STEWART & STEVENSON SERVICES INC - 10-K Annual Report

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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_______________________

FORM 10-K
(Mark One)
[X] Annual report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the fiscal year ended January 31, 1994 ("Fiscal 1993") or

[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the transition period from _________to __________.

Commission file number 0-8493

STEWART & STEVENSON SERVICES, INC
(Exact name of registrant as specified in its charter)

Texas 74-1051605
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) identification No.)

2707 North Loop West, Houston, Texas 77008
(Address of principal executive offices) (Zip Code)

Registrant's telephone number, including area code: (713) 868-7700
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, Without Par Value

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]

State the aggregate market value of the voting stock held by
nonaffiliates of the registrant.

$1,289,619,649
(As of February 28, 1994)

Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.

Common Stock, Without Par Value 32,937,065 Shares
(Class) (Outstanding at February 28, 1994)

DOCUMENTS INCORPORATED BY REFERENCE

Document Part of Form 10-K
__________ __________________

Proxy Statement for the 1994 Annual Meeting of Shareholders Part III

PART I

Item 1. Business.

Stewart & Stevenson Services, Inc.(together with its wholly-owned
subsidiaries, the "Company" or "Stewart & Stevenson") was founded in
Houston, Texas in 1902 and was incorporated under the laws of the State
of Texas in 1947. Since its beginning, the Company has been primarily
engaged in custom fabrication enterprises. Stewart & Stevenson consists of
three business segments: the Engineered Power Systems segment, the
Distribution segment and the Tactical Vehicle Systems segment.

The Engineered Power Systems segment designs, engineers and markets engine-
driven equipment principally utilizing diesel or gas turbine engines supplied
by independent manufacturers. The Company's products include gas turbine
generator sets for primary electrical power, including cogeneration
applications, and diesel generator sets for primary, emergency or stand-by
electrical power sources. Stewart & Stevenson is the leading packager of
aeroderivative gas turbine engines for electrical power generation. A
majority of the gas turbine engines used by the Company is manufactured by
General Electric Corporation ("GE") and GE has selected the Company as the
exclusive packager in the United States and Canada for the LM6000, GE's
latest aeroderivative gas turbine engine adapted for industrial use. The
LM6000 is expected to play a key role for utilities needing additional peak
or base load capacity because of its higher fuel efficiency and competitive
capital cost. The Company's engineered power systems are marketed worldwide.
The Company believes that the international market offers significant
opportunities because of the potential growth in demand for electric power,
particularly in developing nations. In addition, the Company offers
long-term operation and maintenance contracts for large gas turbine projects.
The Company also manufactures power systems for both military and commercial
marine applications, aircraft ground support equipment and equipment for the
oilfield service industry.

The Distribution segment markets industrial equipment and related parts
manufactured by others and provides in-shop and on-site repair services for
such products. This segment began operations in 1938 and currently markets
Detroit Diesel engines, General Motors Electro-Motive diesel engines, Allison
automatic transmissions, Hyster material handling equipment, Thermo King
transport refrigeration units and John Deere construction, utility and
forestry equipment. The Distribution segment markets in Texas and other
Western and Southern states, as well as in Mexico, Venezuela and Central
America.

In October 1991, the Company was awarded contracts by the United States
Department of Defense to manufacture the U.S. Army's next generation of
medium tactical vehicles (the "Family of Medium Tactical Vehicles" or
"FMTV"). The FMTV contracts, valued at approximately $1.2 billion, call for
the production of approximately 11,000 trucks over a five year period
beginning in 1992. Under the contracts, the Department of Defense also has
the option to purchase approximately 11,000 additional trucks between Fiscal
1994 and Fiscal 1997. The FMTV includes newly-designed 2 1/2-ton and 5-ton
trucks which will be manufactured in several configurations, including troop
carriers, wreckers, cargo trucks, vans and dump trucks. All variants of the
FMTV incorporate a high level of common parts. Manufacturing of the FMTV is
being performed by the Company's Tactical Vehicle Systems segment at a
facility located near Houston, Texas, and initial truck deliveries commenced
in the first quarter of Fiscal 1993. The Company believes that it will be
able to sell additional trucks to other branches of the U.S. Armed Forces
and to the armed forces of foreign countries.

The Company's fiscal year begins on February 1 of the year stated and ends
on January 31 of the following year. For example, "Fiscal 1993" commenced on
February 1, 1993 and ended on January 31, 1994. Identifiable assets at the
close of Fiscals 1993, 1992, and 1991 and net sales, operating profit and
export sales for such fiscal years for the Company's business segments and
sales to customers which exceed ten percent of consolidated sales are
presented under "Industry Segment Data" in the notes to the consolidated
financial statements in Part II.

ENGINEERED POWER SYSTEMS SEGMENT

Stewart & Stevenson designs, engineers and markets engine-driven equipment of
various descriptions utilizing diesel or gas turbine engines manufactured by
independent suppliers. As a custom packager of engine-driven equipment, the
Company designs its products to meet the specific needs of its customers in a
variety of applications and sells such equipment under the "Stewart & Stevenson"
name throughout the world.

Operations of the Engineered Power Systems segment accounted for approximately
61.4%, 62.6% and 58.3%, respectively, of consolidated sales during Fiscals
1993, 1992 and 1991.

GAS TURBINE POWER SYSTEMS. The Company packages generator sets and mechanical
drive packages based on turbine engines purchased from General Electric
Corporation ("GE"), Allison Engine Company ("Allison") and the Garrett
Corporation ("Garrett"). The table below lists the capacity of generator sets
based on each model of gas turbine engine regularly packaged by the Company.

Generator Set
Capacity
Engine Model in Megawatts
_____________ _____________
GE LM6000 . . . 42.4 Mw
GE LM5000 STIG . 51.6 Mw
GE LM5000 . . . . 34.4 Mw
GE LM2500 STIG . 26.5 Mw
GE LM2500 . . . . 22.2 Mw
GE LM1600 . . . . 13.4 Mw
ALLISON 571K . . 5.6 Mw
ALLISON 501K . . 3.7 Mw
GARRETT IM831 . . 0.5 Mw

In recent years, demand for electrical power in the United States and in many
industrialized and developing nations has increased at a higher rate than
additional generating capacity has been added to the market. During the same
period, environmental and regulatory concerns have curtailed the construction
of nuclear and coal-fired generating facilities. Gas turbine generator sets
have a lower capital cost, higher efficiency, shorter lead times and are more
environmentally acceptable than alternative technologies. In addition, gas
turbine generator sets may be used for the simultaneous production of
electrical power and useful thermal energy ("cogeneration").

Stewart & Stevenson believes that the international market also provides
significant sales opportunities for the Company's gas turbine generator sets.
The market for electrical power in developing countries is growing and the
Company's gas turbine generator sets are well suited for the requirements of
developing countries; providing quick delivery, low initial capital costs and
ease of installation in areas without significant existing electrical power
infrastructure.

The gas turbine generator sets packaged by the Company in the 20 Mw to 50 Mw
size incorporate GE gas turbine engines and are marketed primarily to
independent power producers for prime power and cogeneration applications
and to public utilities for base load capacity or additional capacity during
peak demand periods. Stewart & Stevenson's package design and full-load
testing prior to shipment permit the complete installation and start-up of
the Company's gas turbine generators in as little as 30 days after shipment and
decrease both the time and expense required to build a complete electrical
generation facility. Generators in the 0.5 Mw to 20 Mw range are marketed
primarily to hospitals, hotels, office complexes and industrial facilities,
both for prime power and cogeneration applications.

During 1992, GE began supplying a new, more efficient aeroderivative gas
turbine, the LM6000 rated at 42 Mw. The LM6000's initial capital cost is
competitive with frame-type industrial gas turbines and provides simple-cycle
fuel efficiency in excess of 40%. As a result, total life-cycle costs of an
LM6000-driven generator set are expected to be substantially below life-cycle
costs of other generator sets of the same capacity. GE has selected Stewart &
Stevenson to be the exclusive packager of all LM6000 generator sets sold by GE
in the United States and Canada. This arrangement does not affect the
Company's worldwide marketing of power systems utilizing other GE
aeroderivative gas turbines or sales by the Company of packages based on the
LM6000 in jurisdictions other than the United States and Canada.

In addition to gas turbine generators, the Company packages compressors powered
by GE and Allison gas turbine engines and vessel propulsion systems
incorporating Allison gas turbines. The Company is also the exclusive marketing
agent for Garrett model IM831 industrial gas turbines and provides operating
and maintenance services to cogeneration facilities under long-term contracts.

A majority of the Company's gas turbine revenues are derived from packaging gas
turbine engines manufactured by GE. The Company has been an authorized packager
of GE gas turbine engines since 1979. The Company has no reason to believe that
its relationship with GE will not continue for the foreseeable future. Any
interruption of this relationship, however, would adversely affect the Company.

Sales of gas turbine products and services accounted for approximately 49.2%,
50.5% and 44.5%, respectively, of consolidated sales in Fiscals 1993, 1992 and
1991.

OTHER POWER SYSTEMS. The majority of other power systems packaged by Stewart &
Stevenson are generator sets and mechanical drive packages using diesel engines,
dual fuel engines or natural gas engines. Generator sets range in size from 20
kw to 12,700 kw and are based on diesel engines supplied by Detroit Diesel
Corporation ("Detroit Diesel"), General Motors Corporation ("General Motors") or
other independent manufacturers. The Company undertakes the selection of the
appropriate engine and generator based on the intended application and
fabricates the completed package according to a design developed specifically to
fit the needs of the customer. Diesel-driven generator sets are marketed by the
Company as both stand-by power sources for emergency use and as prime power
sources to supply electricity at remote locations. Mechanical drive packages
include pump packages for irrigation and compressor packages for pipelines.

The Company also produces and markets generator sets and mechanical drive
packages based on dual fuel and natural gas engines supplied by independent
suppliers of diesel engines modified by the Company to run on dual fuels or
natural gas.

For many years, Stewart & Stevenson has been a leading manufacturer of well
stimulation equipment and other diesel equipment for the oilfield service
industries. Despite the depressed domestic drilling markets, the Company has
continued to manufacture these products, primarily for sale in the international
market. Most of the Company's well stimulation equipment is manufactured
according to the Company's proprietary designs and incorporates advanced
microprocessor-based systems to automatically control the pressures, density and
other characteristics of the high pressure fluids used to fracture oil-bearing
formations. During Fiscal 1993, the Company acquired substantially all of the
assets of Quality Oilfield Products, Inc., a Houston-based manufacturer of
blowout preventors.

Stewart & Stevenson manufactures a complete line of aircraft ground support
equipment, including gate tractors, air-start units, ground power equipment,
airconditioning systems and baggage tractors.

Sales of other power systems and services accounted for 12.5%, 12.2% and 13.8%,
respectively, of consolidated sales in Fiscals 1993, 1992 and 1991.

DISTRIBUTION SEGMENT

Stewart & Stevenson markets various industrial equipment, components,
replacement parts, accessories and other material supplied by independent
manufacturers and provides in-shop and on-site repair services for diesel-driven
equipment. The following table contains the name of each manufacturer with whom
the Company presently maintains a distribution contract, a description of the
products and territories covered thereby and the original distribution contract
date relating to each product line.

Original
Contract
Manufacturer Products Territories Date
_____________ __________ ____________ ___________

Detroit Diesel Heavy Duty High Speed Texas, Colorado, New 1938
Diesel Engines Mexico, Wyoming, Nebraska,
Louisiana, Mississippi
and Alabama; Venezuela

Electro-Motive Segment Heavy Duty Medium Speed Texas, Colorado, New 1988
of General Motors Diesel Engines Mexico, Nebraska,
("Electro-Motive") Oklahoma, Arkansas, Louisiana,
Tennessee, Mississippi and
Alabama; Mexico; Central America;
most of South America

Cooper Industries, Inc. Large-bore Natural Gas, Varies depending on 1991
Dual Fuel and Diesel engine size, fuel and
Engines application

Allison Transmission On- and Off-Highway Texas, Colorado, New 1962
Segment of General Automatic Transmissions, Mexico, Wyoming, Nebraska,
Motors Power Shift Transmissions Louisiana, Mississippi
and Torque Converters and Alabama; Venezuela

Hyster Company Material Handling Texas 1960
Equipment

John Deere Corporation Construction, Utility Southeast Texas and 1987
and Forestry Equipment Wyoming

Thermo King Corp. Transport Refrigeration Southeast Texas and 1970
Equipment Southern Louisiana

Distribution agreements generally require the Company to purchase and stock the
products and repair parts covered thereby for resale to end users, original
equipment manufacturers or independent dealers within the franchise area of
distribution. Such agreements also require the Company to provide after-sale
service within its designated territory and may contain provisions prohibiting
the sale of competitive products within the franchise territory. Distribution
operations are conducted at branch facilities located in major cities within the
Company's franchised area of distribution. New products are marketed primarily
under the trademarks and the trade names of the original manufacturer.

The Company's principal distribution agreements are subject to termination by
the suppliers for a variety of causes, including a change in control or a change
in the principal management of the Company. The Company's distribution
agreements with Detroit Diesel expire in 1995. Although no assurance can be
given that such distribution agreements will be renewed beyond their expiration
dates, they have been renewed regularly.

The Distribution segment also manufacturers and sells snow removal equipment,
wheel chair lifts, rail car movers and alternative fuel systems. Some products
manufactured by the Distribution segment are based upon proprietary designs
owned by the Company and others are based upon designs owned by others and
licensed to the Company.

Operations of the Distribution segment accounted for approximately 31.8%, 33.1%
and 41.7%, respectively, of consolidated sales during Fiscals 1993, 1992 and
1991. The Distribution segment's marketing units regularly sell certain
products manufactured by units of the Engineered Power Systems segment and also
sell to military and airline users. In both cases, such sales are included in
the Distribution segment.

TACTICAL VEHICLE SYSTEMS SEGMENT

In October 1991, the United States Department of Defense selected Stewart &
Stevenson to manufacture the next generation of medium tactical vehicles (the
"Family of Medium Tactical Vehicles" or "FMTV") for the U.S. Army and awarded
the Company contracts, valued at $1.2 billion, for the production of 2 1/2-ton
and 5-ton trucks, spare parts and logistical support. As is typical of multi-
year defense contracts, the FMTV contracts must be funded annually by the
Department of the Army and may be terminated at any time for the convenience of
the government. In the event that vehicle or spare parts deliveries are
canceled or terminated for the convenience of the government, the FMTV contracts
provide for termination charges that will substantially reimburse the Company
for all unamortized non-recurring costs.

The Family of Medium Tactical Vehicles is intended to become the U.S. Army's
next generation of basic transportation vehicle for personnel and materials. As
such, the FMTV will be produced in several variants to carry troops and cargo,
including cargo beds, vans, troop carriers, wreckers, dump trucks and tractors.
In addition, several of the vehicles will be specially configured for air
transportation. Although more than ten configurations of the FMTV will be
produced, a high degree of common components is incorporated in the Stewart &
Stevenson design.

The vehicles manufactured by the Company are based on a design acquired from
Steyr-Daimler-Puch, A.G., an established Austrian-based manufacturer of military
and commercial vehicles. It was adapted to the requirements of the U.S. Army by
Stewart & Stevenson and incorporates a diesel engine manufactured by
Caterpillar, Inc., an automatic transmission and transfer case manufactured by
Allison and drive axles manufactured by Rockwell Corporation. Although the FMTV
will be the Company's first high volume production vehicle, the Company has
previously packaged various equipment for the U.S. Armed Forces using diesel and
gas turbine engines.

Stewart & Stevenson believes that there will be opportunities to sell additional
vehicles to other branches of the U.S. Armed Forces and to the armed forces of
foreign countries. The FMTV contracts allow for such sales, and the Company's
facility has capacity to produce vehicles for those additional sales. The
Company has already begun marketing efforts with potential customers other than
the U.S. Army.

COMPETITION

The Company encounters strong competition in all segments of its business.
Competition involves pricing, quality, availability, the range of products and
services and other factors. Some of the Company's competitors have greater
financial resources than Stewart & Stevenson. The Company believes that its
reputation for quality engineering and after-sales service, as well as single-
source responsibility, are important to its market position.

The Engineered Power Systems segment competes with various entities, including
certain suppliers of major components, for sale of its products. Manufacturers
of gas turbine generator sets in the 20-50 Mw size include General Electric
Corporation, Dresser-Rand Power, Inc., Ruston Gas Turbines Ltd. and ABB Energy
Services, Inc., a subsidiary of Asea Brown Boveri. Competition in the market
for the other products manufactured by the Engineered Power Systems segment is
highly fragmented with no single competitor participating in all of the markets
of the Company. The Distribution segment competes with distributors for other
manufacturers in the sale of original equipment, with the manufacturers and
distributors of non-original equipment parts for the sale of spare parts and
with independent repair shops for in-shop and on-site repair services.

INTERNATIONAL OPERATIONS

The profit margin on export sales is typically not materially different from
that on domestic sales of the same or similar products with the same or similar
delivery requirements. International sales are subject to the risks of
international political and economic changes, such as changes in foreign
governmental policies, currency exchange rates and inflation. Generally, the
Company accepts payments only in United States Dollars and makes most sales to
customers outside the United States against letters of credit drawn on
established international banks, thereby limiting the Company's exposure to the
effects of exchange rate fluctuations and customer credit risks. In the limited
circumstances in which the Company has entered into contracts in foreign
currencies, it has hedged its exposure to fluctuations in such currencies.

UNFILLED ORDERS

Stewart & Stevenson's unfilled orders consist of written purchase orders,
letters of intent and oral commitments. These unfilled orders are generally
subject to cancellation or modification due to customer relationships or other
conditions. Purchase options are not included in unfilled orders until
exercised. Unfilled orders at the close of Fiscals 1993 and 1992 were as
follows:

Estimated percentage to
be recognized in Fiscal Fiscal
Fiscal 1994 1993 1992
_______________________ _________ _________
(Dollars in millions)

Engineered Power Systems
Equipment 60.0% $ 491.5 $ 489.4
Operations and Maintenance 16.3% 269.7 189.6
_________ _________
761.2 679.0

Distribution 100.0% 32.6 24.3
Tactical Vehicle Systems 21.4% 1,119.5 1,185.2
_________ _________
Total 31.9% $ 1,913.3 $ 1,888.5
========= =========

Although no assurance can be given, the Company expects sales of the Engineered
Power Systems segment to continue to be weighted in favor of turbine-driven
equipment because of the large number of unfilled orders for these units, the
number of proposals that are presently outstanding and the current need for
additional electrical generating capacity in the United States and in many
foreign countries.

Unfilled orders of the Tactical Vehicle Systems segment consists principally of
the contracts awarded in October 1991, by the United States Department of the
Army, to manufacture medium tactical vehicles.

EMPLOYEES

At the end of Fiscal 1993, the Company employed approximately 3,400 persons.
The Company considers its employee relations to be satisfactory.

Item 2. Properties.

The Company maintains its corporate and executive offices at 2707 North Loop
West, Houston, Texas. The corporate office, which includes the national sales
offices for the Engineered Power Systems segment and administrative offices for
the Distribution segment, occupies about 78,000 square feet of space leased
from a limited partnership in which the Company owns an 80% limited partnership
interest.

Stewart & Stevenson's Engineered Power Systems segment is headquartered in
Houston, where the Company owns approximately 919,000 square feet and leases
approximately 48,000 square feet of space at six locations devoted to
manufacturing, warehousing and administration. The Company leases gas turbine
parts, service, operations and maintenance facilities in Bakersfield, California
and Long Beach, California totaling 8,200 square feet and maintains a sales
office in Alexandria, Virginia and Fort Lauderdale, Florida. The Company owns
gas turbine parts service, operations and maintenance facilities in Syracuse,
New York and a high pressure valve manufacturing facility in Jennings, Louisiana
totaling 15,000 and 89,000 square feet, respectively.

Activities of the Distribution segment are coordinated from Houston, where the
Company owns 303,000 square feet of space at three locations devoted to
equipment and parts sales and service. To service its distribution territory
(See "Item 1. Business -- Distribution Segment"), Stewart & Stevenson maintains
Company-operated facilities occupying 305,000 square feet of owned space and
391,000 square feet of leased space in 19 cities in Texas, Louisiana, Colorado,
New Mexico and Wyoming.

The Company's new Tactical Vehicle Systems segment is located in a 500,000
square foot company owned facility near Houston, Texas.

The Company considers all property owned or leased by it to be well maintained,
adequately insured and suitable for its purposes.

Item 3. Legal Proceedings.

On April 21, 1994, the Fourteenth Court of Appeals of the State of Texas
reversed a $17.5 million judgment in the case filed by Serv-Tech, Inc. against
the Company, Ohmstede, Inc., and Ohmstede Mechanical Services, Inc. of Beaumont,
Texas. The suit, filed on January 26, 1990, in the District Court of Harris
County, Texas, 125th Judicial District, claims that the Company breached a
secrecy agreement and misappropriated confidential information and trade
secrets of Serv-Tech, Inc. In the opinion of the management of the Company,
any further actions in connection with this suit will not have a material
impact on the Company's financial position or results of operations.

The Company has been advised that on January 5, 1993, John G. Runion, a former
consultant of the Company, filed a suit for himself and the United States of
America in the U. S. District Court, Southern District of Texas. The suite
alleges that the Company supplied false information in violation of the False
Claims Act (the"Act"), engaged in common law fraud and misapplied costs incurred
in connection with a change order under a 1987 government subcontract. Under
the provisions of the Act, the suit has not been served upon the Company pending
an investigation of the case by the U. S. Department of Justice and a
determination as to whether the Department of Justice will intervene and pursue
the matter on behalf of the United States. The suit alleges treble damages of
$21 million plus unspecified penalties. The Company has denied any wrongdoing
in connection with the pricing of the change order and believes that the case
will be resolved without any material effect on the financial position, net
worth or results of operation of the Company.

The Company is a defendant in a number of other lawsuits relating to
contractual, product liability, personal injury and warranty matters and
otherwise of the type normally incident to the Company's business. All such
cases involve primarily a claim for damages and no individual case or group of
cases presenting substantially the same legal or factual issues involve amounts
in excess of ten percent (10%) of the current assets of the Company or is
expected to result in any material liability.

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

Inapplicable.

PART II

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

The Company's Common Stock is traded in the over-the-counter market and listed
in the NASDAQ National Market (Symbol: SSSS). There were 813 shareholders of
record as of February 28, 1994. The following table sets forth the high and
low sales prices relating to the Company's Common Stock and the dividends paid
by the Company in each quarterly period within the last two fiscal years of
the Company.

Fiscal Fiscal
1993 1992
______________________________ ______________________________
High Low Dividend High Low Dividend
______ ______ ________ ______ ______ ________

First Quarter 38 1/2 28 0.05 30 22 0.04
Second Quarter 46 35 0.06 30 1/4 22 0.05
Third Quarter 51 42 1/2 0.06 32 26 1/4 0.05
Fourth Quarter 53 44 1/4 0.06 37 29 0.05

Item 6. Selected Financial Data.

The Selected Financial Data set forth below should be read in conjunction with
the accompanying Consolidated Financial Statements and notes thereto, and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."

Stewart & Stevenson Services, Inc.
CONSOLIDATED FINANCIAL REVIEW

_________________________________________________________________________________________________________________________________
(In thousands, except per share data)
Fiscal Fiscal Fiscal Fiscal Fiscal
1993 1992 1991 1990 1989
_________________________________________________________________________________________________________________________________

Financial Data:

Sales $981,892 $812,526 $686,363 $645,766 $604,868

Earnings before income taxes and accounting
change 85,301 64,376 52,259 43,152 39,009

Earnings before change in accounting 56,780 43,958 35,703 29,384 27,264

Net earnings 56,780 34,658 35,703 29,384 27,264

Total assets 692,624 573,348 477,858 394,118 311,273

Short-Term debt (including current portion of
Long- Term debt) 7,219 3,252 4,582 58,616 9,091

Long-Term debt 68,000 44,451 27,939 37,982 23,544

Per Share Data :

Earnings before change in accounting 1.73 1.35 1.18 0.99 0.97

Net earnings 1.73 1.06 1.18 0.99 0.97

Cash dividends declared 0.23 0.19 0.15 0.11 0.0725

The Company adopted SFAS 106 effective February 1, 1992, resulting in a cumulative charge to 1992 earnings of $9,300, or $.29
per share, after a deferred tax benefit of $4,790 (see Note 7 in the notes to the consolidated financial statements).

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

The following discussion and analysis, as well as the accompanying consolidated
financial statements and related footnotes will aid in understanding the
Company's results of operations as well as its financial position, cash flows,
indebtedness and other key financial information. During Fiscal 1992 the
Company adopted both the Statement of Financial Accounting Standards No. 106
"Employers' Accounting For Postretirement Benefits Other Than Pensions" (SFAS
106), and the Statement of Financial Accounting Standards No. 109 "Accounting
For Income Taxes" (SFAS 109).

SUMMARY

The following table sets forth for the periods indicated (i) percentages which
certain items reflected in the Company's Consolidated Statements of Earnings
bear to consolidated sales of the Company and (ii) the percentage increase
(decrease) of such items as compared to the indicated prior period:

Relationship to Period to Period
Consolidated Sales Increase (Decrease)
Fiscal Year Fiscal Year
____________________________ ______________________
1993 1992 1991 1992-1993 1991-1992
________________________________________________________________________________________________________________________

Sales 100.0% 100.0% 100.0% 20.8% 18.4%
Cost of sales 84.1 84.4 83.0 20.4 20.4
_______________________________________________________
Gross profit 15.9 15.6 17.0 23.2 8.6

Selling and administrative expenses 7.0 7.5 8.8 11.7 .9
Interest expense .3 .5 1.0 (10.2) (45.6)
Other income (.1) (.3) (.4) (62.6) (13.1)
_______________________________________________________
7.2 7.7 9.4 13.5 (3.3)

_______________________________________________________
Earnings before income taxes and accounting change 8.7 7.9 7.6 32.5 23.2
Income taxes 2.9 2.5 2.4 35.9 22.8
_______________________________________________________
Earnings of consolidated companies 5.8 5.4 5.2 30.9 23.4

Equity in net earnings (loss) of unconsolidated affiliates .0 .0 .0 N/A (18.3)
_______________________________________________________
Earnings before change in accounting 5.8 5.4% 5.2% 29.2% 23.1%
=======================================================

RESULTS OF OPERATIONS
Business Segment Highlights

__________________________________________________________________________________________________
(Dollars in thousands)
Annual Annual
Fiscal Percent Fiscal Percent Fiscal
1993 Change 1992 Change 1991
__________________________________________________________________________________________________

Sales:
Engineered Power Systems $602,853 +18% $508,898 +27% $400,133
Distribution 311,983 +16% 269,045 -6% 286,230
Tactical Vehicle Systems 65,894 +93% 34,112 N/A -0-
Corporate Services 1,162 +147% 471 N/A -0-
__________________________________________________________
$981,892 +21% $812,526 +18% $686,363
==========================================================
Operating Profit:
Engineered Power Systems $ 70,292 +18% $ 59,578 +20% $ 49,597
Distribution 20,309 +63% 12,478 -21% 15,884
Tactical Vehicle Systems 2,886 +80% 1,602 N/A -0-
Corporate Services 552 +183% 195 N/A -0-
__________________________________________________________
$ 94,039 +27% $ 73,853 +13% $ 65,481
==========================================================

Fiscal 1993 vs. Fiscal 1992

Sales increased to $982 million for the twelve months ended January 31, 1994
("Fiscal 1993") from $813 million for the twelve months ended January 31, 1993
("Fiscal 1992"). This represents the setting of a new sales record for the
sixth consecutive year and is largely attributable to sales volume increases in
the Engineered Power Systems segment. The Engineered Power System's gas turbine
product lines were the primary source of its growth. The highest rate of
growth was experienced in the gas turbine after market, which consists of the
servicing of customers' equipment and the long-term contracting for the
operation and maintenance of the customers' power plants. The Distribution
segment's increased sales reflect both the general improvement in the U. S.
economy and in the market penetration of the products distributed. The Tactical
Vehicle Systems segment sales, which increased 93% in relation to Fiscal 1992,
reflect the commencement of low volume truck production during Fiscal 1993. The
Company's export sales declined slightly in Fiscal 1993, representing 24% of
consolidated sales in Fiscal 1993 as compared to 32% in Fiscal 1992.

Operating profit increased significantly during Fiscal 1993, with the overall
rate of growth exceeding the growth in revenue. The Distribution segment's
operating profit grew at a rate substantially greater than its sales volume
growth, reflecting primarily operating efficiencies achieved through better
utilization of existing plants. Both the Engineered Power Systems and the
Tactical Vehicle Systems segments' operating profits increased at a rate
comparable to sales volume growth.

Fiscal 1992 vs. Fiscal 1991

Sales increased to $813 million in Fiscal 1992 from $686 million in Fiscal
1991. The Engineered Power System's gas turbine product line was the
primary source of its growth. Export sales continued to represent a
significant portion of the Company's revenue, accounting for 32% of total
sales in Fiscal 1992 and 38% in Fiscal 1991. The Distribution segment
recorded lower sales during Fiscal 1992 in relation to Fiscal 1991. The
lower sales volume for the Distribution segment can be attributed to the
continued recession in the markets serviced, which resulted in reduced demand
for new equipment during Fiscal 1992. The Tactical Vehicle Systems segment,
which contributed only slightly to consolidated revenue for Fiscal 1992,
nevertheless had a significant impact on Fiscal 1992 growth.

Operating profits increased at a double digit rate during Fiscal 1992, due
to the significant increase in sales volume. Operating profit growth in the
Engineered Power Systems segment was principally the result of the continued
expansion of the gas sales turbine product lines in Fiscal 1992. The Engineered
Power Systems segment's operating profit growth was restrained during Fiscal
1992 due to lower operating profits in the diesel product lines. The transit
products group's operating losses moderated only slightly in Fiscal 1992.
The Company has ceased the marketing of its transit products and will direct
its resources to other product lines offering better economic opportunities.

Operating profits of the Distribution segment fell sharply during Fiscal 1992,
after experiencing an increase during Fiscal 1991. This decrease in operating
profits was primarily the result of the decline in total volume, a change in
product mix towards lower value added products and the incurrence of market
introduction expense associated with the Company's alternative fuels products.
The Tactical Vehicle Systems segment began to contribute to earnings during
Fiscal 1992 as it recognized its initial revenue under its contract with the
United States Department of the Army.

Net Period Expense

__________________________________________________________________________________________________
(Dollars in thousands)
Annual Annual
Fiscal Percent Fiscal Percent Fiscal
1993 Change 1992 Change 1991
__________________________________________________________________________________________________

Selling and administrative expenses $ 68,331 +12% $ 61,168 +1% $ 60,603
Interest expense 3,313 -10% 3,689 -46% 6,780
Other income (967) -63% (2,586) -13% (2,974)
__________________________________________________________
$ 70,677 +13% $ 62,271 -3% $ 64,409
==========================================================
Net period expense as a percentage of
sales 7.2% N/A 7.7% N/A 9.4%
==========================================================

Net period expense continued to grow at a much slower rate than revenue.
Operating efficiencies as a result of spreading certain fixed administrative
costs over higher sales has facilitated the control of selling and
administrative expenses. The reduction of interest expense in Fiscal 1992
reflects primarily the use of the net proceeds of $58 million, from the sale of
2,300,000 shares of Common Stock in December 1991, to pay down debt.

Earnings Before Change In Accounting

__________________________________________________________________________________________________
(Dollars in thousands)
Annual Annual
Fiscal Percent Fiscal Percent Fiscal
1993 Change 1992 Change 1991
__________________________________________________________________________________________________

Amount $ 56,780 +29% $ 43,958 +23% $ 35,703
Percent of sales 5.8% N/A 5.4% N/A 5.2%
==================================================================================================

Earnings before the change in accounting for SFAS 106 in Fiscal 1992 continued
to increase period to period in both amount and as a percentage of sales in
Fiscal 1993 and 1992. These increases reflect the growth in operating profits
each period and the reduction in interest expense during Fiscal 1992. The
effective income tax rate increased one percent in Fiscal 1993, principally
as a result of the retroactively imposed increase in the United States
corporate tax rate by the Omnibus Budget Reconciliation Act of 1993.

ACCOUNTING DEVELOPMENTS

The Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No.112 (SFAS 112), "Employer's Accounting for
Postemployment Benefits", in November 1992. SFAS 112 requires that the
liability for certain postemployment benefits, including salary continuation,
be recognized over the employees' service lives when certain conditions are
met. The Company currently plans to adopt SFAS 112 in Fiscal 1994 and does
not anticipate the impact will be material to the Company's financial
statements.

The Fiscal 1992 change in accounting represents the Company's adoption of
Statement of Financial Accounting Standards No. 106 (SFAS 106), "Employers'
Accounting for Postretirement Benefits other than Pensions" (see Note 7 in the
notes to consolidated financial statements). This standard requires that the
cost of retiree medical and other non-pension benefits be recognized on the
accrual method of accounting instead of expensing those costs when paid, as
had been the generally accepted practice. The Company elected to expense
previously unrecognized prior service costs immediately. This resulted in
a one-time charge to Fiscal 1992 earnings of $9.3 million, or $0.29 per share,
after a deferred tax benefit of $4.8 million.

The Company also adopted the Statement of Financial Accounting Standards No.
109 (SFAS 109), "Accounting for Income Taxes", effective February 1, 1992.
SFAS 109 changed the criteria for recognition and measurement of deferred tax
assets and reduces the complexity of accounting for income taxes established
by Statement of Financial Accounting Standards No.96 (SFAS 96), "Accounting
for Income Taxes". Since the Company previously followed SFAS 96, adoption
of SFAS 109 did not have a material impact on the Company's financial
statements.

GOVERNMENT CONTRACTING

The Company's government contract operations are subject to U.S. Government
investigations of business practices and cost classifications from which legal
or administrative proceedings can result. Based on government procurement
regulations, under certain circumstances a contractor can be fined, as well as
suspended or barred from government contracts. On November 5, 1993, the Company
was advised that a former consultant had filed a suit on his own behalf and on
behalf of the United States of America alleging that the Company
supplied false information, engaged in fraud and misapplied costs in
connection with a change order under a 1987 government subcontract. The suit
claims total damages of $21 million and unspecified penalties. Management of
the Company has denied any wrongdoing and believes the case will be resolved
with no material adverse effect on the Company's business, its financial
condition or its operating results.

UNFILLED ORDERS

The Company's unfilled orders consist of written purchase orders, letters of
intent, and oral commitments. These unfilled orders are generally subject to
cancellation or modification due to customer relationships or other conditions.
Purchase options are not included in unfilled orders until exercised. Unfilled
orders at the close of Fiscal 1993 and 1992 were as follows:

Estimated percentage
to be recognized in Fiscal Fiscal
Fiscal 1994 1993 1992
____________________ ________ ________
(Dollars in millions)

Engineered Power Systems
Equipment 60.0% $ 491.5 $ 489.4
Operations and Maintenance 16.3% 269.7 189.6
________ ________
761.2 679.0
Distribution 100.0% 32.6 24.3
Tactical Vehicle Systems 21.4% 1,119.5 1,185.2
________ ________
Total 31.9% $1,913.3 $1,888.5
======== ========

Although no assurance can be given, the Company expects sales of the Engineered
Power Systems segment to continue to be weighted in favor of turbine-driven
equipment because of the large number of unfilled orders for these units, the
number of proposals that are presently outstanding and the current need for
additional electrical generating capacity in the United States and in many
foreign countries.

Unfilled orders of the Tactical Vehicle Systems segment consists principally of
the contracts awarded in October 1991, by the United States Department of the
Army, to manufactured medium tactical vehicles (the "Family of Medium Tactical
Vehicles" or "FMTV").

CAPITAL EXPENDITURES AND COMMITMENTS

Capital Expenditures By Industry Segment

__________________________________________________________________________________________________
(Dollars in thousands)
Annual Annual
Fiscal Percent Fiscal Percent Fiscal
1993 Change 1992 Change 1991
__________________________________________________________________________________________________

Engineered Power Systems $ 14,502 -22% $ 18,646 +269% $ 5,058
Distribution 9,302 +67% 5,582 - 21% 7,041
Tactical Vehicle Systems 6,061 -84% 36,852 +166% 13,859
Corporate Services 781 -94% 13,985 +6,435% 214
__________________________________________________________

$ 30,646 -59% $ 75,065 +187% $ 26,172
==========================================================

Capital expenditures returned to historical levels during Fiscal 1993 after
having increased significantly during Fiscal 1992. The capital expenditures
program at the Tactical Vehicle Systems segment and the program to upgrade the
Engineered Power Systems existing facilities were both substantially completed
during Fiscal 1993. The Corporate Services capital expenditures in Fiscal 1992
consisted primarily of the consolidation of a limited partnership, in which the
Company became a majority limited partner. This limited partnership owns the
building where the Company's corporate office is located. The Company expects
that the level of capital expenditures will moderate during Fiscal 1994.

Cash Dividends

__________________________________________________________________________________________________
(In thousands, except per share data)
Annual Annual
Fiscal Percent Fiscal Percent Fiscal
1993 Change 1992 Change 1991
__________________________________________________________________________________________________

Amount of Cash Dividends $ 7,563 +22% $ 6,193 +35% $ 4,601
Annual Rate of Cash
Dividends $ 0.23 +21% $ 0.19 +27% $ 0.15
__________________________________________________________________________________________________

The amount of cash dividends increased 22% and 35% during Fiscal 1993 and 1992,
respectively. The amount of cash dividends represented 13%, 14% and 13% of
earnings before change in accounting for Fiscal 1993, 1992 and 1991,
respectively. Even though substantial dividends were paid, the Company
retained sufficient earnings to invest in new plant and equipment for a wide
variety of capital expenditure projects, particularly those which increase
productivity, and to provide adequate financial resources for internal and
external growth opportunities. The Board of Directors of the Company intends
to consider the payment of dividends on a quarterly basis, commensurate with
the Company's earnings and financial needs.

LIQUIDITY AND SOURCES OF CAPITAL
Cash Provided From Operations

________________________________________________________________________________________________________________
(Dollars in thousands)
Annual Annual
Fiscal Percent Fiscal Percent Fiscal
1993 Change 1992 Change 1991
________________________________________________________________________________________________________________

Net earnings and accrued postretirement benefits $ 56,689 +14% $ 49,777 +39% $ 35,703
Depreciation and amortization 21,175 +72% 12,305 +49% 8,273
Deferred income taxes 413 N/A (2,935) N/A 3,304
_________________________________________________________
Funds from operations 78,277 +32% 59,147 +25% 47,280
Change in net operating assets and liabilities (86,304) N/A 17,249 N/A (9,462)
_________________________________________________________
Net cash provided by (used in) operating activities $ (8,027) N/A $ 76,396 +102% $ 37,818
=========================================================

Funds from operations increased 32% during Fiscal 1993 versus a 25% increase
during 1992, reflecting primarily the growth in earnings each year, excluding
the adoption of SFAS 106 during Fiscal 1992. The Company's investment in net
operating assets and liabilities increased by an amount greater than that
provided from operations during Fiscal 1993. The growth in both inventories
(see Note 4 to the consolidated financial statements) and contract costs in
excess of customer funding (see Note 3 to the consolidated financial statements)
were the primary areas of increase in operating assets. The growth in
inventories during Fiscal 1993 is comparable to the sales growth rate for Fiscal
1993. Fiscal 1993's increase occurred primarily within the gas turbine product
lines and reflects the restoration of inventory to pre-1992 levels. The Fiscal
1993 growth in contract cost in excess of customer funding resulted from the
commencement of materials procurement required for higher levels of production
at the Tactical Vehicle Systems segment. The Company anticipates that the
working capital needs of the Tactical Vehicle Systems segment will increase
significantly during Fiscal 1994 as this segment moves from low level
production to high level production. Working capital to support the operations
of the Company fluctuates significantly depending on the progress payment
streams of the contracts in process. The Company regularly bids on commercial
and government contracts, which if awarded to the Company, could significantly
affect both working capital and capital expenditures needs.

The Company's liquidity was comparable at the end of both Fiscal 1993 and 1992
using several measures of liquidity and leverage. The Company's current ratio
(current assets divided by current liabilities) remained somewhat constant at
2.2:1 at the end of both Fiscal 1993 and Fiscal 1992. The long-term debt to
equity ratio (long-term debt including the current portion divided by total
shareholders' equity) was a modest 20% at the end of Fiscal 1993 and 16% at the
end of Fiscal 1992. The Company's interest coverage (earnings before income
taxes and interest expense divided by interest expense) was 26.7 times interest
for Fiscal 1993 and 17.8 times interest for Fiscal 1992.

The Company had $5 million in short-term borrowings at the end of Fiscal 1993
and no short-term borrowings at the end of Fiscal 1992. Long-term debt
increased modestly during Fiscal 1993 and Fiscal 1992 principally due to the
timing of customer progress payments for contracts in process and the
acquisition of a majority interest in a limited partnership, respectively (see
Note 6 to the consolidated financial statements).

The Company may expand its Distribution and Engineered Power Systems segments by
selective acquisition of additional distribution territories and product lines.
In the event that such activities or growth in existing operations create a need
for working capital or capital expenditures in excess of existing committed
lines of credit, the Company may seek to convert uncommitted borrowing
arrangements to committed credit facilities, to borrow under other long-term
financing sources or to issue additional equity securities. The Company's
current credit facilities appear adequate to meet its foreseeable cash
requirements.

Item 8. Financial Statements and Supplemental Data.

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

Board of Directors and Shareholders
Stewart & Stevenson Services, Inc.

We have audited the accompanying consolidated statements of financial position
of Stewart & Stevenson Services, Inc. and subsidiaries as of January 31, 1994
and 1993, and the related consolidated statements of earnings, shareholders'
equity and cash flows for each of the three years in the period ended January
31, 1994. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.

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

In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Stewart & Stevenson Services,
Inc. and subsidiaries as of January 31, 1994 and 1993, and the results of their
operations and their cash flows for each of the three years in the period ended
January 31, 1994 in conformity with generally accepted accounting principles.

As discussed in Note 7 and Note 10 to the consolidated financial statements, in
Fiscal 1992 the Company changed its method of accounting for postretirement
medical benefit costs to conform with Statement of Financial Accounting
Standards No. 106 and its method of accounting for income taxes to conform with
Statement of Financial Accounting Standards No. 109.

Houston, Texas Arthur Andersen & Co.
April 21, 1994

Stewart & Stevenson Services, Inc.
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION

______________________________________________________________________________________
(Dollars in thousands)
Fiscal Fiscal
1992 1993
______________________________________________________________________________________

ASSETS

Current Assets

Cash and equivalents $ 7,788 $ 21,939
Accounts and notes receivable, net 147,292 143,166
Recoverable costs and accrued profits not yet billed 115,868 56,693
Inventories 269,605 212,506
Other 224 1,234
________ ________
Total Current Assets 540,777 435,538

Property, Plant and Equipment, net 126,473 117,359

Other Assets 25,374 20,451
________ ________
$692,624 $573,348
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY

Current Liabilities

Notes payable $ 5,000 $ -0-
Accounts payable 131,780 128,770
Accrued payrolls and incentives 18,629 16,322
Billings on uncompleted contracts in incurred costs 31,088 16,984
Current income taxes 27,931 13,850
Current portion of long-term debt 2,219 3,252
Other accrued liabilities 24,539 19,720
________ ________
Total Current Liabilities 241,186 198,898

Long-Term Debt--less current portion 68,000 44,451

Deferred Income Taxes 5,868 5,455

Accrued Postretirement Benefits 15,028 15,119

Deferred Compensation 3,884 3,757

Shareholders' Equity

Common Stock, without par value, 50,000,000
shares authorized; 32,948,885 and 32,785,458
shares issued at January 31, 1994 and 1993,
respectively, including 11,820 shares held in
treasury 160,366 156,593

Retained earnings 198,325 149,108
________ ________
358,691 305,701
Less cost of treasury stock (33) (33)
________ ________
Total Shareholders' Equity $358,658 $305,668
________ ________
$692,624 $573,348
======== ========

See notes to consolidated financial statements

Stewart & Stevenson Services, Inc.
CONSOLIDATED STATEMENTS OF EARNINGS

____________________________________________________________________________________________________
(In thousands, except per share data)
Fiscal Fiscal Fiscal
1993 1992 1991
____________________________________________________________________________________________________

Sales $981,892 $812,526 $686,363
Cost of sales 825,914 685,879 569,695
________ ________ ________
Gross profit 155,978 126,647 116,668

Selling and administrative expenses 68,331 61,168 60,603
Interest expense 3,313 3,689 6,780
Other income, net (967) (2,586) (2,974)
________ ________ ________
70,677 62,271 64,409
________ ________ ________

Earnings before income taxes and accounting change 85,301 64,376 52,259
Income taxes 27,999 20,597 16,775
________ ________ ________

Earnings of consolidated companies 57,302 43,779 35,484
Equity in net earnings (loss) of unconsolidated affiliates (522) 179 219
________ ________ ________

Earnings before change in accounting 56,780 43,958 35,703
Cumulative effect of change in accounting for
postretirement medical benefits, net -0- (9,300) -0-
________ ________ ________

Net earnings $ 56,780 $ 34,658 $ 35,703
======== ======== ========

Weighted average number of shares of Common Stock outstanding 32,861 32,560 30,224
======== ======== ========
Earnings per share before change in accounting $ 1.73 $ 1.35 $ 1.18
Cumulative effect of change in accounting for
postretirement medical benefits, per share -0- (.29) -0-
________ ________ ________
Net earnings per share $ 1.73 $ 1.06 $ 1.18
======== ======== ========

See notes to consolidated financial statements

Stewart & Stevenson Services, Inc.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY

________________________________________________________________________________________________________
(Dollars in thousands)
Common Retained Treasury
Stock Earnings Stock Total
________________________________________________________________________________________________________

Balance at end of Fiscal 1990 $ 92,308 $ 89,703 $ (33) $181,978

Net earnings 35,703 35,703
Cash dividends (4,601) (4,601)
Issuance of Common Stock (net of issuance cost) 58,323 58,323
Exercise of stock options 1,073 1,073
________ ________ ________ ________

Balance at end of Fiscal 1991 151,704 120,805 (33) 272,476

Net earnings 34,658 34,658
Stock dividends 162 (162) -0-
Cash dividends (6,193) (6,193)
Exercise of stock options 4,727 4,727
________ ________ ________ ________

Balance at end of Fiscal 1992 156,593 149,108 (33) 305,668

Net earnings 56,780 56,780
Cash dividends (7,563) (7,563)
Exercise of stock options 3,773 3,773
________ ________ ________ ________

Balance at end of Fiscal 1993 $160,366 $198,325 $ (33) $358,658
======== ======== ======== ========

See notes to consolidated financial statements

Stewart & Stevenson Services, Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS

________________________________________________________________________________________________________
(Dollars in thousands)
Fiscal Fiscal Fiscal
1993 1992 1991
________________________________________________________________________________________________________

Operating Activities

Net earnings $ 56,780 $ 34,658 $ 35,703

Adjustments to reconcile net earnings to net cash
provided by (used in) operating activities:

Accrued postretirement benefits (91) 15,119 -0-
Depreciation and amortization 21,175 12,305 8,273
Deferred income taxes, net 413 (2,935) 3,304
Change in operating assets and liabilities:

Accounts and notes receivable (4,126) (22,136) (20,042)
Recoverable costs and accrued profits not yet billed (59,175) (5,664) 26,557
Inventories (57,099) 21,050 (72,287)
Accounts payable and accrued expenses 10,136 41,114 35,982
Billings on uncompleted contracts in excess of incurred costs 14,104 (8,680) 18,086
Current income taxes 14,081 2,083 69
Other--principally long-term assets and liabilities (4,225) (10,518) 2,173
________ ________ ________

Net Cash Provided by (Used in) Operating Activities (8,027) 76,396 37,818

Investing Activities

Expenditures for property, plant and equipment (30,646) (75,065) (26,172)
Disposal of property, plant and equipment 796 377 873
________ ________ ________

Net Cash Used in Investing Activities (29,850) (74,688) (25,299)

Financing Activities

Additions to long-term borrowings 192,918 190,000 131,200
Payments on long-term borrowings (170,402) (174,818) (142,264)
Net borrowings and payments on short-term notes payable 5,000 -0- (53,013)
Dividends paid (7,563) (6,193) (4,601)
Proceeds from issuance of Common Stock -0- -0- 58,323
Exercise of stock options 3,773 4,727 1,073
________ ________ ________

Net Cash Provided by (Used in) Financing Activities 23,726 13,716 (9,282)
________ ________ ________

Increase (decrease) in cash and equivalents (14,151) 15,424 3,237

Cash and equivalents, beginning of fiscal year 21,939 6,515 3,278
________ ________ ________

Cash and equivalents, end of fiscal year $ 7,788 $ 21,939 $ 6,515
======== ======== ========

See notes to consolidated financial statements

Stewart & Stevenson Services, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share data)

Note 1: Summary of Principal Accounting Policies

Fiscal Year: The Company's fiscal year begins on February 1 of the year stated
and ends on January 31 of the following year. For example, "Fiscal 1993"
commenced on February 1, 1993 and ended on January 31, 1994.

Consolidation: The consolidated financial statements include the accounts of
Stewart & Stevenson Services, Inc. and all of its majority-owned subsidiaries.
Investments in other partially-owned companies and joint ventures in which
ownership ranges from 20 to 50 percent are generally accounted for using the
equity method. All significant intercompany accounts and transactions have been
eliminated.

Change in Accounting: During Fiscal 1992, the Company adopted, effective
February 1, 1992, Statement of Financial Accounting Standards No. 106,
"Employers' Accounting For Postretirement Benefits Other Than Pensions" (SFAS
106)(see Note 7), and No. 109, "Accounting For Income Taxes" (SFAS 109)(see Note
10). In November 1992, the Financial Accounting Standards Board issued SFAS
112, "Employers' Accounting for Postemployment Benefits." The Company plans to
adopt SFAS 112 in Fiscal 1994 and does not anticipate the impact will be
material to the Company's financial statements.

Cash Equivalents: Interest-bearing deposits and other investments with
original maturities of three months or less are considered cash equivalents.

Inventories: Inventories are stated at the lower of cost (using LIFO) or market
(determined on the basis of estimated realizable values), less related customer
deposits. Inventory costs include material, labor and overhead. The carrying
values of these assets approximate their fair values.

Contract Revenues and Costs: Revenue is recognized when a product is shipped or
accepted by the customer, except for large gas turbine contracts, where revenue
is recognized using the percentage-of-completion method. Substantially all of
the revenues of the Tactical Vehicle Systems segment are recognized under the
units-of-delivery method, whereby sales and estimated average cost of the units
to be produced under the Family of Medium Tactical Vehicle (FMTV) contract are
recognized as deliveries are made or accepted. Profits expected to be realized
on contracts are based on the Company's estimates of total sales value and costs
at completion. These estimates are reviewed and revised periodically throughout
the lives of the contracts, and adjustments to profits resulting from such
revisions are recorded in the accounting period in which the revisions are made.

Depreciable Property: The Company depreciates property, plant and equipment
over their estimated useful lives, using accelerated and straight-line methods.
Expenditures for property, plant and equipment are capitalized and carried at
cost. When items are retired or otherwise disposed of, income is charged or
credited for the difference between net book value and proceeds realized
thereon. Ordinary maintenance and repairs are charged to expense and
replacements and betterments are capitalized.

Off-Balance Sheet Risk: The Company enters into forward exchange contracts to
hedge certain foreign currency transactions for periods consistent with the
terms of the underlying transactions. The Company does not engage in
speculation, nor does the Company typically hedge nontransaction-related balance
sheet exposure. While the forward contracts affect the Company's results of
operations, they do so only in connection with the underlying transactions. As
a result, they do not subject the Company to risk from exchange rate movements,
because gains and losses on these contracts offset losses and gains on the
transactions being hedged. The Company's other off-balance sheet risks are not
material.

Fair Value of Financial Instruments: The Company's financial instruments
consist primarily of cash and cash equivalents, trade receivables, trade
payables and debt instruments. The book values of cash and cash equivalents,
trade receivables and trade payables are considered to be representative of
their respective fair values. Generally, the Company's notes receivable and
payable have interest rates which are tied to current market rates. The Company
estimates that the book value of its financial instruments are in the aggregate
of market values.

Interest Costs: Interest costs incurred during the construction of major assets
for the Company's own use are capitalized, and totalled $228 in Fiscal 1991. No
interest was capitalized in Fiscal 1993 or 1992.

Warranty Costs: Expected warranty and performance guarantee costs are accrued
as revenue is recorded, based on historical experience and contract terms.

Net Earnings Per Share: Net earnings per share of Common Stock are computed by
dividing net earnings by the weighted average number of shares outstanding.
Common Stock equivalents (outstanding options to purchase shares of Common
Stock) were excluded from the computations as they were insignificant.

Common Stock: On December 18, 1991, the Company completed the public sale of
2,300,000 shares of Common Stock. The gross proceeds and total costs of the
issue were $58,512 and $189, respectively. Issuance costs are shown as a
reduction of Common Stock. The net proceeds of $58,323 from the issue were used
to retire debt until the anticipated expenditures related to the Company's
Tactical Vehicle Systems segment were incurred.

Reclassifications: The accompanying consolidated financial statements for
Fiscal 1992 and 1991 contain certain reclassifications to conform with the
presentation used in Fiscal 1993.

Note 2: Industry Segment Data

The Engineered Power Systems segment includes the designing, packaging,
manufacturing and marketing of diesel and gas turbine engine-driven equipment.
The Distribution segment includes the marketing of diesel engines, automatic
transmissions, material handling equipment, transport refrigeration units and
construction equipment and the provision of related parts and service. The
Tactical Vehicle Systems segment includes the designing, manufacturing and
marketing of tactical vehicles, primarily 2 1/2-ton and 5-ton trucks under
contract with the United States Army.

The high degree of integration of the Company's operations necessitates the use
of a substantial number of allocations and apportionments in the determination
of business segment information. Sales are shown net of intersegment
eliminations.

Corporate assets consist primarily of cash equivalents and the assets of a
limited partnership, in which the Company is the majority partner, which owns
the building where the corporate office is located. Corporate expenses include
the litigation expense associated with the Serv-Tech, Inc. lawsuit (see Note 5).

The Company markets its engineered power systems throughout the world and is not
dependent upon any single geographic region or single customer. Export sales,
including sales to domestic customers for export, for Fiscal 1993, 1992 and 1991
were $237,807, $256,269 and $258,272, respectively. Export sales in Fiscal
1993 included $113,597 destined for Asia, in Fiscal 1992 included $87,271
destined for South America, and in Fiscal 1991 included $152,217 destined for
the Far East.

Financial information relating to industry segments follows:

___________________________________________________________________________________________________________

Operating Identifiable Capital
Sales Profit Assets Expenditures Depreciation
___________________________________________________________________________________________________________

Fiscal 1993

Engineered Power Systems $602,853 $ 70,292 $396,712 $ 14,502 $ 5,330
Distribution 311,983 20,309 157,696 9,302 5,075
Tactical Vehicle Systems 65,894 2,886 113,917 6,061 9,405
Corporate Services 1,162 552 24,299 781 926
________ ________ ________ ________ ________

Total $981,892 $ 94,039 $692,624 $ 30,646 $ 20,736
======== ======== ======== ======== ========

Fiscal 1992

Engineered Power Systems $508,898 $ 59,578 $311,075 $ 18,646 $ 3,267
Distribution 269,045 12,478 138,359 5,582 5,041
Tactical Vehicle Systems 34,112 1,602 86,351 36,852 3,303
Corporate Services 471 195 37,563 13,985 468
________ ________ ________ ________ ________

Total $812,526 $ 73,853 $573,348 $ 75,065 $ 12,079
======== ======== ======== ======== ========

Fiscal 1991

Engineered Power Systems $400,133 $ 49,597 $312,463 $ 5,058 $ 3,300
Distribution 286,230 15,884 130,272 7,041 4,528
Tactical Vehicle Systems -0- -0- 26,865 13,859 202
Corporate Services -0- -0- 8,258 214 121
________ ________ ________ ________ ________

Total $686,363 $ 65,481 $477,858 $ 26,172 $ 8,151
========= ======== ======== ======== ========

Reconciliation of Operating profit to Earnings before income taxes and
accounting change follows:

_____________________________________________________________________________________________

Fiscal Fiscal Fiscal
1993 1992 1991
_____________________________________________________________________________________________

Operating profit $ 94,039 $ 73,853 $ 65,481
Corporate expenses (5,425) (5,819) (6,501)
Interest expense, net (3,313) (3,658) (6,721)
________ ________ ________

Earnings before income taxes and accounting change $ 85,301 $ 64,376 $ 52,259
======== ======== ========

Note 3: Recoverable Costs and Accrued Profits Not Yet Billed

Amounts included in the financial statements which relate to recoverable costs
and accrued profits not yet billed on contracts in process are as follows:

_______________________________________________________________________________________________

Fiscal Fiscal
1993 1992
_______________________________________________________________________________________________

Costs incurred on uncompleted contracts $355,184 $190,670
Accrued profits 33,300 13,117
________ ________

388,484 203,787
Less: Customer progress payments (303,704) (164,078)
________ ________

$ 84,780 $ 39,709
======== ========

Included in the statements of financial position:
Recoverable costs and accrued profits not yet billed $115,868 $ 56,693
Billings on uncompleted contracts in excess of incurred costs (31,088) (16,984)
________ ________

$ 84,780 $ 39,709
======== ========

Recoverable costs and accrued profits related to the Tactical Vehicle Systems
segment include direct costs of manufacturing and engineering, and allocable
overhead costs. Generally, overhead costs include general and administrative
expenses allowable in accordance with the United States Government contract cost
principles and are charged to cost of goods sold at the time revenue is
recognized. General and administrative costs remaining in recoverable costs and
accrued profits not yet billed amounted to $17,852 and $9,585 at January 31,
1994 and 1993, respectively. The Company's total general and administrative
expense incurred amounted to $79,290, $70,075 and $62,915 in Fiscal 1993, 1992
and 1991, respectively.

The United States Government has a security interest in unbilled amounts
associated with contracts that provide for progress payments.

In accordance with industry practice, recoverable costs and accrued profits
include amounts relating to programs and contracts with long production cycles,
a portion of which is not expected to be realized within one year.

Note 4: Inventories

Summarized below are the components of inventories:

______________________________________________________________________

Fiscal Fiscal
1993 1992
______________________________________________________________________

Engineered Power Systems $218,358 $185,338
Customer deposits (1,178) (6,827)
________ ________

Total Engineered Power Systems 217,180 178,511

Distribution 98,885 76,463
Excess of current cost over LIFO values (46,460) (42,468)
________ ________

Total Inventories $269,605 $212,506
======== ========

The Company's inventory classifications correspond to its industry segments. As
a custom packager of power systems to customer specifications, the Engineered
Power Systems segment's inventory consists primarily of work-in-process which
includes purchased and manufactured components in various stages of assembly.
The Engineered Power Systems segment's inventory includes approximately $14,271
of costs on a certain U. S. Government contract in excess of contractual
authorization which will be billable upon either contractual amendment or
approval of claims increasing contract funding. Management's position,
supported by outside legal counsel which specializes in government procurement
law, is that the Company will recover a substantial portion of the amount
claimed, which significantly exceeds the inventory carrying value. The
Distribution segment's inventory consists primarily of industrial equipment,
equipment under modification and parts held in the Company's distribution
network for resale. The Tactical Vehicle Systems segment's inventory is
purchased solely for the production of the FMTV and, accordingly, is recorded as
recoverable costs and accrued profits not yet billed.

During Fiscal 1992, certain inventories were reduced. These reductions resulted
in liquidations of LIFO inventory quantities carried at lower costs prevailing
in prior fiscal years as compared with the cost of Fiscal 1992 purchases, the
effect of which increased pre-tax earnings in Fiscal 1992 by approximately $204.

Note 5: Commitments and Contingencies

As a custom packager of power systems, the Company issues bid and performance
guarantees in the form of performance bonds or standby letters of credit.
Performance type letters of credit totaled $73,189 at the close of Fiscal 1993.

On April 27, 1994, the Fourteenth Court of Appeals of the State of Texas
reversed a $17.5 million judgment against the Company in a case filed by Serv-
Tech, Inc. of Houston, Texas. In the opinion of management, any future action
in connection with this lawsuit will not have a material impact on the Company's
financial position or results of operations.

The Company has been advised that on January 5, 1993, a former consultant of the
Company filed a suit for himself and the United States of America alleging that
the Company supplied false information in violation of the False Claims Act (the
"Act"), engaged in common law fraud and misapplied costs incurred in connection
with a change order under a 1987 government subcontract. Under the provisions
of the Act, the suit has not been served upon the Company pending an
investigation of the case by the U. S. Department of Justice and a determination
as to whether the Department of Justice will intervene and pursue the matter on
behalf of the United States. The suit alleges damages of $21 million plus
unspecified penalties. The Company has denied any wrongdoing in connection with
the pricing of the change order and believes that the case will be resolved, if
served on the Company, without any material effect on the financial position,
net worth or results of operations of the Company.

The Company is a defendant in a number of other lawsuits of the type normally
associated with the Company's business and involving claims for damages.
Management is of the opinion that such lawsuits will not result in any material
liability to the Company.

In connection with the sale of gas turbine engine-driven equipment and the
execution of an operating and maintenance contract, the Company has entered into
an agreement with a bank under which the Company will repurchase a power plant
in the event that the owner defaults in the repayment of the loan secured by the
power plant. The repurchase obligation runs for seven years from the date of
commercial operation of the power plant and specifies a repurchase price not to
exceed $29 million.

The Company leases certain property and equipment under lease arrangements of
varying terms. Annual rentals under terms of noncancelable leases are less than
1% of consolidated revenue.

Note 6: Debt Arrangements

The Company has informal borrowing arrangements with banks which may be
withdrawn at the banks' option. Borrowings under these credit arrangements are
unsecured, are due within 90 days and bear interest at varying bid and
negotiated rates. On January 31, 1994, the amount outstanding under these
arrangements was $5,000, with an interest rate of 3.39%.

Long-Term Debt, which is generally unsecured, consisted of the following:

_______________________________________________________________________________________

Fiscal Fiscal
1993 1992
_______________________________________________________________________________________

Notes payable to insurance companies:
-10.20%, principal due $1,000 annually to 1998 $ 5,000 $ 6,000
-10.25%, principal retired in 1993 -0- 1,417
-Installment note, 10.20%, due monthly to 1994 451 1,286

Debt of consolidated limited partnership:
-note payable to a bank, principal due monthly
commencing January 1, 1995 with a final maturity
date of January 1, 1998 (see note below) 9,000 9,000

Revolving credit notes payable to banks (see note below) 55,000 30,000
Other 768 -0-
________ ________

70,219 47,703
Less current portion (2,219) (3,252)
________ ________

Long-term Debt -- less current portion $ 68,000 $ 44,451
======== ========

The Company has commitments of $55,000 from banks under revolving credit notes
(subject to reduction at the Company's election) which mature on July 31, 1995,
all of which was used at the end of Fiscal 1993. A commitment fee at the rate
of 1/4 of 1% is paid on the daily average unused balance during the revolving
period. Borrowings outstanding under the revolving credit notes bear interest
at various options, the maximum rate being the prime rate. In Fiscal 1992, the
Company entered into an interest rate swap agreement, which expires in Fiscal
1995, that presently converts $20,000 of floating rate debt into fixed rate debt
with an interest rate of 4.28%. The net interest paid or received is included
in interest expense.

The Company's unsecured long-term debt was issued pursuant to agreements
containing covenants which impose working capital requirements on the Company
and designated subsidiaries and restrict indebtedness, guarantees, rentals,
dividends and other items. At the close of Fiscal 1993, approximately $94,715
of retained earnings were available for payment of dividends under the most
restrictive covenant.

As a result of the acquisition of a majority interest in a partnership in which
the Company is a limited partner, the Company's Consolidated Statements of
Financial Position include the debt of this partnership, which owns the building
where the Company's corporate office is located. Such debt is solely the
obligation of the partnership and is secured by the office building and garage.
Interest is payable in monthly installments at various rates, the maximum rate
being 9%.

Interest paid on both long-term and short-term debt during Fiscal 1993, 1992 and
1991 was $3,425, $3,707 and $6,921, respectively. The Company anticipates long-
term revolving lines of credit will be available when the current revolving
credit notes become due in 1995. The amounts of long-term debt which will
become due during Fiscal 1994 through 1998, are approximately: 1994--$2,219;
1995--$56,108; 1996--$1,100; 1997--$9,792 and 1998--$1,000.

Note 7: Postretirement Medical Plan

The Company has a postretirement medical plan which covers most of its employees
and provides for the payment of medical costs of eligible employees and
dependents upon retirement. Effective February 1, 1992, the Company adopted
SFAS 106 and changed its method of accounting for such costs to the accrual
basis of accounting instead of expensing these costs when paid as had been the
generally accepted method. The Company elected to record the previously
unrecognized prior service cost of such benefits on the immediate recognition
basis resulting in a cumulative charge to Fiscal 1992 earnings of $9,300, or
$0.29 per share, after a deferred tax benefit of $4,790. Postretirement medical
benefit costs for Fiscal 1993 and Fiscal 1992 consisted of the following:

____________________________________________________________________________________________________

Fiscal Fiscal
1993 1992
____________________________________________________________________________________________________

Service costs - benefits attributed to service during the period $ 377 $ 466
Interest cost on accumulated postretirement medical benefit obligation 768 1,105
Amortization of prior service costs (618) -0-
________ ________

Net postretirement medical benefit costs $ 527 $ 1,571
======== ========

The amount paid in Fiscal 1991 for postretirement medical benefit costs was
$332.

The Company's postretirement medical plan currently is not funded. The Company
expects to continue financing postretirement medical costs as covered claims are
incurred. The status of the plan at January 31, 1994 and 1993 was as follows:

_________________________________________________________________________________________

January 31, January 31,
1994 1993
_________________________________________________________________________________________

Accumulated postretirement medical benefit obligation

Retirees $ 6,201 $ 5,561
Employees eligible to retire 2,561 5,436
Employees not eligible to retire 1,419 4,122
________ ________

10,181 15,119

Unrecognized prior service cost 5,954 -0-
Unrecognized net losses (1,107) -0-
________ ________

$ 15,028 $ 15,119
======== ========

Postretirement medical benefit amounts were determined by applying health care
costs trend rates of 10.5 to 13.0 percent for Fiscal 1993 and 11.0 to 14.0
percent for Fiscal 1992, gradually decreasing to 6.0 percent by 2010 to gross
eligible medical claims, and using a discount rate of 7.75 percent for Fiscal
1993 and 8 percent for Fiscal 1992. Changing the health care cost trend rates
by one percentage point would change the accumulated postretirement medical
benefit obligation at January 31, 1994 by approximately $863 and would change
postretirement medical benefit costs by approximately $102.

The Company made plan modifications during the fourth quarter of Fiscal 1992.
The plan was amended for employees that retire on or after February 1, 1993, to
modify the attribution period and the cost sharing provisions of the plan.

Note 8: Employee Pension and Other Benefit Plans

The Company has a noncontributory, defined benefit pension plan covering
substantially all of its full-time employees. The benefits are based on years
of service, limited to 45 years, and the employee's highest consecutive five-
year average compensation out of the last ten years of employment. The Company
funds pension costs in conformity with the funding requirements of applicable
government regulations.

The following table sets forth the plan's funded status and amounts recognized
in the Company's statements of financial position:

_________________________________________________________________________________________

Fiscal Fiscal
1993 1992
_________________________________________________________________________________________

Actuarial present value of benefit obligations:

Accumulated benefit obligation, including vested benefits
of $33,051 in 1993 and $26,124 in 1992 $ 34,714 $ 27,284
======== ========
Projected benefit obligation for service rendered to date $(44,421) $(38,785)

Plan assets at fair value, primarily publicly traded stocks
and bonds,including 120,956 shares of the Company's
Common Stock at the end of Fiscal 1993 and 1992 56,099 52,759
________ ________

Plan assets in excess of projected benefit obligations 11,678 13,974

Unrecognized net gain from past experience different
from that assumed (4,020) (6,462)

Unrecognized net asset at February 1, 1985 being amortized
over the average remaining service period (194) (844)
________ ________

Prepaid pension cost included in Other Assets $ 7,464 $ 6,668
======== ========

Net pension credit for Fiscal 1993, 1992 and 1991 included the following
components:

___________________________________________________________________________________________

Fiscal Fiscal Fiscal
1993 1992 1991
___________________________________________________________________________________________

Service cost -- benefits earned during the year $ 2,012 $ 1,735 $ 1,645
Interest cost on projected benefit obligation 3,108 3,126 2,837
Actual return on plan assets (4,883) (4,550) (8,405)
Amortization of unrecognized net gain (493) (810) (324)
Net amortization and deferrals (540) (847) 3,840
________ ________ ________

Net periodic pension credit $ (796) $ (1,346) $ (407)
======== ======== ========

The assumptions used in Fiscal 1993 and 1992 were as follows:

_____________________________________________________________________________

Fiscal Fiscal
1993 1992
_____________________________________________________________________________

Discount Rate 7.75% 9.00%
Long-term rate of return on 9.50% 10.00%
Rate of increase in graduated salary 4.50 - 5.00% 6.00 - 12.00%

On April 10, 1990, the Company adopted an unfunded defined benefit retirement
plan for non-employee directors which provides for payments upon retirement,
death, or disability. Retirement expense for this plan in Fiscal 1993, 1992 and
1991, respectively, was $164, $71, and $66.

During Fiscal 1993, the Company adopted an unfunded supplemental retirement plan
for certain corporate officers. Retirement expense for the plan in Fiscal 1993
was $290. Prior service cost not yet recognized in periodic pension cost at
January 31, 1994 was $1,208.

In January 1994, the Company adopted an employee savings plan, which qualifies
under Section 401(k) of the Internal Revenue Code. Under the plan,
participating employees may contribute up to 15% of their pre-tax salary, but
not more than statutory limits. The Company contributes twenty five cents for
each dollar contributed by a participant, subject to certain limitations. The
Company's matching contribution to the savings plan was $13 in Fiscal 1993.
Under a nonqualified deferred compensation plan for certain employees, a portion
of eligible employees' discretionary income can be deferred at the election of
the employee. These deferred funds accrue interest payable to the employee at
the prime rate in effect at the end of the year.

Note 9: Stock Options

The Stewart & Stevenson Services, Inc. 1988 and 1993 Nonstatutory Stock Option
Plans authorize the grant of options to purchase an aggregate of up to 1,800,000
and 300,000 shares of Common Stock respectively, at not less than fair market
value at the date of grant. The options expire five to ten years from the date
of grant and become exercisable in four 25% cumulative annual increments
commencing one year from date of grant. Under the terms of the 1993
Nonstatutory Stock Option Plan, the number of options authorized for grant
increased from 300,000 to 415,000 shares of Common Stock on February 1, 1994.

Stock option activity under the plan was as follows:

___________________________________________________________________________

Shares Option Price
under Range
Option Per Share
___________________________________________________________________________

Outstanding at end of Fiscal 1990 627,988 $ 4.75 - $ 13.125
Granted 354,000 $ 18.75
Exercised (234,588) $ 4.75 - $ 13.125
________

Outstanding at end of Fiscal 1991 747,400 $ 4.75 - $ 18.75
Granted 58,800 $ 27.75
Exercised (335,000) $ 4.75 - $ 18.75
________

Outstanding at end of Fiscal 1992 471,200 $ 4.75 - $ 27.75
Granted 178,000 $ 32.625
Exercised (171,100) $ 4.75 - $ 27.75
________

Outstanding at end of Fiscal 1993 478,100 $ 13.125 - $ 32.625
========

Options exercisable at end of Fiscal 1993 79,000 $ 13.125 - $ 27.75
========

Options available for future grants 692,800
========

Note 10: Income Taxes

Effective February 1, 1992, the Company adopted the method of accounting for
income taxes promulgated by SFAS 109. The Company had previously accounted for
income taxes under the method promulgated by Statement of Financial Accounting
Standards No. 96 (SFAS 96). Under both SFAS 109 and SFAS 96, the deferred tax
liability is determined under the liability method based on the difference
between the financial statement and tax bases of assets and liabilities as
measured by the enacted statutory tax rates and deferred tax expense is the
result of changes in the net liability for deferred taxes. The principal types
of differences between assets and liabilities for financial statement and tax
return purposes are accumulated depreciation, pension accounting, contract
accounting, and nondeductible accruals. Adoption of SFAS 109 did not have a
material effect on Fiscal 1992 earnings before the change in accounting for SFAS
106.

The components of the income tax provision and the income tax payments were:

___________________________________________________________________________________

Fiscal Fiscal Fiscal
1993 1992 1991
___________________________________________________________________________________

Current $ 10,454 $ 17,917 $ 16,215
Deferred 17,545 2,680 560
________ ________ ________

Income tax provision $ 27,999 $ 20,597 $ 16,775
======== ======== ========

Income tax payments (excluding refunds) $ 11,965 $ 13,667 $ 15,761
======== ======== ========

A reconciliation between the provision for income taxes and income taxes
computed by applying the statutory U. S. Federal income tax rates of 35% in
Fiscal 1993 and 34% in Fiscal 1992 and 1991 follows:

________________________________________________________________________

Fiscal Fiscal Fiscal
1993 1992 1991
________________________________________________________________________

Provision at statutory rates $ 29,856 $ 21,888 $ 17,712
Other (1,857) (1,291) (937)
________ ________ ________

$ 27,999 $ 20,597 $ 16,775
======== ======== ========

The tax effects of the significant temporary differences which comprise the
deferred tax liability at the end of Fiscal 1993 and Fiscal 1992 are as follows:

____________________________________________________________________________

Fiscal Fiscal
1993 1992
____________________________________________________________________________

Deferred Tax Assets
Postretirement benefit obligation $ 5,260 $ 5,140
Accrued expenses and other 11,426 8,650
Other 1,316 148
________ ________

Gross deferred tax assets 18,002 13,938
________ ________

Deferred Tax Liabilities
Property, plant and equipment 4,027 2,458
Pension accounting 2,412 2,161
Contract accounting 27,533 22,313
Prepaid expenses and deferred 16,997 6,144
Other 7,359 3,642
________ ________

Gross deferred tax liabilities 58,328 36,718
________ ________

Net deferred tax liability $ 40,326 $ 22,780
======== ========

Current portion of deferred tax liability $ 34,458 $ 17,325
Non-current portion of deferred tax liability 5,868 5,455
________ ________

Net deferred tax liability $ 40,326 $ 22,780
======== ========

Note 11: Supplemental Financial Data

Receivables consist of the following:

______________________________________________________________

Fiscal Fiscal
1993 1992
______________________________________________________________

Accounts receivable $145,433 $141,484
Notes receivable 3,576 3,430
Allowance for doubtful accounts (1,717) (1,748)
________ ________

$147,292 $143,166
======== ========

At January 31, 1994, the Company does not have significant credit risk
concentrations. No single group or customer represents greater than 10% of
total accounts receivable.

Components of property, plant and equipment follow:

____________________________________________________________________________________

Fiscal Fiscal
1993 1992
____________________________________________________________________________________

Machinery and equipment $107,405 $ 91,359
Buildings and leasehold improvements 76,533 69,564
Revenue earning assets 10,154 9,145
Accumulated depreciation and amortization (82,188) (63,338)
________ ________
111,904 106,730

Construction-in-progress 2,050 974
Land 12,519 9,655
________ ________

$126,473 $117,359
======== ========

Note 12: Consolidated Quarterly Data (unaudited)

_____________________________________________________________________________________________________
(Dollars in thousands, except per share data)
Fiscal 1993
_____________________________________________________________________________________________________
Fourth Third Second First
Quarter Quarter Quarter Quarter
_____________________________________________________________________________________________________

Sales $244,662 $259,141 $257,936 $220,153
Gross profit 43,399 40,867 38,024 33,688
Net earnings 16,831 14,068 13,789 12,092
Net earnings per share .51 .43 .42 .37

Fiscal 1992
_____________________________________________________________________________________________________

Fourth Third Second First
Quarter Quarter Quarter Quarter
_____________________________________________________________________________________________________

Sales $222,732 $208,260 $199,977 $181,917
Gross profit 33,569 33,899 31,459 27,720
Earnings before change in accounting 13,096 11,503 10,456 8,903
Net earnings (loss) 13,096 11,503 10,456 (397)
Earnings per share before change in accounting .40 .35 .32 .28
Net earnings (loss) per share .40 .35 .32 (.01)

The net loss reported during the first quarter of Fiscal 1992 is after the change in accounting for postretirement medical
benefits. The effect of the change in accounting was to decrease net earnings and net earnings per share by $9,470 and $.29, $170
and $.01, and $183 and $.01 for the first, second and third quarters of Fiscal 1992, respectively.

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

None.

PART III

In accordance with General Instruction G(3) to Form 10-K, Items 10 through 13
have been omitted since the Company will file with the Commission a definitive
proxy statement complying with Regulation 14A involving the election of
directors not later than 120 days after the close of its fiscal year. Such
information is incorporated herein by reference.

CROSS REFERENCE

Form 10-K Item Number and Caption Caption in Definitive
Proxy Statement
________________________________________________________________________________

Item 10. Directors and Executive
Officers of the Registrant . . . . Election of Directors

Item 11. Executive Compensation . . . . . . Executive Compensation

Item 12. Security Ownership of
Certain Beneficial Owners
and Management . . . . . . . . . . Voting Securities and
Ownership Thereof by Certain
Beneficial Owners and
Management
Item 13. Certain Relationships
and Related Transactions . . . . . Election of Directors

PART IV

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

(a)1. The following financial statements for Stewart & Stevenson Services, Inc.
are filed as a part of this report:

Consolidated Statements of Financial Position--January 31, 1994 and 1993.

Consolidated Statements of Earnings--Years ended January 31, 1994, 1993
and 1992.

Consolidated Statements of Shareholders' Equity--Years ended January 31,
1994, 1993 and 1992.

Consolidated Statements of Cash Flows--Years ended January 31, 1994,
1993 and 1992.

Notes to Consolidated Financial Statements.

2. The following financial statement schedule for Stewart & Stevenson
Services, Inc. and Subsidiaries is filed as a part of this report:

IX -- Short-term Borrowings.

Schedules other than Schedule IX are omitted because of the absence of
conditions under which they are required or because the information is
included in the financial statements or notes thereto.

3. The following exhibits are filed as a part of this report pursuant to
Item 601 of Regulation S-K.

3.1 Second Restated Articles of Incorporation of Stewart & Stevenson
Services, Inc., effective as of April 20, 1992.

3.2 Third Restated Bylaws of Stewart & Stevenson Services, Inc.,
effective as of December 8, 1992.

10.1 Lease Agreement effective April 1, 1990, between Joe Manning, Jr.
and C.E. Ames, as Lessors, and the Company, as Lessee.

10.2 Lease Agreement effective January 1, 1991, between Joe Manning,
Jr., as Lessor, and the Company, as Lessee.

10.3 Lease Agreement effective January 1, 1988, between Miles McInnes
and Faye Manning Tosch, as Lessors, and the Company, as Lessee.

10.4 Lease Agreement effective March 1, 1986, between Joe Manning, Jr.
and Joe Manning, IV, as Lessors, and the Company, as Lessee.

10.5 Distributor Sales and Service Agreement effective January 1, 1993,
between the Company and Detroit Diesel Corporation.

10.6 Contract Number DAAE07-92-R001 dated October 11, 1991 between
Stewart & Stevenson Services, Inc. and the United States Department
of Defense, U. S. Army Tank-Automotive Command, as modified.

10.7 Contract Number DAAE07-92-R002 dated October 15, 1991
between Stewart & Stevenson Services, Inc. and the United States
Department of Defense, U. S. Army Tank-Automotive Command, as
modified.

10.8 Stewart & Stevenson Services, Inc. Deferred Compensation Plan dated
as of December 31, 1979.

10.9 Stewart & Stevenson Services, Inc. 1988 Nonstatutory Stock Option
Plan.

10.10 Amendment No. 1 to Stewart & Stevenson Services, Inc. 1988
Nonstatutory Stock Option Plan, dated September 11, 1990.

10.11 Stewart & Stevenson Services, Inc. Supplemental Executive Retirement
Plan

22.1 List of Subsidiaries

24.1 Consent of Arthur Andersen & Co., Independent Public Accountants.

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

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
ON CONSOLIDATED FINANCIAL STATEMENT SCHEDULES

Board of Directors and Shareholders
Stewart & Stevenson Services, Inc.

We have audited in accordance with generally accepted auditing standards, the
consolidated financial statements of Stewart & Stevenson Services, Inc. included
in this Form 10-K, and have issued our report thereon dated April 21, 1994. Our
audit was made for the purpose of forming an opinion on the basic consolidated
financial statements taken as a whole. The schedule listed in Item 14a(2) is
the responsibility of the Company's management and is presented for purposes of
complying with the Securities and Exchange Commission's rules and is not part of
the basic consolidated financial statements. This schedule has been subjected
to the auditing procedures applied in the audit of the basic consolidated
financial statements and, in our opinion, fairly states in all material respects
the financial data required to be set forth therein in relation to the basic
consolidated financial statements taken as a whole.

ARTHUR ANDERSEN & CO.

Houston, Texas
April 21, 1994

SCHEDULE IX--SHORT-TERM BORROWINGS

STEWART & STEVENSON SERVICES, INC. & SUBSIDIARIES

Three Years Ended January 31, 1994
(Dollars in Thousands)

________________________________________________________________________________________________________________
Column A Column B Column C Column D Column E Column F
________________________________________________________________________________________________________________

Maximum Average Average
Category of Weighted amount amount interest
aggregate Balance average outstanding outstanding rate
short-term at end of interest during the during the during
borrowings period rate period period period
____________ ____________ ____________ ____________ ____________ ____________

Fiscal 1991
GMAC $ -0- .00% $ 1,296 $ 111 10.40%
Banks (unsecured) -0- .00 72,500 3,826 6.40
Banks (secured) -0- .00 329 106 8.85

Fiscal 1992
Banks (unsecured) $ -0- .00% $ 36,000 $ 1,292 4.04%

Fiscal 1993
Banks (unsecured) $ 5,000 3.39% $ 50,000 $ 19,250 3.52%

GMAC--Notes payable to General Motors Acceptance Corporation generally
at prime plus 1% or non-interest bearing for 90 days on certain products
secured by new General Motors diesel engines and other equipment included
in inventory. The notes are due in specified installments at twelve,
fifteen and eighteen months or upon sale of the secured inventory.

Banks--Unsecured: Borrowings under credit arrangements which are due
within 90 days. Secured: Notes payable of the Company's finance
subsidiary which pledges notes receivable and certain other assets for
borrowings outstanding.

At any month end.

Total of month end outstanding balances divided by 12.

Stated interest rates of interest bearing notes applied to month end
outstanding balances divided by weighted average short-term debt
outstanding.

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized on the 21st day of April,
1994.

STEWART & STEVENSON SERVICES, INC.

By: /s/ Bob H. O'Neal
Bob H. O'Neal
President

Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities indicated on the 21st day of April, 1994.

/s/ Bob H. O'Neal /s/ Robert L. Hargrave
Bob H. O'Neal Robert L. Hargrave
Director and Principal Director, Principal
Executive Officer Financial Officer and
Principal Accounting Officer

/s/ C. Jim Stewart II /s/ J. Carsey Manning
C. Jim Stewart II J. Carsey Manning
Director Director

/s/ Donald E. Stevenson /s/ Robert H. Parsley
Donald E. Stevenson Robert H. Parsley
Director Director

/s/ Jack W. Lander, Jr. /s/ Jack T. Currie
Jack W. Lander, Jr. Jack T. Currie
Director Director

/s/ James H. Elder, Jr. ______________________
James H. Elder, Jr. Robert S. Sullivan
Director Director

/s/ Donald J. Atwood
Donald J. Atwood
Director

EXHIBIT INDEX

Filed with Incorporated by Reference
Exhibit Number and Description this report Form Date File No. Exhibit
______________________________ ___________ ____ ________ ________ _______

3.1 Second Restated Articles of Incorporation,
effective as of April 20, 1992. *

3.2 Third Restated Bylaws, effective as
December 8, 1992. *

10.1 Lease Agreement effective April 1, 1990,
between Joe Manning, Jr. and C. E. Ames,
as Lessors, and the Company, as Lessee. *

10.2 Lease Agreement effective January 1,
1991, between Joe Manning, Jr., as Lessor,
and the Company, as Lessee. *

10.3 Lease Agreement effective January 1, 1988,
between, Miles McInnes and Faye Manning Tosch,
as Lessor, and the Company, as Lessee. *

10.4 Lease Agreement effective March 1,
1986, between Joe Manning, Jr. and Joe
Manning, IV, as Lessors, and the Company,
as Lessee. *

10.5 Distributor Sales and Service Agreement
effective January 1, 1993, between the
Company and Detroit Diesel Corporation. 10-K 01/31/93 0-8493 10.1

10.6 Contract Number DAAE07-92-R001 dated
October 11, 1991 between Stewart &
Stevenson Services, Inc. and the United
States Department of Defense, U.S. Army
Tank - Automotive Command, as modified. S-3 12/28/91 33-44149 28.1

10.7 Contract Number DAAE07-92-R002 dated
October 15, 1991 between Stewart &
Stevenson Services, Inc. and the United
States Department of Defense, U.S. Army
Tank - Automotive Command, as modified. S-3 12/28/91 33-44149 28.2

10.8 Stewart & Stevenson Services, Inc.
Deferred Compensation Plan dated
as of December 31, 1979. *

10.9 Stewart & Stevenson Services, Inc.
1988 Nonstatutory Stock Option Plan. *

10.10 Amendment No. 1 to Stewart & Stevenson
Services, Inc. 1988 Non-Statutory Stock
Option Plan; dated September 11, 1990. *

10.11 Stewart & Stevenson Services, Inc.
Supplemental Executive Retirement Plan *

22.1 List of subsidiaries. *

24.1 Consent of Arthur Andersen & Co.,
Independent Public Accountants. *