SELECTED FINANCIAL INFORMATION REGAL-BELOIT CORPORATION
- ------------------------------ ------------------------

FIVE YEAR HISTORICAL DATA

(In Thousands, Except Per Share Data)
--------------------------------------------
Year Ended December 31,
--------------------------------------------

1998 1997 1996 1995 1994
-------- -------- -------- -------- --------
Net Sales $543,513 $487,019 $281,508 $295,891 $242,650
Income from Operations 81,113 74,381 51,120 53,607 38,982
Net Income 42,961 38,897 32,276 32,818 23,129
Total Assets 482,022 485,625 196,996 175,480 167,665
Long-term Debt 166,218 192,261 2,168 2,884 16,022
Shareholders' Investment 224,497 189,427 160,023 135,873 110,545
Per Share of Common Stock:
Earnings Per Share 2.06 1.87 1.57 1.60 1.13
Earnings Per Share - Assuming Dilution 2.02 1.83 1.53 1.57 1.11
Cash Dividends Declared .48 .48 .48 .39 .31
Shareholders' Investment 10.74 9.09 7.75 6.61 5.40

Average Number of Shares Outstanding 20,893 20,806 20,617 20,509 20,438
Average Number of Shares -
Assuming Dilution 21,278 21,275 21,075 20,966 20,840

COMMON STOCK
1998 1997
--------------------------------- ------------------------------
Price Range Price Range
---------------------- Dividends ------------------- Dividends
High Low Paid High Low Paid
---------- ---------- --------- --------- -------- ---------

1st Quarter $ 33 1/4 $ 26 7/8 $ .12 $ 24 1/2 $ 18 $ .12
2nd Quarter 33 1/4 27 13/16 .12 28 1/2 22 1/2 .12
3rd Quarter 28 9/16 19 3/8 .12 32 1/4 26 1/16 .12
4th Quarter 26 7/8 17 1/2 .12 32 3/4 25 1/16 .12
<FN>
Regal-Beloit has paid 154 consecutive quarterly dividends through January, 1999. The
approximate number of holders of common stock as of December 31, 1998 is 1,170.
</FN>

QUARTERLY FINANCIAL INFORMATION

(In Thousands, Except Per Share Data)
------------------------------------------------------------------------------
1st Qtr. 2nd Qtr. 3rd Qtr. 4th Qtr.
----------------- ------------------ ------------------ -------------------

1998 1997 1998 1997 1998 1997 1998 1997
-------- ------- -------- -------- -------- -------- -------- --------
Net Sales $137,818 $70,570 $138,981 $143,610 $137,973 $138,403 $128,741 $134,436
Gross Profit 39,738 20,371 41,290 41,408 38,907 39,068 37,879 40,161
Income from Operations 19,868 12,062 21,970 21,863 19,848 19,934 19,427 20,522
Net Income 10,414 7,706 11,679 10,807 10,390 9,914 10,478 10,470
Earnings Per Share .50 .37 .56 .52 .50 .48 .50 .50
Earnings Per Share -
Assuming Dilution .49 .36 .55 .51 .49 .47 .49 .49
Average Number of
Shares Outstanding 20,861 20,774 20,898 20,807 20,905 20,816 20,908 20,826
Average Number of Shares -
Assuming Dilution 21,332 21,248 21,349 21,253 21,223 21,315 21,209 21,300

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL STATEMENTS
- ------------------------------------------------------------
REGAL-BELOIT CORPORATION
- ------------------------

OVERVIEW

The Company in 1998 achieved record highs in net sales, net income, and
earnings per share for the second consecutive year. Net sales in 1998
increased 11.6% to $543,513,000. Net income rose 10.4% to $42,961,000 in
1998, or $2.02 per share (assuming dilution). Return on average shareholders'
investment (ROE) was 20.8%, the fifth year in a row above 20%. As 1998
progressed there was a slowing in demand in many of the Company's markets.
This led to weakening orders and sales in the second half of the year,
particularly during the fourth quarter.

Cash flow from operations of $50,393,000 in 1998 was again strong, enabling
long-term debt to be reduced by $26,038,000 during 1998 to $166,218,000 at
year-end 1998. Virtually all of the debt reduction occurred in the second
half of 1998. The Company's capitalization ratio at December 31, 1998 was
42.5%, down from 50.4% a year earlier.

RESULTS OF OPERATIONS

1998 versus 1997
- ----------------
Total Company net sales in 1998 were $543,513,000, an 11.6% increase from
$487,019,000 in 1997. Mechanical Group net sales were $280,153,000, 1.8%
below 1997 net sales of $285,174,000. The decrease from 1997 occurred
almost entirely in the fourth quarter of 1998, with many of the Mechanical
Group's customers adjusting their inventories to lower levels as the
industrial economy continued to slow. Electrical Group net sales in 1998 of
$263,360,000 were 30.5% higher than the $201,845,000 of net sales for the
nine months of 1997 following the acquisition of Marathon Electric. (See
"Note 4 to Consolidated Financial Statements") On a pro-forma basis assuming
the acquisition had occurred January 1, 1997, Electrical Group sales in 1998
were .5% below net sales of $264,681,000 in 1997.

Gross profit as a percent of net sales for the Company was 29.0% in 1998,
unchanged from 1997. Income from operations for the Company increased 9.1%
to $81,113,000 in 1998 from $74,381,000 in 1997. As a percent of net sales,
income from operations decreased to 14.9% in 1998 from 15.3% the prior year.
The reduction was due in part to having one additional quarter of Electrical
Group operations, with its lower operating margins, in 1998 than in 1997.
Mechanical Group operating income margin decreased to 16.3% in 1998 from 17.0%
in 1997, primarily due to lower sales volume and the related impact on cost of
sales. However, Electrical Group operating income margin increased to 13.4%
in 1998 from 12.9% a year previously, due mainly to reductions in operating
expenses.
2

Interest expense increased to $11,479,000 in 1998 from $10,804,000 in 1997,
due to a full year of the acquisition related debt in 1998 versus only nine
months in 1997. For the last nine months of 1998, interest expense of
$8,491,000 was $2,260,000, or 21%, lower than the comparable nine months of
1997. The average rate of interest the Company paid in 1998 was 6.1% as
compared to 6.2% in 1997. Interest income decreased to $306,000 in 1998
from $810,000 in 1997. The decrease was due primarily to the Company
utilizing $37,000,000 of cash for the March 1997 acquisition of Marathon
Electric.

The Company's effective tax rate decreased to 38.6% of income before taxes
in 1998 from 39.6% in 1997. The decrease was due primarily to reductions in
effective Company state income tax rates in 1998.

Net income of the Company in 1998 was $42,961,000, a 10.4% increase from
$38,897,000 in 1997. As a percent of net sales, net income was 7.9% in 1998
versus 8.0% in 1997. On a per share basis, 1998 net income was $2.06 per
share (basic) and $2.02 per share (assuming dilution), 10% higher in each
case than 1997 net income of $1.87 per share (basic) and $1.83 per share
(assuming dilution).

1997 versus 1996
- ----------------
Net sales of the Company were $487,019,000 in 1997, a 73.0% increase from
$281,508,000 in 1996. Mechanical Group net sales grew to $285,174,000 in
1997, a 1.3% increase from $281,508,000 in 1996. Sales growth in the
Mechanical Group's operating divisions in 1997 varied, with about half
achieving sales growth, more than offsetting those that had sales decreases.
Electrical Group 1997 net sales for the nine months as part of the
Company were $201,845,000, 9% higher than for the same nine months of 1996
under Marathon Electric's former ownership. The Electrical Group achieved
broad-based sales increases in motors, generators, and other electrical
products.

Gross profit as a percentage of sales for the Company was 29.0% in 1997 as
compared to 29.5% in 1996. The decrease from 1996 was due primarily to a
decline in the overall gross margin in the Mechanical Group resulting from a
more competitive pricing environment in 1997 than experienced in 1996.
Company operating expenses increased to $66,627,000 in 1997 from $31,806,000
in 1996 due predominantly to the acquisition of Marathon Electric.

Income from operations of the Company increased to $74,381,000 in 1997 from
$51,120,000 in 1996. The increase was due to the $25,836,000 of income from
operations contributed by the new Electrical Group from April through
December 1997.
3

Interest expense in 1997 was $10,804,000 as compared to $357,000 in 1996.
On March 26, 1997, the Company borrowed $242,000,000 under its Revolving
Credit Facility to finance the purchase of Marathon Electric (See "Note 4
to Consolidated Financial Statements"). The average rate of interest paid
by the Company in 1997 was 6.2%.

The Company's effective tax rate increased to 39.6% of income before taxes
in 1997 from 37.7% in 1996. The rate increase was due primarily to the
nondeductibility of the amortized goodwill associated with the Marathon
Electric acquisition.

YEAR 2000 READINESS DISCLOSURE

The Company has for several years been addressing the Year 2000 issue.
Management has been aware of the critical requirement that the Company's
computer hardware and systems handle all transactions properly relating
to 2000 and beyond. Management further understands the importance of
computer-operated machinery and facilities equipment such as tele-
communications, security, and HVAC also being Year 2000 ready. The
Company's products have been evaluated and determined to be Year 2000 ready.

Accordingly, the Company has assessed its computer hardware and systems and
any necessary changes have, for the most part, been made and implemented.
Testing of the Company's systems to assure Year 2000 readiness is in progress.
Also in progress is the evaluation and testing of computer-operated machinery
and facilities equipment. The Company plans to complete its testing during
the second quarter of 1999.

Additionally, recognizing the Company's dependence on its suppliers, surveys
have been sent to key suppliers to evaluate their Year 2000 readiness efforts
and status. Where key suppliers are not able to verify their readiness to
the Company's satisfaction, the Company plans to consider alternative or
contingent suppliers.

Management believes that the Company is devoting the necessary resources to
identify and resolve significant Year 2000 issues and to minimize the risk of
not being Year 2000 ready. Management further believes the costs it has
expended, and plans to expend, to become Year 2000 ready are not material,
and have not had, and will not have, an adverse effect on the Company's
financial position, cash flow or results of operations. However, to the
extent that the Company or third parties on which it relies do not achieve
Year 2000 readiness in a timely manner, the Company's financial position,
cash flow or results of operations may be adversely affected.
4

LIQUIDITY AND CAPITAL RESOURCES

The Company's working capital increased to $117,305,000 at December 31, 1998,
from $100,627,000 a year ago. The increase was due primarily to reductions in
current liabilities. The Company's current ratio also increased, to 3.0:1 at
year-end 1998, from 2.4:1 a year earlier.

The Company maintains a $190,000,000 unsecured revolving credit facility
which expires March 26, 2002 (the "Facility"). The Facility permits the
Company to borrow up to the credit limit at interest rates based upon a
margin above LIBOR. At December 31, 1998, $166,000,000 was outstanding under
the Facility, a $26,000,000 reduction from the end of 1997, and the Company
had $24,000,000 of available borrowing capacity. During 1998 the Company paid
an average interest rate of 6.1% for its outstanding debt. The Company was in
compliance with the covenants of the Facility throughout 1998. The Company's
capitalization ratio at December 31, 1998 was 42.5%, down from 50.4% a year
earlier and its funded debt to EBITDA ratio at year-end 1998 was 1.61:1 as
compared to 1.86:1 at year-end 1997.

Additionally, the Company maintains a short-term credit line of $10,000,000.
At December 31, 1998, there were no borrowings against the short-term line.
Management believes the credit facilities it has in place provide sufficient
borrowing capacity for the Company to finance its operations for the
foreseeable future. Management further believes that future external growth
from acquisitions can be adequately funded from a combination of the current
credit facilities and the Company's ability to further leverage its equity
with additional long-term indebtedness.

Cash flow from operations was $50,393,000 in 1998, below the $78,789,000 in
1997, primarily due to payment of liabilities associated with the Marathon
Electric acquisition. Expenditures for property, plant and equipment in 1998
were $14,836,000. Commitments for capital items outstanding at December 31,
1998 were $1,500,000. Management believes its present facilities are
sufficient to provide adequate capacity for its operations in 1999.

In the ordinary course of business, the Company is exposed to market risk,
primarily interest rate risk. The Company maintains a credit facility with
floating-rate debt at a rate based on a margin above LIBOR. As a result,
interest rate changes generally do not affect fair market value but do impact
future earnings and cash flows assuming other factors are constant. A hypo-
thetical 10% change in the Company's weighted average borrowing rate on the
outstanding debt at December 31, 1998, would result in a change in after-tax
annual earnings of approximately $630,000. The Company has no material
foreign currency rate risk.
5

CONSOLIDATED BALANCE SHEETS REGAL-BELOIT CORPORATION
- --------------------------- ------------------------
In Thousands of Dollars

ASSETS
December 31,
------------------------
1998 1997
---------- ----------

Current Assets:
Cash and cash equivalents $ 3,548 $ 3,351
Receivables, less allowance for doubtful accounts of
$1,851 in 1998 and $2,620 in 1997 69,400 69,660
Future income tax benefits 10,249 13,141
Inventories 91,461 85,527
Prepaid expenses 1,253 880
---------- ----------
Total Current Assets 175,911 172,559
Property, Plant and Equipment:
Land and land improvements 11,066 10,979
Buildings and improvements 66,123 64,167
Machinery and equipment 169,774 158,468
---------- ----------
Property, Plant and Equipment, at cost 246,963 233,614
Less-Accumulated depreciation (99,034) (82,355)
---------- ----------
Net Property, Plant and Equipment 147,929 151,259
Goodwill 147,161 151,358
Other Noncurrent Assets 11,021 10,449
---------- ----------
Total Assets $ 482,022 $ 485,625
========== ==========

LIABILITIES AND SHAREHOLDERS' INVESTMENT

Current Liabilities:
Accounts payable $ 23,791 $ 23,590
Dividends payable 2,509 2,500
Accrued compensation and employee benefits 19,395 28,674
Other accrued expenses 12,359 11,434
Federal and state income taxes 509 5,696
Current maturities of long-term debt 43 38
---------- ----------
Total Current Liabilities 58,606 71,932

Long-term Debt 166,218 192,261
Deferred Income Taxes 32,507 31,726
Other Noncurrent Liabilities 194 279

Shareholders' Investment:
Common stock, $.01 par value, 50,000,000
shares authorized, 20,911,540 issued
and outstanding in 1998 and 20,830,226
issued and outstanding in 1997 209 208
Additional paid-in capital 40,860 38,904
Retained earnings 183,285 150,357
Accumulated other comprehensive income 143 (42)
---------- ----------
Total Shareholders' Investment 224,497 189,427
---------- ----------
Total Liabilities and Shareholders' Investment $ 482,022 $ 485,625
========== ==========
<FN>
See accompanying Notes to Consolidated Financial Statements.
</FN>

CONSOLIDATED STATEMENTS OF INCOME REGAL-BELOIT CORPORATION
- --------------------------------- ------------------------
In Thousands of Dollars, Except Shares Outstanding

For The Year Ended December 31,
-------------------------------------

1998 1997 1996
---------- ---------- ----------
Net Sales $ 543,513 $ 487,019 $ 281,508
Cost of Sales 385,699 346,011 198,582
---------- ---------- ----------
Gross Profit 157,814 141,008 82,926
Operating Expenses 76,701 66,627 31,806
---------- ---------- ----------
Income From Operations 81,113 74,381 51,120
Interest Expense 11,479 10,804 357
Interest Income 306 810 1,052
---------- ---------- ----------
Income Before Income Taxes 69,940 64,387 51,815
Provision For Income Taxes 26,979 25,490 19,539
---------- ---------- ----------
Net Income $ 42,961 $ 38,897 $ 32,276
========== ========== ==========

Earnings Per Share $ 2.06 $ 1.87 $ 1.57
========== ========== ==========

Earnings Per Share - Assuming Dilution $ 2.02 $ 1.83 $ 1.53
========== ========== ==========

Average Number of Shares Outstanding 20,893,182 20,805,844 20,616,825
========== ========== ==========

Average Number of Shares-Assuming Dilution 21,278,497 21,275,061 21,074,615
========== ========== ==========
<FN>
See accompanying Notes to Consolidated Financial Statements.
</FN>

CONSOLIDATED STATEMENTS OF SHAREHOLDERS' INVESTMENT
- ---------------------------------------------------
In Thousands of Dollars, Except Per Share Data

Common Accumulated
Compre- Stock Additional Other
hensive $.01 Paid-In Retained Comprehensive
Income Par Value Capital Earnings Income Total
-------- --------- ---------- -------- ------------- ---------

Balance, December 31, 1995 $ 206 $ 37,133 $ 99,079 $ (545) $ 135,873
Net Income $ 32,276 -- -- 32,276 -- 32,276
Dividends Declared
($.48 per share) -- -- (9,902) -- (9,902)
Translation Adjustment 1,214 -- -- -- 1,214 1,214
--------
Comprehensive Income $ 33,490
========
Stock Options Exercised 562 -- -- 562
-------- -------- --------- ------------- ---------
Balance, December 31, 1996 206 37,695 121,453 669 160,023
Net Income $ 38,897 -- -- 38,897 -- 38,897
Dividends Declared
($.48 per share) -- -- (9,993) -- (9,993)
Translation Adjustment (711) -- -- -- (711) (711)
---------
Comprehensive Income $ 38,186
=========
Stock Options Exercised 2 1,209 -- -- 1,211
-------- -------- --------- ------------- ---------
Balance, December 31, 1997 208 38,904 150,357 (42) 189,427
Net Income $ 42,961 -- -- 42,961 -- 42,961
Dividends Declared
($.48 per share) -- -- (10,033) -- (10,033)
Translation Adjustment 185 -- -- 185 185
--------
Comprehensive Income $ 43,146
========
Stock Options Exercised 1 1,956 -- -- 1,957
-------- -------- --------- ------------- ---------
Balance, December 31, 1998 $ 209 $ 40,860 $ 183,285 $ 143 $ 224,497
======== ======== ========= ============= =========
<FN>
See accompanying Notes to Consolidated Financial Statements.
</FN>

CONSOLIDATED STATEMENTS OF CASH FLOWS REGAL-BELOIT CORPORATION
- ------------------------------------- ------------------------
In Thousands of Dollars

For The Year Ended December 31,
---------------------------------

CASH FLOWS FROM OPERATING ACTIVITIES: 1998 1997 1996
--------- --------- ---------
Net income $ 42,961 $ 38,897 $ 32,276
Adjustments to reconcile net income to
net cash provided from operating activities:
Depreciation and amortization 22,039 18,874 10,578
Provision for deferred income taxes 3,673 13,770 (54)
Change in assets and liabilities, net of acquisitions:
Receivables 338 (200) 8,799
Inventories (5,816) 473 3,708
Current liabilities and other, net (12,802) 6,975 (1,640)
---------- -------- ----------

Net cash provided from operating activities 50,393 78,789 53,667

CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property, plant and equipment (14,836) (16,076) (11,112)
Business acquisition --- (279,260) ---
Sale of property, plant and equipment 118 515 391
Other, net (1,400) 356 (525)
---------- --------- ----------

Net cash used in investing activities (16,118) (294,465) (11,246)

CASH FLOWS FROM FINANCING ACTIVITIES:
Additions to long-term debt --- 242,000 ---
Repayment of long-term debt (26,038) (52,532) (2,721)
Stock issued under option and compensation plans 1,957 1,211 562
Dividends to shareholders (10,023) (9,970) (9,480)
---------- --------- ----------

Net cash (used in) provided from financing activities (34,104) 180,709 (11,639)

EFFECT OF EXCHANGE RATE ON CASH: 26 (84) 162
---------- --------- ----------

Net increase (decrease) in cash and cash equivalents 197 (35,051) 30,944
Cash and cash equivalents at beginning of year 3,351 38,402 7,458
---------- --------- ----------
Cash and cash equivalents at end of year $ 3,548 $ 3,351 $ 38,402
========== ========= ==========

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest $ 12,081 $ 10,053 $ 413
Income Taxes $ 28,011 $ 9,509 $ 19,728
<FN>
See accompanying Notes to Consolidated Financial Statements.
</FN>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS REGAL-BELOIT CORPORATION
- ----------------------------------------- ------------------------

For The Three Years Ended December 31, 1998

(1) NATURE OF OPERATIONS

Regal-Beloit Corporation (the Company) is a United States-based multinational
corporation. The Company is organized into two operating groups, the
Mechanical Group with its principal line of business in mechanical products
which control motion and torque, and the Electrical Group with its principal
line of business in electric motors and generators. The principal markets
for the Company's products and technologies are within the United States.
Sales in foreign countries represent a relatively minor proportion of total
Company sales.

(2) ACCOUNTING POLICIES

Principles of Consolidation
- ---------------------------

The financial statements include the accounts of the Company and its wholly
owned subsidiaries.

Revenue Recognition
- -------------------

Sales and related cost of sales for all products are recognized upon shipment
of the products.

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

Foreign Currency Translation
- ----------------------------
Net assets of non-U.S. subsidiaries, whose functional currencies are other
than the U.S. Dollar, are translated at the rates of exchange in effect as of
year end. Income and expense items are translated at the average exchange
rates in effect during the year. The translation adjustments relating to net
assets are recorded directly into a separate component of shareholders'
investment. Certain other translation adjustments continue to be reported
in net income and were not significant in any of the three years ended
December 31, 1998.

Cash and Cash Equivalents
- -------------------------
Cash and cash equivalents consist primarily of highly liquid investments with
insignificant interest rate risk and original maturities of three months or
less at date of acquisition. The carrying value of cash equivalents closely
approximates their fair market value.
8

Inventories
- -----------

The approximate percentage distribution between major classes of inventory
is as follows:
December 31
-------------
1998 1997
---- ----
Raw Material . . . . . . . . . . . . . 14% 13%
Work In Process. . . . . . . . . . . . 23% 23%
Finished Goods and Purchased Parts . . 63% 64%

Inventories are stated at cost, which is not in excess of market. Cost for
approximately 82% of the Company's inventory at December 31, 1998 and 1997,
was determined using the last-in, first-out (LIFO) method. If all inventories
were valued on the first-in, first-out (FIFO) method, they would have
increased by $7,030,000 and $8,364,000 as of December 31, 1998 and 1997,
respectively. Material, labor and factory overhead costs are included in the
inventories.

Property, Plant and Equipment
- -----------------------------
Property, plant and equipment is stated at cost. Maintenance and repairs are
charged to expense as incurred and major renewals and improvements are
capitalized.

The cost of property retired or otherwise disposed of is removed from the
property accounts, the accumulated depreciation is removed from related
reserves, and the net gain or loss is reflected in income.

The provisions for depreciation are based on the estimated useful lives of
plant and equipment from the dates of acquisition and are calculated primarily
using the straight-line method for financial reporting purposes and
accelerated methods for income tax purposes. The estimated useful lives are:

Description Life
- -------------------------- --------------
Buildings and Improvements 10 to 45 years
Machinery and Equipment 3 to 15 years

(3) LEASES AND RENTAL COMMITMENTS

Rental expenses charged to operations amounted to $3,616,000 in 1998,
$3,535,000 in 1997 and $1,158,000 in 1996. Future minimum rental commitments
for noncancelable operating leases having a remaining term in excess of one
year as of December 31, 1998 are not material.
9

(4) ACQUISITION

On March 26, 1997, the Company acquired 100% of the stock of Marathon
Electric Manufacturing Corporation of Wausau, Wisconsin for approximately
$279,000,000. The acquisition was financed with a combination of
approximately $37,000,000 of existing cash and $242,000,000 of debt. (See also
Note 5 "Long-Term Debt and Bank Credit Facilities".) Marathon Electric is a
leading manufacturer of electric motors and generators. Marathon Electric
sells its products worldwide to a broad range of industries and customers.

Results of operations for Marathon Electric have been consolidated in the
Company's statements effective March 27, 1997. Unaudited pro-forma results
of operations for Regal-Beloit Corporation for the year ended December 31,
1997 as though Marathon Electric had been acquired as of January 1, 1997 are
net sales of $549,855,000, net income of $39,602,000 and basic earnings per
share of $1.90.

This acquisition was accounted for as a purchase, and the audited results
shown in these statements relating to the acquisition have been prepared in
accordance with generally accepted accounting principles.

(5) LONG-TERM DEBT AND BANK CREDIT FACILITIES

(In Thousands of Dollars)
Long-term debt consists of the following: December 31,
-------------------------
1998 1997
------------ -----------
Revolving Credit Facility $ 166,000 $ 192,000
Other 261 299
166,261 192,299
----------- -----------
Less-Current maturities 43 38
----------- -----------
Noncurrent portion $ 166,218 $ 192,261
=========== ===========

The Company maintains a $190,000,000 unsecured revolving credit facility
which expires March 26, 2002 (the "Facility"). The Facility permits the
Company to borrow at rates based upon a margin above LIBOR. The Facility
also includes financial covenants regarding minimum net worth, maximum
permitted debt and minimum interest coverage. The average balance
outstanding under the Facility in 1998 was $185,427,000. The average
interest rate paid under the Facility in 1998 was 6.1%. The Company had
$24,000,000 of available borrowing capacity under the Facility at December 31,
1998.

The Company also maintains a short-term credit line of $10,000,000 at
December 31, 1998. There was no outstanding balance on the short-term credit
line at December 31, 1998.

Based on the borrowing rates currently available to the Company for bank
loans with similar terms and average maturities, the fair value of long-term
debt is not materially different than the carrying value.

Maturities of long-term debt are as follows:

Year (In Thousands of Dollars)
------ -------------------------
1999 $43
2000 48
2001 54
2002 166,061
2003 and thereafter 55
--------
Total $166,261
========

(6) CONTINGENCIES

The Company is, from time to time, party to lawsuits arising from its normal
business operations. In addition, the Company is party to certain
environmental cleanup proceedings. It is believed that the outcome of these
lawsuits and cleanup proceedings will have no material effect on the Company's
financial position or its results of operations.
<PAGE 10>

(7) RETIREMENT PLANS

The Company has a number of retirement plans that cover most of its employees.
The primary plan of the Mechanical Group is a qualified discretionary profit-
sharing plan covering substantially all domestic employees except those
covered by collective bargaining agreements. Total expense for all profit-
sharing and retirement plans of the Mechanical Group was $4,044,000,
$4,247,000 and $4,041,000 in 1998, 1997 and 1996, respectively.

The Electrical Group has defined benefit pension plans which cover
substantially all employees. Benefits provided under qualified defined
benefit plans are based on employees' average earnings in years immediately
preceding retirement and years of credited service. Funding of the plans is
in accordance with federal laws and regulations.

Net periodic pension benefit costs for the Company sponsored plans were as
follows:

(In Thousands of Dollars)

Twelve Months Ended Nine Months Ended
December 31,1998 December 31,1997
------------------- -----------------
Service cost................ $1,201 $ 822
Interest cost............... 2,635 1,880
Expected return on
plan assets................ (3,752) (2,570)
Amortization of prior
service cost............... 9 --
------- -------

Net periodic benefit cost... $ 93 $ 132
======= =======

The Company's pension plans have assets in excess of the accumulated benefit
obligation. The accumulated benefit obligation of the plans was $34,636,000
and $29,891,000 in 1998 and 1997, respectively. The following table presents
a reconciliation of the funded status of the plans using an assumed discount
rate of 7.0% in 1998 and 7.5% in 1997, annual compensation increases of 4.5%
in 1998 and 1997, and an assumed long-term rate of return on plan assets of
9.0% in 1998 and 1997.

(In Thousands of Dollars)

Twelve Months Ended Nine Months Ended
December 31, 1998 December 31,1997
------------------- -----------------

Change in projected benefit obligation:
Obligation at beginning
of period . . . . . . . . . . . $ 35,316 $ 32,258
Service cost . . . . . . . . . . 1,202 822
Interest cost. . . . . . . . . . 2,635 1,880
Change in assumptions. . . . . . 1,910 1,237
Plan amendments . . . . . . . . 589 104
Benefits paid. . . . . . . . . . (1,520) (985)
--------- ---------
Obligation at end of period. . . 40,132 35,316
--------- ---------

Change in fair value of plan assets:
Fair value of plan assets at
beginning of period . . . . . . 44,937 38,182
Actual return on plan assets . . 4,713 7,740
Employer contributions . . . . . 327 -
Benefits paid . . . . . . . . . (1,520) (985)
--------- ---------
Fair value of plan assets
at end of period. . . . . . . . 48,457 44,937
--------- ---------

Funded status. . . . . . . . . . 8,325 9,621

Unrecognized net actuarial
(gain) loss . . . . . . . . . . (2,934) (3,884)
Unrecognized prior
service costs . . . . . . . . . 684 104
--------- ---------
Intangible asset recognized
in balance sheet. . . . . . . . $ 6,075 $ 5,841
======== =========

The Electrical Group also has defined contribution plans for all salaried and
hourly employees. The plans provide for company contributions based, depending
on the plan, upon one or more of participant contributions, service, and
Electrical Group profits. Electrical Group contributions to the plans totaled
$1,289,000 and $1,073,000 in 1998 and 1997, respectively.
<PAGE 11>

(8) NEW ACCOUNTING PRONOUNCEMENTS

In June, 1997 the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130, "Reporting Comprehensive Income",
which established standards for reporting and displaying comprehensive income
and its components. The statement is effective for fiscal years beginning
after December 15, 1997 and has been adopted by the Company in these
statements. The components of comprehensive income have been displayed in
the Consolidated Statements of Shareholders' Investment.

In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities." This standard requires that an entity recognize
derivatives as either assets or liabilities on its balance sheet and measure
those interments at fair value. The Company was not party to any material
derivative financial instrument contracts in 1998, 1997 or 1996.

(9) STOCK OPTION PLANS

The Company has four stock option plans available for officers, directors,
and key employees. Under the Company's 1982 and 1987 Stock Option Plans,
which have expired as to new grants, 1,200 shares and 150,586 shares
previously granted, respectively, remain outstanding. Options under these
plans were granted at a price that equaled the market value on the date of
grant and an option's maximum term is 10 years from date of grant.

In 1991, the shareholders approved a Flexible Stock Incentive Plan, which
permits the awarding of up to 1,000,000 option shares. Options for 774,156
shares have been granted under this plan; 681,632 shares remain outstanding.
These options were granted at prices that equaled the market value on the
date of grant and an option's maximum term is 10 years from date of grant.

In 1998, the shareholders approved the 1998 Stock Option Plan, which permits
the awarding of up to 1,000,000 additional option shares. Options for 5,600
shares have been granted under this plan and remain outstanding. These options
were granted at prices that equaled the market value on the date of grant and
an option's maximum term is 10 years from date of grant.

A summary of the status of the Company's four stock option plans as of
December 31, 1998, 1997 and 1996, and changes during the years then ended is
presented below:

1998 1997 1996
----------------------- ------------------------ -------------------------
Weighted Weighted Weighted
Average Average Average
Shares Exercise Price Shares Exercise Price Shares Exercise Price
----------------------- ------------------------ -------------------------

Outstanding at beginning of year 907,682 $ 13.42 866,418 $ 8.88 873,086 $ 7.84
Granted 88,400 28.31 243,850 24.10 107,700 18.85
Exercised (81,564) 11.31 (200,336) 7.54 (96,368) 5.84
Forfeited (75,500) 23.65 (2,250) 18.81 (18,000) 19.00
-------- ------- --------- ------- -------- -------
Outstanding at end of year 839,018 $ 14.18 907,682 $ 13.42 866,418 $ 8.88

Options exercisable at year-end 522,981 467,582 616,068

The following table summarizes information about the Company's four stock
option plans outstanding at December 31, 1998:

Range of Options Options
Exercise Outstanding at Exercisable at
Prices 12/31/98 12/31/98
--------------------------------------------------

$ 5.56 - 8.36 410,594 314,594
8.37 - 12.56 64,098 64,098
12.57 - 18.86 75,626 45,626
18.87 - 28.31 217,050 48,063
------- -------
28.32 - 32.44 71,650 50,600
------- -------
839,018 522,981

The Company accounts for its stock option plans under APB Opinion No. 25.
Accordingly, no compensation cost has been recognized in the statements of
income. Had compensation cost for these plans been determined consistent
with FASB Statement No. 123 "Accounting for Stock-Based Compensation", the
Company's net income and earnings per share would have been reduced to the
following pro forma amounts:

(In Thousands, Except Per Share Data)
1998 1997 1996
-------- -------- --------

Net Income:
As Reported $ 42,961 $ 38,897 $ 32,276
Pro Forma $ 41,796 $ 38,100 $ 32,066
Earnings Per Share
As Reported $ 2.06 $ 1.87 $ 1.57
Pro Forma $ 2.00 $ 1.83 $ 1.56
Earnings Per Share - Assuming Dilution
As Reported $ 2.02 $ 1.83 $ 1.53
Pro Forma $ 1.96 $ 1.79 $ 1.52

<FN>
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option pricing model with the following weighted-average
assumptions used for grants in 1996, 1997 and 1998, respectively: risk-free
interest rates of 5.9%, 6.7% and 5.6%; expected dividend yield of 2.5% for
all years; expected option lives of 7.0 for all years; expected volatility of
32% in all three years.
</FN>

(10) INCOME TAXES
The provision for income taxes is summarized as follows:

(In Thousands of Dollars)
----------------------------------
1998 1997 1996
--------- ---------- --------

Current
Federal $ 19,960 $ 9,748 $ 16,232
State 2,493 861 2,712
Foreign 853 1,111 649
-------- -------- ---------
23,306 11,720 19,593
Deferred 3,673 13,770 (54)
-------- -------- ---------
$ 26,979 $ 25,490 $ 19,539
======== ======== =========

A reconciliation of the statutory Federal income tax rate and the effective
rate reflected in the statements of income follows:

1998 1997 1996
----- ----- -----
Federal statutory rate 35.0% 35.0% 35.0%
State income taxes, net of
federal benefit 2.6 3.0 3.4
Nondeductible goodwill
amortization 2.1 1.6 -
Other, net (1.1) - (.7)
----- ----- -----
Effective tax rate 38.6% 39.6% 37.7%
===== ===== =====

Deferred taxes arise primarily from differences in amounts reported for tax
and financial statement purposes. The Company's net deferred tax liability
as of December 31, 1998 of $22,258,000 is classified on the consolidated
balance sheet as a current income tax benefit of $10,249,000 and a long-term
deferred income tax liability of $32,507,000. The December 31, 1997 net
deferred tax liability was $18,585,000, consisting of a current income tax
benefit of $13,141,000 and a long-term deferred income tax liability of
$31,726,000. The components of this net deferred tax liability are as follows:

(In Thousands of Dollars)
December 31
1998 1997
---------- ----------

Operating loss carry forward $ 649 $ 774
Inventory 1,378 1,999
Accrued employee benefits 3,519 4,428
Bad debt reserve 423 959
Other 2,191 2,552
---------- ----------
Deferred tax assets 8,160 10,712

Property related (25,534) (24,277)
Inventory valuation reserve (4,734) (4,734)
Other (150) (286)
---------- ----------
Deferred tax liabilities (30,418) (29,297)
---------- ----------
Net deferred tax liability $ (22,258) $ (18,585)
========== ==========

(11) INDUSTRY SEGMENT INFORMATION

Regal-Beloit's reportable segments are strategic businesses that offer
different products and services. The Company has two such reportable
segments: Mechanical Group and Electrical Group. The Mechanical Group
produces mechanical speed reducers and related products for sale to original
equipment manufacturers and distributors. The Electrical Group produces AC
electric motors, electric generators and related products for sale to original
equipment manufacturers and distributors.

The Company evaluates performance based on the segments' income from
operations. All corporate costs have been allocated to each group based on
the net sales of each group. The reported net sales of each segment are
solely from external customers. No single customer accounts for 10% or more
of the Company's net sales.

The Company's products manufactured and sold outside the United States were
3%, 4% and 7% of net sales in 1998, 1997 and 1996, respectively. Export sales
from U.S. operations were approximately 6% of net sales in 1998, 7% in 1997
and 3% in 1996.

Pertinent data for each industry segment in which the Company operated for
the three years ended December 31, 1998 is as follows:

(In Thousands of Dollars)
-----------------------------------------------------------------------
Net Income From Identifiable Capital Depreciation and
Sales Operations Assets Expenditures Amortization (B)
--------- ---------- ------------ ------------ ----------------

1998
Mechanical Group $ 280,153 $ 45,758 $ 163,740 $ 7,643 $ 10,767
Electrical Group 263,360 35,355 318,282(A) 7,193 11,272
--------- -------- ------------ -------- --------
Total Regal-Beloit Corporation $ 543,513 $ 81,113 $ 482,022 $ 14,836 $ 22,039
========= ======== ============ ======== ========

1997
Mechanical Group $ 285,174 $ 48,545 $ 158,639 $ 9,482 $ 10,767
Electrical Group (9 months results) 201,845 25,836 326,986(A) 6,594 8,107
--------- -------- ------------ -------- --------
Total Regal-Beloit Corporation $ 487,019 $ 74,381 $ 485,625 $ 16,076 $ 18,874
========= ======== ============ ======== ========

1996 (C)
Total Regal-Beloit Corporation $ 281,508 $ 51,120 $ 196,996 $ 11,112 $ 10,578
========= ======== ============ ======== ========

<FN>
(A) Includes $147,161,000 in 1998 and $151,358,000 in 1997 of goodwill relating to the Marathon Electric
acquisition.
(B) Amortization included for Electrical Group only: $4,152,000 in 1998, and $3,124,000 in 1997.
(C) Prior to 1997, the Company's operations were all part of the Mechanical Group.
</FN>

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To the Shareholders of Regal-Beloit Corporation:

We have audited the accompanying consolidated balance sheets of
REGAL-BELOIT CORPORATION (a Wisconsin Corporation) and subsidiaries as of
December 31, 1998 and 1997, and the related consolidated statements of income,
shareholders' investment and cash flows for each of the three years in the
period ended December 31, 1998. These financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.

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

In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Regal-
Beloit Corporation and subsidiaries as of December 31, 1998 and 1997, and the
results of their operations and their cash flows for each of the three years
in the period ended December 31, 1998, in conformity with generally accepted
accounting principles.

Milwaukee, Wisconsin, /s/ Arthur Andersen LLP
-------------------------
January 27, 1999 Arthur Andersen LLP

RESPONSIBILITY FOR FINANCIAL STATEMENTS

The preceding financial statements of Regal-Beloit Corporation and related
footnotes were prepared by management, which is responsible for their
integrity and objectivity. The statements have been prepared in conformity
with generally accepted accounting principles, which have been applied on a
consistent basis.

The system of internal controls of Regal-Beloit Corporation is designed to
assure that the books and records reflect the transactions of the Company and
that its established policies and procedures are carefully followed. The
internal control system is augmented by careful selection and training of
qualified employees, proper division of responsibilities, and the development
and dissemination of written policies and procedures.

Arthur Andersen LLP, whose audit report is shown on this page, is engaged
by the Board of Directors to audit the financial statements of Regal-Beloit
Corporation and issue reports thereon. Their audit is conducted in accordance
with generally accepted auditing standards which require obtaining an
understanding of the Company's systems and procedures and performing tests
and other procedures sufficient to provide reasonable assurance that the
financial statements are neither materially misleading nor contain material
errors.

The Audit Committee of the Board of Directors, which committee consists
entirely of outside directors, meets regularly with the independent public
accountants and management to review the scope and results of audits.
In addition, the Audit Committee meets with Arthur Andersen LLP, without
management representatives present, to discuss the results of their audit
including a discussion of internal accounting controls, financial reporting
and other audit matters.

/s/ James L. Packard /s/ Kenneth F. Kaplan
-------------------- ---------------------
James L. Packard Kenneth F. Kaplan
Chairman, President, Vice President,
Chief Executive Officer Chief Financial Officer
and Secretary

DIVISIONS & SUBSIDIARIES REGAL-BELOIT CORPORATION
- ------------------------ ------------------------

ELECTRICAL GROUP MECHANICAL GROUP----------------------------------------------------------

Domestic Domestic International
- -Marathon Electric -Durst -Mastergear U.S.A. -Costruzioni
Manufacturing Shopiere, WI South Beloit, IL Meccaniche
Wausau, WI Legnanesi S.r.L.
Legnano. Italy
- -Marathon Special -Electra-Gear -Ohio Gear/
Products Anaheim, CA Richmond Gear
Bowling Green, OH Liberty, SC -Mastergear (GmbH)
Neu-Anspach,
-Foote-Jones/ -Regal Cutting Tools Germany
International Illinois Gear National Twist Drill
- -Marathon Electric Ltd. Chicago, IL New York Twist Drill -Opperman Mastergear,
Singapore, Republic of South Beloit, IL Ltd.
Singapore -Grove Gear Newbury, England
Union Grove, WI -Velvet Drive
- -Marathon Electric - Transmissions
U.K. -Hub City New Bedford, MA
Leicestershire, England Aberdeen, SD

SHAREHOLDER INFORMATION
- -------------------------------------------------------------------------------

Corporate Headquarters
- ----------------------
Regal-Beloit Corporation
200 State Street, Beloit, WI 53511-6254
Phone: (608) 364-8800 Fax: (608) 364-8818

Transfer Agent, Registrar and Dividend Disbursing Agent
- -------------------------------------------------------
First Class, Registered
-----------------------
& Certified Mail
---------------- Overnight Courier
BankBoston, NA EquiServe
EquiServe Blue Hills Office Park
P.O. Box 8040 150 Royall Street
Boston, MA 02266-8040 Canton, MA 02021

Phone: (781) 575-3400 Fax: (781) 575-2665

Have you received your cash dividends?
- --------------------------------------
During 1998, four quarterly cash dividends were declared on Regal-Beloit
Corporation common stock. If you have not received all dividends to which
you are entitled, please write or call BankBoston at the address above.

Stock Listing
- -------------
Regal-Beloit stock was first traded publicly in 1969. The Corporation began
trading on the American Stock Exchange in 1976 under the symbol RBC.

Cash Dividends and Stock Splits
- -------------------------------
Regal-Beloit Corporation paid its first cash dividend in January, 1961. Since
that date, Regal-Beloit has paid 154 consecutive quarterly dividends through
January, 1999. The Company has raised cash dividends 33 times in the 38 years
these dividends have been paid. The dividend has never been reduced. The
company has also declared and issued 15 stock splits/dividends since
inception.

Stock Purchases
- ---------------
A shareholder should make sure that newly purchased shares are registered the
same way each time they add to their holdings in order to prevent the creation
of duplicate accounts. Such accounts are not only an inconvenience to the
shareholder, but also increase your Company's administrative costs.

Notice of Annual Meeting
- ------------------------
The Annual Meeting of shareholders will be held at 10:30 a.m.,
C.D.T., on Wednesday, April 21, 1999, at the Corporate Offices,
200 State Street, Beloit, Wisconsin.

Form 10-K
- ---------
A copy of the report filed by the Company with the Securities and Exchange
Commission is available to shareholders upon request.

Please direct requests to:
Regal-Beloit Corporation
Attn: Investor Relations
200 State Street, Beloit, WI 53511-6254

Auditors
- --------
Arthur Andersen LLP, Milwaukee, Wisconsin.

Regal-Beloit Corporation is a Wisconsin Corporation listed on the
- -----------------------------------------------------------------
American Stock Exchange under the symbol RBC.
- --------------------------------------------