SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                    FORM 10-K

/x/ Annual report pursuant to Section 13 or 15(d) of the Securities Exchange Act
of 1934 for the fiscal year ended  December 31, 1998,  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  1-5562 

               ______________KOLLMORGEN CORPORATION__________________
             (Exact name of registrant as specified in its charter)

          New York                                       04-2151861     
(State or other jurisdiction of                          (I.R.S. Employer
incorporation or organization)                           Identification No.)

Reservoir Place, 1601 Trapelo Road, Waltham, MA              02451-7333 
   (Address of principal executive office)                     (Zip Code)

Registrant's telephone number, including area code  (781) 890-5655     

Securities registered pursuant to Section 12(b) of the Act:
                                            Name of each exchange on
      Title of each class                        which registered
      Common Stock - $2.50 par value        New York Stock Exchange, Inc.
      Preferred Stock Purchase Rights       New York Stock Exchange, Inc.
      8 3/4% Convertible Subordinated
            Debentures Due 2009             New York Stock Exchange, Inc.

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

                    ______________None___________________
                            (Title of each class)

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

         Indicate by check mark if disclosure of delinquent filers  pursuant to
Item 405 of Regulation S-K is not contained herein,  and will not be contained,
to the best of the  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 
non-affiliates of the registrant.   $133,534,837 as of March 17, 1999.

         Indicate the number of outstanding shares of the registrant's Common 
Stock. 10,163,806 shares as of March 17, 1999.

                       DOCUMENTS INCORPORATED BY REFERENCE

         Portions of the 1999  Definitive  Proxy  Statement  to be filed for the
1999 Annual Meeting of Shareholders are incorporated by reference into Part III.


<PAGE>2


                                 PART I

Item 1.  Business.

         (a) General.  Kollmorgen  Corporation (the "Company"),  incorporated in
the State of New York in 1916, is one of the major  worldwide  manufacturers  of
high  performance  electronic  motion  control  products  and  systems  and  has
operations in two industry  segments:  (1)  industrial  and  commercial  and (2)
aerospace and defense.

         (b) Financial  Information  about Operating  Segments.  A table setting
forth the amounts of revenue,  pre-tax profit or loss and identifiable  assets
attributable  to each of the  Company's  operating  segments in each of its last
three  fiscal  years  is  contained  in Note  16  captioned  "Geographic and 
industry information" to the Financial Statements.

         (c) Narrative Description of Business. Described below is a description
of the Company's two operating segments.

Industrial and Commercial Group

         The  Company's  products  and services in  this  segment  include  
(i) a  number  of different types of permanent magnet motors, associated 
electronic amplifiers and feedback components, controls and related systems for 
a variety of applications, and (ii) specialized  engineering services to the 
electric utility industry. The Company's  line of servo  motors and related  
drive  electronics are used in many types of industrial automation,  process 
control,  machine tool, underwater equipment,  and robotic  applications.  Its 
torque motors, tachometer generators are used worldwide in medical, machine 
tool and process control applications.

         The Company's  stepper motors and brushless  motors are used for office
and factory automation,  instrumentation, and medical applications. Its Commack,
New York facility  designs,  manufactures and sells a line of low inertia,  high
speed of response,  d.c.  motors and  associated  electronics  used primarily in
industrial  automation and medical  applications.  The Company also manufactures
and sells linear motors for various industrial applications.

         The Company  distributes  industrial  motors and a proprietary  line of
analog and  digital  electronic drives under the  trademarks "Servostar(R)", 
"Digifas" (TM) and "Digilink" (TM) in Europe through its wholly-owned  German  
subsidiary, Kollmorgen Seidel Servo Drives GmbH.

         In July 1998, the Company  acquired the Magnedyne  motor operation from
Sierracin  Corporation.  Magnedyne,  with  operations in California  and Mexico,
designs,  manufactures and sells primarily torque motors to the  semi-conductor,
medical and industrial markets.

         In addition to the Company's principal  facilities located in Virginia,
New York and California,  the Company  develops certain  proprietary  electronic
products in Israel,  and manufactures  and assembles its commercial  products in
several other geographic  locations.  Through a joint venture in Bombay,  India,
the Company  manufactures  fractional  horsepower brushless motors primarily for
the computer and  electronics  markets.  The Company also  distributes,  and has
begun the  manufacture of, its industrial  products in the People's  Republic of
China  through  a  joint  venture  company,  Tianjin  Kollmorgen Industrial 
Drives Corporation, located in Tianjin, PRC.



<PAGE>3


         In this segment,  competitive advantage is gained by the ability of the
Company  to  design  new or adapt  existing  motor  and  drive  systems  to meet
relatively stringent packaging and performance  requirements of customers,  most
of whom are original  equipment  manufacturers  purchasing the motors and drives
for  inclusion in their end product.  While meeting  these  stringent  technical
specifications, the motors and drives must also be price competitive. The number
and  identity of the  competitors  in this  segment  varies  depending  upon the
particular industry and product application. Several large European and Japanese
manufacturers,   either   directly  or  through  joint  ventures  with  American
companies,  have been able to compete  successfully in the United States machine
tool and industrial automation marketplaces, including the market for industrial
motors of the type that the Company  manufactures.  In other markets,  there are
relatively few  competitors for each  marketplace or application,  and generally
they are specialized domestic or foreign motor manufacturers.

         The products in this segment are  marketed  and sold  directly  through
qualified technical personnel employed by the Company, or through manufacturers'
representatives or distributors, or by a combination of the foregoing.

         The Company  provides  engineering  services for the  modification  and
upgrade  of  nuclear  and  fossil  power  plants of  domestic  electric  utility
companies and  independent  power producers  through a wholly-owned  subsidiary,
Proto-Power   Corporation.   This  business   also   licenses  its   proprietary
computer-aided  engineering  software to utility  companies  for  analyzing  the
performance of their power plant systems and equipment.

         The  backlog  of this  segment  at the end of 1998 was $40 million,
essentially all of which is expected to be shipped in 1999.

Aerospace and Defense Group

         The Company's  motion  control  products and subsystems in this segment
are  primarily   manufactured  by  Kollmorgen   Artus,  a  wholly-owned   French
subsidiary,  the Inland  Motor  Division,  located in Radford,  Virginia and its
Electro-Optical Division located in Northampton, Massachusetts.

         Kollmorgen  Artus  manufactures and sells  generators,  special motors,
electro-mechanical  actuators and drive  electronics,  synchros,  and resolvers,
which are sold  worldwide  into the  defense  and  aerospace  market.  After the
successful  test flight of its  proprietary  ac/dc  regulated  power  management
system for the Bell-Boeing  V-22 Osprey tiltrotor  aircraft in 1997,  Kollmorgen
Artus began  production of that system in 1998.  This business also has a motor 
facility in Bien Hoa,  Vietnam,  for the  manufacture  of  resolvers,  
subassemblies  and motors. Kollmorgen Artus also manufactures and sells 
calibration systems for air traffic control navigation aids.

         The  specialty   d.c.   torque   motors,   tachometer   generators  and
electro-mechanical  actuators and related  electronics  are used  worldwide in a
variety of aerospace and defense  applications,  including missiles,  commercial
and military aircraft and sophisticated guidance tracking systems.

         In addition to the products described above,  the Company has been the
primary  designer  and major  supplier of submarine  periscopes  to the United 
States Navy since 1916 and also markets and sells submarine periscopes to
navies throughout the world through its Electro-Optical  Division.  In 1995, the
Company  received a $35 million  contract from the Naval Sea Systems  Command to
design  and  build  a  new  photonic   system  that  replaces  the   traditional
through-the-hull  periscope.  In January 1998,  the  Company  received a $16.6 
million  pre-production  order for this system and in October,  was awarded
the first production order.


<PAGE>4

         This   Division   also  has  been  an   important   supplier  of  other
electro-optical  instruments for various weapon systems,  including  specialized
on-board sights for the DDG-51 Arleigh-Burke Class of guided missile destroyers.
These instruments often possess highly advanced servo-driven optical systems and
may use lasers,  infrared  detectors,  or  low-light  level  television  imaging
systems for night  vision.  The Company also  designs and markets a  proprietary
weapon control system under the registered  trademark  CLAWS(R) for a variety of
platforms.

         In  general,   the  Company's   aerospace   and  defense   business  is
characterized by long-term contracts which require the delivery of products over
more than one year and may include  progress  payments during the manufacture of
the  product.   Competition   is   generally   limited  to  divisions  of  large
multinational  companies which specialize in military  contracting.  The Company
has been able to compete  effectively  against these larger companies because of
the Company's experience and expertise in the specialized areas which it serves.

         The backlog of this segment at the end of 1998 was $62.2 million of 
which approximately 90% is expected to be shipped in 1999.

         Customer Base.

         Except to the extent that sales to the U.S.  government  under numerous
prime and  sub-contracts  may be considered as sales to a single  customer,  the
Company's business is not characterized by dependence upon one customer or a few
customers,  the loss of any of which would have a materially  adverse  effect on
its  total  business.   Typical  of  all  engineered  or  custom-made  component
businesses,  the Company's  motion  technologies  business is characterized by a
customer base founded upon a number of large key accounts, the importance of any
one of which can vary from year to year. During 1998, no customer  accounted for
10% or more of the Company's consolidated revenues.

         Government Sales.

         In 1998, sales to the U.S.  Government or for U.S.  Government  end-use
represented approximately 20.8% of revenues.

         Patents.

         The Company has either applied for or been granted a number of domestic
and foreign patents  pertaining to its business  segments.  The Company believes
that  these  patents  are  and  will be  important  to the  Company's  continued
leadership position in these business segments and, when necessary, has and will
continue to enforce its legal rights against alleged infringements of its patent
estate.  During the first quarter of 1998,  the Company  received  $27.2 million
under a  confidential  settlement  and paid-up  license  agreement  with a large
multinational  Japanese company covering certain of the Company's motion control
patents.  At the same time,  the Company also  notified a number of domestic and
foreign  companies  that licenses are available  for these  patents.  During the
fourth quarter of 1998, the Company also concluded additional licenses for these
patents.

         Raw Materials.

         The raw  materials  essential to the  Company's  business are generally
available in the open market, and the Company did not experience any significant
shortages in such materials  during the past three years.  The Company  believes
that it has adequate  sources of raw  materials  available  for use and does not
anticipate any significant shortages.



<PAGE>5


         Research and Development.

         During 1998,  the Company spent $12.1 million or approximately 5% of 
its consolidated sales on research activities related to the development of new
products.  This  compares to $9.7 million or 4.3% in 1997, and $12.1 million or
5.3% in 1996. Substantially all of this amount was sponsored by the Company.

         Environmental Matters.

         The  Company's   operations   are  subject  to  a  variety  of  federal
environmental  laws and regulations.  The most significant of these laws are the
Clean Air Act,  the Clean Water Act and the Resource  Conservation  and Recovery
Act, all of which are administered by the United States Environmental Protection
Agency.   These  statutes  and  the  regulations   impose  certain  controls  on
atmospheric  emissions,  discharges  into sewers and  domestic  waters,  and the
handling and disposal of hazardous wastes. In addition,  certain state and local
jurisdictions  have adopted  environmental  laws and  regulations  that are more
stringent than federal regulations. Compliance with these federal and state laws
and  regulations  has  resulted  in  expenditures  by the  Company to improve or
replace   pollution   control   equipment.   The  Company's   estimated  capital
expenditures  for  environmental  control  facilities  are  not  expected  to be
material.

         Under the federal Comprehensive  Environmental  Response,  Compensation
and Liability Act and analogous state statutes,  certain liabilities are imposed
for the  disposal  of  "hazardous  substances"  without  regard  to fault or the
legality of such  disposals.  The Company has been named,  or has been  informed
that it may be  named,  as a  potentially  responsible  party at  several  waste
disposal sites under these  statutes.  Based upon the  information  available to
date,  the Company does not believe  that its share of any  clean-up  costs will
have a  material  impact on the  Company's  financial  condition,  cash flows or
results of operations.

         Employees.

         The Company is a party to a collective  bargaining  agreement  with the
International  Association  of Machinists  and Aerospace  Workers that currently
covers 29 employees and expires in August, 1999.

         As of December  31,  1998,  the Company  employed  approximately  1,940
employees.  The Company believes that it enjoys satisfactory  relations with its
employees, including those covered by the collective bargaining agreement.

         Financial Information About Foreign and Domestic Operations and Export 
Sales.

         Financial  information on the Company's foreign and domestic operations
and export sales is contained in the response to Item 14(a) of this Report.

Item 2.  Properties.

         The Company's  corporate  office is located in Waltham,  Massachusetts.
The table which  follows  sets forth a current  summary of the  locations of the
Company's principal  operating plants and facilities,  and other pertinent facts
concerning  them. The Company's  facilities  are  substantially  utilized,  well
maintained and suitable for its products and services.


<PAGE>6



                                                      Size of           Leased
Business Segment              Location               Facility           or Owned

Industrial and             Vista, CA (1)              37,000 sq.ft.     Leased
  Commerical Group         Commack, NY               100,000 sq.ft.     Leased
                           Groton, CT                 32,000 sq.ft.     Leased
                           Radford, VA (1)           261,000 sq.ft.     Owned
                           Radford, VA                15,000 sq.ft.     Leased
                           Petach Tikva, Israel       11,000 sq.ft.     Leased
                           Dusseldorf, Germany        34,000 sq.ft.     Leased

Aerospace and              Brattleboro, VT           24,000 sq.ft.      Leased
   Defense Group           Northampton, MA           98,000 sq.ft.      Owned
                           Avrille, France           94,000 sq.ft.      Owned
                           Besancon, France          15,000 sq.ft.      Owned
                           Bien Hoa, Vietnam         24,000 sq.ft.      Owned

Corporate                  Waltham, MA                6,250 sq.ft.      Leased


(1) Portions of these  facilities  are  utilized for the  Aerospace  and Defense
    Group.

Item 3.  Legal Proceedings.

         The Company has various  legal  proceedings  arising  from the ordinary
conduct  of its  business;  however,  they are not  expected  to have a material
adverse effect on the consolidated financial position, cash flows, or results of
operations of the Company.

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

         Not applicable.

Executive Officers of the Company.

         The following is a list of the Company's executive officers, their ages
and their positions as of March 17, 1999:

                            Present  
      Name        Age       Office         Business Experience

Gideon Argov      42       President        Chairman of the Board since March
                           and              1996, President and Chief Executive
                           Chief            Officer since November 1991;
                           Executive        Director since May 1991. From March
                           Officer          1988 to May 1991, President and
                                            Chief Executive Officer and 
                                            Director of High Voltage Engineering
                                            Company.  Prior to May 1991, for
                                            five years a manager and senior
                                            consultant with Bain & Company.



<PAGE>7



Robert J. Cobuzzi 57       Senior           Senior Vice President (since
                           Vice             February 1993), Treasurer and
                           President,       Chief Financial Officer since
                           Treasurer        July 1991.  From April 1989 to
                           and              July 1991, Vice President and
                           Chief            Treasurer of High Voltage
                           Financial        Engineering Company.  Prior to
                           Officer          April 1989, Vice President and
                                            Chief Financial Officer of
                                            Ausimont N.V.

Daniel F. Desmond 49       Vice             Vice President since November
                           President        1997.  President of the Company's
                                            Aerospace  and    Defense  Group.  
                                            President of  the  Company's
                                            Electro-Optical  Division from 1989
                                            to 1997.

James A. Eder     53       Vice             Vice President since January
                           President,       1990; General Counsel since
                           Secretary        December 1991, and Secretary
                           and              since 1983.  Previously he had
                           General          been Assistant Corporate Counsel
                           Counsel          from 1977 to 1982.

Keith D. Jones    40       Controller       Corporate Controller since May
                           and Chief        1996.  Chief Accounting Officer
                           Accounting       since March 1996.  Director of
                           Officer          Finance and Corporate Controller
                                            of Cambridge Biotech Corporation
                                            from September 1991 to August
                                            1995.

         All   officers  are  elected   annually  for  one-year   terms  at  the
organizational  meeting of the Board of Directors held immediately following the
annual meeting of shareholders.




<PAGE>8



                             PART II

Item 5. Market for the Company's Common Equity and Related Shareholder Matters.

        The  Company's  Common  Stock is traded on the New York Stock  Exchange.
There were  approximately  1890 registered holders of the Company's Common Stock
on March 17 , 1999. The following  table sets forth the high and low sales price
for shares of the  Company's  Common  Stock within the last two fiscal years and
the dividends paid during each quarterly period.

<TABLE>
<CAPTION>

                                                 SELECTED QUARTERLY STOCK DATA
                                           (In thousands, except per share amounts)

                           4 Q 98    3 Q 98     2 Q 98     1 Q 98     4 Q 97    3 Q 97    2 Q 97     1 Q 97   
                           ------    ------     ------     ------     ------    ------    ------     ------   
<S>                        <C>       <C>        <C>        <C>        <C>       <C>       <C>        <C>      
                                                                                                
Market price per                                                                                
common share:                                                                                   
    High:                  $19 3/8   $21 3/8    $21 15/16  $24 1/4    $20 3/8   $19 1/4   $15 15/16  $15 1/8  
    Low:                    13 5/8    13 3/4     17 5/8     16         16 3/4    14 3/4    11 5/8     10 7/8  
Shares of common                                                                                
  stock traded:                647     1,098        703      1,562      1,270     l,914     1,425      2,076  
Dividends per                                                                                   
  common share                $.02      $.02      $ .02       $.02       $.02      $.02      $.02       $.02   
Average outstanding                                                                             
  common shares and                                                                             
  common share                                                                                  
  equivalents               10,482    10,488     10,702     11,599     10,525    10,465    10,190     10,177  
                                                                                                
</TABLE>                                                                    

Item 6. Selected Financial Data.

        The following table sets forth selected consolidated  financial data for
the Company for each of the five fiscal years 1994 through 1998.

<TABLE>
<CAPTION>
                                                  SELECTED FINANCIAL DATA
                                          (In thousands, except per share amounts)

                                                         1998          1997         1996          1995          1994
                                                      ------------ ------------- ------------  ------------ -------------
<S>                                                       <C>          <C>          <C>           <C>           <C>

       Net sales.......................................   $243,939     $222,246     $230,424      $228,655      $191,771
       Impairment of goodwill and assets held for sale      (2,733)           -            -             -             -
       Acquired research and development.......                  -      (11,391)           -             -             -
       Tender offer costs..........................         (1,273)      (4,176)           -             -             -
       Intellectual property license, net of expense        21,217            -            -             -             -
       Gain on sale of investment in joint venture ..            -       24,321            -             -             -
       Reorganization of research and development
         organization  .............................        (1,310)           -            -             -             -
       Cumulative effect of change in accounting
         principle .................................          (438)           -            -             -             -
       Net income.........................................  14,307       19,720        8,904         7,157         4,051
       Total assets......................................  168,633      145,444      141,330       147,474       138,201
       Total debt........................................   47,809       43,623       65,541        49,808        53,991
       Redeemable preferred stock (See Note 8
         to Financial Statements)......................          -            -            -        25,506        22,532
       Weighted average diluted shares outstanding ....     10,506       10,364       10,042         9,770         9,703
       Earnings per common share:
        Basic........................................        $1.42         $2.00        $0.89        $0.26 (1)     $0.18
        Diluted......................................        $1.36         $1.90        $0.86        $0.26 (1)     $0.18
       Cash dividends per common share............           $0.08         $0.08        $0.08        $0.08         $0.08

       (1) After  provision for the 10% premium on the redemption of the Series D Convertible Preferred Stock.

</TABLE>

<PAGE>9


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

        The Company has maintained its focus on high performance motion control.
Over the past four years this effort has resulted in the  acquisition  of three
companies,  the sale of three instrumentation  businesses, and the organization
of its motion control business into two groups, the Industrial  and  Commercial 
Group and the Aerospace and Defense Group.  In addition, in 1997 the Company
was unsuccessful in acquiring a competitor through an unsolicited tender 
offer.  Management believes that the results of these activities and other 
items detailed below are not indicative of the Company's ongoing operating 
results and has therefore grouped them together as "Special Items" to allow 
management to discuss the results of operations on a consistent basis.

        For the year ended December 31,  1998,  the Company had sales of $243.9
million and net income of $14.3  million, or $1.36 per common share (diluted).  
These  results  compare  with 1997 sales of $222.2  million  and net income of 
$19.7 million, or $1.90 per common share (diluted), and 1996 sales of $230.4 
million and net income of $8.9 million, or $0.86 per common share (diluted).  
Excluding the impact of the Special Items, the Company's net income would have 
been $12.0 million, or $1.14 per share; $10.5 million, or $1.02 per share; and 
$8.9 million, or $0.86 per share for the years 1998, 1997, and 1996, 
respectively.

        In January 1998 the Company announced a major license agreement for its
pioneering  electronic motion control patents in the amount of $27.2 million,  
which,  after  legal and other  expenses,  resulted in pre-tax income of $21.2
million.  In connection  with its patent enforcement  program,  the Company has
engaged counsel to continue enforcement of the Company's  patent  estate,  and
accordingly, recorded a pre-tax charge of $6.8 million to cover legal expenses 
and other  related  costs.  At December  31, 1998,  the Company had incurred 
costs of $1.2 million in connection with its patent enforcement program.

        In the first quarter of 1998, the Company recorded a pre-tax charge of 
$2.7 million, primarily relating to the write-down of goodwill from  its 1994
acquisition of the assets of Sperry Marine.  Also in the first quarter of 1998,
the Company elected to change the vesting method for  post-retirement medical
insurance benefits, resulting in a pre-tax charge of $1.6 million.

        As mentioned above, the Company has made three acquisitions in the past 
two years in the field of motion control and organized itself into two 
operating  units.  As a result of these actions, in the fourth quarter of 1998
the Company reorganized its worldwide research and development organization to
eliminate redundancies and improve the efficiency of its development process, 
resulting in a pre-tax charge of $1.3 million for severage cost.

        On December 31, 1998 the Company adopted SOP 98-5, "Accounting for the
Costs of Start-Up Activities" which requires all costs of start up activities 
to be expensed as incurred.  As a result, the Company recorded a charge of $0.4
million as a cumulative change in accounting principle. There was no tax benefit
associated with the charge, which was reflected as a reduction of intangible
assets.


<PAGE>10

        In connection with the 1997 acquisitions of Servotronix and Seidel, the
Company has allocated the purchase price to the assets acquired, both tangible 
and intangible, and the excess of the purchase price over the assets acquired
has been classified as goodwill.  A portion of the purchase price has been
allocated to in-process research and development, in the amount of $10.5 million
and was expensed as "Acquired research and development" in the second quarter of
1997.  Also included in acquired research and development was a charge of
approximately $0.9 million for technology acquired unrelated to the Servotronix 
and Seidel acquisitions.

        On December 15, 1997, the Company commenced a tender offer ("Tender 
Offer") for 50.1% of the outstanding shares of Pacific Scientific Company 
("Pacific") in cash with the  remainder of the  Pacific shares to be acquired 
through the issuance of the Company's common stock.  On February 2,  1998, the 
Company terminated its offer to acquire Pacific after a significantly  higher 
bid was accepted by the Pacific board of directors.  Included in the 
accompanying financial statements are pre-tax charges of $1.3 million and $4.2 
million representing the costs incurred in connection with the Tender Offer for 
1998 and 1997, respectively.

        The Company  entered into an agreement, effective December 31, 1996, to 
combine its Macbeth division with the Color Control Systems business of Gretag 
AG (the "Joint  Venture").  In 1997,  the Company sold its interest in the 
Joint Venture, receiving approximately $42 million in cash, and resulting in a 
gain of $24.3 million.  The gain is net of $2.0 million in income taxes and the 
utilization of net operating losses and other tax credit carryforwards.

        Collectively, the above items will be referred to as the "Special Items"
to provide for comparative  discussion of the Company's  results on a consistent
basis.
     
        In  March  1996,  the  Company  sold  a  significant   portion  of  its
instrumentation  business  located  in  France  for 12  million  French  francs
(approximately  $2.4 million), the approximate book value of the assets.
Collectively the French  instrumentation business and the Macbeth business will
be referred to as the "Businesses Sold".

       


<PAGE>11

                              Results of Operations


        The following table reflects the results of operations for the 
Company's two operating segments excluding the impact of the Special Items and 
the Businesses Sold.  This comparison provides a consistent basis by which to 
view the results of the Company's two operating segments (in millions):

<TABLE>
                                                          1998                1997                1996
                                                    ------------------   ----------------    ---------------
<S>                                                          <C>                 <C>                  <C>

      Industrial and Commercial Group:
               Bookings                                       $ 135.5            $ 117.4              $ 91.7
               Sales                                            135.7              120.2                90.2
               Profit before tax                                 10.2               10.2                 6.1
      Aerospace and Defense Group:
               Bookings                                       $ 106.3            $ 104.6              $ 90.5
               Sales                                            108.2              102.0               107.2
               Profit before tax                                 13.6               10.5                11.0

</TABLE>
 
1998 versus 1997

        Total profit before tax increased in 1998 to $24.9 million as compared 
to a loss in 1997 of $3.4 million.  Excluding the Special Items and Businesses 
sold discussed above, profit before tax would have been $17.4 million in 1998, 
an increase of 42% over $12.3 million in 1997.  Excluding the Special Items, 
the Industrial and Commercial Group's profit before tax remained unchanged at
$10.2 million in both 1998 and 1997.  Increased profit before tax at the 
group's motion business was offset by a decline in the group's engineering 
consulting business.  The Aerospace and Defense Group's profit before tax 
increased 29% to $13.6 million in 1998 from $10.5 million in 1997 principally 
due to the performance of its motion components business and the group's 
electro-optical business.

        The Company's sales increased 10% in 1998 to $243.9 million as compared 
to $222.2 million in 1997.  The Industrial and Commercial Group's revenue 
increase to $135.7 million in 1998 from $120.2 million in 1997, or 13%, was a 
result of the Magnedyne, Seidel, and Servotronix acquisitions, and an increase 
in the sales of fractional motors manufactured at the Company's production 
facility located in India.  The sales increase more than offset a sales decline 
by the group's engineering consulting business.  Sales by the Aerospace and 
Defense Group increased 6% to $108.2 million in 1998 from $102.0 million in 
1997, reflecting increased sales by all of the group's businesses.
 
        The Company's overall gross margin as a percent of sales remained 
relatively constant at approximately 31% in 1998 and 1997.  The Industrial and 
Commercial Group had a decrease in gross margin as a percent of sales to 30% in 
1998 from 32% in 1997.  The decrease was caused by the volume decline in the 
group's engineering consulting business.  The Aerospace and Defense Group 
improved its gross margin as a percent of sales to 33% in 1998 as compared to 
31% in 1997.  The improvement was a result of margin improvements by the 
group's motion components business.


<PAGE>12



        Sales and marketing expenses increased 6% in 1998 to $23.2 million as 
compared to $21.9 million in 1997, but remained constant at 10% of sales in 
both years.  The increase is related principally to the full year impact of the 
Seidel and Servotronix acquisitions and increased sales and bookings during the 
year in the Industrial and Commercial Group.

        Research and development ("R&D") expenses were $12.1 million or 5% of 
sales in 1998 as compared with $9.7 million or 4% of sales in 1997.  R&D 
expenses at the Industrial and Commercial Group increased $2.6 million during 
1998 to 5% of sales from $4.6 million or 4% in 1997 reflecting the impact of 
the Magnedyne, Seidel, and Servotronix acquisitions.  R&D expenses at the 
Aerospace and Defense Group increased 9% in 1998, but remained at 5% of sales 
for both 1998 and 1997.
 
        General and administrative expenses increased $0.3 million or 1% in 
1998 as compared to 1997, but remained at approximately 10% of sales for both 
years.

        Bookings for the Company's products and services increased 9% in 1998 
as compared with 1997.  The Industrial and Commercial Group saw an increase in 
bookings of 15% in 1998 versus 1997 as a result of the Magnedyne, Seidel, and 
Servotronix acquisitions, and the increase in its ongoing motion business more 
than offsetting decreased orders for the group's engineering consulting 
business.  The Aerospace and Defense Group's bookings increased 2% in 1998 over 
1997 principally due to an increase by its French operations offsetting a 
decline in long term orders at the group's domestic military systems business 
where orders are typically large multi-year orders received on an infrequent 
basis.
 
1997 versus 1996

        Profit before tax declined in 1997 to a loss of $3.4 million from 
income in 1996 of $8.4 million.  Excluding the Special Items discussed above 
and the equity in earnings of the Joint Venture, profit before tax would have 
been $12.3 million in 1997, an increase of 47% over 1996.  Excluding the 
Special Items and the Businesses Sold, the Industrial and Commercial Group's 
profit before tax increased by 67% in 1997 over 1996 to $10.2 million from $6.1 
million as a result of the improved results by the group's domestic operations, 
increased sales from its high volume business, the impact of the Seidel 
acquisition, and strong performance in the engineering consulting business.  
The Aerospace and Defense Group's profit before tax declined in 1997 by 4% to 
$10.5 million from $11.0 million in 1996 as a result of the start-up costs of 
the Vietnam manufacturing facility and a decline in foreign sales.


<PAGE>13



        The Company's sales decreased 4% in 1997 versus 1996.  Excluding the 
Businesses Sold, increased revenue in the Industrial and Commercial Group 
contributed to a 13% revenue increase.  The Industrial and Commercial Group's 
revenue increased to $120.2 million in 1997 from $90.2 million in 1996 or 33% 
as a result of the Seidel and Servotronix acquisitions, increased revenues for 
engineering consulting service, and an increase in the sales of  its ongoing 
motion control products.  Sales to Aerospace and Defense customers declined 5% 
from $107.2 million in 1996 to $102.0 million in 1997, a result of the 
weakening in the value of the French franc and a decline in motion control 
component sales.

        The Company's overall gross margin declined as a percent of sales to 
31% in 1997 from 34% in 1996 as a result of the impact of the Businesses Sold.  
Excluding the Businesses Sold, the Company's gross margin as a percent of sales
for 1996 was consistent with 1997 at approximately 31%.  The Industrial and 
Commercial Group increased its gross margin as a percent of sales from 30% in 
1996 to 32% in 1997.  The Aerospace and Defense Group maintained a 31% gross 
profit as a percent of sales for both 1996 and 1997.

        Sales and marketing expenses were $21.9 million or 10% of sales in 1997 
as compared to $27.6 million or 12% of sales in 1996.  Excluding the Businesses 
Sold, sales and marketing expenses increased 15% from $19.1 million in 1996 to 
$21.9 million in 1997, but sales and marketing expenses as a percent of sales 
remained at 10% of sales for both years.  The increase in spending for sales 
and marketing was in the Industrial and Commercial Group due to the Seidel and 
Servotronix acquisitions.

        Research and development expenses were $9.7 million or 4% of sales in 
1997 as compared with $12.1 million or 5% of sales in 1996.  Excluding the 
Businesses Sold, R&D expenses were $9.7 million in 1997 or 4% of sales and $8.8 
million or 5% of sales in 1996.  R&D expenses by the Industrial and Commercial 
Group increased to $4.6 million in 1997 from $3.5 million in 1996, but remained 
at 4% of sales.  This increase in spending was a result of the Seidel and 
Servotronix acquisitions.  R&D expenses by the Aerospace and Defense Group 
decreased in 1997 to $4.6 million from $5.3 million in 1996.  The decline in 
spending was a result of decreased spending by the group's French operation, 
where R&D expenses had risen significantly in 1996 to support certain long-term 
development contracts.

        General and administrative ("G&A") expenses declined to $22.8 million 
or 10% of sales in 1997, from $24.3 million or 11% of sales in 1996.  Excluding 
the impact of the Businesses Sold, G&A expenses increased 3% to $22.8 million 
or 10% of sales in 1997 from $22.2 million or 11% of sales in 1996.  The 
increase in G&A expenses was a result of increased spending by the Industrial 
and Commercial Group due to the Seidel and Servotronix acquisitions and because 
of increased support required by this group's engineering consulting business.


<PAGE>14



Interest and Taxes

        Interest expense was $3.4 million, $4.7 million, and $5.8 million in 
1998, 1997, and 1996, respectively.  The continued decrease in interest expense 
was due to lower debt levels.  This was a result of the repayment at the end of 
the second quarter of 1997 of the balance of the $25 million term loan the 
Company entered into to fund the redemption of its Preferred Stock in 1996.  
Additionally, the Company makes annual mandatory sinking fund payments on its 
convertible subordinated debentures.
 
        The Company recorded a provision for income taxes of $10.1 million in 
1998 or 41% of pre-tax income.  Excluding the Special Items, the Company 
provided income taxes at 31%. The 41% tax rate reflects the effect of the 
patent licensing income, taxable in the U.S., which was subject to Japan 
withholding tax.  The Company's effective tax rate (excluding Special Items) of 
31% is less than the statutory U.S. tax rate as some of the Company's foreign 
subsidiaries operate in countries where the statutory rate is less than the U.S.
rate, or the Company is operating under a tax holiday agreement.  The Company 
reported income taxes of $2.8 million in 1997 provided against a loss before 
taxes of $3.4 million.  The acquired research and development charge was not 
deductible for tax purposes and only a portion of the Tender Offer costs were 
deductible in 1997.  After adjustment for these items, the Company recorded a 
tax provision of approximately 28% against earnings.  The Company had a zero 
tax rate in 1996 as a result of the utilization of net operating loss and other 
tax credit carryforwards.

                          Liquidity and Capital Resources

        The Company's consolidated cash position decreased by $1.8 million 
during 1998.  Cash provided by operations was $17.8 million, $20.3 million was 
used in investing activities, and financing activities provided $0.8 million.

        The Company used $3.8 million of cash to fund working capital 
requirements, principally relating to the increase in accounts receivable due 
to increased sales in 1998; however, the Company saw modest improvement in days 
sales outstanding. The Company continues to focus on working capital reductions 
and effective cash management in order to maximize the amount of available cash.

        The Company's investing activities in 1998 included expenditures of 
$9.7 million for property, plant and equipment, primarily for replacement of 
existing equipment, investment in new equipment to improve the efficiency of 
manufacturing, and continued investment in information systems both domestically
and in Europe.  The Company used $10.0 million of cash to fund the purchase of
Magnedyne.


<PAGE>15



        The Company's financing activities provided $0.8 million of cash during 
the year.  Net borrowings under its short-term credit facilities were $1.9 
million to fund working capital requirements.  The Company also made mandatory 
sinking fund payments on its convertible subordinated debentures totaling $1.8 
million. The Company is required, under the terms of the 8.75% convertible
subordinated debenture, to make certain mandatory sinking fund payments each 
year through the year 2009.  The Company borrowed $2.0 million under its 
revolving credit facilities primarily to fund a portion of the Seidel 
acquisition.  Common dividends paid were $0.8 million.

        The Company entered into a five year, $50 million unsecured 
multicurrency credit facility in 1997 and no amounts were outstanding at 
December 31, 1998.  Borrowings under the agreement bear interest at the bank's 
prime lending rate or the Eurodollar rate plus a margin ranging from 75 to 175 
basis points, and is currently at 75 basis points.  The margin varies based on 
the financial performance of the Company, and the Company expects to continue 
its financial performance at a level that will maintain the existing margin 
rate for the foreseeable future.

        Capital spending for 1999 is expected to decrease versus 1998.  The 
Company expects to obtain lease or debt financing for some of its capital 
requirements for 1999.  The Company's need, cost of, and access to funds are 
dependent on future operating results, as well as conditions external to the 
Company.  The Company believes that with the cash generated from operations and 
with its current borrowing capacity, it will be able to finance its 1999 
capital expenditures, sinking fund payments, and working capital requirements.

        The Company operates in countries in which the currency historically 
has been considered stable.  Management believes that any fluctuations in 
currency rates within these countries will not have a material effect on the 
Company's financial condition, cash flows, or results of operations.
 
Year 2000 Issue

         The year 2000 issue is the result of computer programs having been 
written using two digits, rather than four, to define the applicable year. 
Any of the Company's computers, computer programs, manufacturing and 
administration equipment or products that have date-sensitive software may 
recognize a date using "00" as the year 1900 rather than the year 2000. If any 
of the Company's systems or equipment that have date-sensitive software use 
only two digits, system failures or miscalculations may result causing 
disruptions of operations, including, among other things, a temporary inability 
to process transactions or send and receive electronic data with third parties 
or engage in similar normal business activities.


<PAGE>16



         During 1998, the Company formed an ongoing internal review team to 
address the year 2000 issue that encompasses operating and administrative areas 
of the Company. A team of global professionals has been engaged in a process to 
work with Company personnel to identify and resolve significant year 2000 
issues in a timely manner. In addition, executive management regularly monitors 
the status of the Company's year 2000 remediation plans. The process includes 
an assessment of issues and development of remediation plans, where necessary, 
as they relate to internally used software, computer hardware and use of 
computer applications in the Company's manufacturing processes and products. 
In addition, the Company is engaged in assessing the year 2000 issue with 
significant suppliers.

         The assessment process has been completed at the Company's U.S. 
operations. With respect to the Company's international operations, the 
assessment process has been completed for computer software and hardware 
information technology systems used internally by the Company. The assessment 
process at several international operations for internally used manufacturing 
and administrative equipment is expected to be completed in April 1999.  In 
addition, the Company is finalizing its assessment of significant suppliers at 
all major locations to determine the extent to which the Company is vulnerable 
to third parties' failure to remediate their own year 2000 issues. Finally, 
related to products sold by the Company, the Company believes it has no  
exposure to contingencies related to year 2000 issues.

         During the past three years, as part of business modernization 
programs intended to reduce cycle time and improve profitability, the Company 
has purchased Enterprise Resource Planning ("ERP") Systems for some of its 
operations in the U.S. and other international locations, which the software 
vendors have indicated are year 2000 compliant. The Company is in the
implementation phase for these systems and other ancillary financial systems 
with many sites expected to achieve full implementation before September 30, 
1999. Some sites are not expected to implement new ERP systems before the end 
of 1999 and accordingly, the Company has begun making the current systems year 
2000 compliant.  The cost of making those adaptations are not expected to be
material and will be expensed in the period incurred.  It is expected that the 
Company will be in full compliance with its internal systems before the year 
2000.  If, due to unforeseen circumstances, the implementation is not completed 
on a timely basis, the year 2000 could have a material impact on the operations 
of the Company.

The Euro

        On January 1, 1999, eleven of fifteen member countries of the European 
Union established fixed conversion rates between their existing currencies 
("legacy currencies") and one common currency, the euro.  The euro now trades 
on currency exchanges and may be used in business transactions.  The conversion 
to the euro eliminates currency exchange rate risk among the eleven member 
countries. Beginning in January 2002, new euro-denominated bills and coins will 
be issued.  The Company's business units significantly affected by the euro 
conversion have established plans to address the issues raised by the euro 

<PAGE>17



currency conversion, and expect to be substantially complete with these plans 
by the year 2000.  These issues include, among others, the need to adapt 
computer and financial systems, business processes and equipment, and the need 
to accommodate euro-denominated transactions and the impact of one common 
currency on product pricing, taxation and governmental and legal regulations.  
The Company does not expect the system and equipment conversion costs to be 
material to its financial condition, results of operations or cash flows.  Due 
to numerous uncertainties, the Company cannot reasonably estimate the effects 
currency will have on pricing and the resulting impact, if any, on its 
financial condition results of operations or cash flows.
 
New Accounting Pronouncements

        In March 1998, the Accounting Standards Executive Committee issued 
Statement of Position 98-1 "Accounting for the Costs of Computer Software 
Developed or Obtained for Internal Use" ("SOP 98-1").  The SOP is applicable to 
the Company beginning in fiscal 1999.  The Company engages in ongoing update, 
enhancement and replacement of its computer systems.  Currently, the Company
capitalizes only external costs associated with services and software in 
connection with these activities that are significant.  To date, internal 
resources associated with these activities have not been significant.  The 
Company is currently evaluating the effect, if any, of implementing SOP 98-1.

         In June 1998, the Financial Accounting Standards Board ("FASB") issued 
Statement of Financial Accounting Standard No. 133 ("SFAS 133"), "Accounting 
for Derivative Instruments and Hedging Activities" which must be adopted for 
fiscal years beginning after June 15, 1999.  The new standard establishes 
accounting and reporting standards for derivative instruments, including 
certain derivative instruments embedded in other contracts and for hedging 
activities.  The Company expects to adopt SFAS 133 by January 1, 2000.  Had the 
Company implemented SFAS 133 for the current reporting period, there would have 
been no material effect on the financial statements.

Forward looking information

         Certain statements in this report are "forward looking statements" 
within the meaning of the Private Securities Litigation Reform Act of 1995.  
All forward looking statements involve risks and uncertainties.  In particular, 
any statement contained herein, in press releases, written statements or other 
documents filed with the Securities and Exchange Commission, or in the Company's
communications and discussions with investors and analysts in the normal course 
of business through meetings, phone calls and conference calls, regarding the 
consummation and benefits of future acquisitions, as well as expectations with 
respect to future sales, operating efficiencies and product expansion, are 
subject to known and unknown risks, uncertainties and contingencies, many of
which are beyond the control of the Company.  These factors may cause actual 
results, performance or achievements to differ materially from anticipated 
results, performances or achievements.  Factors that might affect such forward 
looking statements include, but are not limited to, overall economic and 
business conditions; the demand for the Company's goods and services; the
timing of and market acceptance of new products; competitive factors in the 
industries and geographic markets in which the Company competes; changes in tax 
requirements (including tax rate changes, new tax laws and revised tax law 
interpretations); interest rate fluctuations and other capital market 
conditions, including foreign currency rate fluctuations; economic and 
political conditions in international markets; the ability to achieve 
anticipated synergies and other cost savings in connection with acquisitions; 
the timing, impact and other uncertainties of future acquisitions; and the 
Company's ability and its customers' and suppliers' ability to replace, modify 
or upgrade computer programs in order to adequately address the year 2000 
issue.  Any forward looking statements should be considered in light of these 
factors.


<PAGE>18



Item 8.  Financial Statements and Supplementary Data.

         The  information  required  by this Item 8 is included in Item 14(a) of
this Report.

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

         None.


                                    PART III

Item 10. Directors and Executive Officers of the Company.

         The  information  required  by this  Item 10 of Form 10-K  relating  to
directors  who are  nominees,  and to directors  continuing  in office after the
Company's  Annual  Meeting  of  Shareholders  to be  held on May  12,  1999,  is
contained in the definitive  proxy statement to be filed with the Securities and
Exchange  Commission (the  "Commission")  on or before April 5, 1999, under the
headings  "Nominees",  and  "Continuing  Directors",  and  such  information  is
incorporated herein by reference in response to this item.

         The  information  required by this Item 10 of Form 10-K with respect to
executive  officers  is set forth in Part I of this Form 10-K under the  heading
"Executive Officers of the Company".

Item 11. Executive Compensation.

         The  information  required by this Item 11 of Form 10-K is contained in
the Company's  definitive  proxy statement to be filed with the Commission on or
before  April 5,  1999,  under the heading  "Executive  Compensation"  and such
information is incorporated herein by reference in response to this item.

Item 12. Security Ownership of Certain Beneficial Owners and Management.

         The  information  required by this Item 12 of Form 10-K is contained in
the  definitive  proxy  statement to be filed with the  Commission  on or before
April 5, 1999,  under the headings  "Security  Ownership of Certain  Beneficial
Owners"  and  "Security   Ownership  of  Management"  and  such  information  is
incorporated herein by reference in response to this item.

Item 13.  Certain Relationships and Related Transactions.

         None.

                                PART IV

Item 14.  Exhibits, Financial Statements, Schedules, and Reports on Form 8-K.
         (a)      The following documents are filed as part of this report:

                  (1)  Financial Statements.  See Index to Financial Statements 
                       on page 19.

                  (2)  Exhibits. See Exhibit Index on page 46.

         (b)      Reports on Form 8-K.

                  (1)  On November 4, 1998,  the  Company  filed a current  
                       report on Form 8-K  announcing  the adoption of the 
                       Amended and Restated Rights  Agreement dated October 22, 
                       1998 between the Company and BankBoston, N.A. as rights 
                       agent.





<PAGE>19


                               SIGNATURES


         Pursuant to the  requirements of Section 13 of the Securities  Exchange
Act of 1934, Kollmorgen  Corporation has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.

                             KOLLMORGEN CORPORATION


                              /s/ Robert J. Cobuzzi
                              Robert J. Cobuzzi
                              Its: Senior Vice President, Treasurer
                              and Chief Financial Officer
                              March 26, 1999

         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
Company and in the capacities and on the dates indicated:


  /s/  Gideon Argov                
Gideon Argov                                           March 26, 1999
President and
Chief Executive Officer/Director


  /s/  Robert J. Cobuzzi           
Robert J. Cobuzzi                                      March 26, 1999
Senior Vice President, Treasurer and
Chief Financial Officer/Director


  /s/  Keith D. Jones              
Keith D. Jones                                         March 26, 1999
Controller and
Chief Accounting Officer


  /s/  James A. Eder               
James A. Eder                                          March 26, 1999
Attorney-in-Fact For:

         Jerald G. Fishman, Director            J. Douglas Maxwell, Director

         Herbert L. Henkel, Director            Robert N. Parker, Director

         James H. Kasschau, Director            George P. Stephan, Director




<PAGE>20

                          INDEX TO FINANCIAL STATEMENTS


        The following  consolidated  financial statements of the Company and its
subsidiaries are included in response to Item 8.

<TABLE>
<CAPTION>


                                                                                                Page(s) in
                                                                                                Form 10-K
<S>                                                                                             <C>  

        Report of Independent Accountants                                                        21

        Consolidated Balance Sheets as of December 31, 1998 and 1997.                            22

        Consolidated Statements of Operations for the years ended December 31,                   23
               1998, 1997 and 1996.

        Consolidated  Statements of Shareholders'  Equity for the years ended                    24
               December 31, 1998, 1997 and 1996.

        Consolidated  Statements of Cash Flows for the years ended December 31,                  25
               1998, 1997 and 1996.

        Notes to Consolidated Financial Statements.                                              27  


</TABLE>






<PAGE>21



                              REPORT OF INDEPENDENT ACCOUNTANTS


To the Board of Directors and Shareholders of
Kollmorgen Corporation:

        In our opinion, the accompanying consolidated balance sheets and the 
related consolidated statements of operations, shareholders' equity and cash 
flows present fairly, in all material respects, the financial position of 
Kollmorgen Corporation and its subsidiaries at December 31, 1998 and 1997, and 
the results of their operations, shareholders' equity and their cash flows for 
each of the three years in the period ended December 31, 1998, in conformity 
with generally accepted accounting principles. 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 of these statements in accordance with generally accepted 
auditing standards which require that we plan and perform the audit to obtain 
reasonable assurance about whether the financial statements are free of 
material misstatement.  An audit includes examining, on a test basis, evidence 
supporting the amounts and disclosures in the financial statements, assessing 
the accounting principles used and significant estimates made by management, 
and evaluating the overall financial statement presentation.  We believe that 
our audits provide a reasonable basis for the opinion expressed above.





                                   /s/  PricewaterhouseCoopers LLP

Boston, Massachusetts
January 22, 1999                            


<PAGE>22


KOLLMORGEN CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheets
December 31, 1998 and 1997
(Dollars in thousands, except per share amounts)
<TABLE>

ASSETS      
 
 
                                                                           1998                1997
<S>                                                                   <C>                  <C>    
Current assets:
   Cash and cash equivalents (Note 1)                                 $  13,086            $ 14,854
   Accounts receivable (net of allowance of $581
     in 1998 and $971 in 1997)                                           48,927              39,528
   Recoverable amounts on long-term contracts                             2,597               5,762
   Inventories (Note 5)                                                  27,838              25,162
   Prepaid expenses                                                       1,885               2,041
                                                                          -----               -----
Total current assets                                                     94,333              87,347

Property, plant, and equipment, net (Note 6)                             30,809              26,673
Goodwill, patents,  and other intangible assets
 (net of accumulated amortization
 of $5,759 in 1998 and $4,840 in 1997)                                   20,420              14,343
Deferred income taxes (Note 12)                                           9,448               5,802
Other assets                                                             13,623              11,279
                                                                         ------              ------

Total assets                                                           $168,633           $ 145,444
                                                                       ========           =========
 

LIABILITIES AND SHAREHOLDERS' EQUITY

Current liabilities:
   Accounts payable                                                    $ 14,336            $ 18,467
   Income taxes payable                                                   6,733               2,869
   Accrued compensation and payroll taxes                                 8,883               9,218
   Accrued liabilities                                                   19,227              20,866
   Line of credit (Note 7)                                                9,270               5,232
   Current portion of long-term debt (Note 7)                             2,419               2,012
                                                                          -----               -----
Total current liabilities                                                60,868              58,664
 
Long-term debt (Note 7)                                                  36,120              36,379
Other liabilities                                                        14,943               8,673
Minority interest                                                           175                 136
Commitments and contingencies (Note 14)     

Shareholders' equity (Notes 9 and 10):
   Common stock, par value $2.50 per share
     -- authorized 25,000,000 shares
     -- issued 10,774,145 and 10,769,008 shares 
          in 1998 and 1997, respectively
    -- outstanding 10,125,355 and 10,018,022
          shares in 1998 and 1997, respectively                          26,932              26,921
   Additional paid-in capital                                            12,882              12,682
   Retained earnings                                                     22,772               9,268
   Accumulated other comprehensive income                                  (270)               (602)
   Less common stock in treasury, at cost
      -- 648,790 and 750,986 shares in 1998
         and 1997, respectively                                          (5,789)             (6,677)
             -----                                                       ------              ------ 
Total shareholders' equity                                               56,527              41,592
                                                                         ------              ------

Total liabilities and shareholders' equity                              $ 168,633            $145,444
                                                                      =========            ========

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

</TABLE>



<PAGE>23

KOLLMORGEN CORPORATION AND SUBSIDIARIES
Consolidated Statements of Operations
For the Years Ended December 31, 1998, 1997, and 1996
(Dollars in thousands, except per share amounts)
<TABLE>

                                                                                     1998               1997                1996

<S>                                                                             <C>                <C>                 <C>      
Net sales                                                                       $ 243,939          $ 222,246           $ 230,424
Cost of sales                                                                     167,501            152,276             152,928
                                                                             -------------      -------------       -------------

Gross profit                                                                       76,438             69,970              77,496
                                                                             -------------      -------------       ------------- 

Selling and marketing expense                                                      23,202             21,858              27,570
General and administrative expense                                                 23,139             22,847              24,348
Research and development expense                                                   12,125              9,662              12,143
Reorganization of research and development organization (Note 2)                    1,310                  -                   -
Impairment of goodwill and assets held for sale (Note 1)                            2,733                  -                   -
Acquired research and development (Note 2)                                              -             11,391                   -
Tender offer costs (Note 2)                                                         1,273              4,176                   -
                                                                             -------------      -------------       -------------

Income from operations                                                             12,656                 36              13,435 

Other income (expense):
    Interest (expense)                                                             (3,387)            (4,650)             (5,806)
    Interest income                                                                   771                612                 493
    Intellectual property license, net of expenses (Note 4)                        21,217                  -                   -
    Other, net (Notes 4, 15)                                                       (6,356)               585                 268
                                                                             -------------      -------------       -------------

Income (loss) before income taxes, joint venture,
   minority interest and change in accounting principle                            24,901            (3,417)               8,390
Provision for income taxes (Note 12)                                              (10,085)           (2,838)                   -
                                                                             -------------      -------------       -------------

Income (loss) before equity in earnings of joint venture,
   minority interest and change in accounting principle                            14,816            (6,255)               8,390
Equity in earnings of joint venture (Note 3)                                            -              1,430                   -
Minority interest                                                                     (71)               224                 514
Gain on sale of investment in joint venture, net of income taxes (Note 3)               -             24,321                   -
                                                                             -------------      -------------       -------------

Income before cumulative effect of change in accounting principle                  14,745             19,720               8,904
Cumulative effect of change in accounting principle (Note 1)                         (438)                 -                   -
                                                                             -------------      ------------        ------------   

Net income                                                                       $ 14,307           $ 19,720            $  8,904
                                                                             =============      =============       =============


Net income available to common shareholders                                      $ 14,307           $ 19,720            $  8,619
Earnings per common share:
  Basic                                                                          $   1.42           $   2.00             $  0.89
  Diluted                                                                        $   1.36           $   1.90             $  0.86
Number of shares used in calculating earnings per common share:
  Basic                                                                        10,081,578          9,875,963           9,732,055
  Diluted                                                                      10,506,252         10,363,873          10,042,106

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

</TABLE>

<PAGE>24

<TABLE>

KOLLMORGEN CORPORATION AND SUBSIDIARIES
Consolidated Statements of Shareholders' Equity
For the years ended December 31, 1998, 1997 and 1996 (Dollars in thousands)

                                                                                                        
                                               Common Stock                                             Accumulated      
                                        ----------------------------    Additional                        Other              
                                           Issued                        Paid-in        Retained       Comprehensive
                                           Shares         Amount         Capital        Earnings           Income       
<S>                                       <C>                <C>             <C>          <C>                  <C>      
Balance, December 31, 1995                $10,762,024        $26,904         $14,343      $(18,958)            $(1,454)  

Net income                                                                                   8,904                                
Common stock issuances                          3,546             10              34                                               
Dividends paid on common
  and preferred stock                                                         (1,069)                                            
Common stock issued from treasury                                               (142)                                            
Translation adjustments (no tax
  charge in comprehensive income)                                                                                2,245
Comprehensive income                                                                                               
                                        -------------  -------------   -------------  -------------   -----------------  
Balance, December 31, 1996                10,765,570          26,914          13,166       (10,054)                791   

Net income                                                                                  19,720                       
Common stock issuances                         3,438              7              37                                      
Dividends paid on common stock                                                (392)          (398)                       
Common stock issued from treasury                                             (129)                                      
Translation adjustments (net of tax
  benefit of $400 in comprehensive
  income)                                                                                                     (1,393)
Comprehensive income                                                                                           
                                        -------------  -------------   -------------  -------------   -----------------  
Balance, December 31, 1997                10,769,008         26,921          12,682          9,268               (602)   

Net income                                                                                  14,307                       
Common stock issuances                         5,137             11              67                                      
Dividends paid on common stock                                                               (803)                       
Common stock issued from treasury                                               133                                      
Translation adjustments (net of tax
  charge of $100 in comprehensive
  income)                                                                                                         332  
Comprehensive income                                                                                                 
                                        -------------  -------------   -------------  -------------   -----------------  
                                        =============  =============   =============  =============   =================  
Balance, December 31, 1998                10,774,145       $ 26,932        $ 12,882       $ 22,772             $ (270)   
                                        =============  =============   =============  =============   =================  
                                                                                                                  
                                             Treasury Stock                     Totals                 Comprehensive
                                        ----------------------------  -----------------------------        Income
                                          Shares         Amount       Outstanding     Amount          ----------------
                                                                         Shares
                                
Balance, December 31, 1995               (1,068,558)     $  (9,538)     9,693,466     $11,297   

Net income                                                                              8,904              $   8,904
Common stock issuances                                                      3,546          44
Dividends paid on common
  and preferred stock                                                                  (1,069)
Common stock issued from treasury            56,050            500         56,050         358
Translation adjustments (no tax
  charge in comprehensive income)                                                       2,245                  2,245
Comprehensive income                                                                                          
                                       -------------  -------------  --------------  -------------     -----------------
Balance, December 31, 1996               (1,012,508)        (9,038)     9,753,062      21,779                 11,149
                                                                                                       =================  
Net income                                                                             19,720                 19,720
Common stock issuances                                                      3,438          44
Dividends paid on common stock                                                           (790)
Common stock issued from treasury           261,522          2,361        261,522       2,232
Translation adjustments (net of tax
  benefit of $400 in comprehensive
  income)                                                                              (1,393)                (1,003)
Comprehensive income                                                                                           
                                      -------------  -------------  --------------  -------------     -----------------
Balance, December 31, 1997                 (750,986)        (6,677)    10,018,022      41,592                 18,717
                                                                                                      =================     
Net income                                                                             14,307                  14,307
Common stock issuances                                                      5,137          78
Dividends paid on common stock                                                           (803)
Common stock issued from treasury           102,196            888        102,196       1,021
Translation adjustments (net of tax
  charge of $100 in comprehensive
  income)                                                                                 332                    229 
Comprehensive income                                                                                                   
                                        =============  =============   =============  =============    ================
Balance, December 31, 1998                 (648,790)     $  (5,789)      10,125,355   $56,527                $14,536
                                        =============  =============   =============  =============    ================

The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>

<PAGE>25

<TABLE>

KOLLMORGEN CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows
For the Years Ended December 31, 1998, 1997, and 1996
(Dollars in thousands)

                                                                                   1998            1997           1996

<S>                                                                            <C>             <C>             <C>   
Cash flows from operating activities:
Income from operations                                                         $ 14,307        $ 19,720        $ 8,904
Adjustments to reconcile income to net cash
   provided by operating activities:
   Depreciation                                                                   5,648           4,367          5,259
   Amortization                                                                   1,643           1,228          1,063
   Acquired research and development                                                  -          11,391              -
   Impaired asset charge                                                          2,733               -              -
   Gain (loss) on sale of assets                                                    255         (24,766)          (561)
   Equity in earnings of joint venture                                                -          (1,430)             -
   Deferred income taxes                                                         (3,572)         (4,034)        (1,991)
   Minority interest and other non-cash expenses                                    557            (107)          (470)


Changes in operating assets and liabilities (net of
    effects from acquisitions and divestitures):
  Accounts receivable                                                           (5,154)           5,101        (9,664)
  Recoverable amounts on long-term contracts                                      3,165           (789)          7,143
  Inventories                                                                     (878)           (842)          (353)
  Prepaid expenses                                                                  235           (275)          (840)
  Accounts payable and accrued liabilities                                      (1,285)         (4,868)        (3,832)
  Other deferred expenses                                                           105         (1,683)          1,710
                                                                             -----------    ------------    -----------

Net cash provided by operating activities                                        17,759           3,013          6,368
                                                                             -----------    ------------    -----------

Cash flows from investing activities:
  Capital expenditures                                                          (9,659)         (6,216)        (4,848)
  Proceeds from sale of assets (net of related expenses)                            250               -          5,762
  Proceeds from sale of investment in joint venture                                   -          41,396              -
  Acquisitions and equity investments, net of cash acquired                    (10,300)        (15,421)        (1,529)
  Other                                                                           (581)            262            753
                                                                             -----------    ------------    -----------

Net cash provided by (used in) investing activities                            (20,290)         20,021            138 
                                                                             -----------    ------------    -----------



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


<PAGE>26




                                                                                   1998            1997           1996

Cash flows from financing activities:
  Borrowing (repayments) under credit lines, net                                  1,887           (337)        (1,552)
  Principal repayment on other notes                                                  -               -        (1,916)
  Proceeds from common stock issued from treasury                                    66           1,281           358
  Redemption of preferred stock                                                       -               -       (25,506)
  Borrowings of long-term debt                                                   2,427           4,920         25,463
  Repayments of long-term debt                                                  (2,790)        (26,738)        (6,164)
  Dividends paid on common and preferred stock                                    (803)           (790)        (1,069)
                                                                             -----------    ------------    -----------

Net cash provided by (used in) financing activities                                787        (21,664)       (10,386)
                                                                             -----------    ------------    -----------

Effect of exchange rate changes on cash                                            (24)              39          (464)
                                                                             -----------    ------------    -----------

Net increase (decrease) in cash and cash equivalents                            (1,768)           1,409        (4,344)
Cash and cash equivalents at beginning of year                                   14,854          13,445         17,789
                                                                             -----------    ------------    -----------

Cash and cash equivalents at end of year                                       $ 13,086        $ 14,854       $ 13,445
                                                                             ===========    ============    ===========



Supplemental cash flow information
 Cash paid during the period for:
  Interest                                                                      $ 3,770         $ 5,269        $ 5,467
  Income taxes                                                                  $ 7,013         $ 7,358        $   445











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

</TABLE>








<PAGE>27


KOLLMORGEN CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998, 1997, and 1996
(Dollars in thousands, except per share amounts)
_________________________________________________________________
    
Note 1.  Summary of significant accounting policies

        A summary of the significant  accounting policies followed by Kollmorgen
Corporation and its  subsidiaries,  (the "Company") is presented below.  Certain
reclassifications  have been made to the prior years'  financial  statements  to
conform to 1998 classifications.

        Principles of Consolidation.   Except  as  discussed  in  Note  3,  the
consolidated financial statements include the accounts of the Company and all of
its  majority-owned  subsidiaries.  For those  consolidated  subsidiaries  where
Company ownership is less than 100%, the outside stockholders' interest is shown
as "Minority interest".  All significant intercompany balances and transactions 
have been eliminated in consolidation.

        Use of Estimates.  The consolidated  financial  statements are prepared 
in conformity with generally accepted accounting principles and, accordingly,
include  amounts that are based on  management's  best estimates and judgments.
Actual results could differ from those estimates.  Certain significant estimates
are disclosed throughout these consolidated financial statements.

        Cash and Cash Equivalents.  Cash equivalents  are  stated  at cost that
approximates  fair value.  The Company  considers all highly liquid  investments
purchased with a maturity of three months or less to be cash equivalents.

        Recoverable Amounts on Long-Term Contracts.  These  represent  revenues
recognized on a percentage-of-completion basis net of progress billings.

        Inventories.  Inventories are stated net of reserve at the lower of cost
or market,  principally using the first-in,  first-out method. Progress payments
received on contracts  other than major  long-term  contracts  are deducted from
inventories.

        Property, Plant, and Equipment.  Property, plant, and equipment are  
stated at cost less accumulated depreciation and include expenditures for major 
improvements which substantially  increase their useful life.  Repairs and 
maintenance are expensed as incurred.  When assets are retired or otherwise  
disposed of, the assets and related allowances for depreciation and amortization
are eliminated from the accounts and any resulting gain or loss is recognized 
as other income or expense.

        For financial reporting purposes,  these assets are being depreciated on
a straight-line basis over the estimated useful lives of the buildings (10 to 40
years) and the machinery and equipment (3 to 12 years).  Leasehold  improvements
are depreciated over the lesser of their useful lives or the remaining period of
the existing leases. For income tax purposes,  depreciation is computed by using
various  accelerated  methods  and, in some cases,  different  useful lives than
those used for financial reporting.


<PAGE>28



        Year 2000 Costs.   Costs of modifying computer software for Year 2000 
compliance are expensed as they are incurred.

        Goodwill and Intangibles.  Goodwill consists of amounts by which the 
cost of acquisitions exceeded the values assigned to net tangible and 
intangible assets.  Intangible assets consist principally of patents and 
intangible assets purchased as part of acquisitions (Note  2).  All of these  
assets are being amortized on a straight-line basis over periods ranging from 5 
to 20 years.

        Impairment of Long-Lived Assets.  The Company reviews long-lived assets
for impairment when events or changes in business circumstances indicate that 
the carrying amount of the assets may not be fully recoverable.  Each impairment
test is a comparison of the carrying value of the asset against the anticipated 
future cash flows from related operating  activities.  If an  impairment is 
indicated, the asset is written down to its fair value.

        In 1998,  the  Company  recorded a charge of $2.7  million for the
impairment of assets.  Of this amount $2.0 million  related to the write-down of
goodwill from its 1994 acquisition of the assets of Sperry Marine. Additionally,
the Company increased its reserve for impaired real estate by $0.7 million to 
reflect its current assessment of the fair value of real estate held for sale.

        Foreign Currency Translation.  The functional currency for the majority 
of the Company's foreign operations is each entity's local currency.   The
translation from the functional  foreign currencies to U.S. dollars is performed
for balance  sheet  accounts  using the exchange  rates in effect at the balance
sheet date, and for revenue and expense  accounts using an average exchange rate
during the  period.  The gains or losses  resulting  from such  translation  are
included  in  shareholders'  equity.  Gains or  losses  resulting  from  foreign
currency transactions are included in other income.

        Revenue Recognition.  Sales, other than revenues from major long-term
contracts,  are recorded  based upon  product  shipment  (or  acceptance  by the
customer if earlier) or delivery of service.  Major  programs that are performed
under long-term  contracts are accounted for using the  percentage-of-completion
method. Revenues recognized under the percentage of completion method were $34.5
million, $31.6 million, and $31.7 million in 1998, 1997, and 1996, respectively.
In most cases, the contracts  provide for progress billings over the life of the
program.

           Earnings Per Common Share.  Earnings per common share ("EPS") is 
based on net income less the dividends, interest accretion and the premium paid 
on redeemable preferred stock (Note 8), divided by the weighted average number 
of common and dilutive common equivalent  shares  outstanding.  Note 10 to the
Consolidated Financial Statements contains a summary of the proforma effects to
reported earnings per share for 1998,  1997 and 1996 if the Company had elected
to recognize stock based  compensation  expense in accordance with Statement of
Financial Accounting Standard No. 123 ("SFAS 123"), "Accounting for Stock-Based
Compensation."


<PAGE>29



        Income Taxes.  The Company accounts for income taxes under the liability
method.  Under this method, deferred tax  liabilities and assets are recognized
for the expected future tax  consequences of temporary differences between the
carrying  amounts  and the tax  basis of assets  and  liabilities.  A valuation
allowance  is required to offset any net deferred tax assets if, based upon the
available evidence, it is more likely than not that some or all of the deferred
tax assets will not be realized.

        Postretirement Benefits Other Than Pensions.  The Company has elected 
the delayed recognition method where the cost for employees  hired  prior to
January 1, 1992 is amortized over 20 years.

        Fair Value of Financial Instruments.  The method and assumptions used 
to estimate the fair value of each class of financial instrument for which it 
is practicable to estimate a value are as follows:

        Long-Term Debt:  Estimated based on its market price.

        Standby Letters of Credit:  Based on the estimated cost to terminate 
        them or otherwise settle the obligations with the counterparties at the 
        reporting date.

        Derivatives: Derivative financial instruments are used by the Company in
        the management of foreign currency exposures and are accounted for on an
        accrual  basis.  Gains and losses  resulting  from  effective  hedges of
        existing  assets,  liabilities,  or firm  commitments  are  deferred and
        recognized  when the  offsetting  gains and losses are recognized on the
        related hedged items.  The Company does not use hedging for  speculative
        purposes.  As of December 31, 1998 and 1997,  the Company had no foreign
        exchange contracts outstanding.

        Change in Accounting Principle.  On December 31, 1998, the Company 
adopted SOP 98-5, "Accounting for the Costs of Start-Up  Activities" which 
requires all costs of  start-up activities to be expensed as incurred.  As a 
result, the Company recorded a charge of $438 thousand as a cumulative change 
in accounting principle.  There was no tax benefit associated with the charge, 
which was reflected as a reduction of intangible assets.


<PAGE>30



Note 2.   Asset Acquisitions and Equity Investments

        On July 1, 1998, the Company acquired the assets of the Magnedyne
division of Sierracin Corporation in a purchase transaction for $10.0 million in
cash.  The excess of the  purchase  price over the net assets  acquired  of $7.7
million has been  classified  as goodwill  and is being  amortized  over fifteen
years.  The results of operations for Magnedyne are consolidated in the 
accompanying financial statements effective July 1, 1998.  Magnedyne designs 
and builds brushless and brush-type torque motors and drives.

        In May 1995, the Company entered into an agreement to acquire for $0.6 
million, a 10% equity interest in Servotronix Ltd. ("Servotronix"),  a firm in 
Israel  which  designs and  markets  digital  control  systems for the motion
control  market.   In  1996,  the  Company  increased  its  equity  interest  in
Servotronix to 25% with payments totaling $1.4 million. Effective April 2, 1997,
the Company  purchased the remaining  shares of Servotronix  for $6.4 million of
cash and through the issuance of 257,522 shares of the Company's common stock.

        Effective June 10, 1997, the Company entered into a binding agreement to
purchase all of the shares of Fritz A. Seidel Elektro-Automatik GmbH ("Seidel"),
a designer and  distributor  of electronic  motion control  products  located in
Germany,  for $9.4  million in cash.  The results of  operations  for Seidel are
consolidated in the accompanying financial statements effective July 1, 1997.

        In connection  with the  acquisitions  of  Servotronix  and Seidel,  the
Company  allocated the purchase price to the assets acquired,  both tangible and
intangible,  and any excess of the  purchase  price over the assets  acquired is
classified  as  goodwill.   Intangible  assets  acquired  consist  primarily  of
completed  technology  and trade  names and are being  amortized  over a five to
seven year period.  Goodwill is being  amortized over a fifteen- year period.  A
portion of the  purchase  price has been  allocated to  in-process  research and
development  in the amount of $10.5  million,  which was  expensed as  "Acquired
research  and  development"  in the second  quarter of 1997.  Also  included  in
acquired research and development was a charge of approximately $0.9 million for
technology  acquired  unrelated  to the  Servotronix  and  Seidel  acquisitions.
Management  believes  that  the  technological  feasibility  of  the  in-process
technology  had not yet been  established  and the technology had no alternative
future use.

        As a result of these  acquisitions,  in the  fourth  quarter of 1998 the
Company  reorganized  its worldwide  research and development  organization.  In
connection with the  reorganization  to eliminate  redundancies  and improve the
efficiency of its the development  process, the Company took a pre-tax charge of
$1.3 million. The charge was for severance costs that were substantially paid by
the end of January 1999.

        On December 15,  1997,  the Company  commenced a tender  offer  ("Tender
Offer")  for 50.1% of the  outstanding  shares  of  Pacific  Scientific  Company
("Pacific")  in cash with the  remainder  of the  Pacific  shares to be acquired
through the issuance of the  Company's  common stock.  On February 2, 1998,  the
Company terminated its offer to acquire Pacific after a significantly higher bid
was accepted by the Pacific  board of  directors.  Included in the  accompanying
financial  statements  are  pre-tax  charges of $1.3  million  and $4.2  million
representing the costs incurred in connection with the Tender Offer for 1998 and
1997, respectively.


<PAGE>31



Note 3.   Sale of Investment in Joint Venture

        Effective   December  31,  1996,  the  Company  completed  an  agreement
("Subscription  Agreement") to combine its Macbeth division ("Macbeth") with the
Color Control  Systems  business of Gretag AG ("Gretag").  The combined  entity,
GretagMacbeth,  is owned by a Swiss  holding  company (the "Joint Venture")  
which was equally controlled by the Company and the shareholders of Gretag AG 
who owned 48% and 52% of the Joint Venture, respectively.  Accordingly,  the
results of  operations  and statement of cash flows for the twelve months ended
December 31, 1996 reflect the inclusion of Macbeth, and the consolidated balance
sheet as of  December  31, 1996  reflects  the net asset  value of  Macbeth  as
investment in Joint Venture.  The Company accounted for this transaction  using
the equity method until the sale of its investment in Joint Venture.

        In 1997, the Company sold its interest in the Joint Venture, receiving 
approximately $42 million in cash, and resulting in a gain of $24.3 million.  
The gain is net of $2 million in income taxes and the utilization of net 
operating losses and other tax credit carryforwards.    

        For income tax  purposes,  the Company has elected to treat the transfer
of the Macbeth  assets into the Joint Venture as a taxable  transaction in 1996.
Accordingly,  the  Company has  recognized  a tax gain of the excess of the fair
value of the Macbeth assets over their book value.

Note 4.  Intellectual Property Licensing

        In January 1998, the Company announced a major license agreement for its
pioneering  electronic  motion  control  patents in the amount of $27.2 million,
which,  after  legal and other  expenses,  resulted  in pre-tax  income of $21.2
million.  In connection  with its patent  enforcement  program,  the Company has
engaged  counsel to continue  enforcement of the Company's  patent  estate,  and
accordingly,  has  recorded  a pre-tax  charge of $6.8  million  to cover  legal
expenses and other related costs. At December 31, 1998, the Company had incurred
costs of $1.2  million  in  connection  with  its  patent  enforcement  program.
Additionally,  in  1998  the  Company  recognized  $1.5  million  in  income  in
connection with its patent licensing and enforcement efforts.

Note 5.  Inventories

        At December 31, net inventories consist of the following:

                                           1998            1997
                                           ----            ----

            Raw materials             $  12,187        $ 12,640
            Work in process               8,073           8,871
            Finished goods                7,578           3,651
                                      ----------    ------------
                                       $ 27,838        $ 25,162
                                      ==========    ============

Note 6.  Property, Plant, and Equipment

        At December 31, property, plant, and equipment consist of the following:

                                                         1998            1997
                                                         ----            ----

            Land                                     $  1,270         $ 1,368
            Leasehold improvements                      1,155           1,027
            Buildings                                  25,787          25,671
            Machinery and equipment                    84,088          72,279
            Capital leases                                382             382
                                                   -----------    ------------
                                                      112,682         100,727
            Less accumulated depreciation
                and amortization                      (81,873)        (74,054)
                                                   -----------    ------------
                                                     $ 30,809        $ 26,673
                                                   ===========   =============

<PAGE>32



Note 7.   Debt
<TABLE>


        At December 31, long-term debt consists of the following:
<CAPTION>


                                                                                       1998                1997
<S>                                                                                <C>                 <C>             
                                                                                       ----                ----
         8.75% convertible subordinated debentures due 2009                        $ 31,090            $ 32,840
         $50 million revolving credit facility                                            -               4,854
         $11 million revolving credit facility                                        6,051                   -
         Term loans, various rates, due through 2003                                  1,344                 572
         Capital lease obligations                                                       54                 125
                                                                              --------------       -------------
                                                                                     38,539              38,391
         Less current maturities                                                    (2,419)             (2,012)
                                                                              --------------       -------------
                                                                                  $ 36,120            $ 36,379
                                                                              ==============       =============
</TABLE>

        The 8.75%  convertible  subordinated  debentures are  convertible at any
time prior to maturity,  unless  previously  redeemed,  into  905,095  shares of
common stock of the Company at a conversion  price of $34.35 per share,  subject
to adjustment in certain events.  The Company is required to make annual sinking
fund  payments  sufficient to retire at least $1.75  million,  but not more than
$3.5 million principal amounts  commencing May 1, 1994, and each year thereafter
including May 1, 2008.  The balance,  if any, is due on May 1, 2009. At December
31, 1998, the market price of these debentures approximated carrying value.

        On September 30, 1997, the Company  amended its borrowing  facility with
its lead bank to  provide  for a five  year,  $50  million  unsecured  revolving
multicurrency credit facility bearing interest,  at the Company's option, at the
bank's  prime  rate plus 50 basis  points or the  Eurodollar  rate plus a margin
ranging  from 75 to 175 basis  points.  At December  31,  1998,  had the Company
borrowed,  the rate  would  have  been  5.82%.  The  facility  contains  certain
financial  covenants  that the  Company  must comply  with  including  limits on
capital spending,  minimum cash flow requirements,  minimum net worth, and other
ratios  relating  to the  amount  of total  debt  that the  Company  may have as
compared to the Company's net worth and earnings.  The Company was in compliance
with all covenants at December 31, 1998.  At December 31, 1998,  there were $1.2
million  of  standby  letters  of  credit  outstanding,  and  $48.8  million  of
availability under the facility.

        On May 13, 1998,  the Company  entered into an agreement with one of its
syndicate banks to provide for an $11 million  revolving credit facility for its
French and German subsidiaries. This revolving credit facility has terms similar
to the existing $50 million unsecured revolving  multicurrency  credit facility.
At  December  31,  1998,  the  Company's  German  subsidiary  had  $6.1  million
outstanding at a rate of 4.10%.

<PAGE>33



        Term loans held by the Company had a weighted  average  interest rate of
4.40% at December 31, 1998.

        Long-term debt at December 31, 1998, matures as follows:

                                Date                  Maturities

                                1999                    $ 2,419
                                2000                      2,193
                                2001                      2,019
                                2002                      7,811
                                2003                      1,757
                                Thereafter               22,340
                                                         ------
                                                        $38,539 
                                                        =======

        At December  31,  1998,  the  Company's  foreign  subsidiaries  had $9.3
million  outstanding  and $4.6 million  additional  availability  under lines of
credit.

        The Company  incurred  $3.4 million,  $4.7 million,  and $5.8 million of
interest expense on debt in 1998, 1997, and 1996, respectively.


Note 8.   Preferred Stock

        In March 1990, the Company sold 23,187.5 shares of a new issue of Series
D convertible  preferred stock (the "Preferred  Stock") for $1,000 per share, or
an  aggregate of  approximately  $23.2  million,  to a group of  investors.  The
Preferred  Stock had a cumulative  dividend rate of 9.5 percent per year and was
convertible into an aggregate of 1,717,591 shares of the Company's common stock,
subject to antidilution  provisions.  On February 19, 1996, the Company redeemed
all of the Preferred  Stock. The redemption price included a 10% premium of $2.3
million  plus  unpaid  dividends  through  the date of  redemption.  The Company
borrowed $25 million in January 1996 to finance the  redemption and the loan was
repaid during 1997.

Note 9.   Common Stock, Additional Paid-in Capital, and Treasury Stock

        Pursuant to the By-Laws of the Company,  directors who are not employees
of the Company received an annual retainer of $24 thousand,  $12 thousand, and 
$12 thousand in 1998, 1997 and 1996, respectively.  Under the terms of the 1992 
Stock Ownership Plan for Non-Employee  Directors, each non-employee director 
receives at least 50% of his annual retainer in shares of the Company's  common 
stock.  The number of shares of common stock issued is based on the fair market 
value of such shares at the end of each quarterly period.


<PAGE>34



        The Company  maintains a Shareholder Rights Plan which was amended and
restated effective October 22, 1998 and which provides for one Preferred Stock 
Purchase Right ("Right") for each  outstanding  share of Common stock of the 
Company. Each Right entitles the registered holder,  subject to the terms of a 
Rights Agreement,  to purchase one one-thousandth of a share ("Unit") of Series 
B Preferred Stock, par value $1.00 per share ("Preferred Stock"), at a purchase 
price of $70 per Unit. The units of Preferred Stock are non-redeemable, voting, 
and are entitled to certain preferential  dividend rights. The exercise price 
and the number of units issuable are subject to adjustment to antidilution
provisions.  The Rights are not exercisable until the earlier to occur of (i) 10
days following a public  announcement (the date of such  announcement  being the
"Stock  Acquisition  Date")  that a person  or  group  has  acquired  beneficial
ownership of 20% or more of the then  outstanding  stock of the Company entitled
to vote or (ii) a date  determined  by the  Board  of  Directors  following  the
commencement  of a tender  or  exchange  offer  which  would  result  in a party
beneficially  owning 20% or more of the shares of common  stock of the  Company.
The Board of  Directors  of the  Company may redeem the Rights at any time on or
prior to the tenth day following the Stock  Acquisition Date at a price of $0.01
per Right. Unless earlier redeemed, the Rights will expire on October 22, 2008.

        Common stock reserved for issuance at December 31, 1998 and 1997 were as
follows: conversion of debentures - 905,095 and 956,041, respectively; and stock
options and other awards - 1,814,139 and 1,418,699, respectively.

         As a result of the Company's losses in previous years,  there was not a
sufficient amount of retained earnings from which to pay dividends until the end
of the second quarter of 1997. Accordingly, dividends paid on common stock prior
to the date were charged to "Additional  paid-in capital".  For the remainder of
1997 and all of 1998, dividends were charged to "Retained earnings".

         Treasury stock is carried at average cost.

Note 10.    Stock Based Compensation Plans

         At December 31,  1998,  the Company has five  stock-based  compensation
plans.  SFAS 123 requires that companies either recognize  compensation  expense
for grants of stock,  stock options,  and other equity instruments based on fair
value,  or provide pro forma  disclosure of net income and earnings per share in
the notes to the  financial  statements.  The  Company  adopted  the  disclosure
provisions  of SFAS 123 in 1996 and  continues  to  apply  Accounting  Practices
Bulletin  ("APB") Opinion 25 and related interpretations  in accounting for its
employee  stock-based  compensation.  Compensation  expense for shares issued to
directors of $80 thousand,  $50 thousand,  and $40 thousand was recognized for 
1998,  1997, and 1996, respectively. Pro forma amounts are indicated below.

         The Company  maintains  three  employee  stock option plans under which
grants have been made to officers and key employees.  Additionally,  the Company
maintains a  non-employee  director  ("NED")  stock option plan that provides to
each  non-employee  director,   among  other  things,  a  one-time  grant  of  a
non-qualified  stock  option to purchase  (i) 15,000  shares of common stock and
(ii) the right to acquire an  additional  option to purchase up to 10,000 shares
if the non-employee  director purchases a corresponding  number of shares on the
open  market  within  ninety  days  after  the  grant.  Generally,  the  options
outstanding  under the Company's stock plans: (a) are granted at market value of
the stock on the date of grant, (b) vest ratably over a five year period for the
employee  plans and over a two year  period  for the NED plan and (c) expire ten
years  subsequent  to award.  At December  31, 1998 the  Company  currently  has
available 1,484,441 and 288,194 shares for issuance under the employee plans and
the NED plan, respectively. A total of 459,000 and 4,614 options were granted in
1998 under the employee plans and the NED plan, respectively.

         On April 1, 1997,  the Company  approved a stock  option  plan for key
employees of  Servotronix in conjunction  with the  acquisition of that company
(Note 2).  Under this plan, 83,000 shares were authorized and granted in 
exchange for the surrender of rights to acquire Servotronix shares held by 
these  employees.  The options  outstanding under this plan a) were  granted at 
no cost,  b) vest over a three year  period, and c) expire ten years subsequent 
to award.


<PAGE>35



         A summary of the status of the  Company's  stock options as of December
31,  1998,  1997,  and 1996 and changes  during the year ended on those dates is
presented below:
<TABLE>
<CAPTION>

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

<S>                                        <C>            <C>        <C>        <C>           <C>            <C>   
  Outstanding at January 1:                1,240,900      $ 9.45     1,263,700  $     8.93      986,950      $ 7.95
                                                                                      
  Granted                                    463,614       17.94       124,269       17.54      400,500       10.91
  
  Granted to Servotronix employees                 -           -        83,000           -                        -
                                                                                                      -
  Exercised                                 (104,060)       4.42      (180,769)       7.34      (56,050)       6.39
                                                                                      
  Canceled                                   (21,200)      12.22       (49,300)       8.42      (67,700)       8.38

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

  Outstanding at December 31               1,579,254       12.18     1,240,900        9.26    1,263,700        8.93
                                         ============              ============              ===========

  Options exercisable at December 31         776,461        9.31       620,100        8.70      576,200        7.97
                                         ============              ============              ===========

  Options available for future grant         234,885                   177,799                  256,163
                                         ============             =============              ===========


         The fair value of each option  granted  during  1998,  1997 and 1996 is
estimated on the date of grant using the Black-Scholes option-pricing model with
the following assumptions:

                                                                        1998               1997                1996
                                                                        ----               ----                ----

       Expected dividend yield                                          0.4%               0.8%                0.8%
       Expected stock price volatility                                 38.0%              32.0%               37.0%
       Risk-free interest rate                                          5.6%               5.8%                6.2%
       Expected life of options                                      6 years            6 years             5 years

         The  weighted  average fair value of options  granted  during the years
1998, 1997 and 1996 is $8.03, $6.94, and $4.23, respectively.

         The following table summarizes  information about currently outstanding
and exercisable stock options at December 31, 1998:

                              Number of           Weighted           Weighted         Number         Weighted
                               Options            Average             Average      Exercisable        Average
            Range of          Outstanding        Remaining           Exercise           at           Exercise
        Exercise Prices      at 12/31/98      Contractual Life         Price         12/31/98          Price
<S>    <C>                  <C>                    <C>               <C>              <C>            <C>

       $       0 - 8.375      484,054              3.6 years         $    7.28        435,161        $ 7.99
           8.625 - 11.625     399,000              7.4 years              9.99        218,800         10.03
          11.750 - 17.750     397,300              8.6 years             15.76        113,850         12.29
       $  18.125 - 20.938     298,900              9.1 years             18.30          8,650         18.67
                              -------                                                 -------   
                            1,579,254              6.9 years         $   12.18        776,461        $ 9.31
                            =========                                                 =======

<PAGE>36



         If compensation costs for the Company's 1998, 1997, and 1996 grants for
stock-based  compensation  plans had been determined in accordance with the fair
value method  described by SFAS 123, the Company's net income and net income per
share for these years would approximate the pro forma amounts below:

                                               1998                           1997                           1996
                                   -----------------------------  -----------------------------   ----------------------------
                                  As Reported     Pro Forma       As Reported    Pro Forma       As Reported    Pro Forma
                                 -------------  -------------   -------------- -------------    ------------- -------------

Net income                           $ 14,307       $ 13,139         $ 19,720      $ 19,088          $ 8,904      $  8,612
Earnings per common share:
  Basic                               $  1.42        $  1.30          $  2.00       $  1.93          $  0.89      $   0.86
  Diluted                             $  1.36        $  1.25          $  1.90       $  1.84          $  0.86      $   0.83


         The effect of  applying  SFAS 123 in this pro forma  disclosure  is not
indicative of future compensation expense amounts, as SFAS 123 does not apply to
awards prior to 1995, and additional awards in future years are anticipated.
</TABLE>

Note 11.  Earnings Per Share

Basic  earnings  per share  excludes the  dilutive  effect of common  equivalent
securities and is computed by dividing income  available to common  shareholders
by the weighted  average  number of common  shares  outstanding  for the period.
Diluted EPS reflects the  potential  dilution  that could occur if securities or
other  contracts to issue common stock were  exercised or converted  into common
stock or  resulted  in the  issuance  of common  stock  that then  shared in the
earnings of the entity. A reconciliation between basic EPS and diluted EPS is as
follows:

<TABLE>
<S>                                                                   <C>             <C>           <C> 
                                                                         1998            1997          1996
                                                                         ----            ----          ----
       Income before change in accounting principle                   $14,745         $19,720       $ 8,904
       Cumulative effect of change in accounting principle              (438)               -             -
                                                                --------------  -------------- -------------
       Net income                                                      14,307          19,720         8,904
       Less: preferred stock dividends and accretion of
         preferred stock discount                                           -               -         (285)
                                                                --------------  -------------- -------------
       Net income available to common shareholders                    $14,307         $19,720       $ 8,619
                                                                ==============  ============== =============  
       Shares used in net income per share - basic                     10,082           9,876         9,732
       Effect of dilutive securities: Stock options                       424             488           310
                                                                --------------  -------------- -------------
       Shares used in net income per share - diluted                   10,506          10,364        10,042
                                                                ==============  ============== =============
       Income per share before change in accounting
          principle - basic                                            $ 1.46          $ 2.00        $ 0.89
       Income per share before change in accounting
          principle - diluted                                          $ 1.40          $ 1.90        $ 0.86

       Net income per share - basic                                    $ 1.42          $ 2.00        $ 0.89
       Net income per share - diluted                                  $ 1.36          $ 1.90        $ 0.86
</TABLE>



<PAGE>37

         During  1998,  options to purchase  91,393  shares of common stock with
exercise  prices  ranging  from  $18.44 to $20.94 per share and with  expiration
dates ranging up to May 12, 2008 were outstanding,  but were not included in the
computation of diluted EPS because the options'  exercise price was greater than
the average market price of the common shares.  Also,  905,095 common equivalent
shares of the  convertible  subordinated  debentures  were not  included  in the
diluted EPS calculation as a result of their antidilutive effect.

         During 1997,  options to purchase  103,500  shares of common stock with
exercise  prices  ranging  from  $17.31 to $18.69 per share and with  expiration
dates ranging up to December 16, 2007 were outstanding, but were not included in
the  computation of diluted EPS because the options'  exercise price was greater
than the  average  market  price of the  common  shares.  Also,  956,041  common
equivalent shares of the convertible  subordinated  debentures were not included
in the diluted EPS calculation as a result of their antidilutive effect.

         During 1996,  options to purchase  126,200  shares of common stock with
exercise  prices  ranging  from  $12.00 to $16.88 per share and with  expiration
dates ranging up to May 15, 2006 were outstanding,  but were not included in the
computation of diluted EPS because the options'  exercise price was greater than
the average market price of the common shares. Also, 1,086,987 common equivalent
shares of the  convertible  subordinated  debentures  were not  included  in the
diluted EPS calculation as a result of their antidilutive effect.

Note 12.   Taxes on income

The components of income (loss) before income taxes, joint venture, and minority
interest were as follows:

                               1998            1997            1996
                               ----            ----            ----

     Domestic               $22,393         $ 5,751          $9,436
     Foreign                  2,508          (9,168)         (1,046)  
                           --------        --------          -------
     Total                  $24,901         $(3,417)         $8,390
                           ========        ========          =======


        Statement  of  Financial   Accounting   Standard  No.109  ("SFAS  109"),
"Accounting for Income Taxes",  requires recognition of deferred tax liabilities
and assets for the  expected  future tax  consequences  of events that have been
included in the financial statements or tax returns. Under this method, deferred
tax  liabilities and assets are determined  based on the difference  between the
financial  statement and tax bases of assets and  liabilities  using enacted tax
rates in effect for the year in which the differences are expected to reverse.

        As required by SFAS 109,  management  of the Company has  evaluated  the
positive and negative  evidence  bearing upon the  realizability of its deferred
tax assets.  Management has evaluated the components of its deferred tax assets,
the anticipated taxable income of the Company, and concluded that, in accordance
with  applicable  accounting  standards,  it is more  likely than not that these
assets will be realized.


<PAGE>38



        For income tax purposes the Company  treated the transfer of the Macbeth
assets into the Joint Venture as a taxable transaction in 1996. Accordingly, the
Company  recorded  a tax gain on the  excess  of the fair  value of the  Macbeth
assets over its net tax value.

        The  valuation  allowance  decrease in 1997 and 1996  resulted  from the
utilization of net operating loss and tax credit  carryforwards,  current income
from  operations and the tax gain from the formation of the Joint  Venture.  The
1998  valuation  allowance  decrease  resulted from the  utilization  of certain
foreign tax loss carryforwards.  The current foreign tax provision consists of
the foreign withholding taxes paid by the Company in connection with the 
license agreement more fully explained in Note 4.  

        The provision (benefit) for income taxes consists of the following:

                                          1998             1997            1996
                                          ----             ----            ----
       Current provision:
               U.S. federal           $  9,314         $  4,705        $  1,543
               Foreign                   2,720                -               -
               State                     2,055            2,207             185
                                     ---------        ---------       ---------
                                        14,089            6,912           1,728
       Deferred (benefit):
               U.S. federal             (3,345)          (2,980)         (1,487)
               Foreign                       -                -               -
               State                      (659)          (1,094)           (241)
                                     ----------       ----------      ----------
                                        (4,004)          (4,074)         (1,728)
                                     ----------       ----------      ----------
       Total provision                $ 10,085         $  2,838    $          -
                                     ==========       ==========   =============


        The U.S. effective income tax rate from operations is different from 
the U.S. federal statutory rates for the following reasons:

<TABLE>

                                                                                               1998            1997
                                                                                               ----            ----
<S>                                                                                         <C>           <C>
       Income tax provision (benefit) at U.S. federal
          statutory rates                                                                   $ 8,716       $ (1,196)
       Foreign taxes withheld                                                                 1,768              -
       Tender offer costs                                                                         -            550
       Write-off of acquired research and development                                             -          3,098
       Benefit of net operating loss
          carryforwards and tax credits                                                           -           (600)
       Unutilized foreign net operating losses                                                    -            549
       Reduction of valuation allowance                                                        (292)             -
       Foreign tax rate variances                                                              (792)          (129)
       State income taxes net of federal benefit                                               908            400
       Other                                                                                   (223)           166
                                                                                      --------------   -------------  
                                                                                           $ 10,085        $ 2,838

                                                                                      ==============   =============
</TABLE>


<PAGE>39

The deferred tax assets and liabilities are comprised of the following:

<TABLE>
                                                                                               1998            1997
                                                                                               ----            ----


<S>                                                                                           <C>             <C>  
       Bad debt reserve                                                                       $  151          $  153
       Employee benefit reserves                                                               3,766           2,928
       Reserve for net realizable value of real estate                                           881              62
       Patent defense accrual                                                                  2,457               -
       Depreciation                                                                           (1,455)         (1,372)
       Federal tax credits                                                                         -           1,024
       Foreign losses                                                                              -             292
       Other                                                                                   4,006           3,007

                                                                                      --------------   -------------
                                                                                               9,806           6,094
       Valuation allowance                                                                        -             (292)
                                                                                      ==============   =============
       Net deferred tax asset                                                                 $9,806          $5,802

                                                                                      ==============   =============
</TABLE>

 Note 13.   Operating Leases

        The  Company  leases  certain  of its  facilities  and  equipment  under
operating lease  arrangements.  Such arrangements  generally include fair market
value renewal and/or purchase options.

        Rent  expense  for  operating  leases  amounted  to $2.7  million,  $2.5
million, and $2.2 million in 1998, 1997 and 1996,  respectively.  Future minimum
rental payments  required under  non-cancelable  operating leases having a lease
term in excess of one year at December 31, 1998 are as follows:

                                        Operating
                                         Leases
       1999                             $  2,939
       2000                                2,868
       2001                                2,640
       2002                                1,312
       2003                                  959
       Thereafter                          4,277
                                        ----------
       Total minimum lease payments    $  14,995
                                        ===========

Note 14.   Commitments and Contingencies

        The Company has various  lawsuits,  claims,  commitments  and contingent
liabilities including environmental matters arising from the ordinary conduct of
its  existing  businesses;  however,  they are not  expected  to have a material
adverse effect on its consolidated financial position and cash flows.

        In doing  business with the U.S.  Government,  the Company is subject to
routine  audits  and,  in  certain   circumstances,   to  inquiry,   review,  or
investigation  by  the  U.S.  Government  Agencies  relating  to  the  Company's
compliance with  Government  Procurement  policies and practices.  The Company's
policy is to conduct its activities in compliance with all applicable  rules and
regulations.


<PAGE>40



Note 15.  Pension plans and postretirement benefits

Pension Plans:

        The Company  maintains two  non-contributory  qualified  defined benefit
pension plans (the "Plans") covering substantially all domestic employees.  Due
to full  funding,  the Plans  currently  have no required  contributions  by the
Company.

        The net periodic pension cost for the years 1998, 1997 and 1996 includes
the following components:

<TABLE>
                                                                         1998           1997           1996

                                                                         ----           ----           ----
<S>                                                                 <C>             <C>            <C>
       Service cost                                                 $   2,337       $  2,085       $  2,499
       Interest cost                                                    3,174          3,542          3,633
       Expected return on plan assets                                  (7,007)        (6,218)        (5,806)
       Amortization of:
          Transition obligation                                          (538)          (545)          (572)
          Prior service cost                                              160            146            157
          Actuarial gain                                                 (555)           (28)             -
                                                                --------------  -------------  -------------

       Net periodic pension credit                                  $  (2,429)      $ (1,018)        $  (89)
                                                                ==============  =============  =============
</TABLE>


        The  assumptions  used in  determining  the net periodic  pension credit
included  discount  rates  of 6.5%,  7.0%,  and  6.5% in  1998,  1997 and  1996,
respectively, an expected investment return of 10% and compensation increases of
5% for the years ending 1998, 1997, and 1996.

        The assumptions used in determining the end of year benefit  obligations
included  discount rates of 6.25% for 1998 and 6.5% for 1997,  and  compensation
increases of 5% per year.  The Plans' funded  status,  together with the amounts
recognized in the Company's balance sheet at December 31 are as follows:

<TABLE>

                                                                          1998              1997
                                                                          ----              ----
<S>                                                                    <C>               <C>        
       Change in benefit obligations:
            Benefit obligation at beginning of year                    $54,575           $51,729
            Service cost                                                 2,337             2,085
            Interest cost                                                3,174             3,542
            Amendments                                                     223                 -
            Actuarial (gain)/loss                                       (3,766)            7,054
            Settlement                                                       -            (3,192)
            Curtailment                                                      -            (1,652)
            Special termination benefit                                      -               240
            Benefits paid                                               (2,328)           (5,231)
                                                                 --------------    --------------
            Benefit obligation at end of year                           54,215            54,575

       Change in plan assets:
           Fair value of plan assets at beginning of year               70,340            63,879
           Actual return on plan assets                                  5,378            11,693
           Benefits paid                                                (2,329)           (5,232)
                                                                 --------------    --------------
           Fair value of plan assets at end of year                     73,389            70,340

           Funded status                                                19,174            15,765
           Unrecognized actuarial gain                                  (8,989)           (7,408)
           Unrecognized portion of net obligation at transition         (3,375)           (3,914)
           Unrecognized prior service cost                               1,417             1,355
                                                                 --------------    --------------
           Net amount recognized                                         8,227             5,798

       Amounts recognized in the Statement of Financial Position consist of:
           Prepaid benefit cost                                          8,227             5,798
           Accrued benefit liability                                         -                 -
                                                                 --------------    --------------
           Net amount recognized                                       $ 8,227           $ 5,798
</TABLE>


<PAGE>41



        The Salaried Employees'  Retirement Plan provides that in the event of a
termination  of that plan  following  a change in  control of the  Company,  any
assets  of  that  plan  remaining  after  provision  is made  for  all  benefits
thereunder will be employed to supplement such benefits.

        The  Company  also  maintains  a  Supplemental  Retirement  Income  Plan
("SERP")  for former key  employees.  The  Company  has  accrued an  actuarially
determined  liability  of $3.7 million and $3.6 million at December 31, 1998 and
1997,  respectively,  in  anticipation of the future payment of such benefits to
seven former employees who were designated as eligible by the Company's board of
directors for participation in the SERP program.  The Company incurred a pension
expense of $0.3 million in 1998 and 1997 for the SERP.

        The Company has a voluntary  401(k) savings and investment plan designed
to enhance the existing retirement program covering eligible domestic employees.
In 1998 and 1997, the Company matched 50% of each  participant's  contributions,
up to a maximum contribution of 2% of base salary.  Company annual contributions
to this plan were $0.7 million in 1998, 1997, and 1996.

        In 1997,  employees of Macbeth became  employees of the Joint Venture as
described in Note 3. This was accounted  for as a  curtailment  and a settlement
under Statement of Financial Accounting Standard No. 88, "Employers'  Accounting
for  Settlement  and  Curtailments  of  Defined  Benefit  Pension  Plans and for
Termination  Benefits".  The Plan's funded status in 1997 reflects a curtailment
gain  of  $1.2  million,  a  settlement  gain of  $0.5  million,  and a  special
termination benefit loss of $0.2 million due to the Joint Venture.

Postretirement Benefits:
        The Company  maintains a  postretirement  medical benefits plan covering
substantially all domestic employees hired prior to January 1, 1992.

        Net  periodic  postretirement  benefit  cost for  1998,  1997,  and 1996
includes the following components:

<TABLE>
                                                                            1998           1997            1996
                                                                            ----           ----            ----

<S>                                                                      <C>            <C>             <C>    
       Service cost                                                      $   266        $   213         $   168
       Interest cost                                                         263            382             423
       Amortization of:
         Transition obligation                                                30            252             278
         Actuarial loss                                                        -              -               9
                                                                    -------------  -------------   -------------

       Net periodic postretirement benefit cost                          $   559        $   847         $   878
                                                                    =============  =============   =============

</TABLE>


<PAGE>42



        The Company's postretirement benefit plans are unfunded.

        During 1998,  the Company  elected to change the vesting  method used to
determine eligibility for post-retirement medical insurance benefits,  resulting
in a curtailment charge of $1.6 million.

        For  measurement  purposes,  a 9.2%  annual  rate of increase in the per
capita cost of covered  medical  benefits  was  assumed  for 1998;  the rate was
assumed to decrease to 5.5% for 2000 and remain at that level thereafter.

        The  assumptions  used in  determining  the net periodic  postretirement
benefit cost included  discount rates of 6.5%,  7.0%, and 6.5%, for 1998,  1997,
and 1996, respectively.

        The weighted  average discount rates used in determining the end of year
accumulated  postretirement benefit obligation are 6.25% and 6.5% as of December
31, 1998 and 1997, respectively.

         Assumed  health care cost trend rates have a significant  effect on the
amounts reported for health care plans. A one-percentage-point change in assumed
health  care  cost  trend  rates  would  have  the   following   effect  on  the
Postretirement Medical Benefit Progam:

<TABLE>
                                                                  One-Percentage   One-Percentage
                                                                  Point Decrease   Point Increase
                                                                 ----------------- ----------------
<S>                                                                     <C>                <C>  
           Effect on total of service and interest cost                 $  (21)            $  21
             components
           Effect on postretirement benefit obligation                    (157)              157

        The Plans'  funded status  together  with the amounts  recognized in the
Company's balance sheet at December 31 is as follows:

                                                                          1998              1997
                                                                          ----              ----
       Change in benefit obligations:
            Benefit obligation at beginning of year                    $ 5,939           $ 6,536
            Service cost                                                   266               213
            Interest cost                                                  263               382
            Amendments                                                  (1,643)                -
            Actuarial gain                                                 (18)             (117)
            Curtailment                                                      -              (680)
            Benefits paid                                                 (388)             (395)
                                                                 --------------    --------------
            Benefit obligation at end of year                            4,419             5,939

       Change in plan assets:
           Fair value of plan assets at beginning of year                    -                 -
           Employer contributions                                          388               394
           Benefits paid                                                  (388)             (394)
                                                                 --------------    --------------
           Fair value of plan assets at end of year                          -                 -

           Funded status                                                (4,419)           (5,939)
           Unrecognized actuarial loss                                     214               233
           Unrecognized portion of net obligation at transition            420             3,717
                                                                 --------------    --------------
           Net amount recognized                                        (3,785)           (1,989)

       Amounts recognized in the Statement of Financial Position consist of:
           Prepaid benefit cost                                              -                 -
           Accrued benefit liability                                    (3,785)           (1,989)
                                                                 --------------    --------------
           Net amount recognized                                      $ (3,785)          $(1,989)

</TABLE>

<PAGE>43



Note 16.  Geographic and industry information 

        The effect of the Company's  foreign  operations  upon the  consolidated
financial statements are summarized as follows:

<TABLE>
                                              1998                     1997                    1996

                                              ----                     ----                    ----
<S>                                      <C>                       <C>                     <C> 
     Net Sales

       North America                     $ 189,003                 $179,524                $190,776
       Europe                               55,983                   44,733                  48,806
       Other                                18,248                   12,759                     440
       Eliminations                        (19,295)                 (14,770)                 (9,598)
                                 ------------------          ---------------       -----------------
                                         $ 243,939                 $222,246                $230,424
                                 ==================          ===============       =================

     Net Income

       North America                      $ 11,967               $   30,304                 $ 9,416
       Europe                                2,215                     (410)                    (55)
       Other                                   126                   (8,536)                   (536)
       Eliminations                            (1)                   (1,638)                      79
                                 ------------------          ---------------       -----------------
                                          $ 14,307                 $ 19,720                 $ 8,904
                                 ==================          ===============       =================

     Identifiable Assets

       North America                     $ 125,106                 $ 97,211               $ 105,445
       Europe                               46,252                   44,306                  33,288
       Other                                15,190                   13,914                   4,223
       Eliminations                        (17,914)                  (9,987)                 (1,626)
                                 ------------------          ---------------       ----------------
                                         $ 168,634                $ 145,444              $ 141,330
                                 ==================          ===============       =================
</TABLE>

        The  Company's  principal  foreign  facilities  are in France,  Germany,
India,  Israel, and Vietnam.  The sales eliminations are transfers at prevailing
wholesale  selling  prices.  The  Company  has  no  other  significant   foreign
operations.

        In  addition  to foreign  operations,  export  sales  amounted  to $26.4
million in 1998,  $21.0 million in 1997, and $39.7 million in 1996. Sales to the
U.S. Government or for U.S. Government end-use amounted to $50.8 million,  $47.8
million and $41.3 million in 1998, 1997 and 1996, respectively.

        The Company has maintained its focus on high performance motion control,
and the  Company  in late  1997  reorganized  its  business  around  two  market
channels,  Industrial  and  Commercial,  and Aerospace and Defense.  Information
provided  for 1997 and 1996 has been  prepared as if the  reorganization  around
these two market segments had occurred at the beginning of each year.

<PAGE>44



        The following table includes certain financial  information  relating to
each of the Company's segments in the last three fiscal years:

<TABLE>
                                                       Industrial      Aerospace                    Special
                                                          and             and       Corporate,     Items and
                                                       Commercial       Defense      Interest     Businesses
                                                         Group           Group       and Other     Sold (1)        Total

                                                      -------------  -------------- ------------  ------------   -----------
       1998                                                                                                       
       ----
<S>                                                        <C>            <C>          <C>            <C>          <C>
       Bookings                                            $135,492       $106,289     $      -       $     -      $241,781
       Sales                                                135,715        108,224            -             -       243,939
       Profit (loss) before tax                              10,202         13,598       (6,376)         7,477       24,901
       Assets                                                74,017         68,986       25,630             -       168,633
       Capital additions                                      4,456          4,649          554             -         9,659

       1997                                                                                                       
       ----
       Bookings                                            $117,447       $104,583     $      -       $     -      $222,030
       Sales                                                120,244        102,002            -             -       222,246
       Profit (loss) before tax                              10,193         10,548       (8,432)      (15,726)       (3,417)
       Assets                                                56,517         67,716       21,211             -       145,444
       Capital additions                                      2,816          3,348           52             -         6,216

       1996                                                                                                       
       ----
       Bookings                                            $ 91,717       $ 90,513     $      -       $33,622      $215,852
       Sales                                                 90,222        107,167            -        33,035       230,424
       Profit (loss) before tax                               6,101         11,014      (11,017)        2,292         8,390
       Assets                                                42,240         71,814       27,276             -       141,330
       Capital additions                                      1,030          3,487           25           306         4,848


(1)         Excludes the impact of the  "Special  Items" and  "Businesses  Sold"
            more fully  described  in  Management's  Discussion  and Analysis of
            Financial  Condition and Results of  Operations  and in the notes to
            the financial statements.
</TABLE>

Note 17.   Quarterly Results of Operations (Unaudited)
<TABLE>

                                                                                     Quarter
       1998                                                      First         Second        Third         Fourth
       --------------------------------------------------------------------------------------------------------------

<S>                                                               <C>           <C>           <C>           <C>     
       Net sales                                                  $ 56,793      $ 60,340      $ 61,891      $ 64,915
       Gross profit                                                 17,127        18,952        19,481        20,878
       Impairment of goodwill and assets held for sale               2,733             -             -             -
       Tender offer costs                                            1,273             -             -             -
       Intellectual property license, net of expenses               21,217             -             -             -
       Reorganization of research and development
         organization                                                    -             -             -         1,310
       Net income before change in accounting principle              5,560         2,279         3,118         3,788
       Cumulative effect of change in accounting principle               -             -             -           438
       Net income                                                    5,560         2,279         3,118         3,350
       Earnings per common share before cumulative effect  
        of change in accounting principle:
        Basic                                                     $   0.55      $   0.23      $   0.31      $   0.37
        Diluted                                                   $   0.52      $   0.21      $   0.30      $   0.36
       Earnings per common share:
        Basic                                                     $   0.55      $   0.23      $   0.31      $   0.33
        Diluted                                                   $   0.52      $   0.21      $   0.30      $   0.32


<PAGE>45




                                                                                     Quarter
       1997                                                      First         Second        Third         Fourth
       --------------------------------------------------------------------------------------------------------------

       Net sales                                                  $ 50,587      $ 55,757      $ 56,710      $ 59,192
       Gross profit                                                 15,513        17,600        17,066        19,791
       Acquired research and development                                 -        11,391             -             -
       Tender offer costs                                                -             -             -         4,176
       Gain on sale of investment in joint venture,
       net of income taxes                                               -        24,321             -             -
       Net income                                                    2,010        15,459         2,067           184
       Earnings per common share:
        Basic                                                       $ 0.21        $ 1.58        $ 0.21        $ 0.02
        Diluted                                                     $ 0.20        $ 1.52        $ 0.20        $ 0.02






</TABLE>








<PAGE>46






                          EXHIBIT INDEX


                                                         Page in this
Exhibit No.           Description of Exhibit             Form 10-K  


   3(a)     Restated Certificate of Incorporation,             N/A
            as amended, incorporated by reference
            to Exhibit 3(i) to Form 10-Q filed on
            November 13, 1998.

   3(b)     Restated and Amended By-Laws incorporated          N/A
            by Reference to Exhibit 3 to Form 10-Q
            filed on August 13, 1998.

   4(a)     Indenture  dated as of May 1,  1984,  with         N/A  
            respect  to  8-3/4% Convertible Subordinated   
            Debentures  Due  2009  incorporated  by
            reference  to  Exhibit  4 to  Registration  
            Statement  on  Form  S-3 (2-90655).

   4(b)     Amended and Restated  Rights  Agreement  dated     N/A 
            as of October 22, 1998,  between the Company and  
            BankBoston,  N.A.,  as Rights Agent, incorporated 
            by reference to Exhibit 4 to Form 8-K filed on 
            November 4, 1998.

  10(a)     Fifth Amended and Restated Multicurrency           N/A
            Credit Agreement dated as of September 30,
            1997, among Kollmorgen Corporation, BankBoston, 
            N.A., Certain Other  Financial Institutions  
            Listed on  Schedule 1, and BankBoston,  N.A.,  
            as Agent,  incorporated  by  reference to
            Exhibit 10A of the Form 10-Q filed on 
            November 14, 1997.

  10(b)     Form of Limited Guaranty given by the Company
            to secure ABN AMRO's credit facility of up to
            $11,000,000 million provided to the Company's
            wholly owned subsidiaries in France and
            Germany.                                            50

  10(c)     Kollmorgen  Stock  Option  Plan,  as amended,      N/A  
            incorporated  by reference to Exhibit A of the 
            Company's  Proxy Statement dated March 24, 1987, 
            for the Annual Meeting of Shareholders held on 
            April 22, 1987.

  10(d)     Kollmorgen 1991 Long Term Incentive Plan,          N/A  
            as amended, incorporated by reference to Exhibit  
            A of the Company's  Proxy Statement dated 
            April 5, 1996, for the Annual Meeting of 
            Shareholders held on May 8, 1996.

  10(e)     1998 Management Stock Incentive Plan               N/A
            incorporated by reference to Exhibit A of
            the Company's Proxy Statement dated
            April 3, 1998, for the Annual Meeting of 
            Shareholders held on May 13, 1998.





<PAGE>47


                                                          Page in this
Exhibit No.           Description of Exhibit              Form 10-K

  10(f)   Form of Retention Agreement,  as amended,            N/A 
          entered into between the Company and Messrs.  
          Argov, Cobuzzi,  Desmond,  Eder and Jones,
          dated March 17, 1998, and incorporated by 
          Reference to Exhibit 10 of the Form 10-K
          filed for the year ended December 31, 1997.

  10(g)   Kollmorgen Deferred Compensation Plan                N/A
          incorporated by reference to Exhibit 10B
          of the Form 10-Q filed on or about
          November 14, 1997.

  10(h)   Form of 1991, 1992, and 1993 Non-Qualified           N/A
          Stock Option Agreement under the Long-Term
          Incentive Plan and/or Kollmorgen Stock
          Option Plan for Gideon Argov, Robert J.
          Cobuzzi and James A. Eder.  Each agreement
          is identical except for the number of shares
          and the date of grant.  Said agreement is
          incorporated by reference to Exhibit 10(j)
          to the Annual Report on Form 10-K of the
          Company for the year ended December 31, 1991.

  10(i)   Form of 1995 and 1996, Incentive Stock               N/A
          Option Agreement under the Long-Term
          Incentive Plan for Gideon Argov, Robert J.
          Cobuzzi, Daniel F. Desmond, James A. Eder,
          and Keith D. Jones.  Each agreement is
          identical except for the number of shares
          and the date of grant. Said Agreement is 
          incorporated by reference to Exhibit 10(g) 
          to the Annual Report on Form 10-K of the 
          Company for the year ended December 31, 1995.

  10(j)   Form of 1998 Non-Qualified Stock Option Agreement    53
          under the 1998 Management Stock Incentive
          Plan for Gideon Argov, Robert J. Cobuzzi,
          Daniel F. Desmond, James A. Eder and Keith
          Jones.  Each agreement is identical except 
          for the number of shares and the date of grant. 

  10(k)   Form of 1999 Restricted Stock Units                  61  
          Subscription Agreement for Gideon Argov,
          Robert J. Cobuzzi, Daniel F. Desmond, James
          A. Eder and Keith Jones.  Each agreement is 
          identical except for the number of shares of  
          restricted stock units.


<PAGE>48


                                                          Page in this
Exhibit No.           Description of Exhibit              Form 10-K

  10(l)   Kollmorgen 1992 Stock Ownership Plan for            N/A
          Non-Employee Directors, as amended,
          incorporated by reference to Exhibit B
          of the Company's Proxy Statement dated
          April 5, 1996, for the Annual Meeting
          of Shareholders held on May 8, 1996.

  10(m)   Form of Non-Qualified Stock Option Agreement        N/A  
          for the grant of 15,000 options between each  
          non-employee director and the Company pursuant 
          to the Kollmorgen 1992 Stock Ownership Plan 
          for Non-Employee Directors, as amended,
          incorporated by reference to Exhibit 10(i) to
          the Annual Report on Form 10-K of the Company
          for the year ended December 31, 1996.

  10(n)   Kollmorgen 1999 Corporate Incentive Plan            65
          for Corporate Officers and other key
          corporate employees.

  10(o)   Letter employment agreement dated May 21,           N/A 
          1991, for Gideon Argov. Said Agreement is  
          incorporated  by reference to Exhibit 10(c) to 
          the Annual Report on Form 10-K of the Company 
          for the year ended December 31, 1991.

  10(p)   Letter employment agreement dated July 1, 1991      N/A 
          for Robert J. Cobuzzi. Said Agreement is 
          incorporated by reference to Exhibit 10(c)
          to the Annual  Report on Form 10-K of the  
          Company for the year ended December 31, 1991.

  10(q)   Form of severance agreement for George P.           N/A 
          Stephan. Said agreement is incorporated by 
          reference to Exhibit 10(i) to the Annual Report 
          on Form 10-K of the Company for the year ended 
          December 31, 1989.

  10(r)   Form of Indemnification Agreement for each          N/A
          of the Company's executive officers, directors
          and director emeritus.  Each agreement is
          identical to this exhibit except for the name
          and title of each individual.  Said agreement
          is incorporated by reference to Exhibit 10(f)
          to the Annual Report on Form 10-K of the
          Company for the year ended December 31, 1987.

  10(s)   Supplemental Retirement Income Plan for key         N/A  
          executives incorporated  by reference to Exhibit  
          10(n) to the Annual Report on Form 10-K of the 
          Company for the year ended December 31, 1990.

  10(t)   Master Equipment Lease Agreement dated as of        N/A 
          April 19,  1996, between Provident Commercial 
          Group, Inc. and Kollmorgen  Corporation
          incorporated  by  reference to Exhibit 10 to 
          Form 10-Q filed on or about November 12, 1996.



<PAGE>49


                                                          Page in this
Exhibit No.           Description of Exhibit              Form 10-K

   21      Subsidiaries of the Company                        66

   23      Consent of Independent Accountants -               67
           PricewaterhouseCoopers LLP

   24      Powers of Attorney                                 68

   27      Financial Data Schedule                            75




<PAGE>50


                                                                 EXHIBIT 10(b)

                           LIMITED CORPORATE GUARANTY

                               ABN AMRO Bank N.V.
                             One Post Office Square
                                Boston, MA 02109

         THIS GUARANTY (the "Guaranty")  dated as of May 13, 1998 is executed in
favor of ABN AMRO BANK N.V.,  Boston Branch (the "Bank") and any of its offices,
subsidiaries or affiliates.

                               W I T N E S S E T H:

         WHEREAS,  the Bank may from time to time make loans and other financial
accommodations  to PMI Motion  Technologies  GmbH Fur  Servoantribssysteme  (the
"Company"); and

         WHEREAS, the undersigned is willing to guaranty the Liabilities (as 
defined below) as hereinafter set forth;

         NOW, THEREFORE,  for good and valuable  consideration,  the receipt and
sufficiency  of  which  are  hereby   acknowledged,   the   undersigned   hereby
unconditionally  and  irrevocably,  as primary obligor and not merely as surety,
guarantees  the full and prompt  payment when due,  whether by  acceleration  or
otherwise, and at all times thereafter, of all obligations of the Company to the
Bank (including  principal,  interest and charges).  All such obligations  being
herein  collectively  called  the  "Liabilities".   The  Guarantor's   liability
hereunder in respect of principal shall not exceed at any one time the aggregate
sum of the equivalent of

         US$7,000,000 (Seven Million U.S. Dollars)

(maximum principal amount guaranteed)

         The  undersigned  agrees  that,  in the  event  of the  dissolution  or
insolvency of the Company or the undersigned, or the inability or failure of the
Company or the  undersigned to pay debts as they become due, or an assignment by
the Company or the undersigned  for the benefit of creditors,  and if such event
shall  occur  at a time  when  any of the  Liabilities  may not  then be due and
payable,  the  undersigned  will pay to the Bank forthwith the full amount which
would be payable  hereunder by the undersigned if all Liabilities  were then due
and payable.

         This  Guaranty  shall in all  respects  be a  continuing,  irrevocable,
absolute and unconditional  guaranty,  and shall remain in full force and effect
(notwithstanding, without limitation, the dissolution of the undersigned or that
at any time or from  time to time no  Liabilities  are  outstanding)  until  all
commitments to create  Liabilities have terminated and all Liabilities have been
paid in full.

         The  undersigned  further agrees that if at any time all or any part of
any payment theretofore applied by the Bank to any of the Liabilities is or must
be rescinded or returned by the Bank for any reason  whatsoever  (including  the
insolvency,  bankruptcy or  reorganization  of the Company or the  undersigned),
such Liabilities  shall,  for the purposes of this Guaranty,  to the extent that
such payment is or must be rescinded or returned, be deemed to have continued in
existence, notwithstanding such application by the Bank, and this Guaranty shall
continue  to be  effective  or be  reinstated,  as the case  may be,  as to such
Liabilities, all as though such application by the Bank had not been made.


<PAGE>51



         The Bank may,  from time to time,  at its sole  discretion  and without
notice to the undersigned,  take any or all of the following actions: (a) retain
or obtain the primary or secondary  obligation  of any obligor or  obligors,  in
addition to the undersigned,  with respect to any of the Liabilities, (b) extend
or renew any of the Liabilities  for one or more periods  (whether or not longer
than the original period), alter or exchange any of the Liabilities,  or release
or compromise any obligation of the  undersigned  hereunder or any obligation of
any nature of any other obligor with respect to any of the Liabilities,  and (c)
resort  to the  undersigned  for  payment  of any of the  Liabilities  when due,
whether or not the Bank shall have resorted to any obligation hereunder or shall
have proceeded against any other obligor primarily or secondarily obligated with
respect to any of the Liabilities.

         The undersigned  hereby expressly waives:  (a) notice of the acceptance
by the Bank of this  Guaranty,  (b)  notice  of the  existence  or  creation  or
non-payment of all or any of the Liabilities, (c) presentment, demand, notice of
dishonor,  protest,  and all other notices whatsoever,  and (d) all diligence in
collection or protection of or realization  upon any Liabilities or any security
for or guaranty of any Liabilities.

         Notwithstanding  any  payment  made  by  or  for  the  account  of  the
undersigned  pursuant to this Guaranty,  the undersigned shall not be subrogated
to any right of the Bank until such time as the Bank shall have  received  final
payment in cash of the full amount of all Liabilities.

         The  undersigned  further  agrees to pay all  expenses  (including  the
reasonable  attorneys'  fees  and  charges)  paid  or  incurred  by the  Bank in
endeavoring to collect the  Liabilities,  or any part thereof,  and in enforcing
this Guaranty against the undersigned.

         The creation or existence  from time to time of additional  Liabilities
to the Bank is hereby authorized,  without notice to the undersigned,  and shall
in no way  affect or impair  the  rights of the Bank or the  obligations  of the
undersigned under this Guaranty,  including the  undersigned's  guaranty of such
additional Liabilities.

         The Bank may from time to time with notice to the  undersigned,  assign
or  transfer  any  or  all  of  the   Liabilities   or  any  interest   therein.
Notwithstanding any such assignment or transfer or any subsequent  assignment or
transfer  thereof,  such  Liabilities  shall be and remain  Liabilities  for the
purposes of this Guaranty,  and each and every immediate and successive assignee
or transferee of any of the Liabilities or of any interest therein shall, to the
extent of the interest of such  assignee or transferee  in the  Liabilities,  be
entitled to the benefits of this Guaranty to the same extent as if such assignee
or transferee were the Bank.

         No delay on the part of the Bank in the exercise of any right or remedy
shall operate as a waiver thereof, and no single or partial exercise by the Bank
of any right or remedy shall preclude other or further  exercise  thereof or the
exercise of any other right or remedy;  nor shall any  modification or waiver of
any provision of this Guaranty be binding upon the Bank, except as expressly set
forth in a writing duly signed and  delivered by the Bank. No action of the Bank
permitted  hereunder shall in any way affect or impair the rights of the Bank or
the  obligations of the  undersigned  under this Guaranty.  For purposes of this
Guaranty,  Liabilities shall include all obligations of the Company to the Bank,
notwithstanding  any right or power of the  Company or anyone else to assert any
claim or  defense as to the  invalidity  or lack of  enforceability  of any such
obligation,  and no such claim or defense shall affect or impair the obligations
of the undersigned hereunder.

         This Guaranty shall be binding upon the  undersigned and the successors
and  assigns  of  the  undersigned.  To  the  extent  that  the  Company  or the
undersigned  is a partnership or a  corporation,  all  references  herein to the
Company  and to the  undersigned,  respectively,  shall be deemed to include any
successor or successors,  whether  immediate or remote,  to such  partnership or
corporation.

         This Guaranty shall be governed by and construed in accordance with and
governed by the laws of the State of New York  applicable to contracts  made and
to be fully performed in such State.  Wherever possible,  each provision of this
Guaranty  shall be interpreted in such manner as to be effective and valid under
applicable  law, but if any provision of this Guaranty shall be prohibited by or
invalid under such law, such  provision  shall be  ineffective  to the extent of
such  prohibition  or  invalidity,  without  invalidating  the remainder of such
provision or the remaining provisions of this Guaranty.


<PAGE>52



         This Guaranty may be executed in any number of counterparts  and by the
different  parties hereto on separate  counterparts,  and each such  counterpart
shall be deemed  to be an  original  but all such  counterparts  shall  together
constitute one and the same Guaranty.

         ANY LITIGATION BASED HEREON,  OR ARISING OUT OF, UNDER OR IN CONNECTION
WITH THIS GUARANTY, SHALL BE BROUGHT AND MAINTAINED EXCLUSIVELY IN THE COURTS OF
THE STATE OF NEW YORK OR IN THE UNITED  STATES  DISTRICT  COURT FOR THE SOUTHERN
DISTRICT  OF NEW YORK;  PROVIDED,  HOWEVER,  THAT ANY SUIT  SEEKING  ENFORCEMENT
AGAINST ANY COLLATERAL OR OTHER  PROPERTY MAY BE BROUGHT,  AT THE BANK'S OPTION,
IN THE COURTS OF ANY JURISDICTION WHERE SUCH COLLATERAL OR OTHER PROPERTY MAY BE
FOUND.  THE  UNDERSIGNED  HEREBY  EXPRESSLY  AND  IRREVOCABLY   SUBMITS  TO  THE
JURISDICTION  OF THE  COURTS OF THE STATE OF NEW YORK AND OF THE  UNITED  STATES
DISTRICT COURT FOR THE SOUTHERN DISTRICT OF NEW YORK FOR THE PURPOSE OF ANY SUCH
LITIGATION AS SET FORTH ABOVE. THE UNDERSIGNED FURTHER  IRREVOCABLY  CONSENTS TO
THE SERVICE OF PROCESS BY REGISTERED MAIL,  POSTAGE PREPAID,  TO THE ADDRESS SET
FORTH  OPPOSITE  ITS  SIGNATURE  HERETO (OR SUCH OTHER  ADDRESS AS IT SHALL HAVE
SPECIFIED  IN WRITING TO THE BANK AS ITS ADDRESS FOR  NOTICES  HEREUNDER)  OR BY
PERSONAL SERVICE WITHIN OR WITHOUT THE STATE OF NEW YORK. THE UNDERSIGNED HEREBY
EXPRESSLY AND IRREVOCABLY  WAIVES,  TO THE FULLEST EXTENT  PERMITTED BY LAW, ANY
OBJECTION  WHICH IT MAY NOW OR HEREAFTER HAVE TO THE LAYING OF VENUE OF ANY SUCH
LITIGATION  BROUGHT IN ANY SUCH COURT  REFERRED  TO ABOVE AND ANY CLAIM THAT ANY
SUCH LITIGATION HAS BEEN BROUGHT IN AN INCONVENIENT FORUM.

         THE  UNDERSIGNED,  AND THE BANK (BY  ACCEPTING  THE  BENEFITS  HEREOF),
HEREBY WAIVE ANY RIGHT TO A TRIAL BY JURY IN ANY ACTION OR PROCEEDING TO ENFORCE
OR DEFEND ANY RIGHTS UNDER THIS GUARANTY AND ANY AMENDMENT, INSTRUMENT, DOCUMENT
OR AGREEMENT  DELIVERED  OR WHICH MAY IN THE FUTURE BE  DELIVERED IN  CONNECTION
HEREWITH OR ARISING FROM ANY BANKING  RELATIONSHIP  EXISTING IN CONNECTION  WITH
ANY OF THE  FOREGOING,  AND AGREE THAT ANY SUCH  ACTION OR  PROCEEDING  SHALL BE
TRIED BEFORE A COURT AND NOT BEFORE A JURY.

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

                                         Kollmorgen Corporation

                                         By:_____________________________
Address:                                 Title:________________________
Reservoir Place
1601 Trapelo Rd.
Waltham, MA  02154










<PAGE>53


                                                                 EXHIBIT 10(j)



                        NON-QUALIFIED STOCK OPTION AGREEMENT

                                    * * * * * *


        This AGREEMENT, entered into as of this        day of            199  , 
(hereinafter called the "Option Date") between KOLLMORGEN CORPORATION, 
a corporation organized under the laws of the State of New York (hereinafter 
called the "Corporation"), and                of                  an employee 
of the Corporation or of a subsidiary or affiliate of the Corporation 
(hereinafter called the "Optionee").

                              WITNESSETH THAT:

        WHEREAS, the Corporation by due corporate action and with the written 
consent of the holders of at least a majority of the stock of the Corporation 
entitled to vote adopted the Plan (such Plan, as amended, hereinafter called 
the "Plan"); and

        WHEREAS, the Plan is administered by the Personnel and Compensation 
Committee of the Corporation's Board of Directors (hereinafter called the 
"Committee"), which is composed of individuals who are not employees of the 
Corporation or otherwise eligible to receive stock options; and

        WHEREAS, the Committee has determined on the date hereof that it would 
be in the best interests of the Corporation to grant to the Optionee the option 
contained in this Agreement because of the incentives it will generate in the 
Optionee to promote the long range interests of the Corporation; and

       WHEREAS, the Optionee wishes to accept such option, upon the terms and 
conditions hereinafter provided; and
 
        WHEREAS, the Committee has determined that the option price hereinafter 
provided for is not less than 100% of the fair market value of the Common Stock 
of the Corporation on the date hereof;

        NOW, THEREFORE, in consideration of the premises it is agreed as 
follows:

        1.     Option Grant.  Subject to the terms and conditions hereof and to 
the terms and conditions of the Plan, which are hereby incorporated herein by 
reference, the Corporation hereby grants to the Optionee, and the Optionee 
hereby accepts, a non-qualified stock option (hereinafter called the "Option") 
to purchase           shares of Common Stock, $2.50 par value, of the 
Corporation (hereinafter called the "Optioned Shares") at a price of $        
per share (hereinafter called the "Option Price").  Such Option is not intended 
to qualify as an incentive stock option under Section 422 of the Internal 
Revenue Code of 1986, as amended.


<PAGE>54



        2.     Period of Option, and Conditions of its Exercise.

        (a)    Unless the Option be terminated earlier as provided in this 
Option Agreement, the term of the Option and of this Option Agreement shall 
commence as of the date hereof and terminate at the close of business on the 
day immediately preceding the tenth anniversary of such date.  Upon any 
termination of the Option, all rights of the Optionee hereunder shall cease.  
Except as expressly provided in paragraph 3, this Option may be exercised as 
follows:

                 i)      up to 10% of the Optioned Shares on or after twelve 
                         (12) months following the Option Date;

                ii)      up to an additional 10% of the Optioned Shares on or 
                         after eighteen (18) months following the Option Date;

               iii)      up to an additional 20% of the Optioned Shares on or 
                         after twenty-four (24) months following the Option 
                         Date; and,

                iv)      up to an additional 20% of the Optioned Shares on or 
                         after the third, fourth and fifth anniversary of the 
                         Option Date;

provided, however, that the Committee may accelerate the date upon which the 
option may be first exercisable if in its opinion such acceleration is 
advisable in order to effectuate the purposes for which the Option was 
granted.  Events which the Committee may consider in arriving at such an 
opinion shall include, by way of example and not limitation, any merger or 
consolidation of the Corporation or any transfer by the Corporation of 
substantially all of its assets or any change or proposed change in the control 
of the Corporation.   Notwithstanding the foregoing, upon a determination by 
the Committee that there has been a sale of substantially all of the 
Corporation's assets or a dissolution or liquidation of the Corporation, or a 
"Change in Control" of the Corporation (as defined below) this Option shall 
immediately become exercisable in full.  For this purpose a "Change in Control" 
shall mean a change in control of a nature that would be required to be 
reported or disclosed by the Corporation in response to the requirements of any 
rule or regulation promulgated by the Securities and Exchange Commission under 
the Securities Exchange Act of 1934, as amended (the "1934 Act"), as in effect 
on the Option Date; provided, however, a Change in Control shall be deemed to 
have occurred if and when (i) any person [including a "Person" as used in Sec. 
14(d) of the 1934 Act] is or becomes a beneficial owner (as such term is 
defined in Rule 13d-3 under the 1934 Act), directly or indirectly, of 
securities of the Corporation representing 10% or more of the combined voting 
power of the Corporation's then outstanding securities (a) if the beneficial 
ownership of such person is not approved by the Board of Directors of the 
Corporation either before or within 30 days after receipt of notice that such 
person is or has become such a beneficial owner, or (b) if, at any time within 
twenty-four (24) months thereafter, the employment of the person employed as 
Chief Executive Officer of the Corporation terminates involuntarily (other than 
for cause) or (ii) during any period of twenty-four (24) consecutive months, 
commencing before or after the Option Date, individuals who at the beginning of 
such twenty-four (24) month period were directors of the Corporation cease for 
any reason, other than solely because of death, retirement or disability, to 
constitute at least a majority of the Board of Directors of the Corporation and 

<PAGE>55



the nominations of their replacements are not approved by a majority of the 
members of the original Board of Directors who continue on the Board.

        (b)    Nothing in this Option Agreement shall confer upon the Optionee 
any right to continue in the employ of the Corporation or any subsidiary or 
affiliate thereof or interfere in any way with the right of the Corporation or 
any subsidiary or affiliate thereof to terminate the employment of the Optionee 
at any time.

        3.     Death or Termination of Employment of Optionee.

        (a)    If the employment of the Optionee by the Corporation or a 
subsidiary or affiliate thereof shall terminate by reason of his death, the 
Option may be exercised prior to the earlier of (i) the expiration date of the 
Option or (ii) the expiration of one year after the date of the Optionee's 
death (or such longer period, not exceeding one additional year, as the 
Committee may approve), by the person or persons (hereinafter called the 
"Beneficiary") to whom the Optionee's rights under the Option pass by will
or the laws of descent or distribution (including his estate during the period 
of administration), provided, however, that the Beneficiary shall be entitled 
to exercise the Option only to the same extent exercisable by the Optionee on 
the date of his death.

      (b)    If, prior to the first anniversary of the Option Date, the 
Optionee's employment with the Corporation or any subsidiary or affiliate 
thereof shall be terminated for any reason, this Option Agreement, the Option 
and all rights to purchase Optioned Shares pursuant hereto shall forthwith 
terminate and become null and void.

        (c)    If, on or after the first anniversary of the Option Date, the 
full-time employment of the Optionee by the Corporation or any subsidiary or 
affiliate thereof shall terminate for any reason other than (i) the death of 
the Optionee or (ii) circumstances which, in the sole and absolute opinion of 
the Committee, constitute cause for discharge of the Optionee, the Option may 
be exercised by the Optionee at any time prior to the earlier of (i) the 
expiration date of the Option or (ii) the expiration of three months after the 
date of such termination of employment, to the extent the Option was 
exercisable by the Optionee on the date of such termination of employment.

        (d)    If the employment of the Optionee by the Corporation or any 
subsidiary or affiliate thereof shall terminate under circumstances which, in 
the sole and absolute opinion of the Committee, constitute cause for discharge, 
this Option Agreement, the Option, and all rights to purchase shares pursuant 
hereto, shall forthwith terminate and become null and void.

        (e)    If the Optionee is employed by a subsidiary or affiliate of the 
Corporation which ceases to be such a subsidiary or affiliate, the Optionee's 
employment shall be deemed to terminate upon the date of such cessation, unless 
he forthwith becomes or remains an employee of the Corporation or of another
subsidiary or affiliate thereof.

        (f)    To the extent that the Option is not exercised within the 
applicable periods in the cases set forth in subparagraphs (a), (b) and (c) of 
this paragraph 3, this Option Agreement, the Option, and all rights to purchase 
shares pursuant thereto, shall forthwith terminate and become null and void.


<PAGE>56



        (g)    Whether employment has been terminated for the purposes of this 
Agreement shall be determined by the Committee, whose determination shall be 
final, binding and conclusive.

        (h)    Anything in the Plan or herein contained notwithstanding, to the 
extent that (i) any formal written employment or termination agreement between 
the Corporation and the Optionee which is formally executed by both the 
Corporation and the Optionee contains terms governing the Options hereunder
specifically or options in general in the event of a termination of the 
Optionee's employment and (ii) the terms of such employment or termination 
agreement applicable to such options in the event of a termination of the 
Optionee's employment are more favorable to the Optionee than the terms of this 
Agreement, then such terms of such employment or termination agreement shall 
control the terms of this Agreement.

        4.        Non-Transferability.  During the Optionee's lifetime the 
Option shall be exercisable only by him (or other rightful holder of the 
Option) and neither the Option nor any other right granted to the Optionee 
hereunder shall be transferable by the Optionee otherwise that by will or the 
laws of descent and distribution.  Notwithstanding the foregoing, the Optionee 
may transfer the Option to members of his immediate family (defined as his 
children, grandchildren and spouse) or to one or more trusts for the benefit of 
such family members or partnerships in which such family members are only 
partners if the Optionee does not receive any consideration for the transfer; 
provided that such transferred Option shall continue to be subject to the same 
terms and conditions that were applicable to such Option immediately prior to 
its transfer (except that such transferred Option shall not be further 
transferable by the transferee inter vivos); and provided further, that the 
Committee consents in writing to such transfer.  In the event of an attempt by 
the Optionee to alienate, assign, pledge, hypothecate or otherwise dispose of
this Option or of any right hereunder, except as provided for herein, or in the 
event of any levy of any attachment, execution or similar process upon the 
rights or interests hereby conferred, the Corporation may terminate this Option 
Agreement by notice to the Optionee and it shall thereupon become null and void.

        5.     Manner of Exercising Option.  The Option shall be exercised in 
the following manner:  the Optionee (or the Beneficiary) shall give to the 
Corporation notice in writing, substantially in the form set forth in Exhibit A 
hereto, of his intention to purchase, specifying the number of Optioned Shares 
as to which he desires to exercise the Option, the number and denomination of 
the stock certificates that he desires, and the date on which he desires to 
complete his purchase (the "Completion Date"), which shall not be less than 
five business days thereafter.  The Optionee (or the Beneficiary) shall pay the 
Corporation on the Completion Date either (i) in cash by Federal Reserve Wire 
Transfer or by check, or (ii) through the delivery of shares of the 
Corporation's Common Stock having a fair market value on the date of exercise
equal to the full purchase price of the shares purchased, or (iii) by a 
combination of (i) and (ii) above, against delivery of one or more certificates 
therefor.

        6.     Issuance and Delivery of Shares.  Against payment for the shares 
purchased, the Corporation will issue and deliver to the Optionee (or the 
Beneficiary) on the Completion Date, one or more certificates for the shares 
purchased.  If and so long as any Common Stock of the Corporation is listed on
any securities exchange, any other provisions of this Option Agreement 
notwithstanding, the Corporation shall not be required to make delivery to the 
Optionee (or the Beneficiary) of certificates for shares so purchased until 
such shares have been listed (or authorized for listing upon official notice of 
issuance) on the securities exchange on which outstanding shares of Common 
Stock of the Corporation are then listed nor (whether listed or not) until 
there has been compliance with such laws and regulations as the Corporation may 
deem applicable, including, without limitation, the Securities Act of 1933, the 
1934 Act and the rules and regulations issued thereunder.


<PAGE>57



        7.     Rights as Shareholder.  The Optionee or a transferee of the 
Option shall have no rights as a shareholder with respect to any share covered 
by the Option until he shall have become the holder of record of such share, 
and, subject to paragraph 8 hereof, no adjustment shall be made for dividends 
or distributions or other rights in respect of such share for which the record 
date is prior to the date upon which he shall become the holder of record 
thereof.

        8.     Recapitalizations, Reorganizations, etc.

       (a)    The existence of the Option shall not affect in any way the right 
or power of the Corporation or its shareholders to make or authorize any or all 
adjustments, recapitalizations, reorganizations or other changes in the 
Corporation's capital structure or its business, or any merger or consolidation 
of the Corporation, or any issue of stock or of options, warrants or rights to 
purchase stock or of bonds, debentures, preferred or prior preference stocks 
ahead of or affecting the stock or the rights thereof or convertible into or 
exchangeable for stock, or the dissolution or liquidation of the Corporation, 
or any sale or transfer of all or any part of its assets or business, or any 
other corporate act or proceeding, whether of a similar character or otherwise.

        (b)    The shares with respect to which the Option is granted are 
shares of stock of the Corporation as presently constituted, but if, and 
whenever, prior to the delivery by the Corporation of all of the shares of the 
stock with respect to which the Option is granted, the Corporation shall effect 
a subdivision or consolidation of shares, or other capital adjustment, the 
payment of a stock dividend or other increase or reduction of the number of 
shares of the stock outstanding, without receiving compensation therefor in 
money, services or property, the number and price of shares remaining under the
Option shall be appropriately adjusted.  Such adjustment shall be made by the 
Committee, whose determination as to what adjustment shall be made, and the 
extent thereof, shall be final, binding and conclusive.  Any such adjustment 
may provide for the elimination of any fractional share which might otherwise 
become subject to the Option.

        (c)    Upon a merger or consolidation of the Corporation with any other 
entity, pursuant to which the Corporation is not the surviving corporation or 
pursuant to which the Corporation is the surviving corporation and holders of 
Common Stock of the Corporation receive any consideration in exchange for their
shares of Common Stock of the Corporation, the Option shall be terminated 
(whether or not vested) and the Optionee shall receive (i) the consideration to 
which the Optionee would have been entitled pursuant to the terms of the 
agreement of merger or consolidation, if immediately prior to such merger or 
consolidation the Optionee had been the holder of record of a number of shares 
of stock of the Corporation equal to the number of Optioned Shares to which the 
Option relates, minus (ii) the Option Price.  The Committee shall have the 
authority to resolve any questions regarding the application of the foregoing 
sentence and its determination shall be final, binding and conclusive.

        In the event of a liquidation or dissolution of the Corporation 
pursuant to which the Committee has not, under Section 2 of the Option 
Agreement, caused the Option to vest at least 20 days prior to such liquidation 
or dissolution, the Option shall be terminated (whether or not vested) and the 
Optionee shall receive (i) the consideration to which the Optionee would have 
been entitled, if immediately prior to the liquidation or dissolution the 
Optionee had been the holder of record of a number of shares of stock of the
Corporation equal to the number of Optioned Shares to which the Option relates, 
minus (ii) the Option Price.  The Committee shall have the authority to resolve 
any questions regarding the application of the foregoing sentence and its 
determination shall be final, binding and conclusive.

        (d)    Except as hereinbefore expressly provided, the issue by the 
Corporation of shares of stock of any class, or securities convertible into or 
exchangeable for shares of stock of any class, for cash or property, or for 
labor or services, either upon direct sale or upon the exercise of options, 
rights or warrants to subscribe therefor, or to purchase the same, or upon 
conversion of shares or obligations of the Corporation convertible into such 
shares or other securities, shall not affect, and no adjustment by reason
thereof shall be made with respect to, the number or price of shares of stock 
subject to the Option.


<PAGE>58



        9.     Change in Option Terms.  The Committee may, with the consent of 
the Optionee (or the Beneficiary), modify or change the terms of this Option 
Agreement, including the Option Price, in a manner which does not conflict with 
the provisions of the Plan; provided that the Option Price as so changed or
modified shall not be less than 100% of the fair market value of the Common 
Stock of the Corporation on the date of such modification or change.

       10.    Definition of "Year", "Subsidiary" and "Affiliate".  For all 
purposes of this Option Agreement:

        (a)    A "year" shall be a period of 365 consecutive days (or 366 
               consecutive days if a 29th of February shall fall during such 
               period).  The first day of any period shall commence at 12:01 
               o'clock A.M., Eastern Standard Time, on such day, and the last 
               day of such period shall terminate at 12:00 o'clock midnight.  
               If the last day of any period shall fall on a Saturday, Sunday 
               or legal holiday in the State of New York, such period shall be 
               deemed to end on the next business day thereafter.

        (b)    A "subsidiary" shall be a corporation as defined in Section 
               424(f) of the Internal Revenue Code.

        (c)    An "affiliate" shall be a joint venture, partnership or other 
               entity (other than a corporation), 50 percent or more of which 
               is owned directly or indirectly by the Corporation.

        11.    Notices.  Any notice given under this Option Agreement shall be 
in writing and shall be deemed given when delivered personally, or when sent 
by certified mail, postage prepaid, in the case of the Optionee to his address 
hereinabove set forth or such other address as he may designate by notice given 
to the Corporation, and in the case of the Corporation, to its Corporate Office 
at 1601 Trapelo Road, Waltham, MA 02154, Attention:  Secretary, or such other 
address as may then be applicable by notice given to the Optionee.

        12.    Failure to Enforce not a Waiver.  The failure of the Corporation 
to enforce at any time any provision of this Option Agreement or the Plan shall 
in no way be construed to be a waiver of such provision as to any future event 
or of any other provision hereof or of the Plan.

        13.    Governing Law.  This Option Agreement and its interpretation and 
performance shall be controlled solely by the laws of the State of New York.


<PAGE>59



        14.    Date of Granting of the Option.  The date of this Option 
Agreement shall be deemed for all purposes the date of the granting of the 
Option, unless and except where the grant is conditioned upon any event, in 
which case the date of satisfaction on which such event occurs shall be deemed 
the date of the granting of the Option.

        15.    Power of the Committee.  The Committee shall have all the powers 
delegated to it by the provisions of the Plan including, without limitation, 
the power to construe this Option Agreement and the Plan, and the power to 
determine whether a termination of the Optionee's employment was for reasons
constituting cause for discharge, and any determinations of the Committee shall 
be conclusive.

        16.    Provisions of the Plan.  The Option provided for herein is 
granted pursuant to the Plan, and the Option and this Option Agreement are in 
all respects governed by, and subject to all of the terms and provisions of, 
the Plan.  Any term used herein shall, unless the context plainly requires 
otherwise, have the meaning assigned to it in the Plan.  The Corporation agrees 
to maintain a copy of the Plan during the term of this Option Agreement at its 
principal office for inspection by the Optionee at any time during normal 
business hours.

        IN WITNESS WHEREOF, the Corporation has caused this Option to be signed 
by its corporate officer thereunto duly authorized, and the Optionee has signed 
this Option Agreement, all as of the date first above written.

                                                 KOLLMORGEN CORPORATION


                                                 By ___________________________
                                                        Senior Vice President

                                                    ___________________________
                                                                Optionee

                                                    S.S. #_____________________


<PAGE>60


                                                     EXHIBIT A

      [Sample form of letter to be sent by Optionee (or Beneficiary)]



                                                     [ Date ]



Kollmorgen Corporation
Attention:  Secretary
1601 Trapelo Road
Waltham, MA  02154

                        Re:   Exercise of Stock Option

Dear Sirs:

      Pursuant to the terms of the Option Agreement between us dated 
________________, 19___, in which you have granted me an option to purchase a 
certain number of shares of your Common Stock, of the par value of $2.50 per 
share, on certain terms and conditions, I hereby give notice that I elect to 
exercise such option to the extent of _____________ shares and that I desire to 
complete this purchase on __________________, 19___.  On that date I shall pay 
you the sum of _____________________________________________ Dollars 
($___________) in full payment for such shares.  In addition, on that date I 
shall pay you all amounts required under applicable federal, state and local
withholding tax rules and regulations.  I request that such shares be evidenced 
by __________ stock certificate(s) in the following denomination(s):
____________________________________.

                                            Very truly yours,



                                            [name and address]

                                            S.S.#



NOTE:   The above form should be appropriately modified in the case of use by a 
        person to whom the rights of a deceased Optionee have passed by will or 
        the laws of descent and distribution.


     Optionee has signed this Option Agreement, all as of the date first above 
written.

                                                 KOLLMORGEN CORPORATION


                                                 By ___________________________
                                                        Vice President

                                                    ___________________________
                                                                Optionee

                                                    S.S. #_____________________











<PAGE>61


                                                                 EXHIBIT 10(k)




     RESTRICTED STOCK UNITS SUBSCRIPTION AGREEMENT, (the "Agreement"), dated as 
of February   , 1999 between Kollmorgen Corporation (the "Company"), and the 
other party signatory hereto (the "Participant").

     WHEREAS, pursuant to the Company's 1998 Management Stock Incentive Plan 
(as the same may be amended from time to time, the "Plan"), the Company desires 
to provide the Participant with an incentive to remain in its employ and to 
increase the Participant's interest in the success of the Company by granting 
to the Participant Restricted Stock Units (the "Restricted Shares") of Common 
Stock, $2.50 par value per share, of the Company (the "Common Stock"), subject 
to the terms and conditions hereinafter set forth;

     NOW, THEREFORE, in consideration of the covenants and agreements herein 
contained, the parties hereto agree as follows:

     1.   DEFINITIONS; INCORPORATION OF PLAN TERMS.  Capitalized terms used 
herein without definition shall have the meanings assigned to them in the Plan, 
a copy of which has been delivered to the Participant.  This Agreement and the 
Restricted Shares shall be subject to the Plan, the terms of which are hereby 
incorporated herein by reference, and in the event of any conflict or 
inconsistency between the Plan and this Agreement, the Plan shall govern.  The 
Date of Grant with respect to the Restricted Shares shall be the date of this 
Agreement as specified above.

     2.   GRANT OF RESTRICTED SHARES.  Subject to the terms and conditions 
contained herein and in the Plan, the Company hereby grants to the Participant, 
effective as of the Date of Grant, the number of Restricted Shares specified at 
the signature page hereof.  Except as may be required by law, the Participant 
shall not be required to pay any additional consideration for the issuance of 
the Restricted Shares granted pursuant to this Agreement.

     3.   NON-TRANSFERABILITY.  The Restricted Shares, and any rights or 
interests therein, may not be sold, transferred, assigned, pledged or otherwise 
encumbered or disposed of, until such Restricted Shares have vested in 
accordance with the terms of the Plan and this Agreement.  Notwithstanding the 
preceding sentence, prior to vesting the Restricted Shares may be transferred 
by will or the laws of descent and distribution or pursuant to a "qualified 
domestic relations order" as defined in the Code or Title I of the Employee 
Retirement Income Security Act of 1974, as amended, and the rules and 
regulations thereunder.


<PAGE>62



     4.   TERMS AND CONDITIONS OF RESTRICTED SHARES.  The Restricted Shares 
granted hereby are subject to the following terms and conditions:

          (a)      Vesting.  Except as vesting may be accelerated pursuant to 
          the terms of the Plan or this Agreement, the Restricted Shares shall 
          vest on the third anniversary of the Date of Grant.

          (b)      Termination of Employment.  Except as the Committee may 
          otherwise determine in its sole discretion, in the event that the 
          Participant's employment with the Company terminates for any reason 
          prior to the vesting of any Restricted Shares granted pursuant to 
          this Agreement, then such Restricted Shares shall, as of the date of 
          such termination, be forfeited; provided, however the Participant 
          shall be entitled to receive the cash benefits described in the Plan 
          with respect to such unvested shares.

          (c)      Shareholder Rights; Dividends and Distributions.  The 
          Participant shall have all rights of a shareholder with respect to 
          the vested Restricted Shares, including the right to vote the shares 
          and the right to receive any cash dividends as provided for in the 
          Plan.  Cash dividends with respect to unvested Restricted Stock shall 
          be accounted for in accordance with the terms of the Plan.  Any stock 
          dividends issued with respect to the Restricted Shares shall be 
          subject to the same restrictions and other terms and conditions that 
          apply to the Restricted Shares with respect to which such dividends 
          are issued, and all references to Restricted Shares hereunder shall 
          be deemed to include such shares.

          (d)      Issuance of Certificate.  The Participant shall be issued a 
          certificate in respect of the vested Restricted Shares granted 
          pursuant to this Agreement.

     5.   ADJUSTMENTS UPON CHANGES IN CAPITALIZATION.  In the event of any 
change in the outstanding Common Stock by reason of a stock dividend, 
recapitalization, reorganization, merger, consolidation, stock split, 
combination or exchange of shares or any other significant corporate event 
affecting the Common Stock, the Committee, in its discretion, may make (i) such
proportionate adjustments as it considers appropriate (in the form determined 
by the Committee in its sole discretion) to prevent diminution or enlargement 
of the rights of the Participant with respect to the aggregate number of shares 
of Common Stock covered by this Agreement and/or (ii) such other adjustments as 
it deems appropriate.  The Committee's determination as to what, if any, 
adjustments shall be made shall be final and binding on the Company and the 
Participant.

     6.   CHANGE IN CONTROL.  In the event of a Change in Control and except as 
the Committee may otherwise determine in its sole discretion, all Restricted 
Shares granted pursuant to this Agreement shall immediately vest and all other 
restrictions and conditions on the Restricted Shares shall lapse as of the date 
of the Change in Control.


<PAGE>63



     7.   MISCELLANEOUS.

          (a)      Representation by the Participant.  The Participant hereby 
          represents and agrees with the Company that the Participant is 
          acquiring the Restricted Shares without a view to distribution or 
          other disposition thereof.

          (b)      No Rights to Grants or Continued Employment. The Participant 
          shall not have any claim or right to receive grants of Restricted 
          Shares under the Plan.  Neither the Plan nor this Agreement nor any 
          action taken or omitted to be taken hereunder or thereunder shall be 
          deemed to create or confer on the Participant any right to be 
          retained in the employ of the Company or any Subsidiary, or to 
          interfere with or to limit in any way the right of the Company or any 
          Subsidiary to terminate the employment of the Participant at any time.

          (c)      Tax Withholding.  No later than the date as of which an 
          amount first becomes includable in the gross income of the 
          Participant for applicable income tax purposes with respect to the 
          Restricted Shares, the Participant shall pay to the Company or make 
          arrangements satisfactory to the Board regarding the payment of any 
          federal, state or local taxes of any kind required by law to be 
          withheld with respect to such amount.  Unless otherwise determined by 
          the Board, in accordance with rules and procedures established by the 
          Board, the minimum required withholding obligations may be settled 
          with Common Stock, including Common Stock that is part of the award 
          that gives rise to the withholding requirement.  The obligation of
          the Company under this Agreement shall be conditional upon such 
          payment or arrangements and the Company shall, to the extent 
          permitted by law, have the right to deduct any such taxes from any 
          payment of any kind otherwise due to the Participant.

          (d)      Applicable Law.  This Agreement shall be governed by and 
          subject to the laws of the State of New York and to all applicable 
          laws and to the approvals by any governmental or regulatory agency as 
          may be required.

          (e)      Severability.  If any provision of this Agreement shall be 
          held illegal or invalid for any reason, such illegality or invalidity 
          shall not affect the remaining provisions of this Agreement, but this 
          Agreement shall be construed and enforced as if such illegal or 
          invalid provision had never been included herein.


<PAGE>64



     8.   SURVIVAL; ASSIGNMENT.  All agreements, representations and warranties 
made herein and in any certificates delivered pursuant hereto shall survive the 
issuance to the Participant of the Restricted Shares and, notwithstanding any
investigation heretofore or hereafter made by the Participant or the Company or 
on the Participant's or the Company's behalf, shall continue in full force and 
effect.  Without the prior written consent of the Company, the Participant may 
not assign any of his rights hereunder except by will or the laws of descent 
and distribution.  Whenever in this Agreement any of the parties hereto is 
referred to, such reference shall be deemed to include the heirs and permitted 
successors and assigns of such party; and all agreements herein by or on behalf 
of the Company, or by or on behalf of the Participant, shall bind and inure to 
the benefit of the heirs and permitted successors and assigns of such parties 
hereto.

     9.   NOTICES.  All notices and other communications provided for herein 
shall be in writing and shall be delivered by hand or sent by certified or 
registered mail, return receipt requested, postage prepaid, addressed, if to 
the Participant, to his attention at the mailing address set forth at the foot 
of this Agreement (or to such other address as the Participant shall have 
specified to the Company in writing) and, if to the Company, to it at its 
principal offices which are currently located at 1601 Trapelo Road, Waltham, 
Massachusetts  02451, Attn.: Secretary.  All such notices shall be conclusively
deemed to be received and shall be effective, if sent by hand delivery, upon 
receipt, or if sent by registered or certified mail, on the fifth day after the 
day on which such notice is mailed.

     10.  WAIVER.  The waiver by either party of compliance with any provision 
of this Agreement by the other party shall not operate or be construed as a 
waiver of any other provision of this Agreement, or of any subsequent breach by 
such party of a provision of this Agreement.

     11.  ENTIRE AGREEMENT.  This Agreement and the Plan set forth the entire 
agreement and understanding between the parties hereto with respect to the 
matters covered herein, and supersede all prior agreements and understandings 
concerning such matters.  This Agreement may be executed in one or more 
counterparts, each of which shall be deemed to be an original, but all such
counterparts shall together constitute one and the same agreement.  The 
headings of sections and subsections herein are included solely for convenience 
of reference and shall not affect the meaning of any of the provisions of this 
Agreement.


     IN WITNESS WHEREOF, the Company has caused this Agreement to be executed 
by its duly authorized officer and the Participant has executed this Agreement, 
both as of the day and year first above written.

                                            KOLLMORGEN CORPORATION


                                            By:           
                                                Name:
                                                Title:



                                            PARTICIPANT


                                            By:            
                                                Name:
                                                Address:




Restricted Shares:






<PAGE>65



                                                                 EXHIBIT 10(n)

                              1999 ANNUAL INCENTIVE BONUS PLAN


     The 1999 Annual Incentive Bonus Plan (the "Plan") for corporate officers, 
which is directly linked to the financial performance of the Corporation, is 
designed to provide additional cash and stock compensation when specific 
financial performances are achieved or exceeded.  The Plan provides awards to 
individuals when the Corporation meets its operating plan in terms of primary 
earnings per share, revenues, cash flow, and critical objectives as follows:  
40% of the bonus is dependent on earnings per share, 20% on revenue growth, 20% 
on cash flow, and 20% on individual objectives.  Bonuses for the officers may 
range from a threshold of 15% of base pay to a cap of 100% of base pay.  80% of 
the bonus is delivered in the form of cash compensation and 20% in the form of 
restricted stock units issued pursuant to the 1998 Management Stock Incentive 
Plan.