~~195~~170	~~184~~195	~~185~~184
Amortization of unrecognized losses	17--	2417	1924
	$365	$376	$357
	$307	$365	$376

The recorded liabilities for these postemployment benefits, none of which have been funded, are $2,~~279~~427 and $2,~~026~~279 at December 31, ~~2000~~2001 and ~~1999~~2000, respectively.

The Company maintains a separate plan for its foreign operations. The costs associated with maintaining the foreign plan were insignificant for the year ended December ~~2000~~2001.

10. Income Taxes

The Company files separate state income tax returns and is included in the domestic consolidated federal income tax return of its parent company, Lancer. The Company will file a separate stand-alone income tax return for its India operations, and as such, isthe India operations are excluded from the Tax Sharing Agreement. The Company and Lancer have entered into a Tax Sharing Agreement under which the Company is required to calculate its federal income tax liability on a separate return basis.

F - 13

Agreement. The Company and Lancer have entered into a Tax Sharing Agreement under which the Company is required to calculate its federal income tax liability on a separate return basis.

The expense equivalent to provision for income taxes in each of the three years in the period ended December 31, consists of:

	2000	1999	1998
	2001	2000	1999
Current, principally federal	$~~5,231~~ (378)	$115,~~209~~231	$711,~~397~~209
Deferred, principally federal	76(2,994)	~~(747)~~76	(~~2,097~~747)
Provision for income taxes	$5(3,~~307~~372)	$105,~~462~~307	$510,~~300~~462
Tax benefit of extraordinary loss	$ --	$~~(931)~~ --	$ (~~277~~931)

The expense equivalent to provision for income taxes for ~~2000~~2001, ~~1999~~2000 and ~~1998~~1999 results principally from current year operating results.

A reconciliation of the expected expense equivalent to provision for income taxes at the statutory federal income tax rate and the actual tax provision each of the three years ended December 31, is as follows:

	2000	1999	1998
	2001	2000	1999
Tax provision at 35% statutory rate	$4 (3,~~314~~606)	$8 4,~~153~~314	$4 8,~~130~~153
State taxes, net of federal	~~323~~(652)	~~1,106~~323	~~519~~1,106
Non-deductible amortization of excess of investment over net assets acquired	~~563~~562	~~555~~563	555
Provision for tax contingencies	87165	~~683~~87	48683
Other, net	20159	~~(35)~~20	48(35)
Provision for income taxes	$5(3,~~307~~372)	$105,~~462~~307	$510,~~300~~462
Effective Rate	4327.58%	4443.95%	44.9%

Deferred income taxes applicable to temporary differences at December 31, ~~2000~~2001 and ~~1999~~2000 are as follows:

	2000	1999
	2001	2000
Assets:
Employee benefits	$ 9,~~958~~164	$ 9,~~895~~958
Long-term incentive compensation benefits	--	929
Accretion of bond discount	4,641	--
Gross deferred tax assets	9,958	10,824
Net operating loss	112	--
Gross deferred tax assets	13,917	9,958
Liabilities:
Inventory basis difference	(4,~~597~~170)	(4,~~387~~597)
Property, plant and equipment basis difference	(1211,~~846~~203)	(1412,~~313~~846)
Other, net	(1,~~351~~680)	(~~884~~1,351)
Gross deferred tax liabilities	(1817,~~794~~053)	(1918,~~584~~794)
Net deferred tax liability	$ (83,~~836~~136)	$ (8,~~760~~836)

F - 14

Under the Tax Sharing Agreement between the Company and Lancer, the Company is required to pay Lancer an amount equal to the Company's current federal income tax liability calculated on a separate return basis. The Company does not consider the beneficial effect of operating losses originating in previous years in the determination of its obligations to Lancer under the Tax Sharing Agreement.

To the extent such tax liability subsequently reduces Lancer's available tax benefits, Lancer is required to reimburse the Company in an amount equivalent to 50% of such reduction by making a capital contribution to the Company. Lancer made capital contributions to the Company pursuant to this agreement of $20,~~140,~~ $32,~~930~~140, and $23,~~710~~930 during ~~2000~~2001, ~~1999~~2000 and ~~1998~~1999, respectively. The Company issued common stock to Lancer in recognition of ~~these~~the capital contributions in 2000 and 1999 (but none in 2001) (see Note 14).

The Company has certain federal net operating loss carryforwards of approximately $~~165,000~~117 and $~~177~~165,000 at December 31, ~~2000~~2001 and ~~1999~~2000, respectively, from its merger with First Colony Farms, Inc. which ~~begin~~began expiring in 2001. These carryforwards are subject to limitations imposed by the Internal Revenue Code. At December 31, ~~2000~~2001 and ~~1999~~2000, these carryforwards have been fully reduced by a valuation allowance.

11. Incentive Plan for Senior Management

12. Long-Term Debt

Long-term debt consists of the following at December 31:

	2000	1999
	2001		2000
Atlas Gears Ltd Senior Term Loan, due June 30, 2005 Rates at December 31, 2000: 13.75%	$ 2,575	$ --
FAL Senior Term Loan, due June 30, 2005 Rate at December 31, 2001: 13.60%	$ 8,914		$ 2,575
Senior Term Loan, due July 1, 2005 Rates at December 31, 2000: 7.95%	10,000	10,000
Senior Term Loan, due July 1, 2005 Rate at December 31, 2001: 4.43%	10,000		10,000
Senior Subordinated Notes, 9.625%, Due October 15, 2008	100,000	~~100,000~~	100,000
Total debt	~~112~~118,~~575~~914	~~110,000~~	112,575
Less: Current maturities	--	--	--
Total long-term debt	$~~112~~118,~~575~~914	~~$110,000~~	$112,575

F - 15

Credit Facilities

The Company has a Credit Facility provided to it by General Electric Capital Corporation ("GE Capital"). Under the Credit Facility, the Company has $10~~,000~~.0 million of term loans outstanding at December 31, ~~2000~~2001. In addition, the Credit Facility provides for $20~~,000~~.0 million of revolving loans byto the Company, including up to $2~~,000~~.0 million under a letter of credit subfacility, subject to borrowing base availability. At December 31, ~~2000~~2001, the Company ~~had~~has $~~19,633~~16.8 million of availability under the revolver. The Company has the option of increasing the revolver availability by up to $2010.0 million,~~000,~~ subject to the satisfaction of certain conditions. Also, the Company may incur up to an additional $12.0 million of loans under the Credit Facility in the event it is required, under its guarantee, to repay GE Capital any loans made by GE Capital to FAL (see below). Commitments under the revolver terminate on July 1, 2005. The $10~~,000~~.0 million of term loans currently outstanding are payable in a single principal payment on July 1, 2005.

In connection with the ~~Atlas~~FAL acquisition in 2000, ~~the~~GE ~~Company~~Capital ~~amended~~extended ~~its~~a ~~credit~~Credit ~~agreement~~Facility ~~with~~to ~~General~~FAL ~~Electric~~in ~~Capital~~India ~~Corporation~~and, ~~among~~in ~~other~~June ~~things~~2001, agreed to allow FAL to obtain ~~its~~multiple ~~consent~~disbursements term loans and a working capital facility. Pursuant to the ~~acquisition. In~~Credit ~~addition~~Facilities, ~~General~~FAL ~~Electric~~is ~~Capital~~allowed ~~Corporation~~to ~~guaranteed~~borrow a up to $712.0 million, ~~credit~~all ~~facility~~of ~~extended~~which toborrowings ~~Atlas~~are inguaranteed ~~India~~by the Company. ~~Pursuant~~As toof ~~the~~December ~~amendment~~31, to2001, FAL has approximately $8.9 million of loans outstanding. At June 30, 2001, the ~~credit~~Company was in default of a financial covenant in its senior debt agreement. The senior lender waived such default, and, in connection with such waiver, the Company isand ~~obligated~~its senior lender entered into an amendment to ~~repay~~its ~~any~~Credit ~~amounts~~Facility ~~paid~~on inAugust ~~respect~~14, of2001, ~~this~~principally ~~guaranty~~to adjust the financial covenants. AsIn ofconnection ~~December~~with ~~31,~~the ~~2000~~amendment, ~~Atlas~~the ~~has~~interest ~~approximately~~rates on the Company's borrowings under the Credit Facility were increased, and a $27.60 million ~~of loans~~block ~~outstanding~~was made against the Company's borrowing base, reducing the Company's revolver availability.

Indebtedness under the Credit Facility is ~~secured~~collateralized by a pledge of the Company's common stock owned by Lancer and a lien on, and security interest in, substantially all of the Company's assets, including, without limitation, all capital stock of subsidiaries, real estate, equipment, inventory, accounts receivable and cash. The Credit Facility contains certain restrictive covenants limiting among other things, additional debt, additional liens, transactions with affiliates, mergers and consolidations, liquidations and ~~dissolution~~dissolutions, sales of assets, dividends, capital expenditures, sales and leaseback transactions, operating leases, investments, loans and advances, prepayment and modification of debt instruments, the taking or the failure to take, certain actions with respect to the Tax Sharing Agreement and other matters customarily restricted in such agreements. The Credit Facility also requires that the Company maintain compliance with certain specified financial ratios and tests including ratios with respect to fixed charges, interest coverage and working capital. In addition, the Credit Facility contains certain customary affirmative covenants and events of default. If the Company fails to satisfy its financial and other covenants in its Credit Facility, the senior lender may accelerate the Company's obligations, in which case all loans under the Credit Facility would be immediately due and payable. If the senior lender so accelerates its loans, the Company's Senior Subordinated Notes and the Exchangeable Preferred Stock (described below) would also be immediately due and payable.

~~Issuance of~~ 9-5/8% Senior Subordinated ~~Noes~~Notes due 2008

On May 19, 1999, the Company issued $100~~,000~~ million of 9-5/8% Senior Subordinated Notes due 2008. The proceeds of the offering were used by the Company as follows; 1) approximately $68~~,600~~.6 million was used to redeem the 11-3/8% Senior Subordinated Notes due 2001; 2) approximately $27~~,700~~.7 million was used to reduce outstanding amounts under its Credit Facility and; 3) approximately $3~~,700~~.7 million was used to pay the fees and expenses of the offering. During 1998, the Company repurchased $17~~,850~~.9 million of its 11-3/8% Senior Subordinated Notes due 2001 in open market transactions. The deferred financing costs associated with the 11-3/8% Senior Subordinated Notes due 2001 were written off as part of the loss on the early extinguishment of debt, which was approximately $1~~,400~~ .4 million net of tax in 1999 and $~~400~~0.4 million net of tax in 1998. ~~The tax benefit was $931 and $277 in 1999 and 1998, respectively.~~

FThe future maturities of long-term 16debt at December 31, 2001 are as follows:

The future maturities of long-term debt at December 31, 2000 are as follows:

2002		$ --
2003		--
2004		--
2005		18,914
2006		--
Thereafter		100,000

		$118,914

2001		$ --
2002		--
2003		--
2004		--
2005		12,575
Thereafter		100,000
		$112,575

13. Redeemable Exchangeable Preferred Stock

Exchangeable Preferred Stock

On March 12, 1997 the Company issued 50,000 shares of 11-1/4% Cumulative Exchangeable Preferred Stock, liquidation preference $1,000 per share, representing an aggregate liquidation preference of $50,000. The Exchangeable Preferred Stock is exchangeable at the option of the Company, in whole but not in part, for 11-1/4% Subordinated Exchange Debentures Due 2009 (the "Exchange Debentures"), in aggregate principal amount equal to the liquidation preference of the Exchangeable Preferred Stock following the redemption of the Existing Notes, subject to the satisfaction of certain conditions.

14. Stockholder's Equity

Merger

On March 27, 1997, First Colony Farms, Inc., a Delaware corporation and wholly-owned subsidiary of Lancer ("First Colony"), merged with and into the Company, with the Company being the surviving corporation of the merger. Immediately prior to the merger, First Colony had (i) no known liabilities (including contingent liabilities) and (ii) assets consisting of approximately $10 in cash and certain net operating loss carryforwards.

Issuance of Common Stock

F - 17

consideration of certain capital contributions made by Lancer to the Company pursuant to the Tax Sharing Agreement.

Other Income Non-recurring Item

Prior to final settlement with its insurance carrier, the Company had determined its minimum probable recovery for business interruption at the end of each quarter and had recorded those amounts as other income. The amounts recorded by quarter are as follows: June 30, 1999 - $1.0 million, September 30, 1999 - $3.3 million, December 31, 1999 - $2.7 million and March 31, 2000 - $3.0 million. The Company recognized an additional $6.5 million of business interruption insurance recovery during the second quarter of 2000 in conjunction with the final settlement of business interruption losses.

16. Commitments and Contingencies

Litigation

Operating Leases

The Company is obligated to make payments under noncancellable operating leases expiring at various dates through ~~2005~~2006.

Future minimum payments by year under operating leases consist of the following at

December 31, ~~2000~~2001:

Year		Minimum Rental
2001		$1,485
2002		$ 2,487
2002		1,409
2003		1,800
2003		292
2004		1,254
2004		274
2005		306
2005		242
2006		23
		$3,702
		$ 5,870

Rental expense for the years ended December 31, ~~2000~~2001, ~~1999~~2000 and ~~1998~~1999 was $~~971~~1,722, $~~543,~~971 and $~~506~~543, respectively.

Equity Participation Plan

The Company maintained an Equity Participation Plan (the "Plan") which provided for the award of up to an aggregate of 180,000 Equity Participation Rights ("Rights") to certain current and past

F - 18

officers and key employees. At December 31, 1998, all 180,000 rights were granted and vested and 117,000 rights were outstanding. During 1999, the Company redeemed the remaining 117,000 rights for $46. In 1997, the Company paid $25 to redeem 63,000 rights. No additional compensation was charged to earnings for this plan during 2000, 1999 or 1998.

17. Subsequent Events

The Company elected to pay the March 15, 2001 Exchangeable Preferred Stock dividend in kind and, in connection therewith, issued 2,812.5 shares of Exchangeable Preferred Stock to the holders of record as of March 1, 2001.Litigation

FOn -or 19about February 26, 2002, Peter Joseph, a director and Vice President of the Company, commenced a lawsuit against the Company, the Company's sole shareholder, Lancer, and Paul Levy (also a director, Chairman of the Board and Vice President of the Company) in the Delaware Chancery court, challenging certain corporate actions by Lancer and the Company. Both Messrs. Levy and Joseph are also directors, officers and shareholders of Lancer. The Company does not expect that the lawsuit will have a material adverse effect on the Company.

Exchangeable Preferred Stock Dividend

The Company elected to pay the March 15, 2002 Exchangeable Preferred Stock dividend in kind and, in connection therewith, issued 3,137.8 shares of Exchangeable Preferred Stock to the holders of record as of March 1, 2002.

Credit Facility Amendment

The Company and its senior lender entered into an amendment to its Credit Facility on March 18, 2002 to adjust the financial covenants for the quarter ending December 31, 2002. In accordance with the amendment, one of the financial covenants has been revised to include two performance measurements for the quarter ending December 31, 2002. If the higher measurement is not achieved, the block against the Company's borrowing base will be increased from $7.0 million to $10.0 million, further reducing the Company's revolver availability.

FAIRFIELD MANUFACTURING COMPANY, INC.

Schedule II - Valuation and Qualifying Accounts and Reserves
For the Three Years Ended December 31, 2001
(In thousands)

Description	Balance at Beginning of Period	Charged to Costs and Expenses	Charged to other Accounts	Deductions	~~Deductions~~Balance at End of Period	~~Balance at End of Period~~
2000
2001
Allowance for doubtful accounts	$~~700~~1,176	$~~100~~ --	$~~376~~ --	~~(1)~~$ --	$ --1,176	~~$1,176~~
1999
2000
Allowance for doubtful accounts	$ 700	$~~232~~100	$376 --(1)	$ --	$~~(232)~~1,176	~~$ 700~~
1998
1999
Allowance for doubtful accounts	$~~600~~ 700	$~~100~~232	$ --	$(232)	$ --700	~~$ 700~~

(1) ~~Fairfield~~ ~~Atlas~~FAL acquisition

F - 20

				Accumulated
		Additional		Other	Stock-
	Common	Paid-in	Accumulated	Comprehensive	Holder's
	Stock	Capital	Deficit	Income	Equity (Deficit)
Balance, January 1, 1998
	$82	$39,414	$(91,684)	$ --	$(52,188)
Capital contribution	$ 3	$ 2,908	$ --	$ --	$ 2,911
Preferred stock dividends	--	--	(5,625)	--	(5,625)
Preferred stock discount accretion	--	--	(192)	--	(192)
Net income	--	--	6,074	--	6,074
Balance, December 31, 1998	$85	$42,322	$(91,427)	$ --	$(49,020)
Capital contribution	$ 2	$ 3,928	$ --	$ --	$3,930
Preferred stock dividends	--	--	(5,625)	--	(5,625)
Preferred stock discount accretion	--	--	(192)	--	(192)
Net income	--	--	11,430	--	11,430
Balance, December 31, 1999	$87	$46,250	$(85,814)	$ --	$(39,477)
Capital contribution	$ 4	$ 2,136	$ --	$ --	$2,140
Preferred stock dividends	--	--	(5,625)	--	(5,625)
Preferred stock discount accretion	--	--	(192)	--	(192)
Comprehensive income:
Net income	--	--	6,915	--	6,915
Foreign currency translation	--	--	--	(57)	(57)
Total comprehensive income	--	--	--	--	6,858
Balance, December 31, 2000	$91	$48,386	$(84,716)	$(57)	$(36,296)

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