VARLEN CORP, 10-K405, 1998-04-20

VARLEN CORP
10-K405, 1998-04-20
MOTOR VEHICLE PARTS & ACCESSORIES

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<PAGE>

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 January 31, 1998

/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)OF THE SECURITIES EXCHANGE
ACT OF 1934

For the transition period from ___________________ to ____________________

Commission file number 0-5374

VARLEN CORPORATION
- -------------------------------------------------------------------------------

(Exact name of Registrant as specified in its charter)

DELAWARE 13-2651100

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

55 Shuman Boulevard
P. O. Box 3089
Naperville, Illinois 60566-7089
--------------------- ----------
(Address of principal executive offices) (Zip Code)

Registrant's telephone number, including area code (630) 420-0400
--------------
Securities registered pursuant to Section 12(b) of the Act:

Name of each exchange
Title of each class on which registered
NONE NONE
------------------- ---------------------
Securities registered pursuant to Section 12(g) of the Act:

COMMON STOCK, PAR VALUE $.10 PER SHARE
--------------------------------------
(Title of Class)

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

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained 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. [X]

The aggregate market value of the voting stock held by non-affiliates of the
Registrant, as of April 1, 1998, was $470,939,366.

The number of outstanding shares of the Registrant's Common Stock, par value
$.10 per share, as of the close of business on April 1, 1998, was 13,382,157
shares.

<PAGE>

DOCUMENTS INCORPORATED BY REFERENCE

1. The Registrant's Proxy Statement filed pursuant to Regulation 14A within
120 days after January 31, 1998, is incorporated herein by reference to the
following extent: Industry Segments and Officers into Part I; Summary of
Operations, Summary of Financial Condition, Shares Listed, Quarterly Market
and Dividend Information, Management's Discussion and Analysis of Financial
Condition and Results of Operations, Consolidated Balance Sheets,
Consolidated Statements of Earnings, Consolidated Statements of
Stockholders' Equity and Consolidated Statements of Cash Flows with related
Notes and Independent Auditors' Report into Part II; and the information
set forth under the captions, Election of Directors, Executive Compensation
and Pension Plans, Compensation Committee Interlocks and Insider
Participation and Security Ownership of Certain Beneficial Owners and
Management into Part III.

<PAGE>

PART I

Item 1. BUSINESS

GENERAL

Varlen Corporation (the "Registrant") designs, manufactures, and markets
products used in the manufacturing of transportation equipment (Transportation
Products segment) and petroleum analysis equipment (Petroleum Analyzers
segment). The companies in each segment have been aggregated based on the
similarity of the products manufactured, production processes, types of
customers, distribution methods and economic factors impacting the companies in
each segment.

The Registrant's principal business strategy is to employ its product
development capabilities, advanced manufacturing processes and marketing skills
in market niches where the Registrant can achieve a market leadership position.
The Registrant's operations are conducted primarily through subsidiaries that
are relatively autonomous, while its small corporate headquarters staff provides
strategic direction, oversees financial controls and arranges financing.
Management's philosophy emphasizes continuous improvements in quality, product
performance and delivery time, cost reductions and other value adding
activities. Because many markets for the Registrant's products are mature, the
Registrant seeks growth opportunities through the development of new products,
the improvement of existing products and the acquisition of products that can be
sold through its distribution networks. In addition, the Registrant's
development efforts increasingly focus on new products specifically designed for
international markets.

DEVELOPMENT OF THE COMPANY

The Registrant was founded in 1969 for the purpose of acquiring and managing
businesses which manufacture products for several industries. Over the years
the Registrant restructured its operations to serve the transportation and
petroleum analyzer industries. Acquisitions made within the last five years
include the purchases in late 1997 of the railroad divisions of Ringfeder GmbH
and Hanacke Zelzarny a Perovny, a.s. suppliers to the Registrant's German
railcar cushioning device maker Karl Georg Bahntechnik GmbH which was purchased
in late 1996 and the Petrospec-Registered Trademark- product line of portable
laboratory and process petroleum analyzers for which it had been the exclusive
worldwide distributor of these products; Brenco, Incorporated, purchased in mid
1996, a manufacturer and reconditioner of specialized tapered roller bearings
for railroad freight cars and locomotives; and Prime Manufacturing Corporation,
purchased in late 1994, a manufacturer of a wide range of products for railroad
locomotives including heating, ventilating, air conditioning units and valves.
The following provides basic information with respect to the Registrant's
current operations:

PRODUCTS AND PRIMARY MARKETS

TRANSPORTATION PRODUCTS

The companies in this segment manufacture components and sub-assemblies for
vehicles and rolling stock for original equipment manufacturers and tightly
related aftermarkets in the transportation industry.

<PAGE>

The Registrant manufactures products which it sells in global markets to
locomotive and railcar manufacturers, railroads and railcar maintenance
facilities, lessors, and track maintenance contractors. The primary products
are tapered roller bearings, hydraulic cushioning devices, draft gears, buffers,
ring springs and discharge gates for railcars; and roller bearings, HVAC
systems, draft gears and valves for locomotives. Additional products include to
a lesser extent railroad track fasteners, valves, and remanufactured
crankshafts. The Registrant also manufactures products which it sells primarily
to North American Class 8 truck and over-the-road trailer manufacturers. The
primary products are aluminum permanent mold and die-cast products including
axle hubs, suspension components, transmission housings, spring brake
components, and structural molded plastic products including instrument panels,
sleeper cab accessories and door sill assemblies. In addition, the Registrant
manufactures products which it sells primarily in North American markets to
original equipment automotive manufacturers, tier one suppliers and aftermarket
transmission rebuilders for use on cars and light trucks. The primary products
are automatic transmission components including reaction plates and one-way
clutches, steering column components and other precision stamped metal
components and weldments.

PETROLEUM ANALYZERS

These products are sold worldwide to oil refineries, petro-chemical plants,
petroleum transporters and large users of distillate products. The primary
products are automated laboratory quality control instruments, on-line
process analyzers, manual and semi-automatic physical property analyzers,
portable opto-electronic analyzers, certification samples and petroleum
testing services.

TRANSPORTATION PRODUCTS

The companies in this segment manufacture components and sub-assemblies for
vehicles and rolling stock primarily for a limited number of original equipment
manufacturers who collectively have significant market share and for selected
tightly related aftermarkets in the transportation industry. The products sold
to this industry follow the same economic cycle with the same economic factors
including industrial production, interest rates, GDP growth, price of fuel/metal
and labor costs impacting their financial performance. The products in this
segment are manufactured by forming metal or plastic through casting, molding,
stamping, forging and machining with limited secondary operations. The products
are distributed mainly through its direct/technical sales force. The following
is a discussion of this segment by the markets served.

The Registrant is a leading manufacturer and reconditioner of tapered roller
bearings for freight cars and locomotives in both domestic and international
markets. The tapered roller bearing is an anti-friction bearing that contains
steel rollers that turn as the axle rotates. They are particularly adapted to
reducing friction where wheels are used. These products are sold to both
original equipment manufacturers ("OEM's") and the aftermarket.

The Registrant is also a leading manufacturer of energy absorption devices
which are sold in the domestic and international markets to OEM's and the
aftermarket. Their purpose is to minimize or prevent damage to locomotives,
railcars and their cargoes. These products consist of hydraulic cushioning
devices, draft gear cushioning devices, buffers and metal ring springs.
Hydraulic cushioning devices are used on locomotives and rail cars to protect
hi-value/easily damaged cargo (automobiles, equipment, etc.) from damage
whereas draft gears, buffers and ring

<PAGE>

springs are used on locomotives and passenger cars, and freight cars
transporting less easily damaged goods (coal, ore, grains, etc.) to protect
the rail cars themselves from damage.

The Registrant also manufactures other engineered products for the domestic and
international market. The products include HVAC units, toilets, valves, and
remanufactured crankshafts for locomotives, discharge gates for railcars, and
rail anchors. Rail anchors are forged steel devices which are attached directly
to the rail track and are designed to prevent the rail from longitudinal
movement or buckling as a result of traffic and temperature conditions.

Through acquisitions and ongoing product development, the Registrant is
committed to expanding its market share in both the North American and
international railroad markets. The focus continues on opportunities in Europe
and Asia. The Registrant believes that its experience and technological
leadership in the North American railroad freight market can be successfully
transferred to these markets. As the European community opens its borders,
European rail hauls are becoming longer and use heavier freight cars, requiring
more sophisticated cushioning and tapered roller bearing products. Recent
acquisitions made by the Registrant has further improved the Registrant's access
into the European rail market.

North American railroads have a large share of the freight transportation
market. In spite of continuing industry consolidation, the Registrant believes
that the continuing increase in freight rail traffic should continue to create
demand for the Registrant's products as new locomotives and rail cars are built,
old locomotives and rail cars are refurbished and the railroads expend funds to
maintain and improve their tracks. As freight railroad systems are expanded and
updated throughout the world, the Registrant believes that its wide-range of
highly engineered products should be well positioned to meet the growing demand.

In the railroad market, the Registrant's products compete on engineering
features, quality, service and price. There are a small number of competitors
in each of the above described markets. New competitors in the Registrant's
rail products markets have been discouraged from entering these markets because
of the relatively large capital investment required, the time it takes to
receive railroad approval of particular designs and products and the relatively
mature status of these markets. However, the existing competitors in these
markets continue to compete intensely.

The Registrant designs, manufactures and markets lightweight aluminum and
plastic components for heavy-duty over-the-road trucks and trailers in domestic
and international markets. The customer base for these products is original
truck and trailer manufacturers and tier 1 component manufacturers. Production
remains at strong levels in this industry due to continued general economic
strength.

The Registrant continues to benefit from two important market trends in new
trucks. Driver appeal and comfort is emphasized because of the shortage in
over-the-road drivers, so trucking companies use this as a strategy to increase
retention. Manufacturers are looking for ways to reduce truck weights, which
helps trucking firms carry heavier payloads and reduce fuel costs. In addition,
manufacturers make decisions about suppliers based on the best product
engineering, price and service. Contracts usually run for several years, making
this a relationship business.

The Registrant's high-quality products fit industry trends. Its lightweight
structural plastic truck components make truck interiors more operator friendly
and its cast aluminum truck hubs and
<PAGE>

components offer cost advantages over forged aluminum and significant weight
saving advantages over steel and iron without sacrificing strength.

The Registrant's truck component business has benefited from its new product
development, its customer base expansion and increased penetration with key
customers, such as two industry leaders, Freightliner and PACCAR. Also
benefiting the Registrant was the recent introduction of new trucks by
Freightliner and PACCAR which have higher product content of the Registrant than
previous models. With certain of its larger customers, the Registrant has been
able to establish itself as a sole source supplier of certain components.

The Registrant's heavy-duty truck products compete with similar products on
quality, engineering expertise, delivery and price. These products compete with
products that are functionally similar but are manufactured from different
materials or using different industrial processes. The Registrant believes that
its ability to offer products that are designed and engineered to solve customer
problems is a significant factor in establishing and maintaining these customer
relationships and enhancing its opportunities for expansion in export markets.

For the automotive industry, the Registrant produces precision stamped metal
components predominantly for use in steering and automatic transmission
systems. The Registrant's ability to design and engineer tight tolerance
components that can be manufactured in high volume with high quality ratings
has enabled it to become a direct supplier to original equipment
manufacturers, principally divisions of General Motors Corporation ("GM"),
Chrysler Corporation ("Chrysler") and Ford Motor Company ("Ford"). The
Registrant also sells automotive parts to both U.S. and foreign-owned
manufacturers that sell directly to GM, Chrysler and Ford. Its highest
product content is in the light truck segment which includes pickup trucks,
vans and sport utility vehicles.

Industry demand for passenger vehicles has been relatively level over the last
several years, although the light-truck market (including sports utility
vehicles, vans and pickups) has been increasing. The Registrant has a close
relationship with GM, and all of its models carry the Registrant's parts. The
ability of GM to increase light truck production during the current year has
benefited the Registrant. In addition, sales are increasing to Ford due to new
product introductions.

Among the Registrant's principal automotive products are steel reaction plates
that are used in automatic transmissions. It's most significant new automotive
product is its patented Means One-Way Clutch for automatic transmissions. The
first commercial shipment of this product was to Ford in the second quarter of
1997. Other automakers are currently reviewing this product for their use. The
product has significant growth potential because of its superior performance
characteristic and competitive price in comparison to other designs. Due to the
potential of this product, the Registrant acquired expanded rights to this
technology during 1997 which includes world-wide opportunities in the automobile
industry as well as applications for trucks, tractors and other industrial
equipment. In the international markets, the Registrant had its first full year
of exports to France under a 1996 contract with GM for automotive transmission
reaction plates.

Competition for the sale of these products is intense, coming from numerous
companies, including divisions of automobile manufacturers, which have
comparable facilities and greater financial and other resources than the
Registrant. The Registrant competes for sale of these

<PAGE>

products on quality, just-in-time delivery, price and particularly in regards
to the Means One-Way Clutch, technological advances.

OTHER INFORMATION

The primary materials used for the manufacture of products in this segment
are cold rolled and hot rolled steel, special alloy steel bar, castings,
forgings, tubing and rod, powdered metal components, aluminum ingots and
plastic resin. The Registrant has not experienced significant difficulties in
obtaining such materials, although long lead times exist for certain steel
products. The machinery and equipment used for the manufacturing of these
products, which management considers adequate for current operations consist
primarily of heavy-duty forging and heat-treating equipment, metal cutting
machine tools, grinding equipment, heavy-duty metal stamping equipment,
welding equipment, injection molding presses, casting equipment, tools, dies,
furnaces, molds, painting and plating equipment.

Backlog for this industry segment was $123.1 million, $75.1 million and $60.2
million as of January 31, 1998, 1997 and 1996, respectively. All of the current
backlog is expected to be filled during the current fiscal year.

Sales of transportation products to Freightliner amounted to 15% of total
sales in each of 1997, 1996 and 1995, respectively. In addition, the
Registrant's sales of tapered roller bearings for railroad freight cars and
locomotive engines was 14% of total sales in 1997, the Registrant's sales of
aluminum hubs and hub assemblies accounted for 12%, 12% and 14% of the
Registrant's total sales in 1997, 1996 and 1995, respectively, and sales of
cushioning devices and related parts for railroad freight cars and locomotive
engines accounted for 11% of the Registrant's total sales in 1995.

PETROLEUM ANALYZERS

The companies in this segment design, manufacture and market instruments which
analyze the physical properties of petroleum products, such as freeze point,
flash point, pour point, viscosity, vapor pressure and octane levels; engages in
the testing of petroleum products; and sells petroleum product reference
samples. The instruments, testing services and reference samples are used for
quality assurance purposes to test for compliance with industry standards and to
enhance refinery efficiency. These products and services are used in petroleum
refineries, and by transporters and end-users of petroleum products.

The Registrant's petroleum analysis instruments are sold world-wide to petroleum
refiners (of which there are over 600) and to transporters, governmental
agencies, pipeline companies and large users of petroleum products (airlines,
railroads and the U.S. military). Although the number of U.S. refineries is
declining, the Registrant's sales to overseas refiners and to existing
refineries in the process of upgrading and automating their production processes
along with new instruments brought to market by the Registrant are expected to
provide growth opportunities. The Registrant's ability to engineer on-line
analyzers for specific application and to provide timely service at their places
of installation is of competitive importance. With manufacturing facilities in
the United States and Germany, and service and distribution locations in key
strategic domestic and international markets, the Registrant believes it is
well-positioned to maintain a leading position in this global market. The
Registrant's petroleum analysis instruments compete

<PAGE>

primarily on product quality, engineering features, reliability and service.
There are a limited number of competitors in this narrow market, some of
which use alternate technologies.

OTHER INFORMATION

The primary materials used for the manufacture of the products in this segment
are stainless steel, cold rolled carbon steel and electronic components. The
Registrant has not experienced any difficulties in obtaining such materials.
Marketing of these products is done through company sales personnel, independent
sales representative and distributors throughout the U.S. and international
markets. The machinery and equipment used for the manufacturing of these
products, which management considers adequate for current operations, consist
primarily of metal forming, fabrication, welding, and painting equipment,
together with a complement of tools, dies, jigs and gauges.

Backlog for this industry segment was $5.0 million, $3.4 million and $3.5
million as of January 31, 1998, 1997 and 1996, respectively. All of the current
backlog is expected to be filled during the current fiscal year.

EXPORT SALES

Export sales from the Registrant's United States operations were 11%, 10% and
10%, respectively, of consolidated net sales in 1997, 1996 and 1995.

RESEARCH AND DEVELOPMENT

In 1997, 1996 and 1995, the Registrant spent $8.0 million, $9.5 million and $5.9
million, respectively, on research and development activities, all of which was
Registrant sponsored. Of these amounts, research and development spending on new
products was $5.7 million, $6.3 million and $3.1 million for 1997, 1996 and
1995, respectively.

PATENTS, TRADE NAMES AND TRADEMARKS

The Registrant applies for and maintains patents, trade names and trademarks
where the Registrant believes that such patents, trade names and trademarks are
reasonably required to protect the Registrant's rights in its products. The
Registrant does not believe that any single patent, trade name or trademark or
related group of such rights, other than the "Brenco", "ConMet", "Precision
Scientific Petroleum Instruments", "Petrospec" and "Herzog" trade names and
related trademarks, and the "Means one-way clutch" patent license are materially
important to its businesses or its ability to compete. In many instances the
Registrant's technology is not patented but is maintained by the Registrant as
proprietary.

SEASONALITY

In non-recessionary times, the Registrant's first quarter has historically been
the strongest quarter of the year. During the second and fourth quarters, the
Registrant traditionally encounters scheduled vacation and holiday shutdowns and
slowdowns at customers' manufacturing plants.

<PAGE>

EMPLOYEES

As of January 31, 1998, the Registrant employed a total of 3,177 persons, 2,906
of whom were employed in its Transportation Products segment, 250 of whom were
employed in its Petroleum Analyzers segment and 21 of whom were employed at the
Registrant's corporate headquarters. Of the employees employed by the
Transportation Products and Petroleum Analyzers segments, 757 and 39,
respectively, are covered by collective bargaining agreements. The Registrant
believes it has a good working relationship with its employees.

ENVIRONMENTAL MATTERS

The Registrant's manufacturing operations are subject to federal, state, local
and foreign environmental laws and regulations which impose limitations on the
discharge of pollutants into the air and water and establish standards for the
treatment, storage and disposal of hazardous waste. The Registrant has
established a company-wide environmental compliance program that stresses
periodic environmental audits and management review of compliance procedures at
the operating company level. The Registrant believes that it is in substantial
compliance with applicable environmental laws and regulations.

Compliance with these environmental laws and regulations has not had, nor is it
expected to have, a material effect on the Registrant's earnings, competitive
position or capital expenditures through fiscal 1999. The amount of capital
expenditures expected to be spent on environmental compliance costs in fiscal
1998 and 1999 are approximately $686,000 and $229,000, respectively.

<PAGE>

EXECUTIVE OFFICERS OF THE REGISTRANT

Reference is made to the information set forth under the caption "Officers" in
the Registrant's Proxy Statement filed pursuant to Regulation 14A within 120
days after January 31, 1998, which information is incorporated herein by
reference.

Item 2. PROPERTIES

The following table sets forth certain information with respect to the principal
properties of the Registrant. The expiration date of each applicable lease is
given for leased properties; all other properties are owned. Unless otherwise
noted, all properties are manufacturing facilities. All of the Registrant's
listed plants are being utilized, are in good operating condition and are
suitable for its current needs. These facilities are expected to meet the
Registrant's manufacturing needs in the foreseeable future.

<TABLE>
<CAPTION>
Expiration Date Approximate
Approximate of Lease Capacity
Operation Square Feet (if applicable) Utilization(1)
- --------- ----------- --------------- --------------
<S> <C> <C> <C>
Executive Office 12,000(2) 9/30/02 N/A
Naperville, IL

Transportation Products
- -----------------------
Little Rock, AR 52,000 N/A 25%
Bell Gardens, CA 18,000 N/A 40%
Chicago, IL 32,000 N/A 50%
Atchison, KS 60,000 N/A 50%
McPherson, KS 94,000 N/A 50%
Louisville, KY 45,000 1/31/99 30%
Melvindale, MI 45,000 N/A 50%
Saginaw, MI 77,000 N/A 60%
Vassar, MI 76,000 N/A 65%
Bryson City, NC 162,000 N/A 80%
Cashiers, NC 96,000 N/A 85%
Monroe, NC 114,000 N/A 90%
Sparks, NV 36,000 9/30/00 30%
Clackamas, OR 55,000 N/A 90%
Portland, OR 166,000 N/A 75%
Camp Hill, PA 95,000 N/A 50%
Petersburg, VA 412,000 N/A 55%
Oak Creek, WI 72,000 N/A 25%
Halberstadt, Germany 27,000 N/A 50%
Krefeld, Germany (3) 29,000 10/31/99 35%
Neitersen, Germany 89,000 12/31/11 75%
Ploermel, France 70,000 9/1/03 60%
Prostejov, Czech Republic (3) 50,000 N/A 75%
</TABLE>
<PAGE>

Petroleum Analyzers
- -------------------
<S> <C> <C> <C>
Bellwood, IL 42,000 5/31/01 35%
Marlborough, MA (4) 10,000 11/30/00 25%
San Antonio, TX 28,000 4/30/99 35%
Lauda, Germany 24,000 N/A 20%

</TABLE>

(1) Full capacity being deemed a 24 hour day, 7 day week for this purpose.
(2) Office space.
(3) The related locations are from acquisitions in the third quarter of fiscal
1997.
(4) The related location is from an acquisition in the fourth quarter of fiscal
1997.
N/A - Not Applicable.

Item 3. LEGAL PROCEEDINGS

Not applicable.

Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

Not applicable.

PART II

Item 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS

Reference is made to the information set forth under the captions "Quarterly
Market and Dividend Information" and "Shares Listed" in the Registrant's Proxy
Statement filed pursuant to Regulation 14A within 120 days after January 31,
1998, which information is hereby incorporated herein by reference. Note: The
information contained under the caption "Quarterly Market and Dividend
Information" in the Registrant's Proxy Statement includes over-the-counter
market quotations which reflect interdealer prices, without retail mark-up,
mark-down or commission and may not necessarily represent actual transactions.

Item 6. SELECTED FINANCIAL DATA

Reference is made to the information set forth under the captions "Summary of
Operations" and "Summary of Financial Condition" in the Registrant's Proxy
Statement filed pursuant to Regulation 14A within 120 days after January 31,
1998, which information is hereby incorporated herein by reference.

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

Reference is made to the information set forth under the caption, "Management's
Discussion and Analysis of Financial Condition and Results of Operations" in the
Registrant's Proxy Statement filed pursuant to Regulation 14A within 120 days
after January 31, 1998, which information is hereby incorporated herein by
reference.

<PAGE>

Item 7a. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Not applicable.

Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Reference is made to the information set forth under the captions "Consolidated
Balance Sheets", "Consolidated Statements of Earnings", "Consolidated Statements
of Stockholders' Equity", "Consolidated Statements of Cash Flows", "Notes to
Consolidated Financial Statements" and "Independent Auditors' Report" in the
Registrant's Proxy Statement filed pursuant to Regulation 14A within 120 days
after January 31, 1998, which information is hereby incorporated herein by
reference.

Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE

Not applicable.

PART III

Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

Reference is made to the information set forth under the caption "Election of
Directors" in the Registrant's Proxy Statement filed pursuant to Regulation 14A
within 120 days after January 31, 1998, which information is incorporated herein
by reference, and to the information set forth under the caption "Executive
Officers of the Registrant", which appears as a separate item immediately
preceding Item 2 included in PART I hereof, which information is incorporated
herein by reference.

None of the executive officers bear any family relationship to one another. The
executive officers of the Registrant are elected annually by the Board of
Directors.

Item 11. EXECUTIVE COMPENSATION

Reference is made to the information set forth under the caption "Executive
Compensation" in the Registrant's Proxy Statement filed pursuant to Regulation
14A within 120 days after January 31, 1998, which information is hereby
incorporated herein by reference.

Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

Reference is made to the information set forth under the captions "Election of
Directors" and "Security Ownership of Certain Beneficial Owners and Management"
in the Registrant's Proxy Statement filed pursuant to Regulation 14A within 120
days after January 31, 1998, which information is hereby incorporated herein by
reference.

Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

Not applicable.

<PAGE>

PART IV

Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULE AND REPORTS ON FORM 8-K

(a) (1),
(a) (2)
& (d) FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULE
The consolidated financial statements, together with the related
notes and supporting schedule filed as part of this Form 10-K, are
listed in the accompanying Index to Consolidated Financial Statements
and Schedule.

(b) REPORTS ON FORM 8-K

None
(a) (3)
& (c) EXHIBITS

Set forth below is a list of the Exhibits to this Form 10-K in
accordance with the requirements of Items 14(a) (3) and (c) of
Form 10-K and Item 601 of Regulation S-K:

(3) (i) Registrant's Restated Certificate of Incorporation as amended through
October 1, 1996 (incorporated herein by reference to Exhibit 4.2 of
the Registrant's Form S-3 Registration Statement as filed on
August 19, 1997).

(ii) Registrant's By-laws, as amended through November 20, 1995
(incorporated herein by reference to Exhibit (3)(ii) to the
Registrant's Annual Report on Form 10-K for the fiscal year ended
January 31, 1996) as further amended on June 17, 1996 (incorporated
herein by reference to Exhibit (3)(ii) to the Registrant's Quarterly
Report on Form 10-Q for the fiscal quarter ended August 3, 1996), as
further amended on May 29, 1997 (incorporated herein by reference to
Exhibit 4.3 of the Registrant's Form S-3 Registration Statement as
filed on August 19, 1997).

(4) (a) Rights Agreement dated as of June 17, 1996 (incorporated herein by
reference to Exhibit 4(a) to the Registrant's Quarterly Report on
Form 10-Q for the fiscal quarter ended August 3, 1996).

(b) Credit Agreement by and among the Registrant, the Borrowing
Subsidiaries and the Lenders Party Thereto and The First National
Bank of Chicago, as Agent, dated as of July 19, 1996 (incorporated
herein by reference to Exhibit (4)(b) to the Registrant's Quarterly
Report on Form 10-Q for the fiscal quarter ended August 3, 1996), as
amended on October 15, 1996 (incorporated herein by reference to
Exhibit (4)(a) to the Registrant's Quarterly Report on Form 10-Q for
the fiscal quarter ended November 2, 1996), as further amended on
January 17, 1997 (incorporated herein by reference to Exhibit (4)(d)
to the Registrant's Annual Report on Form 10-K for the fiscal year
ended January 31, 1997), as further amended on December 30, 1997.

<PAGE>

(10) (a) Registrant's 1980 Incentive Stock Option Plan, as amended
(incorporated herein by reference to Exhibit (10)(b) to the
Registrant's Annual Report on Form 10-K for the fiscal year ended
January 31, 1989) and as further amended on March 26, 1990
(incorporated herein by reference to Exhibit (10)(b) to the
Registrant's Annual Report on Form 10-K for the fiscal year ended
January 31, 1990).

(b) Varlen Corporation Profit Sharing and Retirement Savings
Plan as amended and restated generally effective July 1, 1994
(incorporated herein by reference to Exhibit (10) (b) to the
Registrant's Annual Report on Form 10-K for the fiscal year ended
January 31, 1995), as further amended effective January 1, 1997.

(c) Registrant's 1989 Incentive Stock Option Plan, (incorporated herein
by reference to Exhibit (10)(h) to the Registrant's Annual Report on
Form 10-K for the fiscal year ended January 31, 1989) and as further
amended on March 26, 1990 (incorporated herein by reference to Exhibit
(10)(g) to the Registrant's Annual Report on Form 10-K for the fiscal
year ended January 31, 1990).

(d) Varlen Corporation Excess Benefits Plan (incorporated herein by
reference to Exhibit (10)(i) to the Registrant's Annual Report on
Form 10-K for the fiscal year ended January 31, 1990).

(e) Varlen Corporation Supplemental Executive Retirement Plan
(incorporated herein by reference to Exhibit (10)(j) to the
Registrant's Annual Report on Form 10-K for the fiscal year ended
January 31, 1990).

(f) Trust Agreement Between Varlen Corporation and Fidelity
Management Trust Company dated November 30, 1992 (incorporated herein
by reference to Exhibit (10)(g) to the Registrant's Annual Report on
Form 10-K for the fiscal year ended January 31, 1993).

(g) Form of letter agreement between the Registrant and Richard L. Wellek
(incorporated herein by reference to Exhibit (10)(j) to the
Registrant's Annual Report on Form 10-K for the fiscal year ended
January 31, 1993).

(h) Form of letter agreement between the Registrant and each of
Richard A. Nunemaker, Raymond A. Jean and George W. Hoffman
(incorporated herein by reference to Exhibit (10)(k) to the
Registrant's Annual Report on Form 10-K for the fiscal year ended
January 31, 1993).

(i) Registrant's 1993 Incentive Stock Option Plan adopted May 25, 1993
(incorporated herein by reference to Exhibit (10)(k) to the
Registrant's Annual Report on Form 10-K for the fiscal year ended
January 31, 1994).

(j) Registrant's 1993 Directors Incentive Stock Grant Plan adopted May 25,
1993 (incorporated herein by reference to Exhibit (10)(l) to the
Registrant's Annual Report on Form 10-K for the fiscal year ended
January 31, 1994), as amended May 29, 1997 (incorporated herein by
reference to Exhibit (10)(l) to the Registrant's Quarterly Report on
Form 10-Q for the fiscal quarter ended May 3, 1997).

<PAGE>

(k) Registrant's 1993 Deferred Incentive Stock purchase Plan adopted
May 25, 1993 (incorporated herein by reference to Exhibit (10)(m) to
the Registrant's Annual Report on Form 10-K for the fiscal year ended
January 31, 1994) as amended on February 3, 1997 (incorporated herein
by reference to Exhibit (10)(m) to the Registrant's Annual Report on
Form 10-K for the fiscal year ended January 31, 1997).

(l) Varlen Corporation Excess Benefit Plan Trust Agreement dated
December 1, 1994 (incorporated herein by reference to Exhibit (10)(n)
to the Registrant's Annual Report on Form 10-K for the fiscal year
ended January 31, 1995).

(m) Form of Indemnification Agreement Dated as of June 17, 1996
(incorporated herein by reference to Exhibit 10 to the Registrant's
Quarterly Report on Form 10-Q for the fiscal quarter ended
August 3, 1996).

(n) Deferred long-term incentive grant to Richard L. Wellek dated
February 2, 1998.

(o) Deferred long-term incentive grant to Raymond A. Jean dated
February 2, 1998.

(p) Deferred long-term incentive grant to Richard A. Nunemaker
dated February 2, 1998.

(13) 1997 Summary Annual Report to Stockholders.

(21) List of Subsidiaries.

(23) Consent of Deloitte & Touche LLP.

(24) Board of Directors' power of attorney for the signing of Varlen
Corporation's 1997 Annual Report on Form 10-K.

(27) Financial Data Schedule.

<PAGE>

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.

VARLEN CORPORATION
(Registrant)

By: /S/ RICHARD A. NUNEMAKER
------------------------------
Richard A. Nunemaker
Vice President, Finance and
Chief Financial Officer

Dated: April 20, 1998

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 and on the dates indicated.

SIGNATURE TITLE DATE

/S/ RICHARD L. WELLEK Chairman, and Chief Executive April 20, 1998
- ------------------------ Officer
Richard L. Wellek (Principal Executive Officer)

/S/ RICHARD A. NUNEMAKER Vice President, Finance April 20, 1998
- ------------------------ and Chief Financial Officer
Richard A. Nunemaker (Principal Financial Officer and
Principal Accounting Officer)

<PAGE>

SIGNATURE DATE

/S/ RICHARD A. NUNEMAKER April 20, 1998
- ------------------------
Richard A. Nunemaker
as attorney-in-fact for
Rudolph Grua, Director

/S/ RICHARD A. NUNEMAKER April 20, 1998
- ------------------------
Richard A. Nunemaker
as attorney-in-fact for
Ernest H. Lorch, Director

/S/ RICHARD A. NUNEMAKER April 20, 1998
- ------------------------
Richard A. Nunemaker
as attorney-in-fact for
L. William Miles, Director

/S/ RICHARD A. NUNEMAKER April 20, 1998
- ------------------------
Richard A. Nunemaker
as attorney-in-fact for
Greg A. Rosenbaum, Director

/S/ RICHARD A. NUNEMAKER April 20, 1998
- ------------------------
Richard A. Nunemaker
as attorney-in-fact for
Joseph J. Ross, Director

/S/ RICHARD A. NUNEMAKER April 20, 1998
- ------------------------
Richard A. Nunemaker
as attorney-in-fact for
Theodore A. Ruppert, Director

<PAGE>

VARLEN CORPORATION
AND SUBSIDIARIES

Annual Report (Form 10-K)

Consolidated Financial Statements and Schedule

Submitted in Response to Item 14

Years ended January 31, 1998, 1997 and 1996

<PAGE>

VARLEN CORPORATION
AND SUBSIDIARIES

Index to Consolidated Financial Statements and Schedule

CONSOLIDATED FINANCIAL STATEMENTS
INCORPORATED BY REFERENCE

The consolidated balance sheets of the Registrant and subsidiaries as of January
31, 1998 and 1997, and the related consolidated statements of earnings,
consolidated statements of stockholders' equity and consolidated statements of
cash flows for each of the years in the three-year period ended January 31,
1998, together with the related notes and the report of Deloitte & Touche LLP,
independent auditors, all contained in the Registrant's Proxy Statement filed
pursuant to Regulation 14A within 120 days after January 31, 1998, are
incorporated herein by reference thereto. The following additional consolidated
financial information should be read in conjunction with the consolidated
financial statements in such Proxy Statement. All other schedules are omitted
as the required information is inapplicable or the information is presented in
the financial statements or related notes.

ADDITIONAL CONSOLIDATED FINANCIAL INFORMATION

- Schedule:

- II - Valuation and Qualifying Accounts

<PAGE>

INDEPENDENT AUDITORS' REPORT

Board of Directors and Stockholders
Varlen Corporation
Naperville, Illinois

We have audited the consolidated financial statements of Varlen Corporation and
subsidiaries as of January 31, 1998 and 1997, and for each of the three years in
the period ended January 31, 1998, and have issued our report thereon dated
March 2, 1998; such consolidated financial statements and report are included in
your 1998 Proxy Statement for Annual Meeting of Stockholders and are
incorporated herein by reference. Our audits also included the consolidated
financial statement schedule of Varlen Corporation and subsidiaries, listed in
Item 14. This consolidated financial statement schedule is the responsibility
of the Corporation's management. Our responsibility is to express an opinion
based upon our audits. In our opinion, such consolidated financial statement
schedule, when considered in relation to the basic consolidated financial
statement taken as a whole, presents fairly in all material respects the
information set forth therein.

DELOITTE & TOUCHE LLP

Chicago, Illinois
March 2, 1998

<PAGE>

Schedule II

VARLEN CORPORATION

AND SUBSIDIARIES

Valuation and Qualifying Accounts

Three years ended January 31, 1998
(in thousands)

ADDITIONS
BALANCE AT CHARGED TO BALANCE
BEGINNING COSTS AND AT END
DESCRIPTION OF PERIOD EXPENSES DEDUCTIONS OF PERIOD

<S> <C> <C> <C> <C>
Allowance for doubtful
accounts (deducted from
accounts receivable):

Year ended 1/31/98 $1,455 $ 556 $ 203(b) $1,808
Year ended 1/31/97 1,318 384(a) 247(b) 1,455
Year ended 1/31/96 1,318 407 407(b) 1,318

Allowance related to
deferred tax assets:

Year ended 1/31/98 $1,237 $ 634 - $1,871
Year ended 1/31/97 1,570 626 $ 959(c)(d) 1,237
Year ended 1/31/96 2,013 355 798(c)(d) 1,570

</TABLE>
(a) Includes additions from companies acquired during the period.

(b) Write-offs, net of recoveries, foreign currency translation adjustments and
reserves related to certain companies disposed of during the period.

(d) The amounts were offset against goodwill and not net earnings.

<PAGE>

INDEX TO EXHIBITS

(4) (a) Rights Agreement dated as of June 17, 1996 (incorporated herein by
reference to Exhibit 4(a) to the Registrant's Quarterly Report on
Form 10-Q for the fiscal quarter ended August 3, 1996).

(b) Credit Agreement by and among the Registrant, the Borrowing
Subsidiaries and the Lenders Party Thereto and The First National Bank
of Chicago, as Agent, dated as of July 19, 1996 (incorporated herein
by reference to Exhibit (4)(b) to the Registrant's Quarterly Report
on Form 10-Q for the fiscal quarter ended August 3, 1996), as amended
on October 15, 1996 (incorporated herein by reference to Exhibit
(4)(a) to the Registrant's Quarterly Report on Form 10-Q for the
fiscal quarter ended November 2, 1996), as further amended on
January 17, 1997 (incorporated herein by reference to Exhibit (4)(d)
to the Registrant's Annual Report on Form 10-K for the fiscal year
ended January 31, 1997), as further amended on December 30, 1997.

(b) Varlen Corporation Profit Sharing and Retirement Savings Plan as
amended and restated generally effective July 1, 1994 (incorporated
herein by reference to Exhibit (10) (b) to the Registrant's Annual
Report on Form 10-K for the fiscal year ended January 31, 1995), as
further amended effective January 1, 1997.

(c) Registrant's 1989 Incentive Stock Option Plan, (incorporated herein by
reference to Exhibit (10)(h) to the Registrant's Annual Report on
Form 10-K for the fiscal year ended January 31, 1989) and as further
amended on March 26, 1990 (incorporated herein by reference to
Exhibit (10)(g) to the Registrant's Annual Report on Form 10-K for
the fiscal year ended January 31, 1990).

(d) Varlen Corporation Excess Benefits Plan (incorporated herein by
reference to Exhibit (10)(i) to the Registrant's Annual Report on
Form 10-K for the fiscal year ended January 31, 1990).

<PAGE>

(f) Trust Agreement Between Varlen Corporation and Fidelity Management
Trust Company dated November 30, 1992 (incorporated herein by
reference to Exhibit (10)(g) to the Registrant's Annual Report on
Form 10-K for the fiscal year ended January 31, 1993).

(k) Registrant's 1993 Deferred Incentive Stock purchase Plan adopted
May 25, 1993 (incorporated herein by reference to Exhibit (10)(m)
to the Registrant's Annual Report on Form 10-K for the fiscal year
ended January 31, 1994) as amended on February 3, 1997 (incorporated
herein by reference to Exhibit (10)(m) to the Registrant's Annual
Report on Form 10-K for the fiscal year ended January 31, 1997).

(n) Deferred long-term incentive grant to Richard L. Wellek dated
February 2, 1998.

(o) Deferred long-term incentive grant to Raymond A. Jean dated
February 2, 1998.

(p) Deferred long-term incentive grant to Richard A. Nunemaker dated
February 2, 1998.

<PAGE>

(13) 1997 Summary Annual Report to Stockholders.

(21) List of Subsidiaries.

(23) Consent of Deloitte & Touche LLP.

(24) Board of Directors' power of attorney for the signing of Varlen
Corporation's 1997 Annual Report on Form 10-K.

(27) Financial Data Schedule.

<PAGE>

AMENDMENT NO. 3
DATED AS OF DECEMBER 30, 1997
TO CREDIT AGREEMENT
DATED AS OF JULY 19, 1996

THIS AMENDMENT NO. 3 TO CREDIT AGREEMENT ("AMENDMENT") is made as of
this 30th day of December, 1997 by and among VARLEN CORPORATION, (the
"BORROWER"), the financial institutions parties thereto as lenders (the
"LENDERS"), and THE FIRST NATIONAL BANK OF CHICAGO, as Agent (the "AGENT")
under that certain Credit Agreement dated as of July 19, 1996 by and among the
Borrower, the Lenders and the Agent, as amended by Amendment No. 1 thereto
dated as of October 15, 1996 and Amendment No. 2 thereto dated as of January
17, 1997 (as so amended, the "CREDIT AGREEMENT"). Capitalized terms used
herein and not otherwise defined herein shall have the meaning given to them
in the Credit Agreement.

WITNESSETH

WHEREAS, the Borrower, the Lenders and the Agent are parties to the
Credit Agreement; and

WHEREAS, the Borrower has requested certain amendments to the Credit
Agreement;

WHEREAS, the Borrower, the Lenders and the Agent have agreed to amend
the Credit Agreement on the terms and conditions set forth herein.

NOW, THEREFORE, in consideration of the premises set forth above, the
terms and conditions contained herein, and other good and valuable
consideration, the receipt and sufficiency of which are hereby acknowledged,
the Borrower, the Lenders and the Agent have agreed to the following
amendments to the Credit Agreement.

1. AMENDMENT TO CREDIT AGREEMENT. Effective as of December 30, 1997, and
subject to the satisfaction of the conditions precedent set forth in Section
2 below, the Credit Agreement is amended as follows:

1.1 SECTION 6.11(vi) of the Credit Agreement is hereby amended to delete
the terms thereof in their entirety and to substitute the following therefor:

(vi) INDEBTEDNESS OF THE BORROWER TO ANY SUBSIDIARY, OF ANY SUBSIDIARY
TO THE BORROWER OR OF ANY SUBSIDIARY TO ANY OTHER SUBSIDIARY,
PROVIDED, HOWEVER, THAT

<PAGE>

ONLY THE BORROWER AND THE BORROWER'S DIRECT AND INDIRECT
WHOLLY-OWNED FOREIGN SUBSIDIARIES MAY LEND TO FOREIGN SUBSIDIARIES.

1.2 SECTION 6.16(a)(iii) of the Credit Agreement is hereby amended to
delete the terms thereof in its entirety and to substitute the following
therefor:

(iii) INVESTMENTS IN SUBSIDIARIES AND NON-SUBSIDIARY AFFILIATES MADE
AFTER THE DATE HEREOF; PROVIDED, HOWEVER, THAT (x) ONLY THE
BORROWER AND ITS DIRECT AND INDIRECT WHOLLY-OWNED FOREIGN
SUBSIDIARIES MAY MAKE LOANS OR ADVANCES TO FOREIGN SUBSIDIARIES AND
TO FOREIGN NON-SUBSIDIARY AFFILIATES AND (y) ANY LOANS OR ADVANCES
TO ANY DOMESTIC NON-SUBSIDIARY AFFILIATES MUST BE EVIDENCED BY
PROMISSORY NOTES WHICH ARE PLEDGED TO THE AGENT, FOR THE BENEFIT OF
THE LENDERS, PURSUANT TO A PLEDGE AGREEMENT SATISFACTORY IN FORM
AND SUBSTANCE TO THE AGENT.

2. CONDITIONS OF EFFECTIVENESS. This Amendment shall not become
effective unless (a) this Amendment shall have been executed by the Borrower,
the Agent and the Required Lenders on or before December 30, 1997 and (b) the
Agent shall have received an executed copy of the reaffirmation executed on
behalf of each of the Guarantors in the form attached hereto as EXHIBIT A.

3. REPRESENTATIONS AND WARRANTIES OF THE BORROWER. The Borrower hereby
represents and warrants as follows:

(a) This Amendment and the Credit Agreement as previously executed as
amended hereby, constitute legal, valid and binding obligations of the
Borrower, enforceable against it in accordance with their terms (except as
enforceability may be limited by bankruptcy, insolvency or similar laws
affecting the enforcement of creditor's rights generally).

(b) Upon the effectiveness of this Amendment, the Borrower hereby
reaffirms all covenants, representations and warranties made in the Credit
Agreement and the other Loan Documents to the extent the same are not amended
hereby, agrees that all such covenants, representations and warranties shall
be deemed to have been remade as of the effective date of this Amendment.

4. REFERENCE TO THE EFFECT ON THE CREDIT AGREEMENT; SUBSTITUTION OF
NOTES.

(a) Upon the effectiveness of Section 1 hereof, on and after the date
hereof, each reference in the Credit Agreement to "this Credit Agreement,"
"hereunder," "hereof," "herein" or words of like import shall mean and be a
reference to the Credit Agreement as amended hereby.

(b) Except as specifically amended above, the Credit Agreement and all
other documents, instruments and agreements executed and/or delivered in
connection therewith, shall remain in full force and effect, and are hereby
ratified and confirmed.

-2-

<PAGE>

(c) The execution, delivery and effectiveness of this Amendment shall
not, except as expressly provided herein, operate as a waiver of any right,
power or remedy of the Agent or the Lenders, nor constitute a waiver of any
provision of the Credit Agreement or any other documents, instruments and
agreements executed and/or delivered in connection therewith.

5. GOVERNING LAW. THIS AMENDMENT SHALL BE CONSTRUED IN ACCORDANCE WITH
THE INTERNAL LAWS (AND NOT THE LAW OF CONFLICTS) OF THE STATE OF ILLINOIS,
BUT GIVING EFFECT TO FEDERAL LAWS APPLICABLE TO NATIONAL BANKS.

6. HEADINGS. Section headings in this Amendment are included herein for
convenience of reference only and shall not constitute a part of this
Amendment for any other purpose.

7. COUNTERPARTS. This Amendment may be executed in any number of
counterparts, all of which taken together shall constitute one agreement, and
any of the parties hereto may execute this Agreement by signing any such
counterpart. This Agreement shall be effective when it has been executed by
the Borrower, the Agent and each of the Lenders and each such party has
notified the Agent by facsimile or telephone that it has taken such action.

---- Remainder of this page intentionally blank ----

-3-
<PAGE>

Executed as of this 30th day of December, 1997

BEECHEAD ASSOCIATES INCORPORATED
CHROME CRANKSHAFT CO.
CHROME CRANKSHAFT COMPANY OF ILLINOIS
CHROME LOCOMOTIVE, INC.
CONSOLIDATED METCO, INC.
FEMC, INC.
KEYSTONE INDUSTRIES, INC.
KEYSTONE RAILWAY EQUIPEMENT COMPANY
MEANS INDUSTRIES, INC.
VARLEN INSTRUMENTS INC. (formerly known as
Precision Scientific Inc.)
PRIME MANUFACTURING CORPORATION
S-G DIESEL POWER, INC.
SAPULPA TANK COMPANY
SCW CORPORATION
SPECIAL METAL RINGS CORP.
UNIT RAIL ANCHOR COMPANY, INC.
WEBCO TANK, INCORPORATED
BRENCO HOLDINGS, INC.
BRENCO, INCORPORATED
FULL STEAM AHEAD REBUILDING, INC.
QUALITY BEARING SERVICE OF KENTUCKY, INC.
QUALITY BEARING SERVICE OF MISSOURI, INC.
QUALITY BEARING SERVICE OF NEVADA, INC.
SEALTECH, INC.

By: /s/ Richard A. Nunemaker
-----------------------------
Name: Richard A. Nunemaker
Title: Attorney-in-fact

<PAGE>

IN WITNESS WHEREOF, this Amendment has been duly executed as of the day
and year first above written.

VARLEN CORPORATION,
AS THE BORROWER

By: /s/ Richard A. Nunemaker
----------------------------------------
Print Name: Richard A. Nunemaker
---------------------------------
Title: V.P.
---------------------------------------

THE FIRST NATIONAL BANK OF CHICAGO,
INDIVIDUALLY AND AS AGENT

By:
----------------------------------------
Print Name:
---------------------------------
Title:
---------------------------------------

HARRIS TRUST AND SAVINGS BANK

By:
----------------------------------------
Print Name:
---------------------------------
Title:
---------------------------------------

<PAGE>

IN WITNESS WHEREOF, this Amendment has been duly executed as of the day
and year first above written.

VARLEN CORPORATION,
AS THE BORROWER

By:
----------------------------------------
Print Name:
---------------------------------
Title:
---------------------------------------

THE FIRST NATIONAL BANK OF CHICAGO,
INDIVIDUALLY AND AS AGENT

By: /s/ Dennis J.Redpath
----------------------------------------
Print Name: Dennis J.Redpath
---------------------------------
Title: Vice President
---------------------------------------

HARRIS TRUST AND SAVINGS BANK

By:
----------------------------------------
Print Name:
---------------------------------
Title:
---------------------------------------

<PAGE>

IN WITNESS WHEREOF, this Amendment has been duly executed as of the day
and year first above written.

VARLEN CORPORATION,
AS THE BORROWER

By:
----------------------------------------
Print Name:
---------------------------------
Title:
---------------------------------------

THE FIRST NATIONAL BANK OF CHICAGO,
INDIVIDUALLY AND AS AGENT

By:
----------------------------------------
Print Name:
---------------------------------
Title:
---------------------------------------

HARRIS TRUST AND SAVINGS BANK

By: /s/ Patrick J. McDonnell
----------------------------------------
Print Name: Patrick J. McDonnell
---------------------------------
Title: Vice President
---------------------------------------

<PAGE>

NATIONSBANK N.A.

By: /s/ Lisa S. Donoghue
----------------------------------------
Print Name: LISA S. DONOGHUE
---------------------------------
Title: VICE PRESIDENT
---------------------------------------

ABN AMRO BANK N.V., CHICAGO BRANCH

By:
----------------------------------------
Print Name:
---------------------------------
Title:
---------------------------------------

<PAGE>
NATIONSBANK N.A.

By:
----------------------------------------
Print Name:
---------------------------------
Title:
---------------------------------------

ABN AMRO BANK N.V., CHICAGO BRANCH

By: /s/ Nancy L. Capecci
----------------------------------------
Print Name: Nancy L. Capecci
---------------------------------
Title: Assistant Vice President
---------------------------------------

By: /s/ Laurie D. Flom
----------------------------------------
Print Name: Laurie D. Flom
---------------------------------
Title: Vice President
---------------------------------------

<PAGE>

FIRST AMENDMENT TO THE
VARLEN CORPORATION
PROFIT SHARING AND RETIREMENT SAVINGS PLAN

The Varlen Corporation Profit Sharing and Retirement Savings Plan (the "Plan")
shall be and hereby is amended, effective January 1, 1997, as follows:

Section 1.14 of the Plan shall be and hereby is amended in its entirety
to read as follows:

1.14 "Compensation" means an Eligible Employee's:

(a) wages, salaries and all other amounts required to be
reported on an Eligible Employee's Form W-2 under Sections
6041(d), 6051(a)(3) and 6052 of the Code and which are received by
an Eligible Employee from the Employer for services rendered in
the course of employment with the Employer (including but not
limited to overtime, shift differential, commissions and
bonuses), but specifically excluding reimbursements or other
expense allowances, fringe benefits (cash and noncash), moving
expenses, deferred compensation and welfare benefits; and

(b) elective amounts excludable from gross income under
Code Sections 125 and 402(e)(3).

In addition to other applicable limitations set forth in
the Plan, and notwithstanding any other provision of the Plan
to the contrary,for Plan Years beginning on or after January 1,
1994, the annual Compensation of each Employee taken into
account under the Plan shall not exceed the OBRA '93 annual
compensation limit. The OBRA '93 annual compensation limit is
$150,000, as adjusted by the Commissioner for increases in the
cost of living in accordance with section 401(a)(17)(B) of the
Internal Revenue Code. The cost-of-living adjustment in effect
for a calendar year applies to any period, not exceeding
twelve (12) months, over which Compensation is determined
(determination period) beginning in such calendar year. If a
determination period consists of fewer than twelve (12) months,
the OBRA '93 annual compensation limit will be multiplied by a
fraction, the numerator of which is the number of months in the
determination period and the denominator of which is 12.

For Plan Years beginning on or after January 1, 1994, any
reference in this Plan to the limitation under section
401(a)(17) of the Code shall mean the OBRA '93 annual
compensation limit set forth in this provision.

If compensation for any prior determination period is taken
into account in determining an Employee's benefits accruing in
the current Plan Year, the

<PAGE>

Compensation for that prior determination period is subject to
the OBRA '93 annual compensation limit in effect for that prior
determination period. For this purpose, for determination
periods beginning before the first day of the first Plan Year
beginning on or after January 1, 1994, the OBRA '93 annual
compensation limit in $150,000.

II.

In all other respects, the Plan shall remain in full force and effect.

Dated: April 7, 1997
-------------------

VARLEN CORPORATION

BY: /s/ Richard A. Nunemaker
-------------------------------

Title: Vice President Finance and
-----------------------------
Chief Financial Officer

<PAGE>

[VARLEN LETTERHEAD]

February 2, 1998

Richard L. Wellek
2587 Stowe Court
Northbrook, IL 60062

Dear Dick:

The board of directors recognizes the excellent performance of the
Corporation and its stock price over the last year and the integral role that
you played. In recognition of the significant contribution that you have made
and we expect that you will continue to make to the long term growth and
profitability of the Corporation, the compensation committee of the board of
directors with the approval of the full board of directors of Varlen
Corporation hereby grants to you a one time payment of $637,500 payable on
April 7, 2002, subject to the terms and conditions as set forth below.

This one time payment will be paid to you as regular income on April 7, 2002,
less all applicable taxes and withholdings. The fixed dollar amount of this
one time grant will not change in the event of a reorganization,
recapitalization, stock split, stock dividend or any other change in the
corporate structure or shares of the Corporation. Your rights to this one
time payment may not be transferred by you or by the Corporation.

This one time payment will only be made if you are still employed with the
Corporation or one of its affiliates. This one time payment shall not be
affected by any change in your duties or responsibilities. In the event of
your death, disability or retirement under one of the Corporation's benefit
plans or if your employment is terminated within one year following a change
in control of the Corporation, as defined in the Corporation's incentive
stock option plan, you will be entitled to a proration of the one time
payment on such date that you are no longer deemed to be an active employee.
Should the Corporation unilaterally terminate your employment, other than for
immoral or illegal acts as determined by the board of directors, you will be
paid a prorated share of this one time payment. This commitment to make the
one time payment shall not confer upon you any right to continue in the
employ of the Corporation or interfere with the right of the Corporation to
terminate your employment at any time for any reason.

<PAGE>

We look forward to your continuing significant contributions and to leading
the Varlen team to further growth and profitability. We have high
expectations for you!

Very truly yours,

/s/ Greg A. Rosenbaum
- ---------------------
Greg A. Rosenbaum
Chairman, Compensation Committee
Varlen Corporation Board of Directors

<PAGE>

[VARLEN LETTERHEAD]

February 2, 1998

Raymond A. Jean
1130 North Green Bay Road
Lake Forest, IL 60045

Dear Ray:

The board of directors recognizes the excellent performance of the
Corporation and its stock price over the last year and the integral role that
you played. In recognition of the significant contribution that you have made
and we expect that you will continue to make to the long term growth and
profitability of the Corporation, the compensation committee of the board of
directors with the approval of the full board of directors of Varlen
Corporation hereby grants to you a one time payment of $425,000 payable on
April 7, 2002, subject to the terms and conditions as set forth below.

This one time payment will be paid to you as regular income on April 7, 2002,
less all applicable taxes and withholdings. The fixed dollar amount of this
one time grant will not change in the event of a reorganization,
recapitalization, stock split, stock dividend or any other change in the
corporate structure or shares of the Corporation. Your rights to this one time
payment may not be transferred by you or by the Corporation.

<PAGE>

We look forward to your continuing significant contributions and to leading
the Varlen team to further growth and profitability. We have high
expectations for you!

Very truly yours,

/s/ Greg A. Rosenbaum
- ---------------------
Greg A. Rosenbaum
Chairman, Compensation Committee
Varlen Corporation Board of Directors

<PAGE>

[VARLEN LETTERHEAD]

February 2, 1998

Richard A. Nunemaker
141 Cottage Hill Avenue
Elmhurst, IL 60126

Dear Rick:

The board of directors recognizes the excellent performance of the
Corporation and its stock price over the last year and the integral role that
you played. In recognition of the significant contribution that you have made
and we expect that you will continue to make to the long term growth and
profitability of the Corporation, the compensation committee of the board of
directors with the approval of the full board of directors of Varlen
Corporation hereby grants to you a one time payment of $85,000 payable on
April 7, 2002, subject to the terms and conditions as set forth below.

This one time payment will be paid to you as regular income on April 7, 2002,
less all applicable taxes and withholdings. The fixed dollar amount of this
one time grant will not change in the event of a reorganization,
recapitalization, stock split, stock dividend or any other change in the
corporate structure or shares of the Corporation. Your rights to this one time
payment may not be transferred by you or by the Corporation.

<PAGE>

We look forward to your continuing significant contributions and to leading
the Varlen team to further growth and profitability. We have high
expectations for you!

Very truly yours,

/s/ Greg A. Rosenbaum
- ---------------------
Greg A. Rosenbaum
Chairman, Compensation Committee
Varlen Corporation Board of Directors

<PAGE>

VARLEN CORPORATION

[PHOTO]

1997 SUMMARY ANNUAL REPORT

[PHOTO]

Engineered
Products
That Help
Keep the
[LOGO] World

Moving

<PAGE>

FINANCIAL
HIGHLIGHTS
<TABLE>
<CAPTION>

VARLEN CORPORATION AND SUBSIDIARIES
(IN THOUSANDS, EXCEPT PER SHARE DATA)

1997(a) 1996(a) 1995(a)
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
FOR THE YEAR
Net Sales $ 522,254 $ 409,475 $ 386,987
Operating Profit (b) 63,193 47,188 45,890
Net Earnings 25,651 17,857 19,609
Net Earnings as a Percent of Sales 4.9% 4.4% 5.1%
Earnings Before Interest, Taxes,
Depreciation and Amortization $ 79,257 $ 59,669 $ 53,432
Cash Flow From Operations 48,399 31,106 32,115
Return on Average Stockholders' Equity 17.2% 17.1% 21.4%
Return on Invested Capital 10.5% 9.6% 13.8%
Capital Expenditures $ 18,776 $ 18,193 $ 23,427
Depreciation and Amortization 24,474 19,098 14,259
- -------------------------------------------------------------------------------

AT YEAR END
Total Employees 3,177 2,850 2,214
Working Capital $ 74,024 $ 69,461 $ 67,044
Net Property, Plant and Equipment 124,180 124,580 69,675
Total Debt 104,910 186,626 73,485
Stockholders' Equity 198,792 109,986 97,953
Total Debt as a Percent of Total
Capitalization 34.5% 62.9% 42.9%
- -------------------------------------------------------------------------------

PER SHARE DATA
Basic Earnings Per Share $ 2.41 $ 2.06 $ 2.21
Diluted Earnings Per Share 1.93 1.51 1.62
Dividends Declared 0.24 0.24 0.23
Stockholders' Equity 14.92 12.73 11.07
- -------------------------------------------------------------------------------

</TABLE>

(a) Throughout this report the years ended January 31, 1998, 1997 and 1996 are
referred to as 1997, 1996, and 1995, respectively. The per share data have
been restated to conform to the new presentation of earnings per share. In
addition, the per share data reflect a 3 for 2 stock split in the form of a
stock dividend in 1997 and a 10% stock dividend in 1996.

(b) Before corporate and net interest expenses.

1997
SEGMENT [GRAPH] [GRAPH]
RESULTS

<PAGE>

VARLEN PRODUCTS AND MARKETS

RAILROAD

[PHOTO] [PHOTO] [PHOTO]
[PHOTO]

[PHOTO]

PRIMARY Locomotive and railcar MARKETS manufacturers, railroads and
MARKETS railcar maintenance facilities, lessors, and track
maintenance contractors. Global markets.

PRIMARY RAILCARS
PRODUCTS - Tapered roller bearings
- Hydraulic cushioning
- Draft gears
- Buffers
- Discharge gates

LOCOMOTIVES
- HVAC systems
- Draft gears
- Tapered roller bearings
- Valves
- Toilets
- Remanufactured crankshafts and camshafts

RAILROAD TRACK FASTENER SYSTEMS

MANUFACTURING Little Rock, AR
AND Bell Gardens, CA
RECONDITIONING Chicago, IL
LOCATIONS Atchison, KS
McPherson, KS
Louisville, KY
Newark, NJ
Sparks, NV
Camp Hill, PA
Petersburg, VA (2)
Oak Creek, WI
Ploermel, France
Halberstadt,Germany
Krefeld, Germany
Neitersen, Germany
Prostejov, Czech Republic

TRUCK / TRAILER

[PHOTO] [PHOTO]

[PHOTO]

PRIMARY Heavy-duty trucks and over-the-road trailer manufacturers -
MARKETS domestic and international.

PRIMARY ALUMINUM PERMANENT MOLD AND DIE CASTINGS
PRODUCTS - Axle hubs
- Suspension components
- Transmission housings
- Spring brake flanges and pistons

STRUCTURAL MOLDED PLASTIC COMPONENTS
- Instrument panels
- Sleeper cab accessories
- Door sill assemblies

MANUFACTURING Bryson City, NC
AND Cashiers, NC
RECONDITIONING Monroe, NC
LOCATIONS Clackamas, OR
Portland, OR

<PAGE>

AUTOMOTIVE

[PHOTO]

[PHOTO] [PHOTO]

Original equipment automotive manufacturers and tier one suppliers. Aftermarket
transmission rebuilders. Parts are used on cars and light trucks. Domestic and
international markets.

Automatic transmission reaction plates

One-way clutch

Steering column components

Transmission components

Precision stamped metal

components and weldments

Melvindale, MI
Saginaw, MI
Vassar, MI

PETROLEUM ANALYZERS

[PHOTO] [PHOTO]

Instrumentation to improve yield, certify products and monitor regulatory
standards. Used by oil refineries, petrochemical plants, petroleum transporters,
and large users of distillate products. Global markets.

Automated laboratory quality control instruments

On-line process analyzers

Manual and semi-automatic physical property analyzers

Portable optoelectronic analyzers

Certification samples

Petroleum testing services

Bellwood, IL
Marlborough, MA
San Antonio, TX
Lauda, Germany

ENGINEERED
PRODUCTS
THAT HELP
KEEP THE
WORLD
MOVING

This report is in a summary format and is intended to present 1997 results in a
simple, readable style. The more detailed financial information is part of the
Proxy Statement, which was distributed to stockholders along with this report. A
copy of the Proxy Statement may be obtained from Varlen Corporation upon
request. See the inside back cover for details.

<PAGE>

TO OUR FELLOW STOCKHOLDERS AND ASSOCIATES

Varlen had record results on virtually every front in 1997. Strong
performances by all of our transportation businesses, healthy marketplace
conditions, and continuous focus on cost control and asset management made this
our most successful year. We exceeded our financial goals and significantly
increased shareholder value.

A RECORD YEAR

- - Earnings reached record levels. Net income rose 43.6% to $25.7 million, and
diluted earnings per share of $1.93 were 28% higher than in the prior year.
Over the last five years, net earnings grew at a 32% compound annual rate.

- - Sales increased by 27.5%, passing the $500 million mark for the first time.
Revenues expanded at a compound annual rate of 14% for the past five years.
Varlen is proving there are many growth opportunities in its markets.

- - Varlen's stock price rose 93% for the year ending January 31, 1998, outpacing
the S&P 500's 25% increase. As a result of this and other actions, the
Company's market value more than doubled during this time.

RECORD FOURTH QUARTER

- - Strong performance in all of Varlen's business sectors produced the best
quarter in Varlen's history.

- - Diluted earnings per share of $.54 were twice the $.27 per share earned in
the same period a year ago. Net earnings more than doubled from $3.0 million
to $7.5 million.

- - Record quarterly revenues of $137 million were 29% higher than the year ago
period.

1997 STRATEGIC ACTIONS STRENGTHEN VARLEN

We continued to focus on all aspects of the business, from acquisitions to
product development, to further strengthening Varlen's balance sheet. Progress
was made in all areas.

- - By converting the $69 million in subordinated debt to equity in September, we
reduced our debt-to-capital ratio to 35% on January 31, 1998, from 63% on
January 31, 1997. Additionally, our stockholders' equity increased by $89
million during the year.

- - Varlen's limited common stock float and liquidity have been a hindrance. This
issue was addressed in two ways in 1997. First, converting the subordinated
debt increased the number of outstanding shares from 5.8 to 8.9 million. In
November, a three-for-two stock split further expanded outstanding shares to
13.3 million.

- - Strategic acquisitions strengthened our operations. We continue to reach out
globally with our businesses and none currently offer more growth opportunity
than the railroad market. In October, we acquired the railroad products
business of Ringfeder GmbH in Germany and HZP in the Czech Republic. The
combination of

[PHOTO]

Raymond A. Jean, PRESIDENT AND
CHIEF OPERATING OFFICER (LEFT) and
Richard L. Wellek, CHAIRMAN OF THE BOARD
AND CHIEF EXECUTIVE OFFICER

[GRAPH]

VARLEN CORPORATION 1

<PAGE>

TO OUR FELLOW STOCKHOLDERS AND ASSOCIATES CONTINUED

[GRAPH]

these acquisitions with our existing railroad products businesses in Germany and
France makes Varlen the preeminent manufacturer of freightcar and locomotive
shock absorption devices in Europe. Varlen is now the only company in the world
with a complete railroad cushioning product line for both the two world
standards -- UIC and AAR.

In November, Varlen acquired the PETROSPEC-REGISTERED TRADEMARK- petroleum
analyzer product line. We now control the products we were previously
distributing and the technology, as well as increasing our engineering
capability. The PetroSpec-Registered Trademark- technology platform lends itself
to the rapid development of products suitable for measuring a wide range of
petroleum properties.

- - Varlen continued to make significant investments in its core businesses.
Research and development expenses were $8.0 million. All of our businesses
introduced new products and more are in the pipeline. Capital expenditures of
$19 million were directed at cost reduction, new products, and capacity
increases. With further growth planned, capital expenditures in the next few
years will be even higher. However, Varlen's strong cash flow should easily
fund these investments.

TAKING THE LONG TERM VIEW

Varlen could not have accomplished what it has in recent years without
aggressively investing in products, people and processes. Varlen is a
manufacturing company, and there is no simple, magic formula for growth. We
focus on niche markets where we can be a leader and develop a competitive
advantage. We work on "blocking and tackling" and are not afraid to take well
thought out risks. One example was our entry into the European railroad supply
market in 1993, which started to pay off in 1997.

Varlen is more focused, having been transformed in recent years. But
periodically, we still hear investors are concerned because the company is not a
"pure play." Our strategy is to concentrate in the transportation and petroleum
analyzer markets. We do not plan to serve only one transportation market. In
1997, we reaped the benefit of strong heavy-duty truck, automotive, and
improving railroad and petroleum analyzer markets. Varlen enjoyed increased
revenues from all these areas. We like these markets and will continue to pursue
growth opportunities in them, both domestically and internationally. This will
include internal growth as well as strategic acquisitions. We believe by being a
global manufacturer of engineered products for multiple end-markets, we can
buffer the cyclicality of any one industry or geographic region.

There are also some significant technology, purchasing and marketing overlaps
between our transportation businesses, and we focus on capitalizing on these to
bring our customers the most cost-effective solutions to their problems. We view
these "overlaps" as another source of competitive advantage.

VARLEN IS MORE FOCUSED, HAVING BEEN TRANSFORMED IN RECENT YEARS.

2 VARLEN CORPORATION

<PAGE>

WE FEEL VERY POSITIVE ABOUT VARLEN'S FUTURE AND ITS ABILITY
TO CONTINUE OUTPERFORMING
ITS MARKETS.

LOOKING AHEAD

In the operations review that follows, we discuss Varlen's markets and growth
opportunities. The upshot is that even without acquisitions, we are
well-positioned for growth in the coming years. We have a number of new customer
programs starting in 1998, and are introducing new products that should help us
increase market penetration. We entered 1998 with a backlog 60% higher than in
the prior year, and a few of our manufacturing facilities are operating near
capacity. The fourth quarter momentum is continuing into the first quarter of
the current year. In 1998, we anticipate the North American production of
heavy-duty trucks/trailers, railroad freightcars, and passenger vehicles will be
equal to or greater than last year. With these high production levels and
Varlen's increased content per vehicle, we expect to have another record year.

At this date the only cloud on the horizon is the Asian economic situation
and its potential impact on the North American economy. Although we sell to the
Asian market, it is less than 1% of our total revenue. Fortunately, markets in
other parts of the world are expanding enough to compensate for any shortfall we
might experience there.

If you detect a sense of optimism from this letter, you are correct.
We feel very positive about Varlen's future and its ability to continue
outperforming its markets.

In closing, we would like to address a few personal issues. Rudolph Grua, a
director since 1993, reached retirement age and will not stand for re-election
to the board at the May Annual Meeting. Rudy has been an outstanding director.
We will miss the sage counsel based upon his vast experience as the CEO of an
international manufacturing company, as well as his common sense. He is the
epitome of what an independent director should be.

To our new employees who joined us from Boston Advanced Technologies,
Ringfeder, and HZP: Welcome to the Varlen Family! We think you'll enjoy being
part of a strong, dynamic and growing company.

To our fellow Varlen employees who contributed to making 1997 a record year:
Thank you, thank you! You did great!

We also express our appreciation to all of Varlen's stockholders, customers
and suppliers for their continued support. We take seriously our commitment to
our fellow stockholders. We know we must satisfy our customers every day in an
ever more competitive world business environment and realize we could not
successfully operate without the help and dedication of our suppliers.

A record year doesn't just happen, it took all of the above to make 1997 a
success.

/s/Richard L. Wellek /s/Raymond A. Jean

Richard L. Wellek Raymond A. Jean
CHAIRMAN AND PRESIDENT AND
CHIEF EXECUTIVE OFFICER CHIEF OPERATING OFFICER

March 6, 1998

"WE ACHIEVED RECORD PERFORMANCE THIS PAST YEAR THROUGH THE DILIGENCE OF OUR
EMPLOYEES' COMMITMENT TO: INNOVATION, CONTINUOUS IMPROVEMENT, EXPANDED
GLOBAL REACH, SUPERIOR QUALITY AND OUTSTANDING SAFETY."

[PHOTO]

Richard A. Nunemaker,
VICE PRESIDENT, FINANCE, AND
CHIEF FINANCIAL OFFICER (left)
and Vicki L. Casmere,
VICE PRESIDENT,
GENERAL COUNSEL AND
SECRETARY

VARLEN CORPORATION 3

<PAGE>

REVIEW OF OPERATIONS

MISSION

Varlen's primary objective is to increase the long-term value of its
stockholders' investment. This will be achieved by building upon our employees'
creativity and their commitment to serving customers better and more efficiently
than our competitors do in the markets where Varlen chooses to compete.

Varlen will invest resources in selected industrial markets where it has, or can
obtain, a leadership position; we will redeploy resources from markets where we
cannot. We will continue to enhance our global presence. Varlen's engineered
products for the niche markets in which it participates are characterized by
differentiable process technology employed in their manufacture and/or superior
performance attributes. Our dedication to continuous improvement will be
unrelenting.

1997 -- A RECORD YEAR

Varlen had a record year by just about any measure! All business areas
contributed to our substantial sales and income increases. The gains resulted
from a strong U.S. economy, new product/program introductions, increased market
share, expanded international sales, and the benefit of acquisitions. What is
particularly satisfying is that Varlen's growth and performance significantly
outpaced the expansion seen in its markets:

- - The successful integration and full-year impact of the Brenco and Karl Georg
acquisitions helped increase our sales to the global railroad industry by
42%. This performance was in stark contrast to the industry. Railcar building
got off to a very slow start in North America. Although orders picked up
strongly by year end, 1997 deliveries were down 11.5%. Demand in Europe
strengthened somewhat after some very anemic spending levels in the
mid-1990s.
- - North American heavy-duty truck and trailer production were up 12% and 13%,
respectively, during 1997. New programs and further penetration fueled
Varlen's growth in this market by 30%.

- - Light vehicle production increased by 3%. Varlen's sales to the automotive
market were up 19%, helped by the introduction of the Means one-way clutch
during the third quarter. Strong sales of pickup trucks and sport utility
vehicles--where our content per vehicle is the highest--also were a factor.

- - Despite a lackluster domestic petroleum analyzer market, Varlen's German
operation had its best year ever. Record demand for a rejuvenated, on-line
instrument product offering also contributed to the modest petroleum analyzer
business improvement over 1996.

BUILDING FOR THE FUTURE

Varlen accelerated its investments for growth, and we challenged ourselves to
"raise the bar" in our continuing improvement efforts.

- - Approximately $26.7 million was invested to introduce new programs and
products, to reduce cost, and improve quality. In 1998, these expenditures
will approximately double, as many of the marketing and engineering successes
of 1997 will be launched this year.

- - Business processes were enhanced to meet or exceed customers' expectations,
with eight more of Varlen's 28 manufacturing facilities achieving ISO or
QS-9000 certification. Twenty-three plants now have this distinction.

- - At two small, underperforming business units, manufacturing capacity was
trimmed, processes improved, and overhead costs reduced. These actions,
combined with market share gains during the second half, have positioned them
for a turnaround in 1998.

4 VARLEN CORPORATION

<PAGE>

During the fourth quarter, Varlen incurred integration costs related to
1997's three "bolt-on" acquisitions: "KG" Ringfeder Bahntechnik GmbH in Germany
and Wakomp s.r.o. in the Czech Republic for our rail energy absorption business,
and the PetroSpec-Registered Trademark- product line for our petroleum analyzer
business. We also continued to invest in StarTrak L.L.C., a railcar monitoring
business, and committed to a majority interest at year-end. These strategic
investments provide the base for profit growth in the future.

CORE BUSINESSES POSITIONED FOR FURTHER GROWTH

TRANSPORTATION PRODUCTS

THE RAILROAD RENAISSANCE

Following years of downsizing and rationalization, the railroad industry is
experiencing a global renaissance. Varlen is well-positioned to participate. In
North America, continued traffic growth and the need to substantially raise
service levels are expected to support strong railroad spending over the next
several years. Freightcar orders during the last quarter of 1997 were the
strongest in 18 years, and left the backlog at its highest level since 1979.
Varlen's railroad business also should benefit from rising maintenance
expenditures. Demand for replacement of our "wear and tear" products (such as
rail anchors, hopper car discharge gates, energy absorption devices, and
bearings) is expected to rise as longer trains of heavier freightcars make more
trips over greater distances in shorter times. Approximately 50% of Varlen's
railroad sales are aftermarket related, and we are determined to grow in this
segment. We re-invested heavily in manufacturing processes, focused our
marketing efforts, and passed improvements on to the customer in our plan to
achieve higher market share.

In North America, new proprietary products directed at increasing our
customers' productivity are stimulating sales. For example, new freightcar
products--the GEN2000 bearing and the QUIK-DRAW-Registered Trademark- cushioning
device--are helping railroads make significant gains in coal train payloads.

The shift to higher-horsepower, alternating current locomotives, along with
rising

[PHOTO]

INNOVATION

Varlen's companies are dedicated to developing new products to better serve
customer needs.

The first model of the Means' one-way clutch went into mass production during
1997. This cost-effective, technology-superior, patented product is used in
automatic transmissions.

[PHOTO]

Con Met's ability to design and manufacture light weight products for heavy-duty
trucks has made it the market leader.

VARLEN CORPORATION 5

<PAGE>

REVIEW OF OPERATIONS CONTINUED

[PHOTO]

CONTINUOUS
IMPROVEMENT

[PHOTO]

Varlen continues to invest in its products and processes.

At Means' Vassar, Michigan plant and at Con Met's Monroe, North Carolina
plant significant improvements in capabilities and productivity have been made
with the help of employee involvement programs.

transit car demand worldwide, bode well for Varlen's locomotive component and
bearing businesses. Locomotive build schedules now extend well into 1999 at both
General Electric Company Transportation Systems and General Motor's
Electro-Motive Division. We are making plans to further increase our
participation in these growing segments, with particular focus on leveraging our
freight product offerings into the transit market, which uses similar product
technology.

In Europe, railroad systems are being privatized, and U.S. style rail
freight technology is being embraced to increase competitiveness. With our
direct investments in France, Germany, and the Czech Republic, we are uniquely
positioned to supply this continent with a full range of energy absorption
devices to either European (UIC) or North American (AAR) standards. Varlen's
engineering teams are developing innovative products to help European customers
make this transition, and adding features to existing products to enhance
performance.

Developing nations are increasing their rail infrastructure spending. This
also represents a significant growth opportunity for our railroad group.

STRONG HEAVY-DUTY TRUCK MARKET

Even if 1998 Class 8 heavy-duty truck builds are flat with 1997,--and most
analysts are forecasting the market to be up 5-10%--increasing builds of the new
models and the higher content we have on them should generate

[GRAPH]

6 Varlen Corporation

<PAGE>

double-digit growth for our truck-related products. Due to added complexity and
amenities, new truck models have become heavier--and Varlen's lightweight
technology is the right antidote. Our engineers continue to
work closely with the manufacturers in designing structural aluminum castings
and applying structural plastic interior components. Demand
for our proprietary axle hubs also continues to grow, as they are a very
cost-effective way to reduce weight and increase payload.

Varlen has achieved excellent domestic internal growth in this
market. Now there is growing interest in international markets for our
lightweight solutions. Test programs are underway with two companies, and
several European manufacturers are about to begin development projects with us.
We are enthusiastic about these offshore growth prospects.

OUTPERFORMING A STABLE AUTO/LIGHT TRUCK MARKET

North American demand for automobiles and light trucks in 1998
is expected to be flat, at best, with 1997. Several factors should enable us to
outperform this market. The rising popularity of light trucks plays into our
hands--it is the strongest portion of the market for us. The full-year impact of
programs for value-added components and welded sub-assemblies launched in 1997
and those targeted for 1998 introduction also will stimulate growth.

Varlen's greatest vehicle for growth--the Means one-way clutch--expects to
double its 1997 sales. This will come from the full-year impact of our first
major program for Ford Motor Company automatic transmissions, and a second
expected to start late in the fourth quarter. Our innovative, patented product
has great potential because of its superior performance characteristics:
increased durability, reliability, an improved "shift feel" quality, and, in
most applications, reduced cost. We are working on other applications for North
America; and with the worldwide rights acquired in 1997, we are developing
marketing plans for Europe and Japan as well.

We continue to redirect our strategy away from being a "stamper" to a
supplier of value-added components for transmissions, steering columns, and
welded sub-assemblies. With a passion for process excellence and an innovative
engineering team, growth prospects are bright.

EXPANDED GLOBAL REACH

With manufacturing facilities in Germany, France, and the Czech Republic, Varlen
is capable of serving customers throughout the world.

[PHOTO]

The management team at Walter Herzog GmbH, Varlen's German-based petroleum
analyzer business, led this unit to a record year.

[PHOTO]

Keystone is now the leading manufacturer of European railcar buffers. With a
strong engineering team and extensive test capabilities, Keystone is the only
company in the world with a complete product line for UIC and AAR energy
absorption devices.

VARLEN CORPORATION 7

<PAGE>

REVIEW OF OPERATIONS CONTINUED

[PHOTO]

SUPERIOR
QUALITY

We are proud of the quality products produced by Varlen's skilled employees.

At Prime Manufacturing in Oak Creek, Wisconsin, employees are undergoing Six
Sigma training.

In Little Rock, Arkansas, at Brenco's Quality Bearing Service facility,
aftermarket railroad bearings are certified and reconditioned to the highest
standards.

[PHOTO]

PETROLEUM ANALYZERS

After a weak first half, orders rebounded somewhat in the third quarter and were
robust in the fourth. The key drivers are mixed as we enter 1998. Crude oil
prices are down, "Big Oil" is reporting flat to lower earnings, and the "Asian
Flu" is dampening demand in that part of the world. The good news is that
gasoline and aviation fuel usage are rising briskly in most parts of the globe.
Also, the new refineries being built in the Middle East and Far East will
further stimulate instrument demand. Most importantly, Varlen's petroleum
analyzer business has a stronger organization, resulting from actions taken in
1997 to more effectively attack and serve the market, and a more extensive
product offering from accelerated engineering developments and the PetroSpec
acquisition. Tightened air quality standards, both here and in Europe, also are
expected to drive demand for some of our instruments.

The PetroSpec-Registered Trademark- technology platform, combined with
existing engineering competencies, give Varlen the ability to rapidly develop
portable, laboratory and on-line instruments. Several were introduced during
1997, and more are coming in 1998. In addition, the products are being well
accepted "downstream" from the refinery by pipeline and terminal operators, and
others needing to test for fuel adulteration. These innovative, spectroscopic
instruments offer excellent growth potential.

[GRAPHS]

8 Varlen Corporation

<PAGE>

OPERATING OBJECTIVES AND STRATEGIES

Staying close to customers, listening to their needs, and relentlessly improving
service are hallmarks of Varlen's success. As we listen now, the emphasis on
price has never been greater. Accordingly, we are intensifying our efforts on
growth and productivity.

- - Growth--to more effectively leverage existing resources and fixed expenses

- - Productivity--including lower raw material prices--to drive down costs

The two are linked, because being the low-cost supplier is the surest way to win
more sales. Varlen's growth strategies revolve around new products and programs,
globalization and acquisitions. The key elements of our productivity drive are
rooted in shared management practices, a focus on processes--thinking
horizontally rather than vertically about our organizations--and the
implementation of "best practices."

SAFETY AND QUALITY INITIATIVES, GLOBAL REACH, INNOVATION AND CONTINUOUS
IMPROVEMENT are very much a part of Varlen's management lexicon, but they have
been adopted by others as well. The difference is that we take them more
seriously than most, and our results speak to the vitality of our efforts.

What often separates successful companies from others is their ability to
execute. We may make mistakes along the way, but a bias for action will enable
us to continue to outperform our markets. We have sound operating plans and are
prepared to execute them.

[GRAPH]

SAFETY

Varlen is committed to providing a safe workplace for all of its employees.

[PHOTO]

Unit Rail Anchor Company has gone over 40 months without a lost time accident.
Unit's safety committee has done an outstanding job of providing the leadership
for this noteworthy achievement.

VARLEN CORPORATION 9

<PAGE>

SUMMARY OF OPERATIONS

(IN THOUSANDS, EXCEPT PER SHARE DATA) 1997* 1996* 1995* 1994* 1993*
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Statement of Earnings Data:
Net sales . . . . . . . . . . . . . . . . . . . . . $522,254 $409,475 $386,987 $341,521 $291,908
--------------------------------------------------------------
Earnings before income taxes . . . . . . . . . . . 45,481 31,831 34,706 25,854 18,723
Income tax expense . . . . . . . . . . . . . . . . 19,830 13,974 15,097 11,092 7,957
--------------------------------------------------------------
Net earnings . . . . . . . . . . . . . . . . . . . $ 25,651 $ 17,857 $ 19,609 $ 14,762 $ 10,766
--------------------------------------------------------------
--------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------
Gross profit as a percent of sales . . . . . . . . 24.8% 24.5% 25.0% 23.7% 24.0%
Net earnings as a percent of sales . . . . . . . . 4.9% 4.4% 5.1% 4.3% 3.7%
- ---------------------------------------------------------------------------------------------------------------------
Effective tax rate . . . . . . . . . . . . . . . . 43.6% 43.9% 43.5% 42.9% 42.5%
- ---------------------------------------------------------------------------------------------------------------------
Per share data:
Basic . . . . . . . . . . . . . . . . . . . . . $ 2.41 $ 2.06 $ 2.21 $ 1.68 $ 1.23
Diluted . . . . . . . . . . . . . . . . . . . . 1.93 1.51 1.62 1.28 1.05
Cash dividends declared . . . . . . . . . . . . . . 0.24 0.24 0.23 0.22 0.22
- ---------------------------------------------------------------------------------------------------------------------
Weighted average number of shares--basic . . . . . 10,653 8,677 8,864 8,811 8,740

Weighted average number of shares--diluted . . . . 13,755 13,617 13,794 13,679 12,055
- ---------------------------------------------------------------------------------------------------------------------

SUMMARY OF FINANCIAL CONDITION

(IN THOUSANDS, EXCEPT PER SHARE DATA) 1997* 1996* 1995* 1994* 1993*
- ---------------------------------------------------------------------------------------------------------------------
Balance Sheet Data:
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Total assets . . . . . . . . . . . . . . . . . . . $419,101 $393,878 $230,874 $220,186 $186,264
Working capital . . . . . . . . . . . . . . . . . . 74,024 69,461 67,044 57,713 49,046
Ratios:
Current assets to current liabilities . . . . 2.0/1 2.1/1 2.5/1 2.1/1 2.4/1
Average inventory turnover . . . . . . . . . 6.9 6.8 7.2 6.7 6.1
Average accounts receivable turnover . . . . 7.9 7.9 8.4 8.2 8.1
- ---------------------------------------------------------------------------------------------------------------------
Net property, plant and equipment . . . . . . . . . $124,180 $124,580 $ 69,675 $ 59,636 $ 52,867
Capital expenditures . . . . . . . . . . . . . . . 18,776 18,193 23,427 14,701 11,240
Depreciation . . . . . . . . . . . . . . . . . . . 19,136 15,373 11,819 11,885 10,295
- ---------------------------------------------------------------------------------------------------------------------
Debt:
Senior debt . . . . . . . . . . . . . . . . . . $104,910 $117,626 $ 4,485 $ 3,855 $ 3,820
Senior debt as a percent of total capitalization 34.5% 39.7% 2.6% 2.5% 2.8%
Total debt . . . . . . . . . . . . . . . . . . . $104,910 $186,626 $ 73,485 $ 72,855 $ 72,820
Total debt as a percent of total capitalization 34.5% 62.9% 42.9% 48.0% 53.4%
- ---------------------------------------------------------------------------------------------------------------------
Stockholders' equity . . . . . . . . . . . . . . . $198,792 $109,986 $ 97,953 $ 79,031 $ 63,644

Stockholders' equity per share . . . . . . . . . . 14.92 12.73 11.07 8.95 7.23

Return on average stockholders' equity . . . . . . 17.2% 17.1% 21.4% 20.5% 18.0%
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>

*The per share data and weighted average number of shares outstanding reflect
the new presentation of earnings per share, a 3 for 2 stock split effected in
the form of a stock dividend in 1997 and 10% stock dividends in both 1996 and
1995.

10 Varlen Corporation

<PAGE>

CONSOLIDATED STATEMENTS OF EARNINGS
Varlen Corporation and Subsidiaries

YEAR ENDED JANUARY 31,
(IN THOUSANDS, EXCEPT PER SHARE DATA) 1998 1997 1996
- ---------------------------------------------------------------------------------
<S> <C> <C> <C>
Net sales . . . . . . . . . . . . . . . . . . . . $522,254 $409,475 $386,987
Cost of sales . . . . . . . . . . . . . . . . . 392,584 309,027 290,052
----------------------------
Gross profit . . . . . . . . . . . . . . . . . . 129,670 100,448 96,935
Selling, general and administrative expenses . 74,887 63,607 57,762
----------------------------
Earnings from operations. . . . . . . . . . . . . 54,783 36,841 39,173
Interest expense . . . . . . . . . . . . . . . (9,536) (9,402) (5,281)
Interest income . . . . . . . . . . . . . . . . 234 662 814
Gain on sale of business . . . . . . . . . . . -- 3,730 --
----------------------------
Earnings before income taxes . . . . . . . . . . 45,481 31,831 34,706
Income tax expense . . . . . . . . . . . . . . 19,830 13,974 15,097
----------------------------
Net earnings . . . . . . . . . . . . . . . . . . $ 25,651 $ 17,857 $ 19,609
----------------------------
----------------------------
Basic earnings per share . . . . . . . . . . . . $ 2.41 $ 2.06 $ 2.21
----------------------------
----------------------------
Diluted earnings per share . . . . . . . . . . . $ 1.93 $ 1.51 $ 1.62
----------------------------
----------------------------
Weighted average number of shares--basic . . . . 10,653 8,677 8,864
----------------------------
----------------------------
Weighted average number of shares--diluted . . . 13,755 13,617 13,794
----------------------------
----------------------------

</TABLE>

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

DEFERRED TOTAL
ADDITIONAL STOCK STOCK-
COMMON PAID-IN RETAINED COMPEN- TREASURY HOLDERS'
(IN THOUSANDS, EXCEPT PER SHARE DATA) STOCK CAPITAL EARNINGS SATION STOCK EQUITY
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance at February 1, 1995 . . . . . . . . . . . . $ 487 $ 16,516 $62,730 $(702) $ -- $ 79,031
Issuance of common stock under options . . . . . . 5 837 -- -- -- 842
Amortization of deferred stock compensation . . . . -- -- -- 206 -- 206
Cash received on stock subscriptions . . . . . . . -- -- 388 -- -- 388
10% stock dividend . . . . . . . . . . . . . . . . 49 12,281 (12,330) -- -- --
Net earnings . . . . . . . . . . . . . . . . . . . -- -- 19,609 -- -- 19,609
Cash dividends ($.23 per share) . . . . . . . . . . -- -- (2,112) -- -- (2,112)
Purchase of treasury stock . . . . . . . . . . . . -- -- -- -- (965) (965)
Additional minimum pension liability . . . . . . . -- -- 69 -- -- 69
Currency translation adjustments--unrealized . . . -- -- 885 -- -- 885
---------------------------------------------------------------------
Balance at January 31, 1996 . . . . . . . . . . . . 541 29,634 69,239 (496) (965) 97,953
Issuance of common stock under options . . . . . . 1 226 (48) -- 88 267
Amortization of deferred stock compensation . . . . -- -- -- 205 -- 205
Cash received on stock subscriptions . . . . . . . -- -- 233 -- -- 233
10% stock dividend . . . . . . . . . . . . . . . . 34 7,613 (11,764) -- 4,117 --
Net earnings . . . . . . . . . . . . . . . . . . . -- -- 17,857 -- -- 17,857
Cash dividends ($.24 per share) . . . . . . . . . . -- -- (2,084) -- -- (2,084)
Purchase of treasury stock . . . . . . . . . . . . -- -- -- -- (3,240) (3,240)
Additional minimum pension liability . . . . . . . -- -- (6) -- -- (6)
Currency translation adjustments--unrealized . . . -- -- (1,199) -- -- (1,199)
---------------------------------------------------------------------
Balance at January 31, 1997 . . . . . . . . . . . . 576 37,473 72,228 (291) -- 109,986
Issuance of common stock under options . . . . . . 8 1,190 -- -- -- 1,198
Amortization of deferred stock compensation . . . . -- -- -- 197 -- 197
Cash received on stock subscriptions . . . . . . . -- -- 322 -- -- 322
Deferred incentive stock purchase plan . . . . . . -- 291 (238) (53) -- --
3 for 2 stock split . . . . . . . . . . . . . . . . 443 -- (443) -- -- --
Conversion of convertible debentures . . . . . . . 305 66,859 -- -- -- 67,164
Net earnings . . . . . . . . . . . . . . . . . . . -- -- 25,651 -- -- 25,651
Cash dividends ($.24 per share) . . . . . . . . . . -- -- (2,639) -- -- (2,639)
Additional minimum pension liability . . . . . . . -- -- (70) -- -- (70)
Currency translation adjustments--unrealized . . . -- -- (3,017) -- -- (3,017)
Balance at January 31, 1998 . . . . . . . . . . . . $1,332 $105,813 $91,794 $(147) $ -- $198,792
---------------------------------------------------------------------
---------------------------------------------------------------------

</TABLE>

See accompanying condensed notes to consolidated financial statements.

VARLEN CORPORATION 11

<PAGE>

CONSOLIDATED BALANCE SHEETS
Varlen Corporation and Subsidiaries

JANUARY 31,
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 1998 1997
- ------------------------------------------------------------------------------
<C> <C> <C>
Assets:
Current assets:
Cash and cash equivalents . . . . . . . . . . . . . . $ 6,206 $ 3,133
Accounts receivable, less allowance for
doubtful accounts of $1,808 and $1,455 . . . . . 70,972 62,088
Inventories:
Raw materials . . . . . . . . . . . . . . . . . . 22,343 23,795
Work in process . . . . . . . . . . . . . . . . . 19,094 17,285
Finished goods . . . . . . . . . . . . . . . . . . 17,360 12,551
-----------------------
. . . . . . . . . . . . . . . . . . . . . . . . . . . 58,797 53,631
-----------------------
Deferred and refundable income taxes . . . . . . . . 7,268 8,244

Other current assets . . . . . . . . . . . . . . . . 6,924 5,357
-----------------------
Total current assets . . . . . . . . . . . . . . . . 150,167 132,453
-----------------------
Property, plant and equipment:

Land . . . . . . . . . . . . . . . . . . . . . . . 4,404 5,436

Buildings . . . . . . . . . . . . . . . . . . . . . 41,564 39,779
Machinery and equipment . . . . . . . . . . . . . . 170,564 155,224
-----------------------
. . . . . . . . . . . . . . . . . . . . . . . . . . . 216,532 200,439
Less accumulated depreciation . . . . . . . . . . . 92,352 75,859
-----------------------
124,180 124,580
-----------------------

Goodwill and other intangible assets, less accumulated
amortization of $21,637 and $18,128 . . . . . . . . 140,675 133,419
Investments and other assets . . . . . . . . . . . . 4,079 3,426
-----------------------
-----------------------
. . . . . . . . . . . . . . . . . . . . . . . . . . . $ 419,101 $ 393,878
-----------------------
-----------------------

- ------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY:
Current liabilities:
Current maturities of long-term debt . . . . . . . $ 195 $ 2,273
Accounts payable . . . . . . . . . . . . . . . . . 33,026 26,623
Accrued expenses . . . . . . . . . . . . . . . . . 38,763 32,366
Income taxes payable . . . . . . . . . . . . . . . 4,159 1,730

Total current liabilities . . . . . . . . . . . . . . 76,143 62,992
Long-term debt:
Convertible subordinated debentures . . . . . . . . . -- 69,000
Other long-term debt . . . . . . . . . . . . . . . . 104,715 115,353
-----------------------
Total long-term debt . . . . . . . . . . . . . . . . 104,715 184,353
-----------------------
Deferred income taxes . . . . . . . . . . . . . . . . 14,679 16,252
Other liabilities . . . . . . . . . . . . . . . . . . 24,772 20,295
Commitments and contingent liabilities. . . . . . . . -- --
Stockholders' equity:
Preferred stock, par value $1.00 per share;
authorized 500 shares, issuable in series;
none issued . . . . . . . . . . . . . . . . . . . -- --
Common stock, par value $.10 per share;
authorized 20,000 shares; issued:
13,322 and 8,637 . . . . . . . . . . . . . . . . 1,332 576
Additional paid-in capital . . . . . . . . . . . . 105,813 37,473
Retained earnings . . . . . . . . . . . . . . . . . 91,794 72,228
Deferred stock compensation . . . . . . . . . . . . (147) (291)
-----------------------
Total stockholders' equity . . . . . . . . . . . . . 198,792 109,986
-----------------------
$ 419,101 $ 393,878
-----------------------
-----------------------

</TABLE>

See accompanying condensed notes to consolidated financial statements.

12 VARLEN CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS
Varlen Corporation and Subsidiaries

YEAR ENDED JANUARY 31,
(IN THOUSANDS) 1998 1997 1996
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net earnings . . . . . . . . . . . . . . . . . . $ 25,651 $ 17,857 $ 19,609
Adjustments to reconcile net earnings to net
cash provided by operating activities:
Depreciation . . . . . . . . . . . . . . . . . . 19,136 15,373 11,819
Amortization . . . . . . . . . . . . . . . . . 5,338 3,725 2,440
Deferred income taxes . . . . . . . . . . . . . (792) 1,165 476
Gain on sale of business . . . . . . . . . . . -- (3,730) --
Change in assets and liabilities net of
effects from purchased and sold businesses:
Accounts receivable, net . . . . . . . . . (10,054) 1,572 2,751
Inventories . . . . . . . . . . . . . . . . (2,813) 245 1,740
Refundable income taxes . . . . . . . . . . 2,496 (2,515) 8
Other current assets . . . . . . . . . . . (1,207) (44) (522)
Accounts payable . . . . . . . . . . . . . 6,675 3,047 (6,061)
Accrued expenses . . . . . . . . . . . . . 1,163 (9,623) (1,079)
Income taxes payable . . . . . . . . . . . 2,303 1,954 (1,803)
Other noncurrent assets . . . . . . . . . . (3,612) 899 1,878
Other noncurrent liabilities . . . . . . . 4,115 1,181 859
----------------------------
Total adjustments . . . . . . . . . . . . . . . . 22,748 13,249 12,506
----------------------------
Net cash provided by operating activities . . 48,399 31,106 32,115
----------------------------
Cash flows from investing activities:
Fixed asset expenditures . . . . . . . . . . . . (18,776) (18,193) (23,427)
Cost of purchased businesses, net of cash
acquired and other long-term investments . . (12,869) (154,926) (6,253)
Sale of businesses . . . . . . . . . . . . . . -- 21,118 8,013
Sale of marketable securities . . . . . . . . . -- 4,469 --
Disposals and other changes in property,
plant and equipment . . . . . . . . . . . . . 777 243 395
----------------------------
Net cash used in investing activities . . . . . . (30,868) (147,289) (21,272)
----------------------------
Cash flows from financing activities:
Proceeds from debt . . . . . . . . . . . . . . 63 111,083 1,107
Payments of debt . . . . . . . . . . . . . . . (12,737) (9,551) (82)
Issuance of common stock under option plans . . 705 95 581
Cash received on stock subscriptions . . . . . 322 233 388
Purchase of treasury stock. . . . . . . . . . . -- (3,240) (965)
Cash dividends paid . . . . . . . . . . . . . . (2,639) (2,084) (2,112)
----------------------------
Net cash (used in) provided by financing
activities . . . . . . . . . . . . . . . . (14,286) 96,536 (1,083)
----------------------------
Effect of exchange rate changes on cash . . . . . (172) (135) 59
----------------------------
Net increase (decrease) in cash and cash
equivalents . . . . . . . . . . . . . . . . . . 3,073 (19,782) 9,819
Cash and cash equivalents at beginning of year . 3,133 22,915 13,096
----------------------------
Cash and cash equivalents at end of year . . . . $ 6,206 $ 3,133 $ 22,915
----------------------------
----------------------------

</TABLE>

See accompanying condensed notes to consolidated financial statements.

VARLEN CORPORATION 13

<PAGE>

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Varlen Corporation and Subsidiaries

(The complete financial statement footnotes can be found in the Company's 1998
Proxy Statement)

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

(a) PRINCIPLES OF CONSOLIDATION: The consolidated financial statements include
the accounts of Varlen Corporation and all of its subsidiaries (the "Company").
All significant intercompany balances and transactions have been eliminated.

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

(c) CASH AND CASH EQUIVALENTS: The Company considers all highly liquid
investments purchased with a maturity of three months or less from the date of
purchase to be cash equivalents.

(d) INVENTORIES: Inventories are stated at the lower of cost or market. Cost of
inventories is determined using the last-in, first-out (Lifo) method for 70% and
79% of inventories, at January 31, 1998 and 1997, respectively. The first-in,
first-out (Fifo) method is used for all remaining inventories. If the Fifo
method of determining inventory costs had been used for all inventories,
inventories would have increased approximately $1,839,000 and $1,501,000 at
January 31, 1998 and 1997, respectively.

(e) PROPERTY, PLANT AND EQUIPMENT: Property, plant and equipment are recorded at
cost. Depreciation is provided on the straight-line method over the estimated
useful lives of the assets. The useful lives of buildings range from 10 to 45
years and the useful lives of machinery and equipment range from 3 to 12 years.

(f) LONG-LIVED ASSETS: Goodwill is amortized on a straight-line basis over a
period of 15 to 40 years. The carrying amount of goodwill and other long-lived
assets is evaluated annually to determine if adjustment to the amortization or
depreciation period or to the unamortized balance is warranted. Such evaluation
is based principally on the expected utilization of long-lived assets and the
projected undiscounted cash flows of the operations to which the long-lived
assets are deployed. Other intangible assets are amortized on a straight-line
basis over their useful lives.

(g) EARNINGS PER SHARE: Basic earnings per share is computed on the basis of the
weighted average number of common shares outstanding during the period. The
computation of diluted earnings per share includes common equivalent shares
arising from stock incentive plans using the treasury stock method and the
weighted average number of shares that would have been issued upon conversion of
the convertible debentures including the effect on net earnings for the
reduction in the after-tax interest expense on the converted debentures.

(h) FOREIGN CURRENCY TRANSLATION: Foreign currency financial statements of
foreign operations where the local currency is the functional currency are
translated using exchange rates in effect at period end for assets and
liabilities and average exchange rates during the period for results of
operations. Related translation adjustments are reported as a component of
Stockholders' Equity. Gains and losses from foreign currency transactions are
included
in earnings.

(i) NEW ACCOUNTING STANDARDS: The Financial Accounting Standards Board (the
"Board") recently issued several Statements of Financial Accounting Standards
("Standards"):

In February 1997, the Board issued Standard No. 128 ''Earnings Per Share''
which was adopted by the Company as of January 31, 1998. This Standard requires
the presentation of earnings per share on a Basic and Diluted basis. All
financial information presented in the accompanying financial statements and
footnotes reflect the requirements of this new Statement including any needed
restatements.

In June 1997, the Board issued Standards No. 130 ''Reporting Comprehensive
Income'' and No. 131 ''Disclosures about Segments of an Enterprise and Related
Information''. Standard No. 130 establishes standards for the reporting and
display of comprehensive income and its components and is effective for the
Company's first quarter of 1998 reporting. Standard No. 131 establishes
standards for reporting information about operating segments and related
disclosures about products and services, geographic areas and major customers
and is effective for the Company's 1998 year end reporting. These Standards
expand or modify current disclosures and, accordingly, will have no impact on
the Company's reported financial position, results of operations or cash flows.
The Company is currently assessing the impact of Standard No. 131 on its
reportable operating segments and related disclosures.

In February 1998, the Board issued Standard No. 132 ''Employers' Disclosures
about Pensions and Other Postretirement Benefits'' which is effective for the
Company's 1998 year end reporting. This Standard revises disclosures about
pension and other postretirement benefit plans and will have no impact on the
Company's reported financial position, results of operations or cash flows.

(j) DERIVATIVE FINANCIAL INSTRUMENTS: The Company currently uses interest rate
swaps to transfer or reduce the risk of interest rate volatility. The amount to
be paid or received from interest rate swaps is charged or credited to interest
expense over the lives of the interest rate swap agreements.

- -------------------------------------------------------------------------------
2. ACQUISITIONS

In October 1997, the Company purchased the railroad divisions of Ringfeder GmbH
located in Germany and Hanacke Zelzarny a Perovny, a.s. located in the Czech
Republic. These entities are suppliers to the Company's German railcar
cushioning device maker Karl Georg Bahntechnik GmbH which was purchased
effective in December 1996. In November 1997, the Company purchased the
Petrospec-Registered Trademark- product line of portable laboratory and process
petroleum analyzers from Boston Advanced Technologies, Inc., for which it had
been the exclusive worldwide distributor of these products. These acquisitions
were financed with cash on hand and through the Company's existing credit
facility.

In June 1996, the Company, a wholly-owned subsidiary of the Company and
Brenco, Incorporated (''Brenco''), a manufacturer and reconditioner of
specialized tapered roller bearings for the railroad industry with headquarters
in Virginia, entered into an acquisition agreement for the purchase of all of
Brenco's outstanding common stock for $16.125 per share. As a result of the
tender offer which expired on July 18, 1996, the Company owned approximately 96%
of the outstanding common stock of Brenco. On August 23, 1996, the remaining
non-tendered shares were canceled and converted into the right to receive
$16.125 per share, making Brenco a wholly-owned subsidiary of the Company. The
total purchase price for the common stock of Brenco was approximately $165
million in cash and was financed with a $190 million credit facility from the
Company's existing bank group plus cash on hand.

The acquisitions have been accounted for by the purchase method of accounting
with the excess of the purchase price over the fair value of the net assets
acquired amortized over a period of 15 to 40 years. The operating results of the
businesses acquired have been included in the accompanying consolidated results
of operations from the respective dates of acquisition.

14 Varlen Corporation

<PAGE>

3. LONG-TERM DEBT

Long-term debt at year end is comprised of the following
(in thousands):
- ------------------------------------------------------------------------------
1997 1996
- ------------------------------------------------------------------------------
<S> <C> <C>
Term loan . . . . . . . . . . . . . . . . . . . . $100,000 $107,000
Revolving credit facility . . . . . . . . . . . . -- 4,000
6.5% convertible subordinated
debentures due 2003 . . . . . . . . . . . . . . -- 69,000
Industrial revenue bonds and other debt . . . . . 4,910 6,626
-------- --------
. . . . . . . . . . . . . . . . . . . . . . . . . 104,910 186,626
Less current portion . . . . . . . . . . . . . . (195) (2,273)
-------- --------
Long-term debt . . . . . . . . . . . . . . . . . $104,715 $184,353
-------- --------
-------- --------
</TABLE>

In July 1996, the Company entered into a $190 million term loan and revolving
credit agreement (the ''Agreement'') which replaced its $80 million revolving
credit facility. This Agreement was obtained to facilitate the Brenco
acquisition as well as future acquisitions. The Agreement is in the form of two
facilities. Facility ''A'' is a term-loan of $110 million and facility ''B'' is
a revolving credit facility with an $80 million capacity. The term-loan comes
due on July 19, 2002 and requires escalating quarterly principal payments which
began in October 1996. The revolving credit facility requires no prepayments and
comes due on July 19, 2002 with two optional one year extensions. The Agreement
provides for interest at one of three market interest rates selected by the
Company plus an applicable margin which is dependent upon the market interest
rate chosen and the relationship of debt to cash flow. The highest interest rate
under the Agreement was the prime rate with maximum commitment fees of 3/8 of 1%
on the unused portion of the line of credit. Pursuant to the Agreement, the
Company has entered into four interest rate swap agreements with durations of
one to three years. The swap agreements effectively convert $40 million of its
term loan from variable interest rate debt to fixed interest rate debt with an
average fixed interest rate of 6.6% at January 31, 1998. While the Company is
exposed to credit loss on its interest rate swaps in the event of
non-performance by the counterparties to such swaps, management believes such
non-performance is unlikely to occur given the financial resources of the
counterparties. The average interest rate on all of the Company's debt during
1997 was approximately 7.0%.

The Agreement contains provisions which require the Company to maintain a
specified level of net worth and comply with various financial ratios and
includes, among other provisions, restrictions on leases, investments, dividend
payments and the incurrence of additional indebtedness. At January 31, 1998,
$32,069,000 was available for dividend distributions under these provisions.

Industrial revenue bonds, due in 2004, and other notes payable are secured by
the property, plant and equipment purchased with the proceeds of such debt.
Interest on the bonds is paid at rates ranging from 6.8% to 7.0%.

In September 1997, the Company completed the call of its 6.5% Convertible
Subordinated Debentures Due 2003. Substantially all of the debentures were
voluntarily converted into approximately 4,582,000 shares (after restatement for
the 1997 3 for 2 stock split) of Common Stock of the Company including
conversions occurring just prior to the call for redemption.

Scheduled repayments of long-term debt in each of the next five years are
$10,195,000, $16,152,000, $22,138,000, $26,750,000 and $26,085,000. The term
loan repayments due in the next twelve months are classified as long-term on the
consolidated balance sheets as the Company has the ability and intent to
refinance these repayments under its revolving credit facility.

- -------------------------------------------------------------------------------
4. INDUSTRY SEGMENTS

Information relating to the Company's segments is as follows
(in thousands):

Net Operating Identifiable Capital Depreciation
Sales Profit Assets Expenditures Amortization
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1997
Transportation
products . . . . . . . . . . . . . . . . . $484,397 $58,466 $369,055 $18,465 $22,382
Petroleum
analyzers** . . . . . . . . . . . . . . . . 37,857 4,727 38,944 192 1,339
----------------------------------------------------------------
. . . . . . . . . . . . . . . . . . . . . . . 522,254 63,193 407,999 18,657 23,721
Corporate . . . . . . . . . . . . . . . . . . -- (8,410) 11,102 119 753
Net interest expense . . . . . . . . . . . . -- (9,302) -- -- --
Total . . . . . . . . . . . . . . . . . . . . $522,254 $45,481 $419,101 $18,776 $24,474
----------------------------------------------------------------
----------------------------------------------------------------
1996
Transportation
products . . . . . . . . . . . . . . . . . $363,999 $37,407 $348,417 $17,628 $16,543
Petroleum
analyzers** . . . . . . . . . . . . . . . . 45,476 9,781* 34,695 431 1,731
----------------------------------------------------------------
. . . . . . . . . . . . . . . . . . . . . . . 409,475 47,188 383,112 18,059 18,274
Corporate . . . . . . . . . . . . . . . . . . -- (6,617) 10,766 134 824
Net interest expense . . . . . . . . . . . . -- (8,740) -- -- --
Total . . . . . . . . . . . . . . . . . . . . $409,475 $31,831 $393,878 $18,193 $19,098
----------------------------------------------------------------
----------------------------------------------------------------
1995
Transportation
products . . . . . . . . . . . . . . . . . $317,122 $36,855 $150,801 $22,428 $10,609
Petroleum
analyzers** . . . . . . . . . . . . . . . . 69,865 9,035 57,207 904 2,925
. . . . . . . . . . . . . . . . . . . . . . . 386,987 45,890 208,008 23,332 13,534
Corporate . . . . . . . . . . . . . . . . . . -- (6,717) 22,866 95 725
Net interest expense . . . . . . . . . . . . -- (4,467) -- -- --
----------------------------------------------------------------
Total . . . . . . . . . . . . . . . . . . . . $386,987 $34,706 $230,874 $23,427 $14,259
----------------------------------------------------------------
----------------------------------------------------------------
</TABLE>

* INCLUDES A $3.7 MILLION PRE-TAX GAIN ON THE SALE OF A DIVISION.
** THIS BUSINESS SEGMENT WAS FORMERLY KNOWN AS THE ANALYTICAL INSTRUMENTS
SEGMENT.
- ------------------------------------------------------------------------------
Sales to one customer by a company in the transportation products segment
aggregated 15% of consolidated net sales in each of 1997, 1996, and 1995. In
addition, sales of one product to customers of the transportation products
segment aggregated 12%, 12% and 14% of consolidated net sales in 1997, 1996 and
1995, respectively, and sales of two other products to customers of the
transportation product segment were 14% of one product and 11% of another
product of consolidated net sales in 1997 and 1995, respectively.

Information relating to the Company by geographic area is as follows (in
thousands):

<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Net Net Identifiable
Sales Earnings Assets
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
1997
Domestic Operations . . . . . . . . . . $469,265 $35,432 $370,727
European Operations . . . . . . . . . . 52,989 1,453 48,374
----------------------------------
. . . . . . . . . . . . . . . . . . . . 522,254 36,885 419,101
Corporate and net
interest expense . . . . . . . . . . -- (11,234) --
----------------------------------
Total . . . . . . . . . . . . . . . . . $522,254 $25,651 $419,101
----------------------------------
----------------------------------
1996
Domestic Operations . . . . . . . . . . $381,993 $27,321* $366,051
European Operations . . . . . . . . . . 27,482 187 27,827
----------------------------------
. . . . . . . . . . . . . . . . . . . . 409,475 27,508 393,878
Corporate and net
interest expense . . . . . . . . . . -- (9,651) --
----------------------------------
Total . . . . . . . . . . . . . . . . . $409,475 $17,857 $393,878
----------------------------------
----------------------------------
1995
Domestic Operations . . . . . . . . . . $358,881 $26,179 $198,346
European Operations . . . . . . . . . . 28,106 360 32,528
. . . . . . . . . . . . . . . . . . . . 386,987 26,539 230,874
Corporate and net
interest expense . . . . . . . . . . -- (6,930) --
----------------------------------
Total . . . . . . . . . . . . . . . . . $386,987 $19,609 $230,874
----------------------------------
----------------------------------

</TABLE>

* INCLUDES A $2.1 MILLION AFTER-TAX GAIN ON THE SALE OF A DIVISION.

Export sales from the Company's United States operations were 11%, 10% and
10%, respectively, of consolidated net sales in 1997, 1996 and 1995.

VARLEN CORPORATION 15

<PAGE>

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED

- ------------------------------------------------------------------------------
5. STOCKHOLDERS' EQUITY

On September 29, 1997, the Company's Board of Directors declared a three-for-two
stock split in the form of a stock dividend payable on November 18, 1997, to
stockholders of record on October 31, 1997. The dividend resulted in the
issuance of approximately 4.4 million new shares of Common Stock. All share and
per share amounts have been restated to reflect the stock dividend.

On May 29, 1996, the Company's Board of Directors declared a 10% stock
dividend payable on July 15, 1996 to stockholders of record on July 1, 1996. The
dividend resulted in the issuance of approx-imately 522,000 new shares of Common
Stock and the reissuance of the remaining 262,500 shares of Common Stock held in
treasury.

On January 4, 1996, the Company's Board of Directors authorized the purchase
of up to 500,000 shares of its Common Stock or the equivalent amount of its 6 1
/2 percent convertible subordinated debentures by the Company. As of January 31,
1998, 181,000 shares (before restatement for the stock dividends) of the
Company's Common Stock were purchased under this authorization and recorded as
treasury shares, at cost.

On May 22, 1995, the Company's Board of Directors authorized a 10% stock
dividend payable on July 10, 1995 to stockholders of record on June 23, 1995.
The dividend resulted in the issuance of approximately 805,500 new shares of
Common Stock.

- ------------------------------------------------------------------------------

REPORT BY MANAGEMENT

TO THE STOCKHOLDERS AND BOARD OF DIRECTORS OF VARLEN CORPORATION:

Management is responsible for the consolidated financial statements which
have been prepared by the Company in accordance with generally accepted
accounting principles applied on a consistent basis. The financial statements
necessarily include amounts based on judgments and estimates by management as
required by the accounting process. Management also prepared the other financial
information in this document.

The Company's system of internal accounting control, which is applied by
operating and financial managers, has been designed to provide reasonable
assurance that assets are safeguarded, that transactions are executed and
recorded in accordance with management's established policies and procedures,
and that accounting records are adequate for preparation of financial statements
and other financial information. The design, monitoring and revision of internal
accounting control systems involve, among other things, management's judgment
with respect to the relative cost and expected benefits of specific control
measures.

Varlen's internal audit function reviews the accounting records, financial
controls and practices on a planned, rotational basis to determine compliance
with corporate policies. The consolidated financial statements have been audited
by Deloitte & Touche LLP, independent auditors appointed by the Board of
Directors. Their responsibility is to audit the Company's consolidated financial
statements in accordance with generally accepted auditing
standards and to express their opinion with respect to the statements being
presented fairly in conformity with generally accepted accounting principles.

The Audit Committee, which is composed solely of outside directors, meets
with and reviews the activities of corporate financial management and the
independent auditors to ascertain that each is properly discharging its
responsibility. The independent auditors and management have unrestricted access
to the Audit Committee, which meets periodically to review accounting, auditing,
internal control and financial reporting matters.

/s/Richard L. Wellek /s/Richard A. Nunemaker

RICHARD L. WELLEK RICHARD A. NUNEMAKER

Chairman and Vice President, Finance and
Chief Executive Officer Chief Financial Officer
March 2, 1998

INDEPENDENT AUDITORS' REPORT

TO THE BOARD OF DIRECTORS AND STOCKHOLDERS
VARLEN CORPORATION, NAPERVILLE, ILLINOIS:

We have audited the consolidated balance sheets of Varlen Corporation and
subsidiaries as of January 31, 1998 and 1997, and the related consolidated
statements of earnings, stockholders' equity, and cash flows for each of the
three years in the period ended January 31, 1998. Such consolidated financial
statements and our report thereon dated March 2, 1998, expressing an unqualified
opinion (which are not included herein) are included in the proxy statement for
the 1998 annual meeting of stockholders. The accompanying condensed consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on such condensed consolidated financial
statements in relation to the complete consolidated financial statements.

In our opinion, the information set forth in the accompanying condensed
consolidated balance sheets as of January 31, 1998 and 1997 and the related
condensed consolidated statements of earnings, stockholders' equity, and cash
flows for each of the three years in the period ended January 31, 1998 is fairly
stated in all material respects in relation to the basic consolidated financial
statements from which it has been derived.

/s/Deloitte & Touche LLP

Deloitte & Touche LLP
Chicago, Illinois
March 2, 1998

16 VARLEN CORPORATION

<PAGE>

BOARD OF DIRECTORS

RUDOLPH GRUA, age 69 l
*Vice Chairman and Director of
General Binding Corporation

RAYMOND A. JEAN, age 55
*President and Chief Operating Officer
Director of Lindberg Corporation

ERNEST H. LORCH, age 65 n s
Senior Chairman
*Of Counsel to Whitman Breed
Abbott & Morgan, Attorneys
Director of Tyler Corporation

L. WILLIAM MILES, age 64 n
*Vice President for Administration,
Fairfield University, Connecticut

GREG A. ROSENBAUM, age 45 n
*President, Palisades Associates, Inc.
Director of Richey Electronics, Inc.

JOSEPH J. ROSS, age 52 l s
*Chairman, President and Chief
Executive Officer of
Federal Signal Corporation

THEODORE A. RUPPERT, age 67 l
*General Partner, Village Development
Chairman, Chief Executive Officer and
Director of Glaize Development and
Director of Pioneer Bank and Trust

RICHARD L. WELLEK, age 59 s
*Chairman and Chief Executive Officer

* Principal Occupation
** Member Audit Committee
+ Member Compensation Committee
++ Member Nominating and Organization Committee

OFFICERS

RICHARD L. WELLEK, age 59
Chairman (1997) and Chief Executive
Officer; President and Chief Executive
Officer (1983); Various Varlen Executive
and Operational positions (1968-1983);
B.S. Industrial Management University
of Illinois

RAYMOND A. JEAN, age 55
President (1997) and Chief Operating
Officer; Executive Vice President and
Chief Operating Officer (1993); Group
Vice President (1988-1992); B.S.
Engineering Physics University of Maine;
MBA University of Chicago

GEORGE W. HOFFMAN, age 57
Vice President (1990); President of
Keystone Industries (1984); Executive
Vice President of Operations of Keystone
Industries (1979-1984);
B.S. Chemical Engineering
University of Pittsburgh

RICHARD A. NUNEMAKER, age 49
Vice President, Finance and Chief
Financial Officer (1991); Vice President,
Controller (1987); B.S. Accountancy;
M.A.S. University of Illinois, C.P.A.

VICKI L. CASMERE, age 40
Vice President, General Counsel
and Secretary (1996); Corporate
Counsel of Caremark Inc. (1992-1996),
Vice President (1994);
B.S. Finance University of Illinois;
J.D. The John Marshall Law School

GENERAL INFORMATION

TRANSFER AGENT
Harris Trust & Savings Bank
111 West Monroe Street
Chicago, Illinois 60690

INDEPENDENT AUDITORS
Deloitte & Touche LLP
Two Prudential Plaza
180 North Stetson Avenue
Chicago, Illinois 60601

SHARES LISTED
Varlen Corporation common stock is traded on the Nasdaq Stock Market under the
symbol VRLN.

INFORMATION CONTACT
Richard A. Nunemaker
Vice President, Finance and Chief Financial Officer
55 Shuman Boulevard
P.O. Box 3089
Naperville, Illinois 60566-7089
(630) 420-0400

ANNUAL MEETING
The Annual Meeting of Stockholders will be held at 10 a.m. (local time)
Wednesday, May 27, 1998 at the Radison Hotel Lisle-Naperville, 3000 Warrenville
Road, Lisle, Illinois 60532

SAFE HARBOR PROVISION

This Summary Annual Report contains outlook and other forward-looking statements
which are not historical facts. These forward-looking statements are based upon
certain assumptions about a number of important factors. While the Company
believes that its assumptions are reasonable, it cautions that there are
inherent difficulties in predicting these factors, that they are subject to
change at any time and that any such change could cause the Company's actual
results to differ materially from those projected in its forward-looking
statements. Among the factors that could cause actual results to differ
materially are: expectations of market growth and size; the demand for the
Company's products and other market acceptance risks; the presence in the market
of competitors with greater financial resources, and the impact of competitive
products and pricing: actual product purchases under existing purchase
agreements and the loss of any significant customers; general market conditions;
the ability of the Company to develop new products; capacity and supply
constraints or difficulties; productivity and efficiency of operations;
availability of resources; the results of the Company's financing efforts; the
effect of the Company's accounting policies; and the effects of general
economic, trade, legal, social and economic conditions. Other risk factors may
be detailed from time to time in the Company's Securities and Exchange
Commission filings. The Company assumes no obligation to update its
forward-looking statements or advise of changes in the assumptions and factors
on which they are based.

FORM 10-K AND PROXY STATEMENT

Stockholders may obtain a copy of the most recent Form 10-K and Proxy Statement
as filed by the Company with the SEC without charge by addressing a written
request to Richard A. Nunemaker, Vice President, Finance and Chief Financial
Officer, Varlen Corporation at the corporate office.

Design: Hirsch O'Connor Design, Chicago

[LOGO]
Varlen Corporation
55 Shuman Blvd., P.O. Box 3089
Naperville, Illinois 60556-7089
(630)420-0400

SALES & DISTRIBUTION
[PHOTO] MANUFACTURING

VARLEN WORLDWIDE

[LOGO]
BRENCO, INCORPORATED

[LOGO]
CONSOLIDATED METCO, INC.

[LOGO]
MEANS INDUSTRIES, INC.

[LOGO]
UNIT RAIL ANCHOR COMPANY, INC.

KEYSTONE INDUSTRIES, INC. GROUP

[LOGO]
ACIERIES DE PLOERMEL

[LOGO]
EISENBAHNTECHNIK HALBERSTADT

[LOGO]
KARL GEORG BAHNTECHNIK GMBH

[LOGO]
"KG" RINGFEDER BAHNTECHNIK GMBH

[LOGO]
KEYSTONE RAILWAY EQUIPMENT COMPANY

[LOGO]
WAKOMP S.R.O.

VARLEN LOCOMOTIVE GROUP

[LOGO]
CHROME CRANKSHAFT COMPANIES

[LOGO]
PRIME MANUFACTURING CORPORATION

VARLEN INSTRUMENTS INC.
[LOGO] Manufacturers of:

[LOGO]

Printed on Recycled Paper

<PAGE>

VARLEN 10-K PICTURE CAPTIONS

-- Front Cover -- A picture of a Chevy Blazer automobile, a freight
train, an eighteen wheel truck and an oil refinery. In the
background is a one-way clutch and a tapered roller bearing.

-- Inside the Front Cover -- Under the "Railroad" heading is a picture
of a draft gear, a rail anchor, a tapered roller bearing, an HVAC
unit and a hydraulic railroad cushioning device. On the foldout are
two pie graphs, one depicting the 1997 operating profit by segment
of the Registrant and the other depicting the 1997 net sales by
segment of the Registrant.

-- Inside the Front Cover -- Under the "Truck/Trailer" heading is an
aluminum truck engine component, a truck hub and a truck dashboard.

-- Inside the Front Cover -- Under the "Automotive" heading is a
one-way clutch, a transmission component and a steering component.

-- Inside the Front Cover -- Under the "Petroleum Analyzers" heading
are two petroleum analyzers.

-- Page No. 1 -- A picture of the Registrant's President and also the
Chairman of the Board. Also on the page is a graph of net sales for
each year of the five years ending January 31, 1998.

-- Page No. 2 -- A graph of both Diluted E.P.S. and Earnings Before
Interest, Taxes, Depreciation and Amortization, both for each year
of the five years ending January 31, 1998.

-- Page No. 3 -- A picture of the Registrant's Vice President, Finance
and Chief Financial Officer and its Vice President, General Counsel
and Secretary.

-- Page No. 5 -- A picture of an employee holding a one way clutch
surrounded by two other employees, and a picture of an employee
holding a truck hub surrounded by two other employees.

-- Page No. 6 -- A picture of four employees with one holding a clutch
component and a picture of four employees with one holding a truck
component. Also on the page is a graph of Net Earnings for each year
of the five years ending January 31, 1998.

-- Page No. 7 -- A picture of the five person management team of the
Registrant's Walter Herzog GmbH business and a picture of two
employees looking at a railcar shock control device attached to a
freight car.

-- Page No. 8 -- A picture of five employees undergoing Six Sigma
training and a picture of two employees with one holding a part of a
tapered roller bearing. Also on the page is a graph depicting the
Book Value Per Share of the Registrant for each of the five
years ending January 31, 1998.

-- Page No. 9 -- A picture of 5 employees of the Registrant's Unit Rail
Anchor Company. Also on the page is a graph depicting Total Debt as
a Percentage of Total Capitalization for each in the five years
ending January 31, 1998.

-- Inside Back Cover -- A faint inlay of a drawing of a railcar shock
control device.

-- Outside Back Cover -- A flattened map of the globe depicting the
sales and distribution, and manufacturing locations of the
Registrant.

<PAGE>

EXHIBIT 21

LIST OF SUBSIDIARIES

The following table sets forth certain information with respect to the
significant subsidiaries of the Registrant. All of the voting securities of
each subsidiary are owned by the Registrant (or a wholly owned subsidiary of the
Registrant) and its financial statements are included in the consolidated
financial statements of the Registrant.

JURISDICTION OF
NAME INCORPORATION

Acieries de Ploermel France
Brenco, Incorporated Virginia
Chrome Crankshaft Co. Delaware
Chrome Crankshaft Company of Illinois Illinois
Consolidated Metco, Inc. Delaware
Eisenbahntechnik Halberstadt GmbH Germany
Karl Georg Bahntechnik GmbH Germany
Keystone Industries, Inc. Delaware
KG Ringfeder Bahntechnik GmbH Germany
Means Industries, Inc. Michigan
Means Technology Corporation Cayman Islands
Quality Bearing Service of Arkansas, Inc. Virginia
Quality Bearing Service of Kentucky, Inc. Virginia
Quality Bearing Service of Nevada, Inc. Virginia
Quality Bearing Service of Virginia, Inc. Virginia
Prime Manufacturing Corporation Delaware
Unit Rail Anchor Company, Inc. Delaware
Varlen Instruments Inc. Delaware
Walter Herzog GmbH Germany
Wakomp s.r.o. Czech Republic

<PAGE>

EXHIBIT 23

INDEPENDENT AUDITORS' CONSENT

Varlen Corporation:

We consent to the incorporation by reference in the Registration Statements
of Varlen Corporation and subsidiaries on Form S-8, File No. 33-55132; Form
S-8, File No. 33-60995; Form S-3, File No. 333-33909; and Form S-8, File No.
333-45673 of our reports dated March 2, 1998, appearing in and incorporated
by referennce in this Annual Report on Form 10-K of Varlen Corporation and
subsidiaries for the year ended January 31, 1998.

DELOITTE & TOUCHE LLP

Chicago, Illinois
April 20, 1998

<PAGE>

EXHIBIT 24

VARLEN CORPORATION

POWER OF ATTORNEY

KNOW ALL MEN BY THESE PRESENTS, that each of the undersigned
directors of Varlen Corporation (the "Company") does hereby irrevocably
constitute and appoint Richard A. Nunemaker, his attorney-in-fact and agent to
sign and execute in his name and on his behalf, in any and all capacities in
which he may be required to sign, an Annual Report of the Company on Form 10-K
under the Securities and Exchange Act of 1934 for the fiscal year ended January
31, 1998, to be filed with the Securities and Exchange Commission, and any
amendments, revisions or supplements thereto, including any exhibits, schedules
and documents in connection therewith and any other instruments necessary or
incidental thereto, all as fully and to the same effect as he might or could do
in person if present and acting, and does hereby ratify and confirm all that his
attorney-in-fact shall do or cause to be done incident to or in connection with
the foregoing or by virtue of the foregoing.

IN WITNESS WHEREOF, each of the undersigned has duly executed
this Power of Attorney this 6th day of April, 1998.

/S/ ERNEST H. LORCH /S/ GREG A. ROSENBAUM
- ----------------------------- -----------------------------
Ernest H. Lorch, Greg A. Rosenbaum,
Senior Chairman of the Board Director
and Director

/S/ RUDOLPH GRUA /S/ L. WILLIAM MILES
- ----------------------------- -----------------------------
Rudolph Grua, L. William Miles,
Director Director

/S/ THEODORE A. RUPPERT /S/ JOSEPH J. ROSS
- ----------------------------- -----------------------------
Theodore A. Ruppert, Joseph J. Ross,
Director Director

<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED STATEMENTS OF EARNINGS AND THE CONSOLIDATED BALANCE SHEETS OF
VARLEN CORPORATION AND SUBSIDIARIES FOR THE YEAR ENDED JANUARY 31, 1998
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL INFORMATION.
</LEGEND>
<MULTIPLIER> 1,000

<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JAN-31-1998
<PERIOD-START> FEB-01-1997
<PERIOD-END> JAN-31-1998
<CASH> 6,206
<SECURITIES> 0
<RECEIVABLES> 70,972
<ALLOWANCES> 0
<INVENTORY> 58,797
<CURRENT-ASSETS> 150,167
<PP&E> 216,532
<DEPRECIATION> 92,352
<TOTAL-ASSETS> 419,101
<CURRENT-LIABILITIES> 76,143
<BONDS> 104,715
0
0
<COMMON> 1,332
<OTHER-SE> 197,460
<TOTAL-LIABILITY-AND-EQUITY> 419,101
<SALES> 522,254
<TOTAL-REVENUES> 522,254
<CGS> 392,584
<TOTAL-COSTS> 392,584
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 9,536
<INCOME-PRETAX> 45,481
<INCOME-TAX> 19,830
<INCOME-CONTINUING> 25,651
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 25,651
<EPS-PRIMARY> 2.41
<EPS-DILUTED> 1.93

</TABLE>