Lima-Hamilton initially manufactured diesel locomotives to stock, and sold them as orders came in. At the beginning of 1950, with only 34 diesels on order, L-H decided to put more 'muscle' into their the existing specification A-3170 1000 horsepower yard switcher by changing the fuel rack settings, producing the first 1200 horsepower yard switcher and giving the company an advantage (albiet, short-lived) over the competitors. On November 28, 1949, Construction Order 1216-DE was issued for ten new stock switchers, and these became L-H's first 1200 horsepower switchers. Another five units were later added for a total of 15. Shipped between April and August 1950, the Nickel Plate acquired four, the Wabash six, and the Erie five. Ironically, Lima demonstrator 1004, which left the plant on April 3, 1950, had the dubious distinction of being the last 1000 horsepower unit constructed. The 1200 horsepower units were officially unveiled a few days later, making the 1004 (sold to the TP&W as 302) obsolete as soon as it left the property.

Although Lima was a sound, well-managed firm in 1946, its Class 1 market prospects were bleak unless it quickly entered the diesel-electric locomotive field. It couldn't afford a full-scale development program, thus Lima was viewed as an attractive potential partner by other firms eager to enter the market. One proposal was from Fairbanks-Morse (FM), because the five-year contract with General Electric (GE) to build road locomotives for FM would run out in 1949, and GE had no interest in renewing the contract because it was building with Alco, and had designs of its own (no pun intended) on the road diesel market. Although details of the FM proposal aren't known, it appears to have offered little more than a contract to assemble locomotives (FM only wanted a manufacturing facility, not a partner). At the time, Lima was also conducting discussions with General Machinery Corporation (General). One of the companies making up General was Hamilton Press and Machinery Company (Hamilton), and one of the products of Hamilton was a diesel engine for marine and stationary generator applications. On July 30, 1947, Lima and General merged to form the Lima-Hamilton Corporation. Almost immediately there was turmoil. The General management wanted to terminate steam locomotive production, while the Lima management was committed to the development of a 4-8-6 'double-bubble' (nicknamed for its unique firebox) super steam locomotive, designed with poppet valves, to be a true competitor of the diesel, the design of which began in 1929. By April 1949, the design was shelved, and Lima finished its final steam locomotives a month later. Chief Mechanical Officer Bert Townsend resigned in protest, perhaps the last true believer in the reciprocating steam locomotive. The similarity to the Alco 1000 hp switcher may be a coincidence, on the other hand, hired by General prior to the merger to oversee the project was former Alco engineer F. J. Geittman, who's job was to develop a new prime mover, as the Hamilton diesel was not suited for locomotive applications.

Hamilton engineers proved worthy counterparts to their Lima brethren. They realized from the start that high horsepower-to-weight ratios yield no advantages for locomotives, since locomotives are traditionally ballasted to obtain optimal adhesion. This allowed them to incorporate heavier crankshafts, bearings, connecting rods, and other parts. The competition was experiencing road failures with their engines because they followed traditional design methods and used lightweight components. The initial switcher design was specification A-3170 (LS-1000), a 1000 hp switcher, which became the standard design. A 660 hp switcher had been designed, but none were built. Later, by changing fuel rack settings, the same design became the LS-1200 (still specification A-3170, L-H did not issue model numbers), producing 1200 horsepower from a Hamilton T-89-SA four-cycle, turbocharged eight cylinder inline diesel engine. Westinghouse supplied the electrical gear.